Mobile TeleSystems PJSC (MBT) 2012 Q3 法說會逐字稿

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

Thank you very much. Welcome to MTS's conference call to discuss the Company's third-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 with 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; debt instruments and their usage; legal actions or proceedings directed at the Company or its representatives; regulatory developments 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; technical matters as they pertain to our mobile communications network, 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 Securities and Exchange Commission.

Important factors could cause the actually results to different 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 at www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statements uttered on this conference or make any adjustments to previously made statements to reflect changes and risks. Copies of the presentations and the materials used and referenced in this conference call are available on our Company website.

I'll 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 of the third quarter 2012.

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

We are pleased to report another strong set of results for MTS Group for the period. Group revenue was the quarter was stable quarter on quarter at just over $3.1b in spite of a significant weakening of our core currencies versus the US dollar. Group Revenue was also weakened by the loss of Uzbekistan revenue due to the suspension of our operating license in July. Excluding Uzbekistan, Group revenue increased 3.9% quarter on quarter.

We continued to see sustained growth on usage of voice and data products in each of our markets of operation as well as steady subscriber growth. We also see signs of continued stability and moderate competitive pressure in our markets of operation.

For the period, total revenue in Russia increased in ruble terms by 8% year over year to RUB88.3b. Key drivers included steady voice usage, growth in our active subscriber base and a strong increase in handset sales, including sales of higher-value smartphones. Year over year our mobile business grew by 8% to RUB74.7b.

As we predicted, we continued to see benefits in our mobile business through a combination of strong tariff plans, prudent sales strategies and continued investment in our networks. We see strength in increasing customer value among our mass market subscribers by marketing better voice plans as ARPU and MOU grew by 9% and 14% year over year respectively.

We also are attracting better subscribers through our own retail and partner channels. New subscribers contributed to the rise in ARPU and continue to demonstrate more loyalty. For the period, churn dropped from 11.9% to 10.3% year over year, which marks the third straight quarter where we witnessed a reduction in churn.

Messaging revenue continued to increase, plus 12% year over year, as lower-value customers develop more affinity for their devices.

Data usage continues to be a strong driver of growth. Revenue grew 31% year over year as we continue to build out our 3G network which reached 26,000 base stations at the end of Q3. Both USB modems and increasingly smartphones account for revenue growth. In fact, sales of handsets and accessories increased 25% quarter on quarter in Russia to RUB8.1b. Two factors are at work here, seasonal factors and increased use of point-of-sales credit, a key benefit of our MTS Dengi project and our partnership with MTS Bank, which my colleague, Michael Hecker, will discuss later.

Our fixed line revenue increased year over year by 5%, largely due to M&A as well as our efforts to modernize regional networks. Residential ARPUs decreased slightly due to seasonal factors but the decrease was twice as less as one year ago, which is a sign of our improving business. Corporate ARPU rose due to higher business activities in September.

We remain focused on network improvement, both in Moscow and the regions, with work being done to increase to full fiber in our networks. We are confident that better networks will allow us to further grow this business and increase customer value.

In the Ukraine our business continued to grow at a strong pace despite the high level of penetration. Revenue increased by 7% year over year to over UAH2.6b. Trends in the market continued to favor us as we saw quarterly growth in ARPU despite a flat MOU. Our strong customer value proposition enabled us to raise minimum top-up rates in our Unlimited On-Net tariff plans which allows us to increase customer value. Data traffic contributed 12% growth year over year, which is strong given the fact that there is no 3G yet in the market.

In Armenia, the market is improving as revenue increased by 5% year over year, to AMD21.8b. The market continues to trend towards stable as we improved churn and subscribers increased their calling and data usage.

In Uzbekistan we did operate our network for two weeks, which yielded roughly $26m in revenue. And, as we mentioned previously, we launched our Turkmenistan operations in late August. Very quickly we exceeded our expectations as within hours 400,000 SIM cards were activated in our network. But by the end of this period we could boast 800,000 active subscribers and realized over $1m in revenues.

Given the strong performance throughout the Group, we feel comfortable adjusting our guidance for the year to 7% revenue growth for 2012 in local currency. Despite the loss of our Uzbekistan assets for the second part of the year, we see enough momentum in the other markets to justify the high end of our previous guidance and confirm a more optimistic outlook in our markets.

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

Thank you, Andrei. In the third quarter, Group OIBDA rose slightly to nearly $1.38b, which was in line with our revenue performance. Again, the loss of our Uzbekistan contribution to our financials and currency fluctuations slowed what had been strong underlying performance in OIBDA and margin improvements throughout our markets. Our adjusted OIBDA margin for the period margin for the period reached 44%, stable relative to our second quarter. Overall we are seeing success in our efforts to increase profitability in our business and realize greater efficiencies across the Group.

In Russia our OIBDA rose 9% year over year to RUB40.1b. For the year to date, OIBDA continues to grow faster than revenue, a sign of our goal of optimizing our operations to extract more value in our core market. Our OIBDA margin increased from 44.6% in the second quarter to 45.4% in the third quarter, an improvement will reflect seasonal trends and cost efficiencies despite significantly higher retail costs. As we have warned, certain costs continued to pressure our margin, including labor costs have increased 50 basis points year over year as a percentage of revenue, which reflects higher payroll taxes. Rent also has similarly increased year over year, which simply reflects the expansion of our network.

Once again we have been able to realize the reduction of SG&A expenses that allowed us to offset these pressures and sustain our high profitability. We continue to see benefits from the optimization of our commercial policy, while reducing subsidies for modems has allowed us to maintain previous levels of profitability on handset sales.

OIBDA trends in our CIS markets were in line with the seasonal dynamics and are reflective of the top-line performance and competitive factors. In Ukraine the OIBDA growth continued historic pace, reaching over UAH1.4b for a margin of 53.1%. Price increases for Unlimited On-Net tariff plans have translated to increased profitability which helped us offset the loss of our high-margin business in Uzbekistan to overall sustain Group OIBDA levels.

In Armenia, our OIBDA margin improved sequentially by 26% to AMD12.5b as the competitive environment continues to improve. With six weeks left in the year we are comfortable raising our OIBDA margin guidance to above 42% for the year. We continue to see margin pressure from inflation-related costs, including increased labor costs based on new laws regarding social taxes, continuously rising rent and maintenance costs as we expand our mobile and fixed networks, further expansion of our retail footprint, in particular the build-out of additional 60 flagship stores, and opening of new stores in the population centers with as few as 20,000 inhabitants, increasing sales of handsets.

However, the competitive environment remains sufficiently moderate to see our improvement trends continue. For certain, fourth-quarter margins will be seasonally weaker and the loss of our Uzbeki units will add additional pressure, but better performance in Russia, Russia retail and the Ukrainian business will help us to offset those losses.

The net income for the period reached $630m. This includes $100m gain on ForEx, but we also saw improvement through lower interest expense.

Overall our total debt remains stable at $7.3b. We had no principal repayments during the quarter, but currency fluctuations and the repurchase of a ruble bond in the amount of RUB13.2b translated in a slight increase in our net-debt-to-OIBDA ratio at 1.2 multiples. We will continue to pursue opportunities to further optimize our portfolio through the year.

During the quarter we paid out our full financial year 2011 dividend in the amount of RUB14.71 per ordinary MTS share, or RUB30.4b in total. This explains the fluctuations in cash on hand in our balance sheet. Free cash flow for the year to date is over $1.5b which is an 8% improvement year over year despite a significantly weaker ruble.

Year-to-date CapEx exceeded $1.8b. Investments are largely being focused on expanding our 3G network and preparing for our 4G rollout, identifying new sites, connecting base stations to fiber and proceeding with the implementation of our GPON project in Moscow.

Overall, however, we feel it prudent to raise our CapEx guidance for the year from 20% to 22% of sales to 23% to 24% of sales, or roughly about $2.9b for the year. This increase is due to the effect of currency and the cost equipment and services since we first guided at the beginning of the year as opposed to any change in our investment plan. Naturally our strong balance sheet and high cash flow generation will mitigate this sum and how it relates to the financial health of the Company.

Now I'm passing over to Michael Hecker.

Thank you, Alexey. Recently we announced our intent to acquire a 25% stake in MTS Bank. As part of our 3i strategy, we seek [ways] to leverage our core assets, including our telecommunications network and especially the distribution capabilities, brand and customer base in order to enhance our customer experience and to increase the customer value and improve the loyalty. We feel that financial services offer a unique and valuable opportunity to leverage the assets and drive future earnings growth.

We began offering SMS payment services in 2010, however as we see and believe that Russia remains underserviced by banking and financial products we expanded this initiative and launched MTS Money, MTS Dengi, in April 2011 as a pilot program to evaluate the market of basic financial services to our customers.

As strong interest in this product grew, it became apparent for us that we needed to strengthen our relationship with a financial institution to ensure our customers have the best experience and realize the maximum benefit from our commercial relationship with a bank.

To bring MTS Dengi further to the market we conducted discussions with other banks about cooperation. These commercial discussions, however, yielded no significantly strong basis for cooperation as we could not agree on key issues on compensation, revenue sharing, shared resources. At the same time, issues like customer service, call center usage, other operational factors were almost impossible to resolve on the basis of a commercial agreement alone. Therefore we quickly came to the conclusion that a project with the scope and perspective of MTS Dengi in the Russian market required much deeper cooperation between us and a partner bank.

To date we have witnessed almost 1m customers for MTS Dengi who benefit from a MasterCard-enabled plastic credit or debit card tied to their mobile account. More than 0.25m customers who use point-of-sale credit, on average around about RUB10,000 to purchase smartphones, and an increasing number of transactions enabled by near-field communication, NFC technology.

This sort of growth puts a considerable strain on the bank's capital cushion so we collectively arrived at the current deal structure which we feel benefits all parties. MTS pays into MTS Bank, MBRD capital, RUB5.09b for a newly issued 25.095% stake, which implies a valuation of roughly around about RUB15b pre-money pre-transaction. All funds go to the bank's capital cushion to accommodate the demand for the MTS Dengi project.

Sistema and MTS agree that in the event that future funding becomes necessary, it will be done commensurate with the stakes held by the shareholders. The bank rebrands to MTS to leverage our market-leading brand and to ensure that customers have a common high-quality experience across these different properties.

We extended a subordinated loan in the amount of RUB2.1b to enhance the retail operations, and most importantly, MTS and MTS Bank agreed a split net proceeds from the MTS Money project with a 70% share of net proceeds coming to MTS. This last point, the 70% of net proceeds coming to MTS, is key to the transaction between us and the bank as we will conclude a separate agreement to manage and promote the project.

All proceeds from the credit payment transactions of the project and services will flow into the project, while both the bank and MTS will allocate their costs, whether it's data centers, call centers and the other expenses. And the net proceeds will then flow from the company back to MTS and to MTS Bank as a contribution to net income, for MTS with 70% of net proceeds. And we believe that this share also ensures that the bulk of the customer value, which is our key objective in rolling out this project, remains with MTS. This value is key as, for example, by the end of the year the loan portfolio will most probably exceed already RUB10b. And we believe by 2017 the project can contribute at least 5% of Group net income.

Overall, when considered in the context of our recent investments, in fixed line, in media, in retail, this deal reinforces our view that Russia provides the best opportunity for profitable growth. Considering the size of the investment and the potential upside for MTS, we feel that the structure offers sufficient transparency and safeguards to ensure that our shareholders benefit from this unique opportunity.

Thank you, Michael, for a clear explanation of what we are going to do in this area.

But over the past quarters we have seen clear volatility in our net income over currency fluctuations related to our debt composition and other one-time factors. This has included developments in our [Central Asian] markets and ruble/dollar swings.

In this difficult currency environment we have come to the conclusion that the net income is not the best method to use as a basis for the calculation of our dividend. Instead, free cash flow constitutes a clearer, more transparent basis for determining our return to shareholders.

Our philosophy remains to pay out a fair remuneration based upon the operational performance of MTS. We do also factor current and future investment needs as well as strategic issues. In determining our dividend payout, we expect that our Board of Directors will continue to consider a variety of factors, including earnings growth, capital expenditure requirements, cash flow from operations, opportunities for inorganic growth as well as the Company's overall debt position.

We are currently devising a new policy [clause] for the dividend amount to be calculated from a portion of free cash flow and we expect to propose it to our Board of Directors for adoption prior to the final determination of our fiscal year 2012 dividend. Decisions on dividends are ultimately, however, proposed by the Board of Directors and voted upon thereafter at an Annual General Meeting of shareholders in the first half of the year.

On our last call, in light of developments in Uzbekistan, we clearly committed to sustaining our dividend. As the third-quarter end, we have a clearer perspective on how market changes are impacting our operations and a better view on our immediate investment plans. We will submit our proposed dividend policy to the Board of Directors later.

For now we can assure the investor community that our goal is to increase our cumulative dividend payout over the next three years by at least 25% in relation to the roughly RUB91b we have paid out since fiscal year 2009. This implies a total cumulative dividend of at least RUB114b for the fiscal year 2012 to 2014, or a payout of shares of at least RUB18.3.

We believe that this level, which should constitute a sizeable portion of our free cash flow, will allow us over the next three years to meet our investment needs, maintain our related debt levels and demonstrate our commitment to shareholder value.

Thank you for your time, ladies and gentlemen. Now I will open the call to questions.

Thank you. (Operator Instructions). We'll take our first question from JP Davids from Barclays. Please go ahead.

Hi there. Good afternoon. Two questions, please. The first question is just -- actually both of them are related to MTS Bank. The first question is -- it's just on e-commerce as you describe in the charts and the exciting possibility there. Is there any intention on your part, whether organically or inorganically, to increase your exposure to e-commerce, mobile e-commerce, and try and build a whole ecosystem around this bank? That would be question one.

Question two. You set out the net proceeds, 70% of the net proceeds very clearly. I'm just interested in how the costs are divided up. I guess 70% going to you would imply somewhere along the line your bear some more costs. Just if you could clarify that, that would be helpful. Thank you very much.

Yes. Thank you for the question. Look, the transaction with the bank is not viewed from us in the context of e-commerce. This is not the ecosystem that we specifically build around the transaction. The ecosystem in which the transaction takes place are classical and mobile transactional services payments, mobile commerce platform, of course, in the sense of payment platforms, and of course financial products. But if you define e-commerce in the way of selling goods via the Internet or via platform, this is not the intention we have.

What we have is products, like classical financial products, payment products and point-of-sale loans, all kinds of new technology with regard to payments, virtual cards, gift cards and so on, but not classical e-commerce in the sense of, I don't know, Amazon would do that. Maybe that is on question number one.

Question number two on the 70% net proceeds. Indeed we have the 70% to 30% split on the net proceeds. On the cost allocation I'm not able to comment at the moment; that is subject to the ongoing negotiations of the final agreement that we have with the banks. But it is totally clear from our side that we are bringing in there very substantially our assets that we have, especially the 4,200 -- more than 4,200 shops, the value of the brand as the most trusted consumer brand in Russia, which is, of course, also connected with cost. So those assets will be brought in in the best way in order to protect the shareholders' interests.

Thank you. Very clear.

And also to add a little bit on the, this is Alexey Kornya, on the cost side, to be more clear that all costs are being accumulated within the P&L of this project. So what we'll share, we'll share the income from and the proceeds from the project while all costs being integrated into the project. So there is no split per se of costs other than those which are in the project.

Yes. I guess the follow-up there would be who is going to pay for, say, the call center staff and so on? One would imagine to keep it simple for the customer, the call center remains with MTS rather than MTS Bank.

Well all costs are being part of P&L for this project. For example, usage of our retail network is being compensated on the market basis. The same with the call center costs; they are being compensated to -- they are in these on MTS side but they are compensated by the price from the P&L of this project. So all costs go into P&L of this project.

I probably have to add a little bit on the first question. This is Vasyl Latsanych, CMO of MTS. The mobile e-commerce is a very big definition to us. We would like to say what exactly we are going to do with this project. That's actually within the presentation that we delivered.

First of all, there is about 1m cards already issued under MTS Bank name, and those were distributed through MTS outlets. And those carry the brand and carry the relations to MTS and which we benefit of the profit from. Also we want to increase that number quite significantly because we see an extension in the credit card business and market in Russia quite significantly in the next couple of years.

Second is the mobile payments from the subscriber accounts. That's something we are not able to do right now extensively because of the absence of the banking license. But with the help of the bank and with the association between us, we can do the joint accounts of the bank accounts and the subscriber accounts and arrange payment to any merchant through the mobile phones without actually using any intermediate, like credit cards or anything else.

The third one would be NFC. We want to develop NFC and benefit on the mobile operator side from developing this as a service. Meanwhile, the processing, the acquiring and the merchant management should be on the bank side, but we should also be able to control that so we want to have quite significant control of all NFC expansion in this market through the deal with our bank.

And the last one, but not the least one, is PoS credit. There's more than a quarter of all phones and devices that are being sold in our retail network. They are sold under credit terms, but credit terms are delivered by the banks. Recently we've switched predominantly MTS Bank giving out the credit in our outlets, and we want to also have a benefit out of these activities and actually come with the situation when all credit purchases in our shops will be financed by the joint venture of ourselves and MTS Bank.

Thank you.

We'll take our next question from Ivan Kim from VTB Capital. Please go ahead.

Yes. Hi. Two questions, if I may, please. One on MTS Bank as well. So basically when do you think the bank will need another capital injection? And also is it possible in the future that MTS gets a controlling stake in the bank?

And secondly on Euroset, basically there were some comments that the management thinks that the changeover of the shareholding of Euroset may result in operators chasing subscribers again. So why do you think this may happen? And do you think that the new shareholders of Euroset would be interested in various rationalization of the market again? Thank you.

Yes. I can answer on the first question. Please understand that we have no reason to comment at the moment on any future capital infusion and we cannot comment on that.

On the question whether we will take a controlling stake, we do at the current point of time not exclude that we're going to, at a certain later point of time down the road which we cannot define, but we cannot exclude that somewhere down the road that we would like to take control in order to grab the full value of the project. This is something that we do not envisage with going in there in a minority stake that we will stay there with a minority stake until the end of the days. And we do have the mid- to long-term understanding to take control and to fully consolidate the net profits from this undertaking. But we cannot give any kind of time forecast on that at the moment. But it is our strategic understanding that we want to go into the deal at a certain point of time later down the road when we have gained more experience and when the business is developing strong.

If I may, let me be more clear on the first part of this question. There are no plans for any additional capital infusion into the bank. That means that we believe that there will be sufficient funds through this deal into the bank which allow us development of our products in the foreseeable future. Of course, there is no visibility on the indefinite perspective, but no plans in the foreseeable future.

It's Andrei Dubovskov, and thank you for your question about Euroset. The situation is very clear. For us, as you know, the current level of attractions in this market is very stable and we are afraid that if somebody like one of our competitors goes in to get more subscribers in this market, it means that he's going to get the [contract] over the part of their channels. And that means that in the other channels, like in (inaudible), in local dealers, the situation can be unstable.

And in my opinion it's not a disaster for other players like MTS, for example. As you know, we have the biggest mono-brand network across Russia, operator network, I mean. But it's a little noisy for us. And it can be more unstable for this market if the behavior of our competitors will be more irrational than in current levels. Thank you.

Thank you. And sorry, just a quick follow-up. You say about seasonal and local duress and unstable situation, you mean that they may require higher dealer commissions?

No. We are not going to increase dealer commissions in these channels, but it means that we need to implement some deals for compensate this impact. No growth of dealer commissions but, for example, we can increase the numbers of our mono-brand shops or other deals.

Okay. It's clear. Thank you very much.

We'll take our next question from Anna Kurbatova from BCS. Please go ahead.

Good evening. I have two questions. First of all, could you share with us your view and the general understanding of the situation with domestic roaming rates? So I think you know that the discussion of consolidation of domestic roaming rates has accelerated recently. So I wonder how much of your top line in Russia of mobile revenue you generate from these types of services and what potential impact you could see from consolidation of these special rates. Thank you.

Hello?

Yes, yes, we are answering. It's Vasyl. I was trying to dig out a number at my end about how big is the inter-country roaming. Is that the question if I understand, how big --?

I mean National roaming.

National roaming, exactly, national roaming. So national roaming is a business that we don't see at risk at this moment because there is no clear guidance to anyhow demolish that business by the regulators or other authorities. There are continuous conversations and sometimes speculations about the future of this business, but it has been for quite a long while and we have managed to sustain that business pretty steadily over time.

Nevertheless, it does represent a certain percent of our revenue, somewhere up to 5%. But we don't have this number at hand so this is quite an educated guess, which, yes, we are considering to be endangered if the regulations come in place. But since we had enough time to prepare ourselves, we are doing a lot of different set of preparations to mitigate this risk, including those that we have done this year when we have launched certain activities in roaming, in national roaming, let's say, national roaming tariffing activities where we had the tariff this year when people did not pay extras for the national roaming, but they had certain commitments to the minutes of use and the volume of use.

That actually brought us very successful results this year which are supporting our top line. So we think that we had enough of opportunities to test different models and we have the instruments at hand to mitigate the risk if it comes to play. Though just to make it clear, we don't see that risk as coming pretty soon, not this year. And even if next year that will still take numerous iterations at the regulator level and with all operators' involvement, which is not happening right now.

Just to add some information, it's Andrei Dubovskov. I think it's not the question on the table right now because it will be a long, hard way in legislation area in this issue.

Thank you very much. And let me then ask my second question, well basically about mobile data market in Ukraine. So as far as I understand, there is only on 3G license until now in Ukraine, which is held by Ukrtelecom. And you provide mobile data services on the basis of CDMA technology. And I wonder, is there any progress in Ukraine to distribute new 3G licenses to market players and how do you perceive in general this situation, because mobile data is very important for future revenue growth. Thank you.

This is Vasyl. I will try to answer that question as well. Yes, you've rightly noticed we don't have a 3G license in the classical terms. We don't have the UMTS license in Ukraine. Nevertheless, we have achieved 12% growth of the data business in Ukraine year over year, which we believe is quite specifically good in the absence of the modem technology, using still the old-edge technology in the country.

What is still fair on that side that it's only Ukrtelecom who has the UMTS license. And Ukrtelecom with their very tiny local operator with only UMTS license, without the GSM network support, it's very difficult to be actively developed. So in fact ourselves, our major competitor Kyivstar, and the third runner Life are all in equal positions without the access to UMTS networks.

Meanwhile, we do have an advantage because we are utilizing our CDMA network, which in terms of the revenue is relatively insignificant. It's not big there; it's really a couple of percentage points. But at the same time it does help those customers who want to use this high-speed mobile data on their big screen devices as the modems connection. Those are easily choosing CDMA with the best coverage in country and with 3G-level speeds. Just this technology is not seamlessly integrated and cannot be seamlessly integrated into GSM technology, it's an obstacle for further development into the integrated voice and data business.

Nevertheless we still look positively at possibilities to develop our EDGE business. As you can see, we have made it 12%. We are looking into the further development of maybe even higher growth rates in the future couple of quarters. Thank you.

Sorry. May I put a follow-up question? Why do you think the Ukrainian government does not distribute some new 3G licenses to develop the market? Thank you.

Anna, it's not that we think this or that way, it's that this has been for a long, long time that we are awaiting the license distribution in Ukraine and it's not happening. So this isn't a very good idea to make any projections about it for the nearest or for this future.

Thank you.

We'll take our next question from Emmy Al-Ghabra from UBS. Please go ahead.

Hi. Thanks very much for the presentation. Two questions from my side. Firstly, given the performance you've seen in the last quarter and so far in the fourth quarter for your Turkmenistan unit, how do you expect to see that unit performing next year?

And also my second question regarding debt maturing next year, what are your intentions regarding repaying or refinancing this debt? And might we see you issuing again on international markets? Thanks.

Good evening. Thank you for your question. Regarding Turkmenistan, yes, we do expect and we do plan to do develop these operations pretty successfully.

As to the figures, initial figures as promised earlier to you, we spent only $1.5m for CapEx to restart operations and we don't plan to spend anything until the end of this year. And CapEx required for us for three coming years will not exceed $40m to provide good return for our investments in this country. As of today we do have, you see, a little bit less than 900,000 subscribers, active subscribers, and we do plan until the end of this year to have close to 1m.

As to the revenues, you see we can promise that revenues till the end of 2012 will not be less than $2m per month. So we have started pretty successfully, October. We have really good results and plan that we see until the end of this year. You can sum up this year, we will earn not less than, say, $7m-something, a pretty conservative forecast. This is initial figures. We are in the process for business planning for coming three years and for budget for 2013. And I do believe you'll see somewhere in December we will be ready to discuss these figures. Thank you.

Okay. Thank you. And regarding the debt?

As for your second question, it's Alexey Kornya. As for your second question, I will be short. We have very limited demand for refinancing in the next year. At this time we keep different options open. We don't have any plan set for the next year for refinancing. We have opened some credit facilities, including those in rubles. We have generally access to ECA-backed financing and some of the instruments available for us. And we'll take decisions through the year depending on the market situation. Generally we have inclination usually towards the ruble financing because that's naturally hedged against our cash flow.

Thank you.

We'll take our next question from Igor Semenov from Deutsche Bank. Please go ahead.

Yes. Hi. Thanks very much. I just wanted to go back to the [Euroset] situation. Don't you think that when this dealer becomes fully controlled by mobile operators they will actually reduce the level of dealer commissions quite substantially? And don't you think that this would potentially benefit you as well as it would be possible to extrapolate this new level of dealer commissions onto other players?

My second question is on retail sales, it was quite strong growth this quarter. I just wanted to understand that this is fully related to the new stores openings and the shift in the sales mix towards more expensive smartphones and that there is no impact from wholesale or some other stuff.

And finally on Uzbekistan, what -- basically I'm just trying to understand what's the status for now and what is your preference as management? Would you rather keep it or if there's an opportunity or it's gone for good? Thank you.

Thank you for your questions. This is Vasyl. I'll answer them. The second question is the easiest one so let me grab that first. The sales increase of the devices of the telephones in our network has nothing to do with the wholesale. We are not bumping up the volumes by wholesale low-margin sales, you can see by our resulting top line margin. This is just a seasonal increase of the sales plus the increase of the sales of the smartphones which we conduct quite extensively and we draw a lot of attention by advertising and promotions to the smartphones in our network. And the third one is that we are selling quite a significant amount of the phones on credit terms which, as mentioned before, together with MTS-Bank to increase the sales volumes but not to lose the margin.

The first question on the Euroset perspective. As I understood that, Euroset -- inside Euroset and agreements between MegaFon and VimpelCom are not known to us. They might be discussing some lower commissions or might otherwise be discussing even higher commissions, because if we pull out of Euroset business or if we get degraded in the Euroset business, our share of the revenues from MTS has to be compensated by the other players, mainly by MegaFon and VimpelCom. So we expect that if we get pulled out of that business, MegaFon and VimpelCom may face even increase in their commissions to Euroset to sustain the business of Euroset on their service.

Meanwhile, they might be also trying to leverage their existence at Euroset and thus increase their share and decrease MTS share, which we will have to offset by our own activities in our own network and in third party dealership, which may mean that the commissions would grow as the total, but would probably not grow as a fraction. So we don't expect the commissions outside of Euroset to grow, but we may presume that inside of Euroset commissions may increase due to our pullout of that business, if that happens.

Yes, this is Michael Hecker. Let me take the third question on Uzbekistan. Please understand that given the fact that we are in the middle of legal proceedings, several legal proceedings in Uzbekistan, that we have to refrain from further commenting on these matters except for the fact that MTS management is doing everything with regard to the matter to protect the shareholders' benefits and shareholders' interests.

Okay. Thank you.

We'll take our next question from Max Loginov from Goldman Sachs. Please go ahead.

Yes. Hi. Two questions, if I may. The first is on the OIBDA margin guidance. Don't you find it a little bit conservative and the minimum level of profitability could be actually higher for the year? I'm just trying to reconcile your OIBDA margin in fourth quarter and assuming the same level of profitability in the quarter you had last year. I am actually getting to around [43%] for the full year, or probably you expect some ramp-up in cost in first quarter? And if this is the case, what would be the key drivers of cost increase?

And the second question somewhat relates to the first one is on sales and marketing expenses. You showed quite noticeable reduction in third quarter. Were there any one-off things or just your own distribution and dealers' compensation rationalization now all coming through and the effect is going to be sustainable? Thanks.

Max, you are really right speaking about OIBDA margin. It's Andrei Dubovskov, speaking about OIBDA margin guidance. It can be much better but we need to take into account the following issues. First of all it's a continuous rise in maintenance costs as we expand our mobile and fixed networks, and of course the product expansion of our retail footprint, speaking about the Euroset issue event in Uzbekistan as we mentioned earlier. And to add, increased labor costs based on new laws regarding social taxes. It means that we need to be more conservative that we can allow that.

And the next question about marketing expenses?

Well, I think that there are two comments here. First, we don't think that marketing expenses were unreasonably low or unexpectedly low. We think that we'll sustain if we talk about annualized level of marketing expenses where we stand right now, somewhat on this level with some seasonal hike in the fourth quarter. So I think that that's the trend which we expect.

And as for our guidance for the fourth quarter, naturally seasonally it's going to be lower. Still the guidance which we give refers to the minimum level, which means that any figure above that level is possible. In this extent you can consider that to be conservative.

Okay. Understood. Thank you.

We'll take our next question from Viacheslav Shilin from Deutsche Bank. Please go ahead.

Yes. Good afternoon, everyone. I just wanted to clarify how the risk sharing is conducted, if there is any, when the business is done with MTS Bank. So, when MTS Bank is issuing a loan towards its customer, is there any risk that -- is there any recourse towards MTS if, let's say, a handset is sold using a loan from MTS Bank? So if your customer is defaulting, whether there is any risk falling into MTS itself?

And also in line with this, what was the share of handset sales in the third quarter that were sold using loans from MTS Bank, if there were any? Thank you.

Okay. On the first question, we are carrying only the risk which relates to our participation with MTS Bank -- the MTS Dengi project, so not any additional risk on sales of our handsets on credit.

And could you please repeat the second question?

Do I understand it correctly that there is also now -- it's possible to buy handsets from MTS using loans from MTS Bank?

Exactly. Of course. And that's already the practice which exists a long time. And about a quarter of our handsets being sold are sold on credit, and a big chunk of that goes through credit from MTS Bank.

But is this part of the MTS Money project or not?

Yes, it is.

And what happens when the customer defaults? Do you get the handset back or there is no recourse to MTS at all?

There is no recourse to MTS.

Okay. Thank you so much.

We'll take our next question from Dalibor Vavruska from Citigroup. Please go ahead.

Hello. Just two quick questions, if I may. On the -- it's more of the business trends, if you can comment a little bit more on the non-voice services in mobile. We saw some decline in some of the year-on-year trends. I'm just wondering if you have any visibility where do you expect mobile data and the content, for example, growth in the next year or in the next couple of quarters?

And also I'm just looking at the fixed line business. And there's some volatility in the year-on-year trends, but I'm just wondering if you can comment what is happening in the fixed line business. If I'm looking at the correct numbers there is some improvement in the trend in the revenue but I did not see much improvement in the KPIs, so just if you can comment on that.

This is Vasyl. I will answer your first question. Yes, indeed, we see the voice business stagnating and we project that if no rapid base growth, the stagnation may continue into future. That is pretty standard for our industry, actually Europe-wide and worldwide, so we are not fearing this trend, especially knowing that since we have almost finished building the 3G network and are building the LTE network quite extensively, these stagnations should be compensated by the data business.

You rightly pointed out that the data business is the stake everybody is -- everybody has put in the stake. We see the growth amounting to more than 30% and projected to be at around 40% for the next quarters, next year, year over year. And we think that this is how we mostly will compensate possible stagnation and decline of the voice business.

The content business will not likely be growing any more. It is quite high for this market so far. We are a leader in the content business of Russia and further growth might be problematic. So we don't think that this growth will incur unless the customer number will increase, but the data growth will definitely be happening quarter by quarter quite significantly.

And if I can ask, how do you plan to accelerate this data growth? Is it largely driven by smartphones or do you have any specific plans? Or maybe is there anything to do with pricing that now you are aggressive and you will be less aggressive or --?

Actually this is a very good question since our Company is right now going through a data transformation exercise where we are re-cutting our tools to fit the future growth of the data and to actually facilitate it. You have rightly pointed out that the biggest prospective that we see comes from the smartphones, where at this moment the smartphone penetration in our base is relatively low at about 20%, 21% at the year end of 2012, while the European normal penetration is somewhere above 40%. So we believe that the higher penetration of smartphones will increase the data adoption in our base.

We are facilitating this by increasing the share of the tariffs with embedded data that we sell to the market with CRM activities and with the increasing sales of smartphones in our RTK network, which I mentioned before. At this time we sell more than a third of all of our sales in the area of smartphones in our RTK network and we are looking forward to increase even that up to even 50% in the next one or two years. So we are boosting the adoption of the data to benefit from the increasing usage and increasing ARPU of the data customers throughout our base. Thank you.

Yes. This is Aleksander Popovskiy. Coming to fixed line business, yes, we see a sort of stagnating in our ARPU and in some other figures in fixed line business. It's mostly due to high competition especially from small- and mid-sized players in the region. It is also driven by the fact that our network in most regions used to have pretty much our data technology, like ADSL, DOCSIS and [LTE]. So we have -- the competition that we face is more harmful for us than for other players a little bit.

But we are continuing a big upgrade of existing networks and the rolling out of new fixed line networks. And this will allow us to have both new subscribers and to increase ARPU and pricing for existing subscribers, with bringing them new value.

This September we've launched our --- we have converted our analogue cable TV network into digital. And now we're starting to distribute digital STBs, supporting up to 140 HD channels and a number of HD high-definition channels. So we expect that this will have a positive influence both on our ARPU and a positive influence on churn reduction, and of course this will acquire -- this will help us to acquire new subscribers for TV.

Thank you so much. If I can ask just, on that subject, one quick follow-up. Can we talk a little bit about the timing of this? Obviously you are spending significant amounts of money on the GPON upgrades, etc. And, as I mentioned, if I'm looking at the right line, it seems that the growth rates in the fixed line business, the revenue growth rates seem to be quite volatile. So it's hard for me to read whether something positive is happening already or whether this is just some volatility in the revenue growth rates. And if so, when do you expect this impact of this fixed line investment to start impacting the revenue growth rate?

Yes. We have a little bit different technology and strategy in Moscow and in the regions. So in regions we are more or less finishing modernization of our broadband networks and digitalization of our cable TV networks this year mostly. In Moscow, GPON project is a longer and more ambitious project. It is a different technology. It is a technology which will bring a big future to our (inaudible) company, to MGTS. The full modernization of our Moscow network to GPON technology will be finished in the end of 2015.

Okay. Thank you.

(Operator Instructions). We'll take our next question from Anna Lepetukhina from Sberbank. Please go ahead.

Yes. Hello. I had a question about CapEx. Can you please explain what was the reason for increase in CapEx and your CapEx guidance? Can you maybe break down where exactly you invest and what caused such an increase? Was it fixed line or mobile? Because I don't see you speeding up the process of installing 3G base stations; you installed just 1,000 base stations. So whether you invest into capacity or coverage, so where this increase is coming from and what we should expect for 2013.

Thank you for the question. This is Alexey. The bulk of our investments in this year go into data investment, data services. So around about 70% of our investments are actually linked to this type of technology or to this type of service. That includes fiberization of our network, building backhaul, building backbone. And we are already having about 70% of our base stations transferred on IP technology.

We also are aggressively building up our fiber in our fixed business, and particularly in Moscow, investing for our GPON project. And in July we completed digitalization of our pay TV networks. And starting from September we expect that we can enhance our content portfolio of these products.

So basically those, and also we've been investing in LTE specifically in Moscow and [4TTD] technology which we launched in September. And also we are starting preparation for LTE for the next year already right now. So all that together gives an understanding where we're investing.

As for difference between our initial guidance and current, we believe there is being minor fluctuations in terms of --- when you look at currency fluctuations through the year. And we're talking about some projects which -- some currency effects and some projects being completed faster probably and not passing over into the next year.

And what we should expect for the next year, if possible?

As for the next year, we have clear guidance over the next three years that we'll hit within 15%, 18% range cumulatively for the next three years, which gives us the comfort to enhance our dividend capabilities and to give the guidance and to give an understanding what we propose on the dividend side, which we outlined today.

Thank you.

We'll take our next question from Janna Anikina from BCP Securities. Please go ahead.

Thank you. Thank you for the presentation. I believe my question was asked but my connection was not good and I couldn't hear the answer. Is there plans to issue new debt? And if so, please comment on that. Thank you.

We've been -- as I said earlier today that we keep different options possible for the next year. As for the end of this year, we will use whatever possibilities we have at our hand, like open credit lines and ECA-backed facilities. As for the next year, as I said, we keep different options and different opportunities open. Generally we have inclination towards ruble-based financing.

So we shouldn't be expecting any US dollar or euro-denominated bonds in the remaining of the year or next year, right?

Not until the end of this year. It's too early to say what we'll do next year because we'll be looking at the market situation, what will be the market conditions and what instruments will be the best fit to use to build up a balanced portfolio.

Very good. Well thank you so much.

(Operator Instructions).

Operator, do we have any more questions?

We currently do not have any questions in the queue.

In that case I'd like to thank everyone listening on the call. 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 everyone a pleasant day and evening. Thank you very much.

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