Mobile TeleSystems PJSC (MBT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mobile TeleSystems First Quarter 2015 Financial and Operating Results Announcement. For your information, today's conference is being recorded. At this time, I would like to turn the call over to your host today, Mr. Joshua Tulgan. Please go ahead, sir.

Thank you very much. Welcome everyone to today's conference call to discuss the Company's first quarter 2015 financial and operating results.

Before beginning our discussion today, 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 in Russia and other markets of operation; revenue or subscriber dynamics; financial indicators such as operating income before depreciation and amortization, or cash flow projections; operating indicators like average revenue per user or value-added service indicators; debt instruments and their usage; legal actions or proceedings directed against the Company or its representatives; regulatory developments and their impact on the Company's operations; technical matters as they pertain to our communications networks, including equipment, licensing or network technologies; activities in lines of business that complement our communications networks; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in our MTS Annual Report on Form 20-F, which is now 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, our form 20-F, as well as other public filings made by the Company with the United States Securites and Exchange Commission, all of which are available on the Company website, www.mtsgsm.com, or that of the US SEC, www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call, or make any adjustments to previously made statements to reflect changes and risks. Copies of the presentations and materials used in reference in the conference call are available on our Company website.

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

Thank you, Josh. Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results for the first quarter of 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer; Vasyl Latsanych, Vice President, Chief Marketing Officer; and Andrei Smelkov, Vice President, International Subsidiaries.

We are pleased to share with you another set of solid results. For the period, MTS again demonstrated strong operational trends in our core markets. Revenue for the group grew 2.7% year over year, to RUB100.2 billion. Growth was primarily driven by increases in voice usage and data adoption.

Despite the volatile and generally negative macroeconomic environment, we maintained the strong profitability with a group adjusted OIBDA margin coming in at 41.2%. In Russia, we continued to benefit from growing smartphone penetration and increased data usage in all customer segments, while overall demand for our services remains resilient. Our sensible commercial strategies, the speed and quality of our networks, our commitment to customer service and the biggest chain of proprietary retail stores have allowed us to continue to outperform the market.

Vasyl will now discuss the performance of our various business units.

Ladies and gentlemen, Q1 revenue at our business in Russia grew 3.6% year over year to RUB90.4 billion. The most significant growth was seen in our mobile business, which increased 3.9% year over year to EUB70.5 billion. This was mainly attributable to higher uptake of data plans, as smartphone penetration reached 43.5% among our active subscribers, contributing to a 26% increase in data traffic revenue year-over-year.

We also generated significant addition of subscribers to the period. Year-over-year, we increased our subscriber base by 4.5 million customers. Sales of SIM cards continued to be both consistent and sustainable, while churn remained stable at the lowest level in the market.

Sales of handsets increased by 1.2% year-over-year. We continued to see significant demand for smartphones, including LTE-enabled smartphones. However, we do see demand shifting towards more affordable devices. Following our ruble volatility in Q4, in anticipation of such a shift, we adjusted the product portfolio in our stores to showcase more affordable devices. [53%] of smartphones sold in our shops in Q1 2015 were priced under RUB5,000. Whereas the share of devices priced over RUB10,000 continued to decline.

We saw a slight increase in fixed-line revenues of 0.9% year over year. We continued to grow residential ARPU by increasing our share of double- and triple-play products, by migrating customers to our digital TV platform, and by upselling our customers to tariff plans with higher speeds.

In Moscow we are nearing the final stages of our GPON rollout. By the end of the quarter, we had passed 3.7 million households with GPON, and provided over 650,000 subscribers with internet Pay-TV access. However, our success in increasing B2C customer value in Moscow and the regions was mitigated by weakness in the B2G segment, as ongoing projects reached their conclusion.

In Ukraine, our revenues grew 9 percentage points year over year, to UAH2.6 billion. In spite of the operational challenges in the East, and the exit from Crimea, MTS Ukraine's operations show remarkable resilience. In addition, revenues were boosted during the quarter by an increase in international termination rates, as well as by the hryvnia devaluation against the US dollar, as interconnect rates are fixed in hard currency.

We also saw an increase in value-added services and data traffic revenues due to reallocation of the revenues from subscription services from Q4 2014.

In Armenia, revenues fell by 1.3% year over year, to AMD16.9 billion. Weak macroeconomic trends continued to impact our performance there through a decline in the volume of international calls. But we remained the dominant operator in the market.

In Turkmenistan we increased revenues by 9.4% year over year, to TMT71.9 million. Operating trends remain stable, and we have been successful in monetizing subscribers by growing data and content usage.

I'll hand now over to Alexey Kornya who will discuss the Group's profitability and financial performance in more details.

Thank you, Vasyl. Adjusted OIBDA for the period declined by 2% to RUB41.3 billion. Our Group adjusted OIBDA dynamics were impacted by a lower share attributed to international roaming in our Russian revenues, alongside decreased roaming profitability due to the ruble's depreciation. We also saw losses related to the launch of our operations in Uzbekistan, and the decline in the contribution to OIBDA of our business in Ukraine. Despite these factors, this translated to respective adjusted Group OIBDA margin of 41.2% for the period.

In [the case of] Russia, OIBDA increased by 0.9% year over year to RUB38.2 billion, where OIBDA was positively impacted by a growing share of high-margin data revenues. At the same time weaker roaming revenues increased the roaming expenses, depressed the margin, which came at 42.2%. And sequentially OIBDA fell by 7.7%, in line with revenue.

In Ukraine we delivered stable adjusted OIBDA of UAH1.2 billion, with an OIBDA margin of 47%. OIBDA was adjusted for reserves booked due to the insolvency of Kylvska Rus Bank, Platinum Bank, and Delta Bank, where MTS Ukraine held UAH648 million in cash and deposits.

On the quarterly basis, we saw a strong increase in OIBDA due to growth in interconnect revenues. Our termination rate fixed in US dollars also benefitted from the considerable depreciation of hryvnia during the quarter.

In Armenia OIBDA grew by 4.4% year-over-year to AMD8.1 billion. Profitability was boosted by an increase in termination rates for international calling introduced in third quarter of 2014. Organically, the unit remains strongly profitable. And we anticipate stable margins going forward.

In Turkmenistan OIBDA declined by 14.8% to TMT25.9 million at a margin of 36%. This decline was primarily driven by the impact of US dollar appreciation versus the manat on US dollar-denominated cost items, and the customary increase in payroll cost in January 2015.

Group net income for the period declined 13.8%, to RUB11 billion. The dynamics behind this reflects the decline in our OIBDA, a ForEx loss of RUB3.5 billion in the first quarter based on the value of MTS's foreign currency-denominated debt, due to ruble depreciation and volatility throughout the period, and a reserve related to cash balances held in distressed banks in Ukraine in the amount of RUB1.7 billion.

Free cash flow for the first three months fell by 56%, to RUB15 billion. Free cash flow was largely impacted by higher than normal CapEx for the period. This included brought-ahead construction cycle for 2015, and settlement of invoices billed at the end of 2014.

At MTS we have long considered dividends to be a key commitment to our shareholders. This is both a reflection of the strong markets in which we operate, and the prudent management of our business. We are pleased that the results of 2014 will allow us to pay our largest dividend in the history.

For the fiscal year 2014, MTS will have paid out RUB53.2 billion. Most importantly, this sum is derived from our free cash flow, which does not require us to resort to outside financing to finance this payment. Our view is that dividend story is best preserved by paying one.

And in that respect, in April the Board recommended to the Annual General Meeting to be held on June 25, to approve annual dividends of RUB19.56 per ordinary MTS share, for a total of RUB40.4 billion, based on the full-year 2014 financial results.

The Board recommended that the shareholder meeting set the record date for the shareholders and ADR holders entitled to receive dividends for 2014 fiscal year for July 7, 2015. Payout of the dividends will be within 25 days after the record date.

By the end of the period, the total debt stood at RUB330 billion, an increase of 13.7% from fourth quarter. During the quarter we drew RUB25 billion from a credit line signed with Sberbank, and $283 million from a credit with Citibank and EKN. The revaluation of the foreign currency-denominated portion of our debt portfolio also contributed to an increase in the amount of total debt.

However, our net debt to the last 12 months OIBDA ratio remained constant at a multiple 1, which is in line with the previous quarters. Most of our repayments during the year are all due in the fourth quarter of 2015, where we will make repayments predominantly in rubles in the amount approximately RUB30 billion. This also includes a RUB15 billion put option, which we expect to be exercised on our Series 8 ruble bonds.

After the end of the period we signed $200 million equivalent term loan facility agreement with China Development Bank [Corporation], which features both US dollar-denominated and renminbi-denominated tranches. Funds drawn under the facility agreement will be used for procurement of network equipment and related services from Huawei. This transaction represents the first experience of attracting funding in renminbi, and as such showcases our success in further diversifying our sources of credit.

On an operational note, I would like to remind you that in accordance with the recent Russian regulations, we are now reporting our financial and operational results under IFRS, rather than US GAAP. We have provided restated financial results from first quarter of 2014 to provide comparisons. And in our disclosure materials, you will find more information on comparative results and other key principles adopted in line with IFRS requirements. If you have any specific questions about this, please contact our Investor Relations department, who will be glad to assist.

Thank you, Alexey. As we previously announced, MTS has launched its operations in Uzbekistan and I will now invite Andrei Smelkov, Vice President of Foreign Subsidiaries, to discuss this in more detail. Please, Andrei.

Thank you, Andrei. As has been related previously on this call, in July of 2014 we concluded the global settlement agreement with the government of Uzbekistan on outstanding claims and litigation of our legacy and subsidiary in Uzbekistan, Uzdunrobita.

As part of this agreement, we have created a new (inaudible), Universal Mobile Services, or UMS, of which 50.01% is owned by MTS, while the balance is held by an Uzbekistan government entity. Assets, equipment and infrastructure, which were previously owned by Uzdunrobita have been transferred to UMS.

Prior to the transfer of the stake in UMS to MTS, UMS had been granted 2G, 3G, and LTE licenses, and received frequencies, numbering capacity and other permits required for the launch of the operations. UMS has also received guarantees covering the protection and return of investments in accordance with the laws of the Republic of Uzbekistan.

On December 1, 2014, we launched our operations in Uzbekistan. By the end of the year, after just one month, we could boast 200,000 subscribers. And in Q1, we have doubled our base to 400,000. We realized UZS19.3 billion contribution from Uzbekistan in Q1, and we anticipate realizing over UZS189 billion in revenue for the year as a whole.

We anticipate that our performance will be OIBDA negative in 2015, a fact we have already factored into our Group guidance, before turning OIBDA positive at some point in 2016.

We believe that in time Uzbekistan, with over 31 million people and an economy expanding roughly 7-8% per annum can provide a significant contribution to the Group results.

Thank you, Andrei. As you've seen from the results of all players in the sector, even in conditions of great macroeconomic uncertainty, the Russian telecom sector continues to present growth opportunities. But only operators with the right business model will be able to realize them. Our leadership of the sector positions us to benefit over our competitors, for example, from the continued increase in data usage and strong unit sales in lower-value handsets.

So before closing, I would like highlight three key points that clearly demonstrate the success of our strategy. Firstly, we saw revenue growth in our two core markets, Russia and Ukraine. In Ukraine, results are naturally more volatile, but our growth in Russia seems to unique in the market. The key factor of interest is handset revenues, which grew slightly year-over-year.

Customers are still buying handsets. And judging from the fact that more handsets are being sold for less than RUB5,000, we are seeing more customers migrate to data despite the unexpected surge in sales during Q4 last year. This has long been our key growth driver, and smartphone penetration continues to grow.

Secondly, our ability to better monetize our customers with data plans also led us to show the strongest data revenue, and fastest growth rate in the market. We also showed the highest data traffic penetration among [our own base] as smartphone penetration reached 43.5%. This (inaudible) shows that customers are still migrating. But it also provides an opportunity to further monetize usage growth of existing customers.

And thirdly, while adjusted OIBDA for the Group decreased year over year, we saw OIBDA increase in Russia by over RUB300 million. Such a strong performance naturally has to raise questions about our margin guidance for the year. But for now, we maintain our guidance on the expectation that further volatility and the rate of inflation may impact profitability.

We will of course address our guidance after our mid-year results. But for now we are confident of our markets and have faith in our continued outperformance. With that, we'd like to open the call to questions.

(Operator Instructions) JP Davids, Barclays

Yes, hi. Thanks. Two questions from my side. The first one relates to Russia, and specifically can you provide a little bit more color around the business-to-government and business-to-business revenues? And specifically how those two markets have reacted to the economic crisis, so are they proving more immune or less inelastic to the macro pressures we see?

And then a separate question on Ukraine. I picked up your comments on the ARPU growth and what drove that in the first quarter. Would you see a lot of what happened in the first quarter as one-off in nature, or do you expect this ARPU level of about 43, to be maintained for the rest of the year? Thank you.

Hello. This is Vasyl. I wanted to clarify the first question. The question regarding the B2B and B2G performance. Was it regarding the fixed business, which we have mentioned in the disclosure or it was about the general business?

Actually the general business, so both fixed and mobile if you don't mind, thank you.

Okay. So on the fixed line, what we have disclosed in the statement was that there was a clear one-off strong batch of projects that we have executed during 2014 which strongly contributed to our top-line in MGTS performance and some of other fixed-line parts of our business. Those contracts were finished. And they are not anymore present in Q1. So we have returned to more or less normal business as usual, in the fixed B2B environment.

Meanwhile, we would like to highlight that our B2C operation and business is growing. And we believe that we have passed the turnaround point, where we have gone through the network cleaning, network remoting, and finally have customers paying us higher ARPU and consuming more services in the B2C market of fixed business.

Now regarding the overall business, at the moment we do not see any adverse effects in the B2B or B2G areas of our business. In Russia, we did see some weakness in the Ukraine. But that's mostly weakness of the overall market. In the B2B area in Russia, and the B2G, we are expecting tenders. We are expecting more scrutiny from the customer site. But it is not reflected in the top line as of today, more than it was usually very competitive environment where we had to fight for every customer.

The second question was about the Ukraine and the general volatility of the situation. As Andrei mentioned before, Ukraine results are volatile, plus 9% year-over-year is an outstanding result. But you are right. It incorporates certain-- in fact it can be taken as one-offs. We have increased the dollar price for international termination, and as well as the local currency has weakened. So that the local currency results look better, because of this exchange rate change.

That is for sure partially a one-off result. But to look into more detail into our Ukrainian business, we have seen that apart from these one-offs, the overall business looks to be healthy and is growing, in spite of very harsh conditions it operates.

Very clear. Thank you.

Roman Arbuzov, UBS

Thank you for taking the question. I had two please. The first one is on CapEx guidance. So just looking to CapEx spend in the first quarter that was very high, and also putting that in context of your full-year guidance of RUB85 billion for 2015, which is actually below your 2014 spending. And of course all of this comes sort of in a year where ruble has depreciated a lot. And as you've mentioned in your release, you had to take on some CapEx spending and pay for it in this quarter, some CapEx spending from last year from 4Q 2014.

So bearing all of that in mind, I'm just trying to gauge your comfort around the 2015 CapEx guidance, and also related to CapEx. I mean should we expect some extraordinary quarterly trends this year as well? For example, in the fourth quarter should we still expect a very big CapEx spend per the usual seasonality, or perhaps you can slow some of your 4Q Capex onto 2016 for example?

And also could you comment on whether you've prepaid any of the capital expenditures as well for the rest of the year?

Okay. Thank you. It's Alexey Kornya for the question. We confirm our guidance for the full year. However, we would like to stress that this guidance does not include our 3G project in Ukraine. We are finalizing the tender for 3G in the Ukraine. And we will probably be ready during our next disclosure to give more details and more light on our plans for 3G, and how they impact the guidance on CapEx for this year and later, further on.

However, as far as our (inaudible) CapEx are concerned, we indeed moved construction cycle in 2015 a bit ahead. That means that we will see an elevated CapEx level in the first half of the year. However, that means that we will put earlier through the year our network into use. And it will faster and sooner generate revenues and benefits from the construction, already starting from the summer of this year.

But that leads to some redistribution of the CapEx through the year. And we will see a lower level of the CapEx in the second half of the year, where we'll plan to end up at the level which we guided, RUB85 billion for the Group.

Okay. Thank you. So you've essentially prepaid some of the CapEx.

Well, it's not-- sorry. Just to stress, it's not that we prepaid. We moved the construction cycle ahead. It's usual in traditional construction cycle in telecoms that you're starting construction in the first quarter, and move construction through the year. And most of your construction, finalizing by the end of the year in the fourth quarter, where the highest CapEx spend comes.

Now we move the construction cycle so that most of the infrastructure will be put in use by the summer. So we actually are pushing that right now, so that we will already benefit from our network buildup through the summer and during the year. And that leads sequentially to the redistribution of CapEx spend through the year, where you will spend more CapEx at the beginning of the year for the construction at the beginning of the year, and less CapEx for the second half of the year.

So that's not prepayment. This is a change in the construction cycle.

Okay. Thank you very much. Very clear. And can I ask my second question on the handset sales in Russia please, for Vasyl? I was just wondering. It's interesting that handset sales were actually up, whereas they were down for your competitors. So I was just wondering if you've been particularly active, or doing anything out of the ordinary this quarter to promote your handsets. For example, have you been subsidizing your handsets this quarter?

Yes. Thank you for the question. You've noted. That's right. We have been increasing our activity in the sales and the handset sales as well. In fact, we believe that we have been catching the wave correctly, by moving to the lower-price handsets more aggressively than our competitors, who were more hooked up to the high-end smartphones having direct contracts with Apple, for example, which we do not have. So we don't have that burden to execute on the obligations to sell more high-end handsets.

Meanwhile we can concentrate on something we believe is more applicable to the current state of the markets, to selling more handsets under $100 price, which will inevitably deliver the more data ARPU yields from our customer base. Because the switching from a feature phone to a smartphone definitely delivers more revenue increase than switching from a smartphone to a higher-end smartphone. That's according to our calculations.

Regarding the subsidies, no. We were not doing subsidies. We are not, and we do not intend to pay any subsidies in this market.

Thank you, Vasyl.

Ivan Kim, VTB Capital

Thank you. Two questions from my side, please. Firstly on the mobile data pricing in Russia, which seems to have become more aggressive lately with the growing data allowance by (inaudible) within the offered bundled tariffs. Do you think it shall continue? And how can you mitigate the reduction in this implied price per megabyte? That's the first question.

The second question in on Ukraine. So why did you decide to increase these termination rates? Is it partly for funding your 3G CapEx, or something else? Because full CapEx is probably not as material. And if it's possible, probably also can you state growth in Ukraine, excluding the effect of this termination rate increase? Thank you.

Thank you, Ivan. I will answer the questions. Maybe I will start from the second one. It's actually an easier one. We have increased to the market level. The whole market shifted from around $0.14 and $0.15 to around $0.18 and $0.19. So that was probably not right to stay down there and collect less money when all the market, all our colleagues and competitors have moved up. We are now as well on par with our competitors in the area that is totally justified by the market levels. There was no one-off from our side. This was the market's move.

The first question on the mobile data pricing, it a little bit triggers the questions, what do you consider to be more aggressive and reduction of the [APPNB]. In fact, what we have seen in the last couple of months in the Russian markets was a relative healthening of the APPNB pricing, with reduction or elimination of unlimited offers, elimination of extra-generous 80 gigabyte offers for the bundles, as well as we see all the carriers getting more or less on par for the smartphone volumes and the prices.

So we do not consider that to be an aggressive reduction. In contrary, we think that the market is more or less stable for the last couple of months, or even quarters. And we do count on more stability and less aggression for the APPNB per megabyte pricing in future, especially when you compare it versus our APPNB pricing versus our voice pricing, and our SMS prices with most of the leading markets and developing markets in the world. We have seen ourselves pretty much on par with most of the competitive markets throughout Europe and the world.

Thank you, Vasyl. Just if I may, a quick follow-up. But if we're talking purely about smartphones, it still looks like the bundled offers, the smart offers and then the offers by your competitors have increased the data allowance over the past six months, let's say. Do you see that not really impacting your ARPU just because the usage grows so fast that people just keep upgrading and taking up more data? And where do you see basically that trend going?

Well, you may be also confusing a little bit the aggression and increasing the bundles on the upper side, and lowering the entry barrier on the lower side. What we did complete in the last half of the year, we have introduced the lower tier voice and data bundle prices. And that was done throughout the market with many of our competitors. Because we have seen more people ready to sign up to the bundle doffers. But the pricing level was relatively restrictive for massive connections.

So we have moved down in terms of we had offered to the market a lower price, smaller bundle massively, which was there in place to substitute the previously very popular prepaid-only prepaid offer. So our move towards the voice and data bundles is by selling it to more people, even if it takes lowering the entry level entry barrier for those people.

In terms of increasing the bundle sizes, there was this movement in the market about a year ago. But I think it's slowed down recently. And we did not see any major moves from any competitors in the market.

Okay. Great. Thank you.

Herve Drouet, HSBC

Yes. Good afternoon. Two questions as well on my side. The first one is on your fixed-line business. As you mentioned, there has been some declining on the revenue in Russia in the B2B segment. Do you think it is likely to continue during the rest of the year, or you think that will be more growth to come in the future?

And I would like to see as well, how that's going to impact your overall CapEx allocation, especially to the GPON network. If you consider the overall fixed group revenue, it's barely growing now, almost flat, slightly positive, even if we include the B2C. And I was wondering. I mean can that impact your plan in investment if it's a [cheaper] network? So that's my first question.

The second question is maybe on the handset as well, in terms of the-- just ability of having a positive handset revenue growth. I mean do you think that's feasible in your view? And do you believe as well that it looks like there has been some talk of potentially new operating system, Russian operating system, to be gradually being developed. Do you think that may come and potentially be imposed by the regulatory to be on new generation of handsets in the future? Thank you.

Thank you. Herve, this is Vasyl. You asked some very creative questions. We'll have to find some creative answers for those. Well the first one is relatively straightforward. As I mentioned before, there was no decline in the fixed-line B2B revenue. There used to be a couple of projects which we completed throughout 2014, which were extraordinary projects, and they contributed to some extra growth.

If you look back to our reporting a couple of quarters backwards, you will notice that we had some extraordinary growth in B2B revenue, which at that time we did not manage to separate B2B from B2C in our disclosures. So we did not give you full transparency on where the revenue was coming from. While we noted that the revenue is coming from some extra projects made on the B2B and B2G side, specifically by MGTS.

So these projects are over. We have returned to normal growth levels where B2C growth is present. And we believe that this growth will continue, and even enhance. And we do not foresee any adverse revenue declines or adverse effects from B2B or B2G sides, while the fixed projects are over, the normal business as usual is continuing.

The other question was about the GPON. GPON is an infrastructure project which we are finishing this year. We will be happily finishing it. We don't see any threat present in the market that would force us to change these plans. And honestly speaking, when we have completed the absolute majority of these projects, I don't see it feasible to be changing in the last moment.

So we will be completing as planned. And we believe that this will be a very good platform for further development in the most lucrative, most core market of the high end broadband and TV services.

Regarding the handsets, the handsets revenue that we have shown in Q1, we believe that it is sustainable. We hope we can sustain that level or even the growth throughout 2015. Because as I said before, we believe that we have found the right place in the market, the right pricing, right promotion, and the right handsets to be pushed to the market at this time.

Meanwhile, your question on the Russian OS [of handsets] probably we'll have to live without a comment, as we have not participated in that development, and we do not have a lot of information about it, probably not more than you do.

Meanwhile on the handsets overall, we do move quite aggressively, pushing the handsets to the market. Because as you know, we have built a tremendous network of LTE in 2014 and the beginning of 2015, and we have finished the major construction of 3G network. And now our commercial task is to fill this network with profitable traffic as much as possible.

And as I mentioned before, the customers migrating from feature phones to smartphones immediately use the data in most of the cases, and increase the ARPU. So we believe that this is a major driver for us to utilize the newly built network and to increase the ARPU of existing customers, and even maybe to attract new customers, by giving them the smartphones, even if those smartphones are of the low end. Thank you.

Thank you. That's very clear. Thank you.

Alex Balakhnin, Goldman Sachs

Good afternoon. A quick question on dividends. In your press release you make quite a strong emphasis that the progress with your dividends and highlight that this time the dividends are highest ever. I was wondering if-- well as long as you are so proud of your dividends, should we probably expect next year you will repeat your success and post even higher dividends, i.e., is your statement on the dividends-- is it sort of a manifest of commitment to a growing dividend policy? I mean is that what you are saying? So your thoughts here would be very helpful. Thank you.

Thank you, Alex. I think that would be slightly preemptive to consider our statement on dividends performance this year, treat it as a commitment for dividend increase, growing dividend for the next year. As you probably know, we have a three-year dividend policy, which comes to end next year or the first half of the next year. We'll have to discuss with our Board a new dividend policy, which will be probably also based on our free cash flow. And as you know, our current dividend policy is based on free cash flow, and we are paying our dividends from our free cash flow.

So let's wait. But however, we would like to stress that we definitely see dividend as important and an integral part of our value. And whatever comes out, will be with the understanding of that, of the role of dividends in our value.

Maybe just quickly ask a follow-up here. Well given the financial indicators of the Company performance may be quite volatile, and that income can flip (inaudible), like even cash flow, maybe volatile as you may book some CapEx sooner or later in the year. When do you internally think about the shareholder remuneration? What is sort of the main starting part? Is this just a performance on free cash flow and net income in a particular time? Or do you still think of some positive dynamics over the dividends, i.e. considering maybe some slight increase of the dividend every year?

So how do you approach to shareholder remuneration when it comes to the internal discussions, if you can share that?

I think we view our value creation capabilities in the profitable growth or cash flow generative growth concept. We believe that we can grow, and we can grow with the healthy-- with generating the healthy cash flow, which will be in its turn distributed in the form of dividends.

So that is why we believe that in several integral parts of our value creation idea consists of two points. First is determined in the form of dividends, and secondly, profitable growth.

Yes. That's clear. Thanks so much.

Anna Lepetukhina, Sberbank

Yes. Hello. I have two questions. I have a follow-up question on CapEx. I'm just trying to understand what was the rationale behind moving the construction cycle to the first half of the year? And also, out of this RUB25 billion in CapEx that you spent in the first quarter, how much is related to the equipment that was installed last year? Because in the press release you mentioned that you're paying invoices billed at the end of 2014. So I'm just trying to understand actual CapEx, how much you could have spent last year, not in terms of cash CapEx, and kind of how much you plan to spend this year on equipment that you will install this year.

And also on Ukraine, I noticed an increase in CapEx as well. But at the same time, you said that you are still finalizing plans for 3G investments. So what was this increase due to, if possible?

And my second question is about MGTS. You mentioned that by the end of first quarter, you've passed 3.7 million households. But how many households actually now are connected to GPON? And what is their uptake rate? And what do you see in terms of competition? Thank you.

Anna, thank you for the question. As far as the rationale for the CapEx brought forward, we would like to stress that the rationale is to put the infrastructure faster in place. Because during the traditional construction cycles, you have most of the infrastructure being put on air at the fourth quarter or in the third and fourth quarter. And at this period of time, it starts generating revenue.

So our view and our idea was to put it as soon as possible, so that we'll put most of our infrastructure already in the first half of the year, so it starts generating revenues for us, and bringing benefits earlier through the year. So that was the main idea.

As far as the share, whether there was some portion of bills or construction of 2014 paid in 2015, yes. This is a normal situation when you have some bills related to the end of the previous year. In accordance with the previous construction cycle, most of the construction comes at the end of the period. So you're just paying on those bills. And we paid some amounts related to the construction in 2014. That was normal-- that was a normal share, depending on the volume of the constructions for the fourth quarter 2014. I would say out of the total spend, that would be probably around 10-15%.

As for Ukrainian CapEx, there was nothing specific. I think the increase which you could note was rather linked with the low base effect. Because as you could see last year, we have very low CapEx spending in Ukraine. And it was also reflected in the first quarter. So there is not yet CapEx which accumulates 3G construction. And we'll clearly see the higher CapEx then in Ukraine.

And sorry, one more point to stress that probably looking at the Ukraine CapEx figures, you see also acquisition of our licenses, which came as a CapEx spend. However, we?re splitting that separately in our figures.

Anna, regarding your question on MGTS, household pass and [real] customers. As we've indicated, we have 3.7 million households passed. That's nearing the 4.4 million target. Out of those, we have 1.2 million of the paid telephony subscribers, which is extremely high penetration; and about 700,000 of broadband and Pay-TV customers. The number actually doubled during 2014, and continues to grow. Thank you.

Thanks.

Allan Nichols, Morningstar

Hi. Thank you. Just on Uzbekistan, your outlook is only for 1.15 million subscribers by the end of the year. You had had 9 million customers before you lost your license. I thought you'd have a little bit faster comeback than that. Is there just no loyalty there? Or what's the reason that you expect such a slow recovery? Thank you.

Thank you for that question about Uzbekistan. Here is Andrei Smelkov.

Yes, indeed, we had 9 million customers before operations got closed in Uzbekistan. But we had, as I mentioned in my speech, we had created the new company, a joint venture between the government and us. And we started to attract customers from (inaudible). And we definitely have a new strategy of customer attractions.

We have a strategy now of premium quality and network. We have network which has capacity for 9 million customers, with much better quality of voice and data for the capacity and for customers who come to our network.

And we decided to slow down customer intake to provide better quality. And in fact, we see ARPU almost two times higher than the ARPU of our competitors on the market. So this is our strategy. And we are totally in line with our plans. As we forecasted, we are going to intake 1.1 million customers to the end of this year. And we will continue growth next year.

Great. Thank you.

Igor Semenov, Deutsche Bank

Thanks very much. My questions have actually been answered. Thank you.

Igor Goncharov, BCS

Yes. Thank you very much for the opportunity. Just a quick follow-up on the dividends. Do you plan to pay interim dividend for 2015, as you have doing over the last years? Thank you.

Excuse me. Could you repeat your question?

Yes. This is in regards to interim dividend for 2015. Over the last years you have been paying not only a final dividend, but also interim dividend during the years. Do you plan to do so during 2015?

Yes. Definitely. We do. This is a part of our dividend policy. We are also with the new dividend policy, we'll also introduce the two periods of paying dividends. And we'll also indicate that we see that total payment for 2015, including the share of 2014 and the interim dividend, will be approximately the size, roughly the same size as we had in 2014.

Thank you very much.

Roman Arbuzov, UBS

Thank you. Just a follow-up on the dividends. Your dividend policies for 2014 and 2015, could you just perhaps remind us why it was [passed] for a specific time period, as opposed to indefinitely, and sort of what makes this time period extraordinary from your perspective? For example, why couldn't you commit to a 75% equity free cash flow payout for the indefinite future? Thank you.

I think is just a legacy of how we looked at midterm perspective. We usually take a three-year view period. And historically we approve our dividend policy with the Board, at least last three times when we had that set. We were setting that for three years, for a three-year period. And there is no specific reason for that. It's just a midterm view which we tend to take.

Thank you very much.

As we have no further questions, I would like to turn the call back over to Mr. Joshua Tulgan and the other speakers for any additional or closing remarks. Thank you.

Yes. Thank you very much. And thank you, ladies and gentlemen, for listening today. We welcome you at any time to contact our IR Department for any further questions. A webcast of this discussion will be available on our website if you wish to rehear the call. In the meantime, we appreciate everyone's interest, and wish everyone a pleasant evening. Thank you very much.

Ladies and gentlemen, that will conclude today's conference. We thank you much for your participation. You may now disconnect. Thank you.