Mobile TeleSystems PJSC (MBT) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Mobile Telesystems first quarter 2012 financial and operating results conference call on 21 May 2012. 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 Joshua Tulgan. Please go ahead sir.

Welcome to MTS's conference call to discuss the Company's first-quarter 2012 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 topics. The strategic development of MTS's business activities, both in Russia and abroad; revenue [in our] subscriber growth; loan facilities and their usage; and 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/or return on capital; technical matters as they pertain to our mobile and fixed communication networks, including equipment licensing or network technologies; capital expenditures and operating expenses; and macroeconomic developments within the markets of operation.

A comprehensive overview of these issues is available in MTS's Annual Report on Form 20-F, which is available on our website or through the 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's 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, www.MTSGSM.com or that of the US SEC.

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 in risks. Copies of the presentations and materials used in reference to the conference call are available on our Company website.

I now turn the call over to Mr. 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 for the first quarter 2012. Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Aleksander Popovskiy, Vice President, Chief Operating Officer; Vasyl Latsanych, President, Chief Marketing Officer; and Dr. Michael Hecker, Vice President, Strategy and Corporate Development.

[Little] time has passed since we released our financial year 2011 results. The (inaudible) shareholders results in wishing (inaudible) of the success of our approach to the market (inaudible) overall.

In 2011 (inaudible) in an effort to create incentives for (inaudible) focus on mineralocorticoid rather than (inaudible) accounting practices.

Combined (inaudible) similar actions by our competitors, we have shown more prudent marketing efforts and more effective cost control for (inaudible). Group revenue for the quarter increased 3% year-over-year to reach $3.01 billion. With such sustained growth in usage of voice and data products, also the [changed our] the underlying growth dynamics in market (inaudible) in Russia and (inaudible). As we discussed in Q4 2011, we also [covered the] wholesale sales of handsets. This further strengthened our year-over-year performance. In Q1, however, performance reflected general (inaudible) also that (inaudible) [the leap year in our] performance.

For the period, total revenues in Russia increased in rubles [to dollars by 6%] year-over-year to [RUB78.7 million] (inaudible) included. Higher usage of mobile voice and data products and growth and expansion in our fixed line business unit. Sequentially revenues declined by 1% likely due to the (technical difficulty) (inaudible).

In our mobile business we delivered 7% year-over-year growth to RUB65.4 billion. This includes a nearly 11% yearly decline in sales from handsets and accessories, which reflects our decision to cut back on fewer [margin contract] sales.

With that being said, [total revenue increased] a respectable 8.6% year-over-year, largely through higher voice and data usage, and that was focused in higher-quality subscribers, which you can see in our reduction of SIM-card sales and [1% drop] in overall subscribers, an increase in ARPU of over 12% year-over-year and a reduction in churn from 12.3% in Q4 to 11.3% in Q1.

The (inaudible) financial results for the period (inaudible) to see that our revenue dynamics is ahead of the market. In H2 2011, the traditional (inaudible) with (inaudible) and shifted our financial policies to focus more on retention rather than SIM-card distributions. Because of this, we naturally saw a (inaudible) topline development for 2011 and year-over-year. However, given our competitor's results, we have seen the outperformance in market quarter on quarter despite our greater dependency on seasonally weak revenue stream like (inaudible).

Therefore, we feel confident that we can manage growth, stability and sustain leadership tradition in the Russian market through the second half of the year.

Our fixed line [operating unit] increased 9% year over year to RUB15.2 billion, key drivers included. And (inaudible) on the existing customers, regional M&A activity and [upward tariff revisions] at MGTS. At MGTS, we already (inaudible) price on average by 7.1% beginning from March 1, 2011.

In the Ukraine, revenue increased by 8% year-over-year to [UAH2.2 billion]. Key growth factors include (inaudible) rising voice usage and the increased adoption of (inaudible) reserves.

Uzbekistan revenue increased by 10% year-over-year to $116 million. This is attributable to the rising contribution of [favorable] (inaudible) as we extended our 3G network. Year over year, data traffic revenues increased by 146%. We continue to lead the market in terms of subscribers with a [38%] market share. The market although remains highly competitive.

In Armenia, revenue increased slightly year-over-year to AMD16.7 billion. This sequential revenue decline was attributable to similar factors in sustaining CapEx (inaudible) capital (inaudible) which we saw in the second half of 2011. However, we have seen signs of an overall softness on the (inaudible) subscriber quality. This evidence in our declining subscriber base [has been reducing] (inaudible) sales in Q1.

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

Thank you Andrei. In the first quarter we improved Group OIBDA by 12% year-over-year to $1.26 billion. Our OIBDA margin for the period reached 41.8%, an increase of a peace 3.4 percentage points from first quarter 2011.

All in all, we have seen success in our efforts to increase profitability in our Russian business and there was greater efficiencies across the group. However, we have also seen the impact of competition in our [CIS markets] and increased regulatory pressure.

In Russia, our OIBDA margins increased from 39.1% to 43.1% in first quarter 2012. The improvement came on the back of a significant reduction in dealer commissions following our (inaudible) [revenue-based] commission structures which also saw lower sales on advertising expenses relative to last year.

Sequential OIBDA margins [required] is attributable to seasonal factors, but we still see cost pressure in license, which we mentioned in the fourth quarter. OIBDA trends our sales markets were in line with the seasonal dynamics and are reflective of the topline performance and competitive factors.

In the Ukraine OIBDA continues to grow faster than revenues, as OIBDA grew 15% year-over-year. Sequentially OIBDA fell in the Ukraine from fourth quarter, but this was largely due to seasonal factors.

In Uzbekistan, new (inaudible) regulatory (inaudible) lead to longer-term reduction in our OIBDA margin. In EMEA we are (inaudible) an extraordinary gain tied to improvement growth in the market. Here we expect our OIBDA margin to fall back in line with historical trends.

Net income increased nearly 60% year-over-year to $512 million. Gains made on the bottom line tied to gross margin and OIBDA improvements were offset largely by an increase in D&A expenses. We also gained -- benefited from ruble appreciation for the period, which led to foreign currency gain of $174 million.

At the end of first quarter, our total debt [decreased] to $8.1 billion. During the quarter we completed the redemption of a $400 million Eurobond due to (inaudible) late January. We also (inaudible) RUB15.2 billion loan held by Gazprombank and a RUB10 billion loan held by Bank of Moscow using a cash on hand.

Net debt to EBITDA declined to a multiple 1.2. We will continue to pursue opportunities to further optimize our portfolio throughout the year.

In (inaudible) we announced (inaudible) a dividend amount of RUB14.71 per ordinary MTS share for the full year 2011. This amounts to RUB30.4 billion or approximately 72% of US GAAP net income for the year 2011.

The dividend will be subject to the approval of the Company's Annual General Meeting of Shareholders on June 29. Under Russian law, payments should be made within the next two months following the approval at the shareholder meeting. But it is likely we will make payments relatively quickly.

Free cash flow for the quarter came at $829 million. CapEx for the quarter totaled $463 million. Investments are largely being focused on expanding our 3G network, connecting [stations] to fiber, and [practicing] with implementation of our GPON project in Moscow. As we have more information on the market, we see less downside risk in our OIBDA margin guidance.

With results of our (inaudible) having been made public, we see a reduction of SIM-card sales and [we are ready to implement] in the market place of competitive cost pressures. Also, we expect cost pressures to remain, which would the delay impact of commission due to our transition to revenue-sharing based agreements, inflationary pressure (inaudible) to support our [expensing] network, higher labor cost, and continued growth in the expansion of our [APO] business. Nevertheless, we feel comfortable (inaudible) the range of our OIBDA margin guidance to 41%, 42%.

Thank you Alexey. As we discussed on our last call with our [cap rate] 3i Strategy and (inaudible) policy, (inaudible) our market [for penetration]. Increases to this evolution of (inaudible) products (inaudible). It has recently been announced (inaudible) the condition for the allocation of LTE licenses in Russian Federation. [Formulas is the creator] of the tender and the framework for development of (inaudible) to the transparency of the Russian communication market.

We also share a commitment to a [nonbond regulator] and the operators to continue extended access to communications, services and (inaudible) infrastructure development. Naturally we are throwing our full efforts towards the tender. We feel we are in the best position according to the conditions and fully expect to achieve them if (inaudible).

Leveraging our current (inaudible) in the 2595 to 2620 MHz range, (inaudible) for the LTE TDD services in Moscow in the Moscow region. While we are focused on the MTS owned and operated LTEs to the network is extended for all of Russia, we're (inaudible) continuing to (inaudible) to ensure that we are among the first to market with key products and have a network capable of tandem future growth in beta. We are considering MVNO in different markets and in Moscow. LTE TDD will enable us to afford more data traffic and (inaudible) speed to accommodate the same growth in data consumption.

We anticipate full commercial launch in two to three months.

Close to (inaudible) as most of our home base stations are compatible with LTE and require more investments to our rates. Our investments in our mobile networks in Moscow are being made to conjunction with our GPON projects. In case we (inaudible) late 2011 to replace the 4.4 million existing copper line for a true fiber to the home, come to market with a solution known as GPON, (inaudible) optical network.

GPON (inaudible) up to 1 GB per second in each apartment in Moscow we shall further open markets for a number of telecommunications and data products. In many of our regional markets, in fact, we (inaudible) GPON for full fiber networks. Like in the regions, the installation of fiber will lead to improvements in our Moscow modern networks at GPON will (inaudible) in backhaul.

The projects will take roughly four years and cost an estimated more than RUB50 billion. With this [economical growth] and an improving competitive environment in Russia, we continue to remain optimistic about OpEx for [our ability] to grow and develop (technical difficulty).

Thank you for your time. And now I'll open the call to questions.

(Operator Instructions) JP Davids.

Two questions please. The first one, on EBITDA margin outlook, into the second half of the year, as I understand some of the utility price rises have been deferred from 1 January to 1 July. Will those have a meaningful impact on your second-half margins?

The second question is on smartphones. You launched a trial bonus type offering. Instead of subsidizing smartphones, this is in the Northwest region, I was just wondering how that campaign had been going and whether you see that as the template for pushing smartphones across your base? Thank you.

This is Alexey Kornya. As we understood the first question, (inaudible) whether we will see a delayed impact or impacts from dealer commissions on our [EBITDA] margin in the [second quarter], we do expect to see an effect from the part where we start analyzing our dealer expense, together with the [rating news]. So we will still see in the second quarter some delayed effect which will put pressure on our margin in terms of dealer commission costs.

Great. Just to follow up on that question, I was asking specifically on the utility price rises, so energy, water, et cetera. I understand that some of those have been pushed into the second half of the year.

Well, it does include. These are not that material cost for us and our guidance does include effects from whatever increase in utility costs.

As of the next question, my name is Vasyl Latsanych, the CMO of the Company. Could you please repeat the question? There was a noise and (technical difficulty)

Of course. So, it was on your smartphones, and specifically, as I understand in the Northwest region you have been trialing a new incentive plan, a bonus plan, where you give RUB1000 to RUB5000 of airtime or usage for free if a customer takes a smartphone. I was wondering if this was the template, how this rollout was going and whether this is the sort of template we should think that will be rolled out across the rest of Russia. Thank you.

That's right. It was regarding what we call rebirth subsidy sales of the smartphones. In the Northwest was one of the reasons we did some trials. We don't have the results yet as the smartphone sales are booming in Russia and our existing base of smartphone users is growing quarter over quarter very rapidly. So, part of that growth is attributable to such promotions and also it grows naturally.

We don't have the results to be shared right now, and there is no problem of growing such activity out through -- for the whole [base country is Russian].

Thank you.

Cesar Tiron.

I have a quick question on data traffic growth, revenue growth. Actually (technical difficulty) a little bit although it's very strong. Can you please let us know what the main drivers are? Have you cut pricing? Or is it less of the conception of data growing at the store base in some of the regions? Thank you.

So it's (inaudible) the main drivers of (inaudible) growth is of course the minutes of usage, and as you know, it has very big growth in previous year. For example, 2011 as compared to mid-2010, it was approximately [35 minutes, approximately 16%]. And in Q1 we have approximately the same growth.

Thinking about the data growth, this is of course more new subscribers, which can attract to our subscriber base. And then to remind you that mobile Internet user integration is growing steadily. At the end of Q4 2011 it stood at 35.4% and we expect this to go up to 44% and more in 2013, for example. Thank you.

Can I just briefly ask a follow-up question just on the (inaudible) marketing expenses? The decline in social marketing expenses is one of the key rivers of the margin improvement, and I was just wondering whether you have delayed some expenses into the next quarters. Thank you.

Yes. This is Alexey Kornya. Yes, there is some delayed expense. It gets in other quarters from delayed commissions.

Thank you very much.

Tibor Bokor.

I was wondering whether you could tell us a little bit about Turkmenistan. Since MTS lost license there, we haven't heard a lot of updates like what is happening in the country, what happened with the number of users and whether there is any opportunities for MTS in that country. Thank you.

Andrei Dubovskov. I'll claim some answer for this question. The overall view of the decision is the following.

Of course they are going through [slight depreciation] in Turkmenistan in (inaudible). And right now we are in negotiations with the government of Turkmenistan and Oleg Raspopov can explain more detail on this issue.

Good afternoon, gentlemen. I'm ready to answer your (inaudible) accretion, so if you have in general (inaudible) agreed fundamentally we are to return to this geography. So now we are in the process of synchronizing everything you see providing from (inaudible) there to provide all necessary, so just to us in terms of licenses, frequency and some stuff like this. Also you see there is Turkmenistan government monopoly issues. And for us also, actually, to resolve the left issues in the international courts, we are still in.

And it's Andrei Dubovskov. I'm going to add some information. Thinking about the CapEx, for example, of (inaudible) [expenses] because our network (inaudible) and I think you will know it's a very good program to launch our operations in Turkmenistan. Thank you.

Yes (inaudible) [it will be an issue, exactly]. Like this, of course, you see this time there will be -- you will see more courses in terms of return of our investments, since we'll do our best actually to make investments on those returns when it is possible, not waiting the (inaudible) in terms of our existence there.

Thank you very much. That was very helpful.

Viktor Klimovich.

Good evening. (technical difficulty) May I ask a question regarding base stations that are connected with fiber optics through your networks out of all 3G stations?

Thank you for your questions. As you remember, at the end of [this year] it was approximately [64%]. But if it's about the event the third quarter, it is approximately 65%, and of course we have a very high level to the end of this year and there will be no less than 85%.

Thank you very much. May I ask -- may I follow-up with the previous question regarding (inaudible) revenues. So as we could see, there was a decline in data revenues this quarter in terms of growth. Sorry; so there was a decline of growth in data revenues. Can you explain the major reasons and what should we expect going forward?

There was a seasonal decline plus we had a reclassification of some sales of the equipment, meaning modems, which were in some actions -- activities included in the revenue from the data into the terminal's revenues. So there was no clear declined in the growth of the data sales that we encountered. (multiple speakers)

A little information about our data revenue. I'm going to remind you that we have good data growth q-on-q. It is approximately [12%] and it was in line with expectation. However this was less than Q4 2010. It was approximately at [plus 6%]. But it was continued (inaudible) so it slightly affected growth. Thank you.

Thank you very much.

[Alexander Vagrovitch].

(technical difficulty) the late commissions which will be increasing in the second half. How do you -- could you please clarify whether you are provisioning for the increase in the late commissions in the second half right now, in terms of the accounts in your financial statements? Thank you.

Unfortunately -- this is Alexey Kornya again; unfortunately the (inaudible) wasn't very well. As far as we understood the question was the delayed (inaudible) back towards the accounting of effect in the relation to dealer commission. How it worked that we see some delay in expenses following our transition to (inaudible) scheme.

So how it usually works is that we used to have a fixed compensation for (inaudible) which was recounted at the moment and sale of SIM-card. Now dealer commission is recognized in accounting together with revenues, because this is basically share of revenue, which will compensate the dealer. So as revenues are delayed away from the moment when SIM-card was sold, their commission (inaudible) is delayed as well.

So we will see a later a (inaudible) in the amount of dealer commission. We think that by the second quarter and further on we'll see (inaudible), by the end of the second quarter we will see a normalized effect from transition of our dealer commission compensation to a (inaudible) revenue scheme.

Okay, just to clarify, that means that in six months you should start paying the commissions to the dealers, but at the same time you are not provisioning for that (inaudible) payments right now? Yes?

Well, we're not provisioning this because this commission goes together with the revenue. So we cannot provide for that known amount. We recognize this expense together with the revenue.

So, as soon as we get revenue -- and this is a basic principle in accounting that quarters should be recognized in the period when they appear. So, as we receive revenue we recognize cost and (inaudible).

Okay, thank you.

(inaudible)

Hi, good afternoon. Thank you. This is a really horrible line.

I just wanted to ask you about the cash conversion ratio. If you look at the operating cash flow as in relation to EBITDA, it improved quite significantly in Q1. Could you just explain what happened there, what sort of changes in operating in your working capital happened that drove this increase, and whether this is a new level of that should be sustainable going forward?

And also, a follow-up on Turkmenistan, could you possibly elaborate a little bit more in the terms of the license whether -- what kind of level revenue share you think you will be paying, where you stand with the cash repatriation to Russia? Do you have these kind of issues in the past? Do you expect these kind of issues to affect your business in Turkmenistan, and whether license will come for free or you are expecting to pay some sort of entry payment, so to speak, for the license? Thank you.

Let me take the first one on [EBITDA] to cash flow convention ratio (inaudible) so a high level of (inaudible) conversion. There was some one-off effect, usually attributable to first quarter because of the high accrual -- higher payable accrual on taxes. And this was one of the major factors. So our accounts payable grew about [$800 million]. Most of them attributable to tax level, and this is not sustainable through the years. So we will see a lower level of [EBITDA] to cash flow conversion.

Thinking about the question about Turkmenistan, today they have not (inaudible) because as I have said earlier, we are under negotiation. We're under negotiations talking about EU agreements with (inaudible). If we have news about this issue, we're going to show this (inaudible).

Okay. Thank you.

(Operator Instructions) Cesar Tiron.

I would like to ask about the also the slowdown of handset sales, which is (inaudible) very good for your margins. Is the level of handset sales that we have seen in value that we have seen in Q1, is -- can we use this as a guideline for the next quarters?

Thank you for the question. In my opinion, it's a normal level and we're [not] going to decrease this level (inaudible) approximately the same [addition] like in Q4 and Q1 in this year, maybe a little less. But it will be not (inaudible) approximately the same (inaudible). Thank you very much.

Thank you.

Anna Lepetukhina.

Yes, hello. I have two questions if I may. My first question is on an increase in CapEx in the first quarter. There was a hefty increase compared to what you invested in 2011, because if I then understand the first quarter, is usually not capital-intensive.

Could you please explain the reason why you invested more in first quarter of 2012? And does it mean that we shouldn't extrapolate it for the full year and kind of in absolute terms CapEx should not increase?

And my second question is on Ukraine. I just want to understand where you see growth in Ukraine coming from, because usage is increasing but it is already $600 million. At the same time there's no clarity in terms of 3G licenses, and therefore potential from the growth in data services is limited.

So, do you think that in Ukraine revenues can continue increasing at current price, and if yes, then where these calls will come from? Thank you.

Thank you for your question. And thinking about the CapEx in Q1, I'm going to remind him that it was not very different than Q1 in 2012 and Q1 in 2011. And then of course in 2011, fortunately or unfortunately, we had no [strong] projects.

And we had a big project only in the Q4 2011 and they're going to spend much more money in this year and in 2013. And if you remember, it will be approximately RUB50 billion. We're going to finish with this process in 2014.

And speaking about CapEx for sales, of course it will be according to our guidance that (technical difficulty) and thinking about the current year, thinking about the Q1 2011, it was 15.4%. In my opinion it was a normal trend for this year. So there is no (inaudible).

But thinking about the Ukraine, of course you are right. Minute usage is already high. Of course we have no clarity in 3G license. But in my opinion, you have good flexibility to have normal rate in the Ukraine, because we have good flexibility to increase our data usage in 2G networks in each area, first of all.

And secondly, we have good possibility to increase activity of our (inaudible) and to have some issues. I'm going to remind you that they have good data network in the Ukraine in CDMA standards, and in my opinion it is very good edge to other avenues. And the last of my arguments, I would like to say that in 2011 we had very good results in growth of (inaudible) instead of a decline in the previous year. Thank you.

Thank you very much.

(inaudible)

(technical difficulty) In Russia, I hope that you can (technical difficulty). Are you going or (inaudible) colors on your advertising budget in Russia this year, or at least the change in the (technical difficulty) budget compared to the previous year, so do we need to (inaudible) [causing] you a (inaudible) rates currently and what do you expect for maybe the second half of year? (multiple speakers)

Excuse me. You are speaking a very poor line. Could you speak more into the phone, and louder please, so we can understand the first question again.

Yes. My first question is about advertising. I hope that you can understand me. Yes? No?

I'm sorry. The first question is about what?

Advertising expenses in Russia.

And your question is?

What is the dynamic compared to the last year? What is -- what are your expectations for the second half compared to the first half of this year in terms of rates? What are the trends that you see in terms of advertising money that you have to spend this year? Thank you.

Okay, Anna. This is Vasyl speaking. Really it was so poor line I could only understand the question about the advertising expense, so I will try to answer as I understand the question (technical difficulty) but speak a bit slower.

So the thing is in the first quarter 2012 we have registered quite significant decrease of advertising spend versus both Q4 2011 and Q1 2011 as well. This reflects our policy of spending less for customers' attraction to high-speed tariffs and works more on the CRN level. At the same time we have decreased our activities in the image advertising in the first quarter, which will be regained in the second and the third quarters as we move more into image around the data area and data possibilities for our subscribers.

So, overall, speaking about 2012, in our plans we will have less expense allocated to direct advertising than in 2011. I will not say to what extent less. But it will be quite sensible as we are seeing that as the potential for economy for OIBDA improve this year.

Thank you very much. (technical difficulty) The second question is about the probability or possibility of the share buyback. If the market really continues to be weak, would we (inaudible) think that the question could be on your agenda? Thank you.

As we understood, the question was about possibility of share buyback.

Exactly.

We don't have any plans for share buyback at this point.

Thank you.

Thank you. There appear to be no further questions. Please continue.

Thank you very much. Ladies and gentlemen thank you very much. 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 all a pleasant day.

Thank you. This concludes the Mobile Telesystems first quarter 2012 financial operating results conference call. Thank you for participating. You may now disconnect.