Mobile TeleSystems PJSC (MBT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Mobile TeleSystems second quarter 2011 financial and operating results conference. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Mr. Joshua Tulgan. Please go ahead, sir.

Thank you. Welcome to MTS' conference call to discuss the Company's second 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's business activities, both in Russia and abroad; revenue and/or subscriber growth; loan facilities and their usage; legal actions or proceedings directed against 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 generations, and or return on invested capital; technical matters as they pertain to our mobile communications networks and fixed networks, including equipment licensing or network technology; 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 and Form 20-F, which is available on our websites or the US SEC.

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 within the US SEC, all of which are available on the Company website, www.mtsgsm.com, or that of the US SEC at www.sec.gov.

MTS disavows 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 presentation and materials used inside -- on 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 [operating] results on the second quarter 2011. Joining me today is Alexey Kornya, Vice President and Chief Financial Officer.

Group revenue for the quarter increased 13% year over year to reach more than $3.1 billion. During the quarter, we have delivered healthy revenue growth on the back of the seasonality strength of our business performance,; and growing contributions from our retail and fixed businesses.

Total revenues in Russia, including mobile, fixed and handset, and equipment sales, have increased year over year by 9% to RUB76.1 billion.

Our Mobile business demonstrated 10% year-over-year growth, up to RUB63.1 billion, on the back of higher voice and data usage, strong subscriber additions, coupled with a sequential decline in churn, rising sales of handsets, and active sales of modems and data tariff plans as demand continues to grow for data as we expand our 3G networks. Data coverage now reaches over 2,000 population centers in Russia.

Our Fixed Line business revenue grew by 22% year over year, to RUB15.6 billion. Key drivers included growth in subscriber base as a result of our continued M&A activity, and network modernization and upselling of existing customers.

In Ukraine, revenue increased by 4% year over year to UAH2.2 billion. Key growth sectors includes (inaudible) growth of our subscriber base, and strong [creative] propositions for our tariff plans. Changes in termination rates has slowed the growth in Ukraine, but improvements in our business means that this translates into an increase in absolute OIBDA by over 7%, while net income has increased by over 55%. Ukraine continues to demonstrate the value of a stable market in which operators are focusing on maximizing customer value.

In Uzbekistan, revenues declined by 4% year over year to $108.6 million. We have seen more competition in the market, but we feel that our strong market share and product roadmap will allow us to improve our performance in the market.

In Armenia, revenue declined by 3% year over year to AMD 19.7 billion (sic - see presentation) due to increased activity from our competitors. However, we witnessed a strong growth quarter on quarter of 15%; but again, the market remained competitive.

Now Alexey Kornya will further discuss the Group's profitability and financial performance.

Thank you, Andrei. During the second quarter 2011 for the Group, we realized strong sequential OIBDA growth of 16% for a margin of 41.6%.

In Russia, OIBDA increased by 12% quarter on quarter to RUB32.5 billion. This led to a sequential improvement in OIBDA margin of 42.7%. Seasonal factors, such as increased business activity and roaming contributed to the growth, but we have also seen improvements in the underlying business stemming from a sequential reduction in dealer commissions as we have reduced our SIM card sales, focused sales through our own stores and shifted more commissions to a revenue sharing structure.

High usage data, improvements in our Fixed Line business, namely through the closing of our Comstar transaction, and progress related to the integration of other acquired companies, and reduced G&A expenses by optimizing headcount and other costs.

During the second quarter, we introduced tariff plan schemes [simulating] on net calling, and better managing of net calling to reduce interconnect expenses. We anticipate a positive impact from this in third and fourth quarter, which will help drive improvements in profitability of operations in Russia.

We are leveraging capacity of our retail network to deliver strong sales of smartphones and modems. During this quarter, we have shifted the focus to the sales of smartphones that generates higher data traffic revenues. In second quarter, we have also sold more than 1 million of modems and data tariff plans. So the growth of mobile Internet enables us to improve margin in our Russian operations.

As Andrei explained, we continued to see strong improvement in our Ukraine operations. This is the second year where OIBDA has increased faster than revenues. The OIBDA margin reached 48.4%, which also marks the second year in a row we have increased profitability.

Net income for the quarter rose 3% year over year, and [14]% quarter on quarter to $367 million.

I would like to point out the increase in depreciation expenses tied to the swapping of equipment in certain regions. As we disclosed previously, we are upgrading older equipment as part of our outsourcing initiative tied network servicing. While we anticipate significant deterioration of savings, we will incur charges related to accelerated depreciation of older equipment. We expect that this could be visible in our results over the next two years.

We also realized a slight ForEx loss due to ruble depreciation versus the euro. Meanwhile, interest expenses declined slightly as we continued to optimize our debt portfolio.

Total debt increased slightly due to currency moves, but overall, net debt to OIBDA remains at a comfortable 1.2 multiple.

We have two debt events recently. We repurchased our Series 04 ruble bond in the amount of approximately RUB1.1 billion, and lowered the bond's coupon rate from an annual rate of 16.75% to 7.6%.

In July, we completed the second replacement of the series, second series ruble bond on the Moscow Interbank Currency Exchange raising approximately RUB6.3 billion.

In second quarter 2011, our CapEx amounted to $528 million, and we expect the CapEx for the full year to come in line with our guidance of 22%-24% of revenues. Most of the resources are invested in build-up of our 3G and the call network in Russia.

Free cash flow in second half 2011 amounted to $847 million on the back of the healthy operational cash flows.

Thank you, Alexey. Yesterday, we extended indicative offer to Sistema for the purchase of Sistema Inventure, which owns a 29% stake in MGTS. This acquisition is one more step towards the completion of the process that began with the acquisition of Comstar, the full transformation of MTS into an integrated telecommunications provider.

Eventually, we intend to fully acquire and integrate MGTS into MTS, a process that will take two/three years. By doing so, we believe we can realize synergies of RUB14 billion through the launch of new products and services, and enhance the operational efficiency of the combined business. Most importantly, the merger will give us a market position that is unrivaled in Russia's most valuable market, Moscow.

[Since] our purchase of Comstar, the deal was overseen by the special committee of independent [dealers], and we expect their recommendations in the coming weeks to our Board of Directors.

In April, we launched our OIBDA guidance for the full year 2011. Our range of 42%/43% was based on an improved competitive environment and lower SIM card sales. Since this time, we have reduced our SIM card sales by 25% per month. We have also moved many of our dealer contracts away from a fee-based system to a more aggressive revenue sharing model to improve subscriber quality and reduce the practice of discounting.

We were optimistic that the market would see the logic in reducing SIM sales, but we are witnessing increased sales by our competitors. We have also seen increased competition in the handset market over the past three months, which has driven the profitability down on handset sales.

So for now, we have not yet increased or own sales of SIM cards. We believe it's prudent to withdraw our guidance on OIBDA for the year due to the risk of increased competition. Hence, we are making progress on other issues affecting profitability, including our interconnect balance, integration in our Fixed Line business, and broader cost control measures. We can only indicate that margins should end the year in the lower 40s.

Thank you for your time, and now I am happy to open the call for your questions.

(Operator Instructions). Cesar Tiron, Morgan Stanley.

I have two questions, actually. The first question; there seems to be a trend of a slowing down in service revenue growth in Russia. You delivered 10% growth in ruble terms in Q1 and 7% in Q2, and we saw similar trends at MegaFon when they reported numbers. From the numbers you see in July and August, can you say if that trend continues and if you see any indication that Russian subscribers are more cautious?

Second question is on Mr. Dubovskov's comment in the earnings release saying that you are seeing some operators increasing SIM card sales. Can you please say if this is a nationwide issue, or if it's more related to some regions? And also, it would be helpful to understand if you were talking more about data SIM cards, or if it's mainly on voice.

Thank you very much.

Thank you for your question, and particularly about your first question. I think it's too early to comment about slowing down the revenue in Russia in July and August, and I'm going to remind you that just now, we are going to comment our results in second quarter.

And I'm sorry, can you repeat your second question, please?

Sorry, the second question was to understand if the increase in SIM card sales that you're talking about are related to some regions or if it's a national issue; and also to understand if you were talking about voice or data SIM cards.

Thank you. No, it doesn't depend on the regions and we are going to have a good result thinking about our sales in all regions across Russia if our competitors going to increase the number of sales. But I'm going to remind you right now we are not going to do it as soon as possible.

Thank you.

Alexander Vengranovich, Otkritie Capital.

I have two questions, if I may. The first one is regarding sales of handsets. We've seen [13%] quarter-on-quarter drop in sales of handsets since the original network, and do you see this drop as a market trend, or it's specific to MTS only, and all their competitors are experiencing [bad] growth in sales of handsets? That's the first question.

And the second question is regarding the subscriber acquisition costs in second quarter '11. Can you comment on the current quarter or year-on-year dynamics for subscriber acquisition costs, because I haven't seen it in the press release.

Thank you.

Excuse me. Could you repeat the first question?

Yes. In your second quarter '11 financials, we've seen the drop in sales of handsets quarter on quarter, and I'd like to find out whether it's only MTS retail network specific, or you have seen this drop in sales of handsets across the whole market.

Okay, I will start with the second question related to SAC, subscriber acquisition cost. The dynamic which you have seen the second quarter is explained by the fact that we combine fixed and mobile SAC, since we consolidate from April 1 Comstar fully into MTS operational results. So the increase which you see is driven mostly by this fact, and also it is worthwhile noting that we have lower sales, which also affects the SAC, since advertising is distributed to all acquisitions.

I am going to add some information about our SAC in second quarter. As you know, the second quarter, it was last quarter which we had special agreement with (inaudible) team, and starting third quarter this year, it will be absent.

So you're guiding for decrease in SAC in the following quarters of 2011, am I right?

Not necessarily. Again, as we said that -- it is driven the dynamic which you see by mostly consolidation of Fixed and Mobile. So this will sustain, and further dynamic will depend on the market development.

Okay. And as for my first question?

As for the first question, yes, this is a seasonal factor. Second quarter is weaker on the volumes of handset sales, because on the first quarter we have a number of holidays, and usually, first and third -- second quarter is weakest in terms of volume of handset sales. So this is a seasonal factor.

Yes, but if I look at 2010, the drop was not so significant from the first quarter to second quarter in 2010. So here in this year, the drop is much more significant.

Yes, of course, because last year, we were yet in the build-up stage, so we were growing fastly number of shops, of stocks, of outlets. So this year, we already reached plateau and just have normal seasonality.

Okay, thank you.

Alex Balakhnin, Goldman Sachs.

I have a couple of questions, if I may. First is on your inter-company elimination on the [EBITDA] level; just trying to get to the consolidated number. From the operations EBITDA, I get to something like $125 million elimination. Can you properly explain the nature, and probably what is more important, the dynamics of this EBITDA? How should we think about this number going forward?

Second question is on your guidance and motivation for the withdrawal of the previous guidance. As long as you are not really returning to the aggressive distribution of SIM cards, why do you think you will have a pressure on the profitability in the second half, and what may force you to get back to aggressive distribution of SIM cards. In other words, what -- do you think that low quality subscribers will help you generate value to the shareholders?

And lastly, on your projected synergies with MGTS of RUB14 billion, could you probably explain where they're coming from? And second of this is why it wasn't possible to extract the synergies without getting to full control.

Thank you.

Okay, let me start with the first one. The increased intra-Group eliminations which you see now are stemming from Comstar [region] and Comstar intra-Group [derivations]. Previously, they were on the level of Comstar, so they were not visible; they were inside Comstar consolidation. Now, since we consolidated this Comstar business in Moscow and have Comstar region separately, those intra-Group derivations move to the Group level so that this increase is sustainable.

May I ask a second follow-up here? Sorry.

Yes, and your second question? Yes.

The total EBITDA of Comstar, for example last year, was around $700 million, if I recall correctly. So we are talking about, if annualized, $125 million. Are we talking about this [600 million] eliminations? So it's basically the full EBITDA of Comstar being eliminated, which doesn't sound right.

No, no. We do have this -- I don't think that there is an increase in the eliminations by $125 million. The increase is lower and it is linked to the fact which I just mentioned. So we'll be able to provide you a more detail breakdown afterwards.

Okay. Thanks.

So the increase was about $50 million, if we talk about quarter to quarter.

Yes.

It's Andrei Dubovskov and I am ready to talk with you about your second question. You're right, our range of 42%/43% was based upon an improved competitive environment and lower SIM card sales, but unfortunately you know that the negative [debt] between ourselves and sales of our main competitors can be much. And my own opinion it's a waste of resources and a waste of money, and we are not going to do this 'til the time when we understand that it will be a dramatic way for us, speaking about waste our [just] position in the Russian market in subscribers and in [rating] the position.

But I hope that our competitors must understand that it will be no more than a waste of money, and I hope it will be [stopped].

Thank you.

And the question on synergies?

Speaking about synergies in our deal with MGTS, it will be not a one-time effect. It will be approximately effect during the next five years. And we can get this effect through our new services, through our new tariff plans, through our billing and the billing for all our operations in Moscow and in the fixed network, and mobile network also.

And the next effect which we need to get is the one dealers' networks, etc. Approximately should be RUB14 billion during next five/six years.

And may I ask a quick follow-up on my second question? So do I hear you correctly that you will stick to a prudent subscriber position strategy as long as you are number 1 operator by revenues? So when you see that your number 1 position is threatened, you will accelerate with the SIM card sales?

Correct. Correct.

Thanks.

Dalibor Vavruska, Citibank.

Just a few questions; first, just a technicality. How much of your fixed growth year on year in the second quarter was organic as opposed to the acquisitions?

Second question; obviously, in the second quarter, you were a bit more cautious with SIM sales, but if you look at the churn rate, that still seems reasonably high in line with the Russian market, I presume. I'm just wondering what you are expecting that is going to happen with the churn rate in the following quarters.

And finally, when I look at your data, or rather value-add services part of your revenue, there was actually a quarter-on-quarter decline, if I look at it correctly; and you can start seeing the Messaging Service revenue declining, whereas there's also some volatility on the [compensates]. So I'm just wondering if you can make a comment about this, and I know that value-added services tend to be volatile, but do you see a possibility that the Messaging Services can actually peak now and start declining as a medium-term trend which could affect your value-added services in the next couple of quarters?

Thank you.

Dalibor, welcome back. It's a pleasure to see you again. Speaking about your first question, it's combined digits, and from my information it's approximately 5% organic growth, and 7%/8% is M&A deals.

And next question?

The churn.

Yes. Speaking about the churn question, you are right. It's a stable situation here in the last some quarters, and my target speaking about churn to make this one digit [aim]. In my opinion, it would be better if our churn will be no more than 8%/9% per quarter. That's my own target.

If I may, the issue is you slowed down your gross additions, which I think is a supposedly good move in this kind of market environment. The churn rate stayed high. Do you see any kind of relationship between the two? Or in other words, how do you want to reduce the churn? What else would you want to do to bring the churn down than what you've done in the second quarter?

There are two main reasons which impact to the churn. [Great], it's a convergent product, and the numbers of sales are have going to decline these numbers and in parallel to establishing new convergent products. And this situation can reduce our churn rate to 8%/9%. And I'm going to remind you it's my own target.

And on your last question related to what dynamics, we see that this is a seasonal trend, which is to a large extent related to our impatience on reducing [our costs] during roam and high-roaming season. So naturally, we saw a similar reduction last year and this year, so we feel it's more like seasonality.

But you're not expecting Messaging revenue to start declining from now?

Say it again, please.

You're not concerned that the Messaging revenue can still be peaking and start declining as it does in some other countries?.

No, messaging -- well, Messaging revenue is not affected by over-the-top profits, and this is not related to some industrial shift from messaging to some other technologies. We believe it's more related to, A, seasonality; and, B, our packaged positions where we include the SMS package.

Okay. Thank you.

In my opinion, it's seasonality, of course. If you look at our results of the previous quarter in the previous year, it's a very good growth, which are growing to speak about 13%.

Thank you very much.

Tatiana Boroditskaya, UBS.

Thank you for your presentation. Can you please comment on any plans you might have to raise debt, both in domestic and international markets, and buy back existing debt?

Thank you.

Well, at this stage, we feel that we'll be focusing on domestic markets, and until the end of the year we'll probably use those open credit facilities which we have with the local banks, or our [ECA] backed facilities. So we are really looking right now on the international markets.

And do you have any intentions to buy back existing debt?

No. We don't plan any buybacks. You mean buy back our shares or our debt?

No, we do not have plans to buy back our debt since we have quite an extensive investment program, and we have yet borrow until the year end a certain amount to fully realize our investment program.

Thank you very much.

[Pavel Mamai], Goldman Sachs.

Could you comment, if you can, on your plans to repay the MTS (inaudible) Eurobonds in January? There are some technical issues with that. It may be the case if you have new information or something of a game plan.

Yes, of course, we do have plans to repay our 2012 Eurobonds. We paid our interest in July without any delays. So we'll be dealing with the situation of our 2012 Eurobonds and we'll meet our obligations.

Thanks. A quick follow-up. I never doubted that, obviously, but in terms of some of the [trading] actions, they've set a certain deadline. I think by the end of October they want to see a more clear game plan from you or some kind of actions from you in this regard.

Do you think they'll be satisfied with what you tell them, or should we expect a negative action from them?

Well, of course, we do have plans how to deal with the situation, and with different options. So it's (inaudible). They will get back to this project in October, but we do not have any expectations of them revising our ratings at this stage. It's just their policy; when they put companies on the credit watch, they will have to get back with the situation in 90 days. So they will be revisiting this situation by October, but we do not expect any changes in October since there will be no development by October.

Thank you very much.

Herve Drouet, HSBC.

My first question is regarding your planned transactions for the 29% stake in MGTS. I just want to confirm with you it will not automatically trigger a mandatory buy-out of MGTS and that you will do it later in the next two/three years. So that's my first question.

Second question is will 94% stake be enough to if needed restructure the network and free some real estate? And can you sell real estate and get the benefit of that, or do you need 100% stake to be able to do that in the Company?

And finally, just on the deprecation, on the acceleration of the depreciation, I may have missed a part of the conference call, but I just wanted to check with you what is the rationale of the acceleration of the depreciation. Is it in the type of network equipment you are currently putting? Are you accelerating the replacement of 2G base stations with upscaling the technology with potentially a 4G LTE enabled type of equipment? I just wanted to know a little bit more about that trend.

Thank you.

Well, for first question, our acquisition of the stake in MGTS does not trigger a mandatory buy-out, because this is an acquisition under [Goldman] control. So that's the situation.

As for our plans to monetize real estate, most of our synergies which we calculate is mostly in the field of commercial field and optimization of our costs. It does not include the better monetization of real estate. So it will be real estate that will go on top of what we calculated as the synergies.

And on depreciation and amortization increase, we are in the active phase of 3G rollout network. And at this stage, we're having two factors. First, we are substituting old equipment which is not well positioned for 3G. We have a certain technical quality on how we are rolling out 3G, and that goes together with the substitution of certain equipment in the regions.

And, of course, that accelerates depreciation and amortization. And also on the back of [our tactics], we have a higher depreciation expense.

Some more information about our real estate issue. Right now, we're under evaluation with this real estate, but we are not going to sell all our real estate to the market. Just that for us it's to move all our departments, all our [micro agent] stuff to our own real estate.

Okay, so we should not expect anything soon on the real estate side? Basically, that's your main message from MGTS in the short term?

No, we should not expect anything with real estate. And as I said earlier, first of all, we are going to move all our departments to our own real estate.

Okay.

No more.

Okay, thank you. Thank you very much.

(Inaudible), Barclays Capital.

I just have one question that's regarding the last statement on the press release. You're talking about the range of 42% to 43% of EBITDA margin, the revision, and you tie in this with SIM card sales. I'm just not quite sure if I understand correctly. How is this related to this margin revision to low 40%, because you also say that you actually managed to reduce the sales by 25% of the SIM cards. Could you please elaborate more on that?

Thank you.

Okay, let me try to explain you that. We -- there are some to factors. First, we see right now that we are managing an improvement. However, there is high uncertainty in the market how the market develops in the second half of the year. If high sales are continued in the market by our competitors, then we see some probability that we'll have to get back to this by year end. This is not our plans, but since the uncertainty in the market is there, then we feel that it is safe to take a more conservative view.

Secondly, this is not the only factor which is affecting our margin. Another big factor which we also highlighted is increased competition in handset market, namely between (inaudible) which brought our margins in the market down. And you can see in our management presentation that we also feel pressure from this field as well.

So this and other factors combined, as well as the high uncertainty in the markets, forced us to take a conservative view. We just withdraw our guidance.

So it's still possible that you may end up at 42%/43% range? It's just you're being conservative.

Absolutely. In our view, low 40s; it's from 40% to 43%. So we believe that we still can make it.

I see. Great. Thank you very much.

[Rodney Thomas], Citigroup.

Two questions. The first is just following up on the plans to repay the Eurobonds due in January. Could you just confirm what availability you have under the local bank facility and the ECA bank facilities?

Well, right now, we have signed credit facilities with the (inaudible) Bank for the amount of almost $1.5 billion. We have signed credit, open credit lines with a number of other banks, and namely with Gazprom Bank and a few other small ones. So we have quite a high volume of committed credit lines at our disposal.

Okay.

But it is credits which were not withdrawn and signed some time ago.

Roughly how much is available under ECA lines?

Well, that's roughly about $600 million which we can do in the short term. But on the longer term, that's about $1 billion or even slightly more.

Okay. My second question is, could you just remind me why the CapEx is always back loaded to the fourth quarter of the year?

Well, that's related to the cycle of construction, because usually there is a build-up in the warm months, and we start building up late in spring, summer, and autumn. And by the end of the year, we are completing our build-up so that we are finishing most of the work by that time.

So does that mean in the fourth quarter, you make the orders for the new construction season that will begin in, say, the second quarter?

That means that, in the fourth quarter, we are paying final amounts for construction which was done.

Okay. That's -- I understand. So you're generally paying -- the payments are back loaded at post-completion or at completion, not paying in advance?

No.

Okay, very good. Thank you.

Igor Semenov, Deutsche Bank.

I just wanted to follow up on the synergies with GCS again. Remember when you were buying Comstar, you were also talking about synergies, so I just wanted to understand if this RUB14 billion synergies are on top of the amounts indicated at the time of the Comstar transaction.

The second question is, in your spreadsheet that talks about mobile Internet indicators, you have 31% percentage of active users of mobile Internet, but the smartphone penetration is only 12%. How do you reconcile that?

And the third question. For -- can you remind me, for the management team, including the top managers of MTS and the regional managers, what is the most important indicator for you when you are being paid -- compensated? Is it the top line growth, or is it the EBITDA margin?

Thank you.

Okay, I will start with the first one. So all the synergies is going on top of the synergies which were planned during Comstar acquisition. And they derive, of course, mostly from full consolidation of the assets. At the same time, it is important to note that we are [2 times] (inaudible) already by present time, or before our planned synergy from Comstar acquisition. So we are much better in realizing those synergies than they were valued and put in valuation for Comstar. And again, MGTS goes on top.

The next question is the compare with total smartphone penetration of 15%, and 31% of active Internet users, if I currently understand. I think it's not such a problem, because this difference we can explain of a lack of modem users in our 3G network.

Okay. And on the third question related to compensation, what has been key [performance] indicator?

And the next question is -- repeat it if possible. Ah, it's a question about KPIs for management, yes?

Yes, what is the key, or what is the most important?

The main KPIs for management team is the following. It's, number 1, revenue; number 2, OIBDA; and number 3, OIBDA margin. And speaking about volume of all this issue, it's approximately equal.

Okay. Thank you.

Alexander Kazbegi, Renaissance Capital.

Just to follow up on a couple of things again, I think on the data side. What is the cheapest smartphone you have now on sale, either by your retail network or in the market? And what is the dynamics there? Do you expect again the prices to come down sufficiently again to see the smartphone penetration increase from this fairly low 10%?

Second, on the data also, so to say, in terms of the pricing in general, because your usage on the network has increased fairly significantly, but your revenues did increase a bit, but not probably as much. What is the situation with the pricing now? Do you see a lot of competition on the pricing? Do you reduce it significantly? What's your outlook for that one?

And then I'll have one more question on the margin, but maybe we'll start with this.

Thank you for your questions, Alex. And thinking about the cheapest smartphone on sale in the retail network, it's no more than $100 in Moscow; in the regions also. And in my opinion, this price can be less, approximately $50/$70. And it's a real price which you can [consider] with our chain of vendors (inaudible).

But speaking about data price and usage increases, yes, you are right, usage increases faster than revenue, and it's a very competitive situation. But in my opinion, we are waiting for the stable position in usage and revenue in the near future because it will be the last step of construction of 3G network; it will be the last step of price reduction between the smartphone and modem. And so I'm sure that 'til the end of this year, it will be stable digits.

Okay. The second question if I may on the margins, so just to follow up again. You mentioned still several reasons again for the margin to come down. Let's say one was the interconnect balance. On interconnect, I don't quite understand; you have fairly stable subscriber base. Do the traffic patterns change that much that MTRs have not changed? So why would the interconnect be so significantly different to affect the margin so much?

Also, on the handset and accessories again, if you compare the second quarter of 2010 with what was in second quarter of 2011, the difference in gross margin is not that dramatic. Given that the handset sales is only like 6% of the total, or 7% total probably so to say sales in Russia, this shouldn't have such a big effect. So are you saying that basically this margin is going to zero in the next couple of quarters probably because of the increased competition? Just to understand also these two dynamics, please.

Thank you for the questions. And thinking about OIBDA margins, the negative [gap] with our competitors of interconnect will be much better in the near future. And you are right, it's very big impact for our marginality. But we are going to establish a new tariff plan in Russian market, especially tariff plan with on-net traffic, and it can support our improving of OIBDA margins, of course.

And the second question is about handsets and accessories.

Yes, the gross margins on that. Well, I was just saying that, if you compare to the second quarter '11 with '10, the difference in gross margin on the handset sales is not that big. If you are again guiding us lower for the EBITDA and saying that that's one of the reasons, this margin should really collapse. And I was just wondering if that's what you're indeed expecting now from the competitive stance that you are seeing in the market?

Yes, I think you should take into account two factors. First, that you -- when you are looking at the dynamics, the seasonality of this margin is increasing because size of the sales in the first half 2010, and first half 2011 is (multiple speakers).

It went up [0.7].

[Much higher] in the first half 2011. And secondly, we are talking about trends, and the trend is going downwards. So even 3%/4%/5% margins on the volumes of our handset sales put a significant pressure on our margins.

And lastly, we are not talking about dramatic change in -- or significant change in our license. It rather a withdrawal of our guidance because of the increased uncertainty. As I said, we do not -- at this phase, we do not know now what would be the development in the market in the second half of the year, and we feel it is proper and a more conservative way to withdraw this guidance and change it to low 40s.

Okay. And just a follow-up on this interconnect. Andrei, did you say that you don't have very good traffic mix you believe at the moment, that you can improve that vis-a-vis what competitors have in terms of on-net versus off-net.

Sure, you are right. Unfortunately, we have right now bad balance in interconnect traffic with our main competitors. But as I said earlier, we are going to improve this situation through the establishing in the UK with on-net traffic, with on-net zero pricing.

Okay. Understood.

Just, if you will, that we believe that a practical mix can be improved in favor of on-net traffic with the reduction of off-net traffic, and that in itself will drive improved interconnect balance.

Of course. Did I hear correctly also that you said on-net will be quite significantly reduced then which can then have impact on the revenues as well?

Well, not necessarily significantly reduced. Our on-net traffic and on-net volume can be increased, and there might be some skew towards on-net traffic which, yes, there will be some rebalancing, but this does not necessarily tell us about a significant shift. But still, it can have a material effect on our total interconnect balance.

Okay, understood. Thank you very much.

Victor Klimovich, VTB Capital.

May I follow up with Alex's question regarding on-net/off-net traffic first of all? And my question is the following. As far as I remember, you implemented this off-net price plan to attract customers from other networks, so if you plan to implement this on-net price plan with attractive price points, I guess, don't you think that you will lose some of your customer base which use the current price plan just to talk with their peers in other networks?

This is my first question. Thank you.

Victor, thank you for your question. And you are right; if you are going to see our (inaudible) when MTS launch a tariff to attract other subscribers from other networks, [with reduced off-net column], it was a first step to attract bad interconnect to get with our competitors. It's a good instrument to attract more customers, but unfortunately it's a good instrument to attract new customers with low marginality.

And now we are going to change this situation, because if a lot of subscribers go into talk inside our network, it can improve our interconnect balance with our competitors.

Well, I see, but anyway, they will -- and probably some of them, they will have their peers in other networks, so don't you expect increased churn? Or I will put this question another way. Will you cancel this price plan, or you will just try to promote to these customers a new price plan?

Victor, it's a question which has no direct answer. It's a question of balance how many subscribers are going to use our old tariffs and how many subscribers are going to use our new tariff.

Okay. May I have another question regarding Turkmenistan? Any latest information regarding the situation?

Victor, did you say Turkmenistan?

Yes.

Victor, no news.

At all?

Victor, come on. No news.

Okay. Thank you. And my last question to Alexey. Alexey, can you please comment regarding your CapEx payment schedule for the CapEx which was already -- physical CapEx which was done in your network? As far as I could get, the difference in our assumption for ForEx gain or losses with the actual number came because you have presumably a lot of obligations in euros, and I just want to clarify what is the scale of this obligation to your CapEx providers.

Thank you.

If we talk about -- if you want to understand the origination of our CapEx, or of our ForEx loss on Europe, this does not relate to CapEx. This relates to the assets which we have in euros, and namely the debt to other shareholders of K-Telekom, [I mean] minority shareholders.

Then as for CapEx payments schedule, it does not affect now our ForEx loss.

Okay.

Operator, we'll take one more question.

Tibor Bokor, ING.

A quick question on dividends from MGTS. Were those already paid, when do you expect the payment, and can you confirm it goes both to the common and preference shares?

Thank you.

We did already pay it, and it went to both common and preference shareholders.

Was it in the third quarter, sorry?

No, that was not in the -- well, I think it was either June or July.

Okay. Thank you.

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.

Ladies and gentlemen, this concludes the Mobile TeleSystems' second quarter 2011 financial and operating results conference. Thank you for participating. You may now disconnect.