Mobile TeleSystems PJSC (MBT) 2012 Q2 法說會逐字稿

Good day and welcome to the Mobile TeleSystems second quarter 2012 financial and operating results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to your host today, Mr. Joshua Tulgan, MTS Director for Investor Relations. Please go ahead, sir.

Thank you. Welcome to today's conference call to discuss the Company's second 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 issues -- the strategic development of MTS's business activities both in Russia and abroad; revenue and our subscriber growth; loan facilities and their usage; legal actions or proceedings directed against the Company or its representatives; regulatory developments and their impact on the Company's operations in 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 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's Annual Report and Form 20-F which is available on our website or through 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's Form 20-F, as well as other public filings made by the Company with the United States 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 statement either 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 will 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 2012.

Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Aleksander Popovskiy, Vice President, Chief Operating Officer; Michael Hecker, Vice President, Strategy and Corporate Development and M&A; and Oleg Raspopov, Vice President of Foreign Subsidiaries.

We are happy to present another strong set of results for MTS Group for the second quarter. Group revenue for the quarter increased 4% quarter on quarter to reach over $3.1 billion, in spite of a significant weakening of our core currency versus the USD.

We saw sustained growth in usage and voice of data products in each of our markets' operation. We also see signs of stability and moderate competitive pressure in our markets.

For the period, total revenue in Russia increased in ruble terms by 9% year-over-year to RUB82.8 billion. Key drivers included steady voice usage, higher revenue subscribers through our efforts to optimize dealer relationships and sell more through MTSS proprietary retail chains, and growth in handset sales including sales of higher value markdowns.

Year-over-year, our mobile business grew by 10% to RUB69.3 billion. As we predicted, we continue to see benefits in our mobile business through a combination of strong tariff plans, proven sales strategies and continued investments in our networks. We see strength in upselling our mass-market subscribers to better voice plans of ARPU and mobile by 12% and 15% year-over-year, respectively. We also are attracting better subscribers through our own retail and partner channels. Network subscribers also contributed to the rise in ARPU and demonstrate more loyalty.

For the period, churn dropped from 11.3% to 10.5% and modem sales remain strong despite the cancellation for subsidies. Sustained investment in our networks makes MTS the logical choice for customers who want speed and access to the Internet.

Our fixed line business remained stable year-over-year. Both residential and corporate ARPU fell slightly due to increased competition and the addition of lower value customers, also added roughly 50,000 new subscribers. We remain focused on network improvement both in Moscow and the regions. There are work being done to upgrade to full fiber in our networks. We are confident that better networks will allow us to show the growth in this business and increase customer value.

In Ukraine, revenue growth continued at 7% year-over-year to nearly AMD2.4 billion. Trends in the market continue to favor us as we saw definite year-over-year growth in ARPU, MOU and data traffic.

We also were able to benefit from the year 2012 through higher guest roaming so the overall contribution from this is minor. Data traffic grew 9% year-over-year which is strong given the fact that there is no 3G yet in the market.

In Armenia, revenue increased by 2% year-over-year to AMD19.1 billion. The market continued to [trend toward] stable as they improved churn and subscribers increased their calling and data usage.

In Uzbekistan, we didn't recognize a full quarter of revenue and OIBDA is (inaudible) separation impact of our district with regulatory authorities only in the third-quarter. Operationally, we realized a strong quarter as revenue increased 22% year-over-year. As for our future in Uzbekistan, I will speak to this topic later.

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

Thank you, Andrei. In the first quarter, we grew Group OIBDA by 5% year-over-year to $1.37 billion, despite the year-over-year weakening of the ruble/US dollar rate of nearly 11%. Our adjusted OIBDA margin for the period reached 44%, an increase of 2.4 percentage points from second quarter 2011. Overall, we are seeing success in our efforts to increase profitability in our Russian business and realize great efficiencies across the Group.

In Russia, OIBDA rose 14% to RUB36.9 billion. For the first half of the year, OIBDA has grown twice as fast as revenues as we are optimizing our operations to extract more value in our core market. Our OIBDA margin increased from 42.7% to 44.6% in second quarter 2012.

We continue to see benefits from growth in higher margin (inaudible) revenues, higher margins in retail, across-the-board cost discipline. Sequential OIBDA margin gains are largely attributable to seasonal factors. OIBDA trends in all CIS markets were in line with the seasonal dynamics and are reflective of the topline performance and competitive factors.

In Ukraine, OIBDA reached over UAH1.2 billion and we realized the margin of 51.9%. While our business in Ukraine continues to grow profitably, we realized a one-time margin benefit of roughly 2 percentage points due to the reduction of a reserve held against interconnect.

In Uzbekistan, we ordered our churn (inaudible) to minimize taxes against number and capacity which allowed us to improve our margins sequentially.

In Armenia, our OIBDA margin has returned to historical levels as we realized a one-time benefit due to the equipment swap in first-quarter 2012.

While we are obviously pleased with our strong performance and the overall profitability of the Group, we do see second quarter as a big margin. In second quarter, we realized approximately 1.5 additional percentage points of OIBDA as one-offs from a number of adjustments related to a variety of things including sales of handsets and equipment previously held in reserve, employee bonus release for the financial year 2011, sale of real estate [payments] and the aforementioned reduction in interconnect expense in Ukraine.

As we have mentioned, we feel that it is likely that margins will weaken in the second half of the year due to fill the expansion in our retail footprint in particular the buildout of additional 60 flagship stores and opening new stores in population centers with as few as 20,000 inhabitants and increasing handset sales; increased labor costs based on new laws regarding social taxes; the full impact of our transition to a new dealer commission structure and continuously rising rent and maintenance costs as we expand our mobile and fixed networks. Obviously, the developments in Uzbekistan where the margins were 49.7% for the first half of the year will not help our margin performance.

Net income excluding adjustments related to Uzbekistan reached $397 million for the period. Because of the 2.5 depreciation -- of the -- the sudden depreciation of the ruble, we were forced to realize a non-cash loss of ForEx of nearly $200 million of ForEx. Otherwise, line items like depreciation and amortization as well as interest expense slightly improved for the period.

However, given our limited ability to conduct operations in Uzbekistan, we determined that a portion of MTS long-lived assets, intangible assets and goodwill time period and we recorded a charge of $579 million for the period. In addition, MTS has provided for tax and other liabilities that are likely to result from the various legal proceedings currently ongoing in Uzbekistan in the amount of $500 million.

The total amount of impairment and provisions is about equal to the total book value of our assets in Uzbekistan. The cumulative effect is a net loss for the period of $682 million.

As MTS has stated, there have been limitations in the amounts of earnings we have been able to repatriate with dividends and other means due to specific market conditions in Uzbekistan. Therefore, we do not see any risk for the liquidity position of the Group as a whole.

At the end of the first quarter, our total debt decreased to $7.3 billion. We had no principal repayments during the quarter but currency fluctuations, the repurchase of a ruble bond in the amount of RUB13.2 billion, preparations for our financial year 2011 dividend payments and improvement in OIBDA allowed us to improve our net debt to OIBDA ratio to 1.1 multiple.

We will continue to pursue opportunities to fill up the (inaudible) in our portfolio. In July, we paid out our financial year 2011 dividend in the amount of RUB14.71 through ordinary MTS share or RUB30.4 billion in total.

Free-cash flow for year-to-date is nearly $1.1 billion which is over 33% higher than this period in 2011 despite a significantly weaker ruble. In the first half of the year, CapEx exceeded $1.1 billion. Investments are largely being focused on expanding our 3G network and preparing for our 4G rollout, identifying these sites, connecting base stations to fiber and proceeding with the implementation of our GPON project in Moscow.

Thank you, Alexey. As Alexey has explained, we have obviously had difficulties with our business in Uzbekistan. I do not (inaudible) developments. I refer you to our disclosures in our website for a more detailed chronologically of demand.

Let me asset what has happened so far in Uzbekistan. There has been a travesty of rule of law and justice for foreign investors over the past eight years, and this has been at the forefront of the development of telecommunication in Uzbekistan.

In addition to the (inaudible) in the business, MTS has invested over $1.1 billion to provide 9.5 million customers, a third of the population in this country with the latest voice and data telecommunications services. Over the past eight years, MTS cooperated fully with authorities on various outages, inspections and (inaudible). In fact, as recently as February 2012, MTS cooperated with tax authorities over a multiyear audit and it resulted in an adjustment of roughly $1.2 million which MTS -Uzbekistan fully paid to us already.

Thirdly, our subsidiary has been subjected to numerous actions by various authorities that have eventually led us to suspend our operations. While MTS strongly denies any wrongdoing alleged by the various Uzbekistan authorities and has challenged it and intends to continue to challenge the legality of their actions, MTS has fully complied with relevant court decisions.

We continue to challenge the allegations against MTS-Uzbekistan and make use of the appeals process with Uzbekistan. We're also evaluating other appropriate legal strategies to defend our legitimate rights and investment interests. For now, our primary focus remains the well-being of our employees.

We were successful in freeing our acting COO, (inaudible), a Russian citizen with the help of the Russian Ministry of Foreign Affairs. But four of our colleagues remain in jail in Uzbekistan. We have engaged with various stockholders both here and abroad to build support for their release. The process in Uzbekistan is ongoing. However, we believe that we face a significant loss of revenue in our business regardless of the outcome.

Our decision to write off a portion of the asset value and take provisions for claims reflects this fact. Nevertheless, we are committed to defending our rights. We have no hesitation to challenge any authority, or any dollar initiated with this unwarranted attack on what has been a good corporate citizen in Uzbekistan and the driver of growth, (inaudible) and innovation in the Uzbek (inaudible).

On a more positive note, we came to an agreement with government authorities in Turkmenistan over their launch of our networks. In late September, we were able to launch services under the MTS brand. We do not anticipate large costs to get the network up and running. Our assets remains intact and in good condition. Overall, we expect to spend just under $40 million in CapEx in the market through 2015. However, by year end, is to attract approximately 440,000 customers and realize over $3 million in revenue.

While this may seem small in comparison to the total size of MTS, it is a reasonable step in leveraging our expertise in the market utilizing a high-quality asset and turning a negative situation into a positive for MTS, its employees and its shareholders.

In Russia, we continue to see opportunities to create value in our business. By the end of this year, we will increase our retail footprint by up to 500 stores. Many of these stores will be opened in cities and towns as small as 20,000 people. The opportunity here leads to promoting higher-margin data projects. We have already extended our 3G networks into these types of communities and we see great demand for data enabled devices.

The combination of 3G networks and the retail presence will help us drive sales of smartphones and increase smartphone penetration which will in turn lead to higher value customers.

Ladies and gentlemen, thank you for your time and now I will open the call to questions.

(Operator Instructions). JP Davids, Barclays.

Hi, thank you for the opportunity. Two questions please. The first one on the Uzbek impairment, just in terms of your dividend outlook for 2012, will this impairment be looked at or considered when you pay out dividends at the end of 2012 with the knowledge that you do have a dividend payout ratio as guidance? Sorry, EPS payout ratio.

The second question is a broader question on mobile data and more specifically, when you move into the LTE world in Russia, do you see this as an opportunity to accelerate usage amongst your base or to price the product differently? Thank you.

Thank you for the question. It's Alexey Kornya. At this time I will answer the first one on dividend. At this time it is too early to speculate of what will be the final impact of events in Uzbekistan. We are now a year-end financial and operating -- full-year financial and operating results, which in turn will affect our proposal to the Board of Directors on the recommended dividend payments.

Under the internal policies, dividends declined as a percentage of net income and under Russian law, we can pay dividends from our net income on the Russian accounting standards and a percentage of retained earnings. While we have the option to revisit our internal policies, we also possess enough funds in our retained earnings to sustain the level of dividend payments which we historically had.

So at this point, as I said, I think it is a bit too premature to speculate about what will be the effect of this event on our dividends.

This is Aleksander Popovskiy speaking. On LTE, yes, we have already moved into the LTE world. As you probably know, we have just announced our first LTE launch on the first of September in Moscow. This will be our own LTE network which will be fully operational since the first of September this year.

We of course see LTE as an opportunity both for accelerating usage of course, this is logical because of the higher speed and higher ARPU also, in two ways. The first opportunity, of course, LTE raises the quality standard of mobile data to the new level which gives us a right, a moral right to price it differently to switch more towards [clear] pricing and to price it eventually higher than we used to for 3G networks. And the other way is that by releasing our existing 3G network from huge big screen traffic which we mostly flooded to LTE networks, we raise the level of customer experience for smartphones, which gives us of course a high potential for ARPU growth and for growth -- the penetration of mobile data.

Thank you. (inaudible)

Some words about pricing. It's Andrei Dubovskov. I couldn't tell price policy in Moscow region. We are not going to establish very big differences between price in 3G or 4G network. Thank you.

Cesar Tiron, Morgan Stanley.

Yes, congratulations for these outstanding numbers. I actually would like to know if you can go through those exceptional items, the EBITDA level one more a time and say if your expectations of a lower margin in H2 2012 is compared to H1 or compared to Q2? Thank you very much.

Well, that's both. That relates our low expectations second half of the year against first half of the year, and further as we will see in the second half, third and fourth quarter, we expect that they will be a bit weaker than our second quarter. Even though third quarter can be quite the key because of seasonality, I think we will see the main pressure on our margins somewhere in the fourth quarter and basically that still allows us to show quite a good profitability level, and we believe with respect of our margin, we will be at the high -- at the very high end of our guidance.

Thank you. Do you mind to go through those exceptional items one more time?

Well, you mean -- which positively affected our financials that we expect to come out.

Okay. Then we had sale of equipment, against -- which we previously reserved, then the release of employee bonus for full financial year 2011. We had the sale of real estate payments in the MTS, and a reduction of interconnect expense in Ukraine due to the release of some reserves held against interconnect.

And the total impact was 150 basis points, 1.5 percentage points?

It was around 1.5 percentage points.

Thank you very much.

Alexander Vengranovich, Otkritie Capital.

Yes, good afternoon. I just wanted to elaborate on your 4G network development. I know that you are now in negotiations with Scartel about the potential usage of their frequencies. Could you please explain a bit whether you think that the frequencies you got from LTE auctions and the frequencies you got in Moscow are enough to develop your network, or do you think you still need to work as an MVNO and Scartel network? Thank you.

Yes, this is Michael Hecker. We are pleased with the frequency that we have received in the FCD and TDD area. We have altogether received 50 megahertz in the FTD spectrum and we are already, as you know, up there with a double-digit amount in the TDD area. That is for the time being a very good spectrum base to offer the superior customer experience as has been outlined by Aleksander Popovskiy earlier.

With regard to further activities mentioned by you with regard to Scartel, we would not like to comment on anything like that.

Okay, thank you.

Herve Drouet, HSBC.

Yes, good afternoon. My first question is regarding the non-cash impairment for Uzbekistan of $579 million. Just want to see -- to confirm that it corresponds to the full net book value of your subsidiary. Is there still a remaining part which potentially could be further write off in the following quarter?

And the second question is regarding the objective in Turkmenistan, the quality of the line on my end was not very good so I was just -- if you can repeat what are your annual objective in terms of subscriber on the revenue and financials for Turkmenistan? Thank you.

Okay, it's Alexey Kornya again. As for the size of the impairment, it's basically about the size of total net book value which we have on balance against our Uzbek asset. It doesn't equal one by one, but it is basically about this figure, so we will not see any sizable potential impairment in the future.

Okay, thank you. And for the second question, please?

As to Turkmenistan, Oleg Raspopov, VP for Foreign Subsidiaries. As to Turkmenistan, we are launching the day after tomorrow launching the (inaudible) test mode so-called so it is fully commercial. The only exception that we will not be able to switch new subscribers. We do intend to seek the return former subscribers, existing subscribers to test our network -- the network, I mean the whole network of the Company, so as well as our sales and customer care network on the load and launch full-scale only by the end of next month.

As to the targets for subscribers, quite conservative. We are growing 0.5 million to [0.5 million] before the end of this year. In terms of bringing you up to 3.5 million in terms of CapEx, we are keeping our awards, you see for the launch, for the returning. We will not spend more than 1.5 million. In terms of CapEx cash until the end of this year, we are not going to spend anything.

Right. And are there any maybe medium-term objectives you can share with us as well?

Not more than 40 million in terms of CapEx cash until 2015.

Right, and in terms of subs, what you would expect there in let's say two years time? Is there any objective you can share?

I can't hardly speak a little on this actually issue because the market is already rather competitive, the competition is rather strong. Let us return to this issue after the third quarter.

Okay, all right. Thank you very much.

Alex Balakhnin, Goldman Sachs.

Yes, good afternoon. I have a few questions. First, just wanted to follow up on your dividends and implication of Uzbekistan development. Correct me if I'm wrong, but when you have the write down of the assets related to Turkmenistan, you adjusted your net income for the amount you have written down. Should we apply the same logics here? Or the situation is completely different?

And also wanted to ask you on how should we currently think about Uzbekistan operations? So you don't have licenses so you can't book revenues, but do you have any cause to run the network?

And lastly, I just wanted to get better understanding on your margin wording? So your previous EBITDA margin guidance of 41%, 42%, implies that your second-half EBITDA margin will be lower both sequentially and year on year. Is your previous guidance remains in place, I understand Uzbekistan developments don't help here, but in general, do you see any [actuarial] trends in your core markets like Russia and Ukraine, which you didn't see in May when you gave this guidance? That's it for me.

Thank you for the question. It's Alexey Kornya. On the dividend question, again, we believe that this is a bit too early to speculates on this topic. Yes, you remember correctly, the logic which was applied when the readjustments against net income when Turkmenistan was written off. However, this does not necessarily mean that the same logic will be applied for the case with Uzbekistan because of the size of the impairment or of the impact on P&L.

At the same time, it doesn't mean vice versa. So it does not mean that we will multiply this logic. We believe that a big value of MTS is associated with our dividend value and with our sustained dividend payments and relatively high dividend yield, so we are appreciating that and that is why we will, of course, looking at sustaining considering heavily to keep up with these value expectations. As for the margin questions, not (multiple speakers)

Alexey, if it is possible I am going to explain our position on this issue, because previously we have had some questions about this. Maybe it was not clear.

Speaking about our margin guidance, we are not going to change because we know that we have new laws in Russia concerning social taxes. First of all, and secondly, it is a process of rising rent and maintenance costs as we expand our mobile and fixed networks.

To add some information about further expansion of our retail footprint, in particular the build out of an additional 500 outlets by the end of this year and of course, it's some problems in Uzbekistan. It is a lot of reasons which are not going to change our position in margin guidance. Thank you.

And, so basically just to sum it up, so your previous 41%, 42% margin is unchanged, you just wanted to highlight the issues you are dealing with, right?

Yes, of course.

And, sorry to return to that, on Uzbekistan, of course of running the operations, will you have to have some costs related to that as of now, obviously?

Yes, let me answer. Oleg Raspopov. Yes, we do have issues and of course for keeping (inaudible) networking, of course you (inaudible) of our cost we have already used more than half our staff in the operation also you see some of this stuff (inaudible) allowance so in this way, we managed to reduce our costs. As to keeping -- and that is sort of keeping the -- major costs regarding this network, the payments we are actually doing to the police.

You see we do expect that you see money, we do have resources -- we do have (inaudible) on our accounts in this country on this particular purpose will be enough for us till the end of this year.

Understood. Thank you.

Tibor Bokor, ING Bank.

Hi, I have a question on Ukraine. Do you see any disruptive move from any of your competitors? We heard recently from one of your biggest competitors that they are going to invest into margins in Ukraine for next three quarters. Do you already see that on the market and should we expect your margins to be under pressure for the rest of the year? Also, what sort of impact of a hryvnia devaluation should we expect on your business in Ukraine? Thank you.

Thank you for your question. It's Andrei Dubovskov. We cannot comment on our competitors but we continue to offer strong value proposition in Ukraine as they have customers and increase customer revenue. In my opinion, speaking about the revenue and margin in H2 in Ukraine, it will be stable situation, no less, no more, because it will be OIBDA margin in 50%, in my opinion, it is a very comfortable situation for our business in Ukraine.

Speaking about the revenue, it will be a little better than in current quarter, because now we have good results in ARPU and MOU and it can support our position in Ukraine business. Thank you.

And about devaluation? How big risk do you see?

Okay. We think that if there is a material devaluation of hryvnia in the end of the year, we will see some impact on our marginality. However, we do not expect that it will be big one, more than 1 percentage point or so on the quarterly basis. So that is why generally taking the materiality of Ukraine and the overall business and thinking that if devaluation happens, it happens at the very end of the year, we don't think that it will have any significant impact on our results.

Thank you very much.

Tatiana Boroditskaya, UBS.

Good afternoon. Thank you much very much for the presentation. Tatiana Boroditskaya from UBS. Several questions from my side. Could you please clarify if you intend to raise any debt in financial markets in next 12 months? And if you have done or intend to do any debt buybacks? And also if you have any M&A targets in mind or anything like that?

We might need to have some minor debt raising by the year end, but we will do it through already open credit facilities, (inaudible) open credit facilities and it will not be of big amounts. And no buybacks expected. We are not planning any buybacks in the foreseeable future.

And as for M&A targets, we are looking at M&A targets within our general strategy building conversion play in the markets of our operation, which is a small fixed line operations in those regions where we are not fully present.

Thank you very much.

Ivan Kim, VTB Capital.

Yes, good afternoon. Two questions, please. First on Ukraine. Can you roughly quantify the effect of the euro on the top line? And second on the regulatory front in Russia, want effect do you expect from the potential abortion of internetwork roaming? Thank you.

Ivan, speaking about the euro in Ukraine, it is not significant value. I think creates no more than 0.5% of all our revenue in Ukraine in that period.

Ivan, please quantify your next question about regulatory environment in Russia. What do you mean?

Yes, just the Ministry potentially can cancel the internetwork roaming so basically for a person who is going -- traveling within Russia to cancel that roaming which is currently in place, and I am just wondering what kind of effect on your P&L can happen from this abortion?

Aleksander Popovskiy, so we are -- first of all, we didn't expect a significant impact on our P&L from this. It will have some influence on the overall market conditions. It will influence on the market, but the particular way in which we are currently discussing this with the regulators is not that strong in terms of potential impact, and those measures, they will have to do. In order to make it possible will I would say, also very beneficial for our operators and we will have a reasonable compensation for this regulatory change.

Okay, thank you.

Thomas Heath, Handelsbanken.

Thank you. A quick few questions if I may. First, a follow-up. What sort of compensation would be possible for changes in interconnect between regions as you just touched upon?

And then a second question on smartphone penetration, comparing Moscow to other regions in Russia, you say 27% of handsets on our smartphones and in your sold networks of 17% of all the handsets in your network, could you perhaps give some color on the difference between Moscow and other regions? Thank you.

Aleksander Popovskiy, continuing regulations, so I don't mean for financial compensation, I mean regulatory compensation. For example, they will have to redesign the way how interconnects used in the market have been set up and have been (inaudible) between the different operators. They will have to enable the user core network infrastructure, infrastructure which is now mandatory to have in each particular region, then we will have an opportunity to use the same core network for different regions that will provide some savings for us.

So overall, it can be neutral or even positive effect for the industry and for operators.

Thank you, and on smartphones in Moscow versus regions?

So, speaking about your next question, it is Andrei Dubovskov. Smartphone penetration of 4G mobile phones on the MTS network, right now it is approximately 22%, 23%, but more important for us, that the sales of smartphones through MTS retail network as a percent of total handsets sold in units, more than 30%.

And speaking about the differences between Moscow and region, it is not big differences, because a lot of smartphones and to our subscribers located in big cities like (inaudible), etc., and in my opinion, until the end of this year, until approximately the same situation, 23%, 25%. Thank you.

Okay, thank you. That's very clear. And one last question if I may. You are starting up LTE with TDD technology now. What sort of timeframe do you think you could use broadly, 2.6 and 800 and also what do you expect to be used -- to be able to use an 1800 band, and if so, when? Thank you.

Yes, this is Michael Hecker. As you know, we are going to launch the TDD network, fortunately already in the next weeks in Moscow as kind of an advanced going to market in the biggest area -- in the biggest market of the country. With regard to the other FTD bands, we are at the moment in our strategic setup for the rollout in the 2600 area which will take place next year. Exact details on that would follow in the Q3 disclosure.

Regarding the 800 and 700 area, we are also investigating that at the moment. It depends a little bit on the limitations we have in those bands from spectrum limitations still from some [air radio] navigation. There are pockets or there are spaces where we can already today start 800 and there are some other spaces where we cannot start yet 800 where it will take a small amount of time until we can also go to market there. That is something that differs from city to city, sometimes from basically street to street.

But overall, we believe that we have a very, very good starting perspective for the next years with our extremely strong position in Moscow, with a TDD network and FDD coming up and in the rest of the country with FDD so that we are very, very happy about the opportunity that we can now serve our customers with LTE in those spectrum bands.

Thank you. That's very clear. And on 1800, do you see a future for LTE 1800 in Russia?

Well, we would not like to comment on the discussions that you are obviously referring to that are ongoing in the regulatory area. We do believe that so far very progressive approach of the Russian regulatory authorities and the legislation behind it will also continue with regard to 1800 and other opportunities, so this will, over long term, as we hope and believe even more strength in our strategic spectrum situation that we already enjoy.

Okay. Thank you very much.

Evgeny Golosnoy, Metropol.

Yes, thank you. A couple of technical questions probably. First, could you please remind us of the guidance for 2012 revenue side and EBITDA wise, both rates of growth and margin?

Secondly, could you please specify what would be your net income if there were no Uzbek write offs? And then there were different figures voiced at this presentation and a different figure was -- has appeared on Bloomberg.

And, finally, I couldn't quite understand what you said about the extraordinary items. Were those items that had an impact on the second-quarter results, or this is something you expect in the second quarter to take place and affect your results in the second half of the year? And specifically, if 1.5 percentage point impact took place in the second quarter, then your increase in EBITDA margin was preferably roughly 2.2 percentage points. That means that probably two-thirds of the improvement in the EBITDA margin came from these extraordinary items. What is the way to interpret your phrases about extraordinary items? Thank you.

Okay. It's Alexey Kornya. Thank you for the questions. To remind you, our guidance is 5%, 7% on topline and 41%, 42% on the margin, OIBDA margin, and we will also have guidance on our CapEx. CapEx to sales is 20%, 22%.

As for OIBDA margin, we were indicating that we expect to see the upper end of our guidance at the end of the year -- full-year results.

As for net income, without -- with Uzbek write-off, the amount in the second quarter would be about $360 million, net income, not loss as we -- as our figure with impairment. And about extraordinary items, you are getting it about right. If you take only positive extraordinary items, there were a few which had negative impact as well, which -- which was about 0.4 percentage points, so in total, we enjoyed about 1, 1.1 net effect of one-offs and coming from that, that's about half of our improvement.

Okay. Thank you very much.

Anna Lepetukhina, Troika Dialog.

Yes, hello. I have two questions. My first question is on Russian operations. First of all, I noticed that in second quarter, sales of handsets increased almost 60% year-on-year. As far as I understand, it contradicts your previous strategy to reduce sales of handsets. Can you please explain the reasons for such growth?

Also, can you please explain what is going on with Voice services whether you continue promoting on net calling or you are focusing on other promotions or have an intention to promote something else?

And also, my other question is on CapEx. In first half of 2012, CapEx increased almost 40%. Do you stick to your guidance for CapEx of 20% to 22% of revenues for the full year, because it implies that in second half of the year, you should decrease CapEx. Thank you.

Thank you, Anna. On our retail top line dynamics, one has to say that second quarter is usually quite strong, or strong in terms of revenues than first one. Besides, we significantly improved our sales capacity in our retail business. There is sales per store, and on top of that, as I indicated, we realized some volume of handsets which were previously reserved with a discount which gives us also -- which gives us also some topline improvement in retail.

At the same time, as we said, our strategy in retail is to reduce the wholesale part of our retail part, so we are not actively pursuing the strategy of wholesale part in our retail business but we are focusing more and more on sales for sure.

So taking that all, we see quite a good improvement, quite a good improvement on our topline. And (inaudible) --

Speaking about your next question, it's Andrei Dubovskov, speaking about voice in Russia. In my opinion, the best explanation of this issue is our results in ARPU and MOU and I am going to remind you that speaking about our results quarter over quarter, it is approximately 12% growing in ARPU and 15% growing in MOU.

Okay, and as for CapEx guidance, we stick to our current CapEx guidance, although we allow that we might see figures higher than 22% CapEx sales, slightly, but right now, we will have yet to see how we will finish the year with our buildup. So at this point, there is not enough visibility to assume that we will be for sure above that figure, but we allow that it might be a bit -- a tick higher.

And can I have one more question. When I look at cash from operating activities, I noticed that second quarter in a row you improved cash conversion ratio. Can you please explain the reason for this? And whether it can be sustained for the second half of the year?

Well, actually, our cash conversion ratio for the second quarter was lower than for the first one, and this is due to a higher turnover. Because as you grow internal, you have higher prepayments or higher kind of working capital needs, and taking our growth in retail as well it consumes our working capital. So in the second quarter actually, we had lower than in the first one, but we were about 80% which is generally average figure for us through the year.

Okay. Thank you very much.

Igor Semenov, Deutsche Bank.

Yes, hi. Thank you. Yes, just want to go back to this outlook for the second half, so you said -- you talked about the cost but you also mentioned that the revenue outlook, the wording of your statement implies some sort of issues on the revenue side. Can you comment in a bit more detail about it? So what do you see different this year from last year? Do you start to detect already some sort of softness in your revenues and in which area?

And also, just to go back to Uzbekistan running costs, can you quantify how much you expect to spend in running costs in the third quarter assuming that the network will be down? Thank you.

Yes, thank you, Igor. We don't expect any significant slowdown in our top line. I think there are two reasons to be a bit cautious on that. First, there is a slower macroeconomic development, which is expected in the market and which is forecasted in the market generally. So that will have some impact on our topline, although limited.

And a second reason is that we had very strong second half of last year, which was stronger than the first half in terms of revenue and growth. So we will see some comparative ways when we compare year to year, we will see probably some reduction. While we still stick to our confidence in our guidance, and I wouldn't say that this is a serious kind of -- a serious matter that we will see a serious slowdown in our top line. It is just some particular in terms of year on year growth rates.

Okay. And on the running costs in Uzbekistan?

Oleg Raspopov again. Thank you for your question. Our expenses are of course are mostly securities I told you, utility and for security expenses and also of course, rent of our equipment. We are going, as I told you, to spend not more for this purpose, not more than you see a $3 million currency United States dollars per month, so (inaudible)

All right, great. Thank you.

(Operator Instructions).

Operator, is that the last question?

We have one final question in the queue. Anna Kurbatova, Gazprombank.

Hi, thank you very much for taking my question. Very short one about LTE and CapEx combined. For the market, it is still unclear, the future cost of frequency conversion. I wonder if you have some kind of better visibility of the -- in this regard of updating LTE license in July? And if you probably could tell us something about the role of the former or existing 4G mobile consortium in this regard? So what steps are being gone? And when are you as a Company and the management expect more or less clarity in terms of future costs of conversion? Thank you.

Okay, so starting from the CapEx, we have a clear target for CapEx for LTE in our new, just acquired LTE licenses. It is RUB15 billion per year, and we think that this amount of money will be enough both for network development and for frequency conversion. So this you can treat as sort of a natural limits for our CapEx -- capital expenses on LTE.

But how will be this frequency conversion on, so it is still in the process of discussion between different market players so we don't have any final solution and we don't have any final view on the role of existing 4G mobile consortium. When it will be somehow transformed or whether we will design a new organization, it is not clear at the moment.

Thank you very much.

Thank you very much, ladies and gentlemen. We welcome you at any time to contact the 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 or evening. Thank you, operator.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.