Mobile TeleSystems PJSC (MBT) 2015 Q2 法說會逐字稿

Good day, and welcome to the Mobile TeleSystems second quarter 2015 financial and operating results announcement conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead, sir.

Thank you very much, and everyone, welcome to our conference call today to discuss the Company's second quarter of 2015 financial and operating results.

Before beginning our discussion, I would like to remind everyone that, except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

These statements may relate to one of the following issues -- the strategic development of MTS's business activities both in Russia and abroad; revenue and/or subscriber 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 communication networks; capital expenditures and operating expenses and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in our Annual Report on Form 20-F, which is available on our website or through the United States Securities and Exchange Commission. Important factors could cause the actual results to differ from -- materially from those contained in our projections or forward-looking statements.

These statements may include press releases, earnings presentations, MTS Form 20-F, as well as any other public filings made by the Company with the SEC, all of which are available on our website, www.mtsgsm.com, or that of the US SEC at sec.gov.

We disavow 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 in risks. Copies of the presentations and materials used and referenced in this conference call are indeed available on our Company website.

With that, I'll turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results for the second quarter, 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer, and Vasyl Latsanych, Vice President and Chief Marketing Officer.

For the period, we delivered Group revenue growth of 3.9%, or RUB102.7 billion. Data adoption continues to drive growth in Russia and other markets, while recent changes in our approach to distribution have helped boost handset revenue.

Adjusted OIBDA fell year over year to RUB42.7 billion. Our OIBDA margin came in at 41.6%. This is a reduction from last year, due largely to a smaller contribution from our Ukraine business and startup costs related to our relaunch in Uzbekistan.

Vasyl will now take us through the key markets.

Good day, ladies and gentlemen. For the quarter, total revenue in Russia grew to RUB94.3 billion, or 4.4% year over year.

Our market share in the mobile business continued its expansion to RUB72.7 billion, or a 2.8% increase from 2014. Data traffic revenue grew by 23.4% as smartphone penetration reached nearly 45%. Uptake remains strong for our primary growth product.

We continued to outperform the market in mobile services revenue even though we had to exit from one of our key sales channels, Svyaznoy, which has effectively been taken over by our competitors. It had contributed between 12% and 20% of our subscriber net adds over the years, but we managed to effectively capture Svyaznoy's [falling out] sales numbers in our own and local partners' outlets.

Andrei will discuss our rationale for no longer participating in national multibrand chains, as we feel that we can create greater value by focusing more on our proprietary retail to further grow quality of our new customers and strengthen our share of market.

The proof of success of such strategy can be seen in our numbers, boasting almost 1 million of net adds in Q2, a 50% increase versus the same period of last year, while further decreasing our churn to a record 9.1%.

Our new sales approach certainly had additional impact in driving a nearly 27% growth in the handset sales year over year. We do continue to see significant demand for smartphones, including LTE-enabled ones. Sales of devices under RUB10,000, continued to be the focus of our efforts, as these are the devices first-time data users can afford.

We saw a slight increase in fixed-line revenue of 0.8% year over year, but B2C sales overall increased 2.2% due to the growth in Moscow market through our GPON product. GPON allowed us to grow residential broadband and Pay-TV revenue as -- at MTGS, nearly 34% year over year.

Service enhancement at MTGS, and strong FTTB offered in many regions allow us to grow residential ARPU by increasing our share of double and triple-play products, migrating customers to our digital TV platform, and upselling our subscribers to tariff plans with higher speeds.

In Ukraine, we saw revenue decline year over year by 5.8% to UAH2.4 billion, while organically, without Crimea, this implies growth year over year.

Elsewhere, we see continuing strength in our market positions in Turkmenistan and Armenia despite competitive and macroeconomic pressure. And in Uzbekistan, we see strong growth as we continue to build our presence.

I will now hand 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 2.1% to RUB42.7 billion. Although factors we have previously mentioned in Russia, for example inflationary cost, put pressure on margin, we saw in second quarter a significantly smaller contribution to OIBDA from our non-Russian asset.

In Russia, OIBDA came in at RUB41.2 billion, or 2.2% growth above second quarter of 2014. Our OIBDA grew 8.1% quarter on quarter, over twice the pace of revenue growth. We adjusted pricing on international calling, which certainly was a factor, but we also saw OIBDA expansion due to fewer SIM card sales, and we implement our new retail strategy.

Another factor pressing margin in our -- is our increase of handset sales, which translated to a 0.9 percentage point decline in OIBDA margin year over year. In Ukraine, adjusted OIBDA fell significantly as we witnessed the full effect of the cessation of business in Crimea, which had been a strong market for us.

Likewise, we raised prices on international termination, which had a negative effect on ongoing traffic from Russia to other countries.

Usually point of strength in our business, our non-Russian assets overall contributed a 1.7 percentage point decline in Group OIBDA margin. In Armenia and Turkmenistan we saw general seasonal trends in profitability, which were boosted slightly by local currency strength versus the ruble. However, our startup costs in Uzbekistan contributed to a negative OIBDA, although we saw an over 50% reduction in our loss compared to first quarter in the market.

Group net income improved during the quarter by 57% to RUB17.1 billion. Our bottom line was boosted by revenue in the OIBDA dynamics as well as a non-cash RUB3.6 billion FOREX gain on the value of our non-ruble-denominated debt.

Free cash flow for the first 6 months reached nearly RUB19.7 billion, while running less than in 2014 where have -- as we have stated before, this is because we accelerated our CapEx build in the first half 2015 from second half 2015.

CapEx reached RUB53.6 billion for the first half of the year, and this amount is consistent with what we initially planned and guided.

As we already announced, we were awarded the license to provide 3G UMTS services throughout Ukraine. The cost of this license was UAH2.7 billion. In addition, we have spent an additional UAH358 million for the reforming cost. Already, we have begun building our network in key regions of Ukraine and anticipate the widespread launch of proprietary 3G services in fourth quarter of 2015.

The cost of 3G network rollout as well as the related reforming costs should translate to an additional around RUB7 billion of our total CapEx (inaudible) for 2015.

3G services are obviously critical development in any mobile market, and given our strong balance sheet, we have no issues in meeting this funding need.

At MTS we have long considered dividends to be key commitment to our shareholders. In August, completed payment of our last installment of fiscal year 2014 dividends, which totaled RUB53.2 billion. We also announced our recommended interim dividend of RUB5.6 per share, or roughly RUB11.6 billion in total. This sum is based on our first half 2015 results, and will be paid out in November 2015.

A key question has been how additional spending in Ukraine may impact our dividend calculation. Our current dividend policy calls for a minimum of 75% of free cash flow, so obviously we can devote a great amount of free cash flow towards our dividend.

Even though this policy will expire this year, and we will return to the Board of Directors to approve a new dividend policy next year, we do not expect Ukraine 3G spending to impact the total dividend.

Though it is too early to make a firm commitment, it is likely we will not consider license costs as part of our dividend calculation. And we have stated many times that we consider it a strategic priority to provide a stable dividend payout without compromising what has proven to be strong and resilient balance sheet.

By the end of the period, the total debt stood at RUB312 billion, a 2.9% reduction from first quarter, largely attributable to repayments and ruble depreciation. Our ratio of net debt to last 12 months OIBDA remains constant at 1 times multiple, which is in line with the -- with previous quarters.

Most of our repayments during the year fall due in the fourth quarter of 2015, when we will make payments, predominantly in rubles, in the amount of RUB30.5 billion. This also includes a RUB15 billion put option, which we expect to be exercised on our Series 8 ruble bonds.

Thank you, Alexey. Andrei Dubovskov. Recent changes in the retail landscape in Russia have been of key concern to investors.

Let me remind you that, for years, multibrand retailers like Euroset, Svyaznoy and other dominated the market. In 2009, we began our [rollout] of proprietary detail to both ensure future growth and protect ourselves against aggressive moves by independent retailers.

And the sector was positive. We witnessed significant reduction in churn and dealer expenses from 2011 to 2014 because we leveraged our own retail to migrate (inaudible) to revenue-sharing models and reduce growth in the marketplace.

We believe that this new model favors both customers and retailers. It allow us to devote our services to give customers better services, and invest in our product. The new approach also exposed inefficiencies at multibrand retails. We had been in discussions with Syvaznoy about deepening our partnership, but we declined for three reasons.

Firstly, a partnership would run contrary to our goals of reducing overall SIM card sales in the market. Secondly, it [has fixed] growth in the marketplace by discouraging growth in usage and data migration. And thirdly, the loss-making uptake record of multibrand retail and the fact that Syvaznoy is growing in depth.

[Assessed] globally, the multibrand retail model is outdated as markets mature, particularly as e-commerce becomes a more important channel. In Russia, the mono has been negatively driven SIM card sales, impacting churn and holding back growth in the market.

It's clear from our own experience in Russia that to operators the retail network is a necessary complement to its core business. This market should be served by no more than 10,000 stores.

Independent retailers alone operate more than 7,000 stores -- funds that could be used to finance acquisition of retail and pay down their high level of debt (inaudible) better to use for our own (inaudible).

We witnessed this with the initial buildout of our own retail, which resulted in a lower per-store cost compared to our peers, who acquired (inaudible). And the benefits are visible in our numbers to this day, because (inaudible) a faster top line growth rate, higher data penetration among its customers, and lower customer churn than our competitors. This is (inaudible) a loss-making business.

We decided to devote funds that (inaudible) enhancing our retail to achieve our ultimate goals of reducing SIM card sales in the market. As we discussed previously, we have lowered prices on smartphones to entice customers to adopt data plans; reduced commissions on certain payment services to drive foot traffic to our stores; and adopted a number of other tactics to enhance our retail experience.

We are confident this is the best course of action for not only MTS the market. We have been through this before, and we are confident that we can affect the market in the same way, and these activities in total will not impact our guidance for the year. We still envision at least 2% revenue growth for the Group, more than 3% revenue growth in Russia, and 40% OIBDA margin for the Group.

With that, we'd like to open the call to questions.

(Operator Instructions). Roman Arbuzov, UBS.

Thank you for taking my questions. I actually had two lots of questions, if I may. The first lot is on distribution and the second one is on costs.

So, regarding distribution and Svyaznoy, A, you've mentioned that Svyaznoy has historically accounted for a large share of the total net adds -- 12% to 20%. And you've also mentioned that you're planning to make up for the lost net adds by local dealers and your own retail.

So, could you please provide us some color in terms of -- or perhaps some breakdown in terms of how exactly you're planning to make up for the loss of this significant sales channel? So, perhaps a mix between local dealers and your own retail.

And also, do you envisage that you will be utilizing perhaps more multibrand retail -- I'm not talking about Svyaznoy or Euroset; I'm actually talking about what was recently reported in the press about MTS potentially launching a stand-alone multibrand called Telefon.Ru.

And then, do you think you have to make up the [gross] adds fully, or do you see some potential through churn reduction as well? And if you could give us the mix there, that would be very useful for us.

And then secondly, I just wanted to ask Alexey on cost and the ruble depreciation, in terms of how to think about the ruble depreciation and the impact on margins.

Clearly the ruble has been strong this quarter; but then, if we assume that the ruble rate stays at the current sort of RUB65 to the $1 level throughout the third quarter, and therefore results in a sort of 20% depreciation quarter on quarter -- given that around 15% to 20% of the OpEx is -- (inaudible) is debased, what does that imply for margins? Does that mean we should expect quite a large hit on margins? That would be -- if you could expand on that, that would be great. Thank you very much.

Roman, it's Andrei Dubovskov. Thank you very much for your question. During the last 5 minutes, we enjoyed your question.

So, speaking about our (inaudible) distribution, I just want to remind you that you are really right. The -- at least 15% of all our sales based on Svyaznoy network during a lot of previous years; but right now, approximately 60% of all our sales based on our own retail network.

And of course, we are going to increase the numbers of monobrand shops (inaudible) Russia. I think that the total number till the end of this year will be approximately 5,000.

Speaking about our activities in multibrand network, which you mentioned earlier, (inaudible) Telefon.ru. That's not bad idea for us, but this -- that's not a strong way. This is not a silver bullet for this problem. Of course we are going to -- pioneering this approach in this market, but it will be not significant -- no huge impact to our sales channels.

And speaking about growth at -- in second quarter 2015, as you know, we attract approximately 900,000 new subscribers in Russia. In -- compare with the same period in 2014, it's 50% more than in the previous period. In second quarter 2014, it was approximately 600,000 new subscribers. That mean that the loss of our activities in Svyaznoy does not impact to our business right now or in the near-in future.

And second question -- let me take this question to Alexey Kornya.

Maybe I will add a couple of points. This is Vasyl. Just wanted to point out that, since we exited Svyaznoy, we are saving quite significant amount of money that we used to pay to Svyaznoy as the commission.

Svyaznoy wasn't a cheap channel for us. It was relatively good quality; but we believe that by using that money more wisely and to -- investing in it to our own retail developments, and development of other channels, some experiments in the different areas of sales we are conducting right now, we may achieve even better results in terms of quality without losing the volumes that we had with Svyaznoy previously.

And Roman, as far as the second question on the costs side concerns, I think the effect on marginality is -- depends from what perspective you are looking. So, if you compare the value effect on the year-on-year basis, clearly we do see pressure on our margin, because second quarter of 2014 we had a much stronger ruble, and this effect is marked in our presentation.

However, if you look at the dynamic quarter on quarter, of course we had some strengthening of ruble, which helped us in the second quarter, and that was also reflected in the margin dynamics, together with the seasonal trends.

So, what is important also to know, is that our margin this year is impacted structurally by the fact that we have Uzbek operations startup -- starting up, and running initial costs on those operation.

And the second structural change is the deconsolidation of Crimea operations from Ukraine, and strong devalue of hryvnia in Ukraine, which put too much low -- almost 10 percentage points low margin in Ukraine, if you make a year-on-year comparison.

So, summing that up, I would say that our guidance is fairly reflecting all the challenges which we are facing. And I would say somewhat on the conservative side; but still, we are committed to meeting the guidance and even looking at potentially outperforming.

Okay. Thank you very much.

[Alexander Agranovich], [Otkritie Capital].

Two questions from my side. So, first, just a followup on retail strategy -- can you please elaborate a little bit more on Telefon.ru, and what is the rationale behind building an additional multibrand network, versus just focusing all your efforts on the existing monobrand retail and expanding it?

And the other question here is -- I heard that you are planning also to offer Tele2, to sell their contracts in this telephone network. So, what is the rationale here? So, why are you planning to help your competitor to sell their contracts, and do you plan that the impact will be positive on the back of this partnership?

And the second question is on CapEx in Ukraine. Do you expect that the majority of the CapEx you need to spend on the 3G network in Ukraine will be spent this year, or you also expect it to continue at such, I will say, fast and strong pace, also next year? Thank you.

Alexander, this is Vasyl. Regarding your first question, honestly this is a much overheated subject, as there is no chain of Telefon.ru in the market. We are experimenting with different types of setups in our now existing retail network, including we may experiment with the different names for different types of openings.

And there is no decision, and even though speculation in sight, on whether we should or should not sell Tele2 or any other competitors in network, if we decide to make it multibrand.

So, I do believe that this is a way ahead of time discussing this subject, as there is no distinctive strategy for it so far, and there is no Telefon.ru retail network in place in Russia.

And speaking about CapEx in Ukraine, there are two points to say. First, that Ukrainian 3G CapEx -- it's the beginning of a big project on rolling out 3G network in Ukraine. Ukraine probably is one of the last European countries where there is no yet 3G network.

So, of course the plan for and the CapEx spend for 3G network will not be only limited by this year. However, starting from the next year, that will be of course an organic part of our guidance, and that will be organic part of development on our CapEx.

This year, the exception is related to the fact that we were -- we won a 3G license already this year, and that is why our 3G plans were not included in the guidance of this year, which was given upon the results of last year.

However, another important point to mention in respect of Ukrainian CapEx is that Ukrainian CapEx is fully funded, and to be fully funded through Ukrainian sources and from Ukrainian operations. So, we are not planning to transfer any funds in Ukraine in order to fund this network rollout.

We'll use either local banking facilities, which are not yet in plan, or we'll use the accumulated cash there right now -- we have more than $100 million on the accounts -- and the free cash flow which is to be generated by Ukrainian operation.

Thank you. That's helpful.

Ivan Kim, VTB Capital.

Two questions from me, please. Firstly, on NVision, it was a loss-making business at the time of acquisition. So, do you think it can become profitable, and when? And can you probably quantify the merits of this transaction as a term of, like, increase for your OIBDA going forward to maybe decrease in CapEx?

And then, secondly, on Moscow fixed-line -- so, I remember a couple of years ago, one of the scenarios was that there will be some decent growth in Moscow because of GPON upgrade and consumers taking more products; you gaining share, et cetera, et cetera. So, where we stand now, do you think that there is any growth coming in Moscow, or the fixed revenues would be more flattish, so to say? Thank you.

Ivan, let me take the NVision one. So, we do not view the acquisition of NVision as a deal we -- on which we will continue the existing model -- business model of the NVision. For us, 90% of the valuation of NVision is the billing platform on which MTS exists. So, in this respect, firstly, that was a profit-making business in NVision.

Secondly, that is more than just a CapEx saving. This is a strategic, different prospect for us to develop our own billing rather than we -- that being developed independently by a separate Company. Because you have completely different incentives and motivations if you have -- if you are running it as a separate business with the short-term KPIs and P&L targets for one year or for one quarter and next quarter.

And you have completely different ambition and vision if this is a strategic asset, as it is for us. We should set to ground our strategic development, being our competitive advantage in the long run. So, we clearly have a much more strategic approach towards developing the product, or towards developing the billing system in itself.

As far as the rest of this business concerned, this is really not material part of the transaction itself. We see some side benefit from having integrational experience on our B2B sales, which will help us to provide the complex solution to our B2B customers. However, comparatively to strategic advantages which we are gaining through developing our own billing platform, that is the minor one.

And mostly, we'll see the optimization or, I would say, the benefits, of course, coming from on one side revenue, and time to market of our product, and flexibility of our product. So, our commercial policy. And as far as the cost side or expense side concerned, that will grow mostly on CapEx side. But again, the strategic advantages which we are gaining on the commercial side is exceeding any cost benefits which we might get on this transaction.

I will take it from here, Ivan. This is Vasyl. Coming back to your question on the MGTS networks and Moscow fixed-line, in fact throughout -- through this year, since second quarter of 2014, we have more than doubled our subscriber base on the GPON network, and that led to 34% increase in the B2C market from broadband and TV products.

So, we do believe that the growth is very significant and it's actually growing faster than the market, and we are gaining the market share. I believe we will be soon able to show the market share dynamics as we get the data from the other carriers as well, in the researches. Thank you.

Thank you. Just a quick followup on NVision. So, basically, in other words, you are going just to shut down all businesses that's unrelated to billing, except for a small portion which is involved in IT services or something, for B2B sales, right?

It will measure -- the integrational part of this business will significantly reduce. Especially targeted at external clients. So, there will be a lot of product which we will have internal support, support of our functions, including support of our billing in our B2B clients. However, as far as other purely integrational services being provided to external clients, that will probably diminish.

Okay. Thank you.

Herve Drouet, HSBC.

Two question as well on my side. The first one is on CapEx. I think the previous guidance of RUB85 billion, I thought included some of the 3G rollout as well, in Ukraine. Maybe I'm wrong.

So, I was wondering if this increase of RUB7 billion for Ukraine -- there are other elements that has played for increasing CapEx guidance. I mean, have you changed any of your outlook for the currency, who may have an impact on the CapEx?

Are you planning maybe to accelerate potentially monobrand retail shop that may have, as well, an impact on the CapEx? I was wondering if other elements, just purely Ukraine, that may have appreciative increases [to this] CapEx guidance.

The second question is as well regarding NVision. I was wondering if there is any data you can share with us in term of EBITDA or EBITDA margins for the business. I understand that half of the revenue of NVision is mostly MTS contract, so I was wondering if it's what we are talking about, about this billing, is roughly 50% of the business, or is it more than that?

And I'm trying to figure out, when NVision will be incorporated on MTS, which -- I would expect that in Q3 -- how the EBITDA of the Group will be impacted by that consolidation. Thank you.

Thank you for your questions. On the first part on the CapEx, the increase is purely related to our 3G project in Ukraine. So, that is not driven by any other factors.

And we've been communicating in our previous disclosures that the CapEx guidance which we are giving was -- which we were giving, did not include 3G rollout network in the Ukraine. There was included minor preparational work which Ukraine was doing in order to get its network ready. However, the rollout CapEx and the rollout plans, of course, were specified only after the license was granted to us.

So, as we were indicating, that by the end of second quarter, during our second quarter disclosure, we'll give an idea what would be a top-up on our CapEx because of 3G Ukraine. So, this is only 3G Ukraine-related increase.

Okay. Thank you, Andrei.

As far as NVision -- yes, and as far as NVision consolidation concern -- so, there are two -- the transaction is broken down in two part. The first part includes billing, and we closed already the first part of this transaction, and starting already accumulate head count and preparations related to maintenance of our -- and developing of our billing.

And the second part of these preparations to -- will be consolidated at the end of fourth quarter. So, it will not have any significant impact on our performance. And as we discussed, since we will not develop integrational services per se, other than those B2B-related, we will -- we don't see that it will have any significant impact on our margins in the next year as well.

And the people who are involved in the billing development -- they are being capitalized. So, that will not only also have a change perspective for our financial, in terms of how we recognize those expenses. So, you will not see significant impact from consolidation of NVision in terms of our financials.

Right. Thank you. Thank you very much.

Alex Balakhnin, Goldman Sachs.

My first question is on the handset margins and overall handset strategy. So, you've been saying before that you were offering substantial discounts on your handsets distributed, and also the performance recently on Samsung partnership, whereby you jointly promote devices which may also have some impact on the profitability.

I was just wondering, with this decline in the gross margin on the handsets we've seen in the second quarter, is this all the impact we will see, or you will probably envisage some greater effect towards the end of the year?

And my second question on the dividends -- so, you made a comment in the introductory statement that you have a dividend policy; but in the same time, you have this guidance of not less than RUB90 billion paid in 2014 and 2015, which you will successfully deliver.

So, I was just wondering -- you've been staying on fairly stable dividends over the last 2 years. To what extent is dividend stability -- is important for your internal understanding of MTS investment case?

Alexander, thank you for your questions. It's Andrei Dubovskov. So, speaking about handset margin, I just want to say that you are right, it's low profitability in this area for us -- lower than in previous years. But, of course, we are not going to subsidy these operations.

I want to remind you that we have revenue from handset -- in second quarter 2015, approximately RUB7.7 billion. At the same time, our cost for this operations -- it's lower than RUB7 billion. It means that we have approximately 5%, 7% marginality in this area.

And again, I just want to remind you that we are not going to subsidy (inaudible) the Russian market. But of course, this is a little bit normal impact to our profitability, because we are moving to keep our guidance -- speaking about our OIBDA in absolute terms. It will be approximately 40% -- at least 40% during all this year.

But speaking about our Samsung partnership, this is clear for us that all big vendors in the Russian market does not want to have the situation when they will be in this market, face to face with their cartel multibrand retail networks and our competitors. Samsung and other vendors wants to be a part of competitive market in Russia, and of course we are going to support this approaches.

And that mean that the -- with Samsung as vendors, we have really good possibility to keep their lower prices in this market, and especially speaking about the economy situation in Russia and the problem with GDP and Russian ruble devalue.

Alexander, speaking about dividends, stability in dividends is very important for us. As I mentioned in my speech, we view stability in dividends as integral part of our value, and that is why we are committed to delivering stable dividend return.

However, at this point of time I think that would be premature to commit for any amounts over the next year. However, as I -- as we mentioned, we do not think that we'll see any change in the approach towards our dividend payout.

Okay. Thanks so much.

Ksenia Mishankina, UBS.

You've mentioned that you've signed a $200 million term loan with China Development Bank Corporation as well as a credit line with Sberbank. Do you plan to draw on Sberbank credit facilities to refinance your [shifting] debt? Are you planning any further debt in financing, or you will be partially using your cash? Thank you.

Thank you for the question. We have not yet drawn on the facilities with the CDB. So, we are looking at that, on one side, as a cushion. On the other side, what -- when we'll have a need for additional financing -- that's probably closer to the end of this year -- we might consider utilizing this facility.

On Sber, we mostly utilized all the facilities which we signed with Sber. We have only 5 billion pending, probably, and that's how we view our position in respect of the Sberbank facilities.

We are not planning to have any issue of [euro] bonds, and ruble bonds issuance will depend on the market situation. Taking where the market situation is right now, the probability is also remote.

Okay. Thank you.

Dalibor Vavruska, Citi.

Can I just ask just one question on market share? Clearly, when we look at the year-on-year comparisons, it seems that you've been doing very well in Russia relatively to your peers. How important is this for you, to sustain this trend?

And if I can just ask, when you look at the quarter-to-quarter numbers -- just the reported one for the mobile service revenue for this quarter -- it seems that the competitors did a little bit better and they also gained a little bit more subscribers.

I mean, is this something that the -- you think may have to do with seasonalities, or would you attribute part of this to the changes in distribution, and you think the steps that you are taking now will reverse this, or at least equalize this? Just to give a flavor how important these things are for you. Thank you.

Dalibor, please clarify the question. Are you talking about the subscribers or revenue?

Well, I was talking mobile service revenue in Russia, where I think in the second quarter, when you look at the mobile service revenue quarter to quarter, and the competitors may have done a little bit -- may have shown a little bit higher number than you did. But, of course, there may be some seasonalities or other factors. This is just one quarter. So, I -- just wondering if this is something that you would totally disregard, or how important is this for you?

Yes, Dalibor, it's clear -- it's Andrei Dubovskov. Speaking about the -- our market revenue share, that's clear for us that we are really faster than our competitors, speaking about the comparison year over year.

But seasonal fluctuations -- talking about the previous quarter -- it's a (inaudible) that's not so important for us. Much more important for us is our leadership position in the market in Russia, and at the same time the much more faster developing our revenue. That's our point.

And do you think there was some reason that can be possibly described -- seasonal reasons why you would grow at the slower rate in the second quarter versus the first quarter compared to VimpelCom and MegaFon?

Dalibor, I think that the seasonal (inaudible) -- it's a little bit [ancient] describing when the operators made a really big acquisition and really big churn (inaudible).

Speaking about the current time, much more important for us to see that we have the really fastest growth in market revenue share in the subscribers.

And let me remind you that, for example, during the last year, we increased our subscriber base by 5 million new subscribers. That's a really big impact into our business -- much bigger than the seasonal trend (inaudible).

Uh-huh. Thank you.

Allan Nichols, Morningstar.

Thanks for taking my questions. Two of them, please. First, in most of your countries' operations you saw a year-over-year decline in ARPU but a sequential increase. Is that just a seasonal uptick, or is there something more sustainable going on?

And secondly, in Ukraine you talked about problems in Crimea and in the east. But are you seeing any issues with right-wing militias in the west? Thank you.

Allan, regarding your first question on the ARPU, we don't see any significant shift in the consumer usage patterns. It's rather the effect of quite a big addition of the new subscribers during the second quarter of 2015. We had slight decrease in the ARPU numbers versus the previous year, but we still see our ARPU growing well and project it grows well, based on our [ML use], which grew quite nicely throughout the last year.

Regarding the Ukraine situation, we don't see any issues with the right-wing militants in the west, and there is no disruption, no fighting, and no other issues in the west. On the contrary, as I said in my speech, we do see that the country -- if we factor the Crimean revenue out of the previous year, it shows the positive dynamic year over year and building of the 3G network this year.

We hope to set up a very well push for the next year development of the data services, which, long-expected in Ukraine, will finally arrive and deliver the revenue growth and the new trends. Thank you.

Great. Thank you.

Sergey Libin, Raiffeisen Bank.

Two questions from me as well, please. First of all, the proportion of data users -- mobile data users, actually declines in the second quarter compared to the first quarter, and it's now even lower than the number of smartphone users.

I was just wondering, why did this happen? Is it kind of a one-off, or could you just explain this effect?

And secondly, there were some articles about your potential participation in the Telekom Srbija privatization. Could you confirm or disapprove that; or maybe, in more general terms, what's your attitude towards the international M&A in telecoms now? Thank you.

Sergey, hi. This is Vasyl. Regarding your first question on the data users, we did see some abnormal, very high growth of the users in Q4 2014 and Q1 2015, which has affected our short-term results, and the second quarter 2015 indeed looks like a decline.

But if you draw a long-term trend since 2014, like the very first quarter of 2014, and through to the -- today's numbers, you will see a steady trend upwards. And actually, if you take a look at our previous results, we did have some splashes of the activities in the past as well.

So, we are seeing some seasonal high sales of the devices and Q4, 2014 was abnormally high sale. We do see the first activations increase in Q4 and Q1 2015, which is most likely the short-term usage -- the seasonal usage we have seen. And we have got back on the trends, which is long-term positive for us, throughout 2014, and we believe will be continuing in 2015 as well.

Thanks.

And speaking about our interest in M&A area, you know that our last deal in this area was in 2007 in Armenia, and starting this time we had no real deals in other countries. And -- just our whole market in Russia in data (inaudible) fixed business, TV satellite, et cetera.

But speaking about Telekom Srbija, it can be a little bit interesting for us. Just for elaborate, it will be profitable for us [for now], and of course our interest depends on the real terms and condition, and real money which we need to spend for this deal.

Right. Thank you.

Igor Semenov, Deutsche Bank.

A couple of questions from my side as well. So, first of all, on Ukrainian CapEx, do you have an idea how much money you will spend over the next couple of years on 3G? And also, I just wanted to ask you -- I mean, I think you had a very high CapEx in 2013 in Ukraine and Q4 2012.

And the reason was that you were preparing the network for eventual award of the 3G license. You were swapping some equipment. So, shouldn't it reduce your CapEx needs for the next couple of years? So, that's question number one.

Second question is on your guidance in general. Just wanted to -- especially EBITDA margin guidance, just wanted to reconcile the -- what's going on in the distribution market and the acquisition of NVision. I mean, this is a material event, in my view, and you're not changing the guidance. I just wanted to see the dynamics -- how come? Thank you.

Thank you. On Ukrainian CapEx, we -- if you look historically, Ukraine over the decade backwards, you will see that the relative ratio of CapEx to sales in the Ukraine was substantially lower to what was the -- an average on the Group, and specifically in Russia. And that was to a large extent also linked to the lack of remodernization of network and 3G network rollout.

So, that time probably came to pay out the check, because network needs modernization and needs upgrade for the modern technology. As I mentioned already, it's probably one of the last countries which is not having 3G in Europe.

That is not to say that we'll see an elevated level of CapEx in Ukraine -- abnormally elevated. That will be on the level which is normal for introduction of new technology. You can compare that with the similar CapEx ratios which one could saw in Russia at the time of 3G introduction in the market. So, we estimate that the CapEx will be around probably RUB15 billion over the next -- over this and next year.

As far as the OIBDA margin guidance is concerned, I mentioned that we are being probably rather on the conservative side. However, right now there is not enough visibility in order to upgrade our guidance.

On the OIBDA, we would prefer to be rather on the conservative side with some upside potential rather than being over-bullish, taking that uncertainty in the market and volatility -- macroeconomic volatility and other volatility which we have in our markets.

And at the same time, based on our good results in marginality in the first half of this year, I think if you (inaudible) guidance, our approaches in this area it will be an explanation from you why we are changing our approaches. And again, based on our current results, I think it's normal behavior to keep current level of our guidance and profitability.

Okay. Thank you, guys. Followup here on Ukraine. VimpelCom one day were presenting the results; they also provided an update on the strategy, and they mentioned the transition to the asset-light model.

I'm not sure if it would work in Russia, but in Ukraine for example, do -- would you see it as an opportunity to actually be very active, in terms of sharing and maybe building joint 3G and 4G network structure to reduce CapEx?

On our track records, you can judge that we are very open to optimizing any CapEx spend when we have such an opportunities. We have very positive experience with VimpelCom in Russia, on sharing our costs on LTE network rollout in some of the regions. So, if there is such an opportunity, that will be of course exploited. However, right now, we do not see the practical opportunities on that side.

Right. Thank you very much.

Igor Goncharov, BCS Financial Group.

I have a followup question on the dividend policy. As far as you highlighted, the dividend payment which is to be approved in September (inaudible) last payment under the current dividend policy.

Can you maybe give some indications as to when you plan to approve the new policy and to communicate it to the minority shareholders? Thank you.

Historically, we're usually coming out in the market with our view on the dividend somehow in April and May. So, up until this time, we can assure only that stability of dividends, as I mentioned earlier, is very important for us and it's integral part of our value, and we are committed to providing stable dividend return. However, the exact parameters of our dividend policy and repayments for the next year -- in the next year for this year, will be in the market probably April of next year.

Understood. Thank you very much.

Alexei Gogolev, JPMorgan.

I had a followup question on the fixed-line business. If you're saying that your subscriber base subsequently increased in Moscow, does this imply that you're losing subscribers outside of Moscow in the regions -- if that is correct, are you seeing a lot of competition from Rostelecom and ER-Telecom?

And also, what is your future strategy going to be with regards to new services -- video on demand; broadband expansion -- could you elaborate on that, please? Thank you.

Thank you, Alexei. This is Vasyl. We are seeing the shrinkage of the base, which has been for a long time the story with us, as we are converting people from analog TV to the digital TV, as well as our current accounting has numeric effects because, as we were using every single service to count as a customer, now we are moving the customers from single play to double and triple play sometimes, we accumulate these customers under one ID. And that becomes one customer with a number of services; unlike before, it used to be a separate customer from it -- for its previous service, and separate customer from a broadband service.

As -- at this, if you take a look at our decrease of the customer number throughout the whole country, that corresponds to at least a 0.5% decrease when we are aggregating the services under one ID.

The other half is really the migration of the relatively free and non-efficient, for us, analog services, to the new digital services on the new platform. And that comes to the second part of your question, what we are doing. We are deploying probably the best and state-of-the-art Ericsson's platform, which is a hybrid platform, allowing us to work on literally all of our transports to deliver the TV signal, including IPTV, cable, and even satellite.

And we will be delivering not just the normal line TV, but catch-up, Post TV, and video on demand, through this platform to literally every one of our customers, non-regarding to the technology the signal is delivered on. So, we do see a very bright future developing the TV offering, backed up by the ARPU growth that we have enjoyed throughout the last year in the fixed business in Russia.

Thank you, Vasyl. And could you also elaborate on competition on broadband? Are you seeing much pressure from other players? What is your focus right now? Is it on ARPU or is it on subscriber market share?

Well, our focus is, as I said, on the technological upgrades. So, going through the digitalization and changing to the hybrid platform. This will be a cornerstone for the future development, as we will be technologically advanced over our competitors in most of the markets.

About the big competitors like R-Telecom and Rostelecom, we see different dynamics. Rostelecom is literally saving the bases. They bleed heavily on the -- as we see in the reports, they bleed heavily on the voice business, so they have to replace by whatever it takes, even sometimes price-slashing in the broadband market and sometimes TV market.

R-Telecom, on contrary, tries to build the market and delivers relatively high-quality service at a relatively premium price. So, we are in between different competitors out there. We are at the moment very price-competitive and we do see a good potential for the price increase and value increase in the market for the next 1 to 3 years.

Thank you very much.

Alex Kasbegi, Renaissance Capital.

Two questions, if I may, also. First one -- maybe it's a bit early to discuss, because -- but if I look back, so to say, a couple of years -- actually, quite a lot of years back, your CapEx to sales ratio has been somewhere between like 22%, 23%, and the same will be -- not probably, but given again your guidance in 2015.

So, if you look for the next, so to say, 2, 3 years, how do you see this ratio, so to say, developing? Understand you might not be ready to discuss, so to say, quantitative numbers; but qualitatively?

And where do you see, possibly, reductions or external increases, given again that you've done the GPON; you've done, let's say, most of the 3G behind you in Russia. Okay, there is Ukraine, but could you just give us some, so to say, overall vision that you wish for the next one or two years?

And second one is a small one probably, on Uzbekistan. I just noticed again that the growth in terms of the market share has been quite slow, so to say -- 2%, 3%. And as a result, again, the EBITDA margin and EBITDA is negative.

So, just wondering again, at what level of the market share, or whatever the metrics could be -- when do you feel and see that the EBITDA margin can actually turn positive there? And do you think that in order to achieve that, would you need some investments which potentially has a risk of taking money again from Russia and still investing into Uzbekistan? Or, that's basically off the cards, irrespective of how the market develops there? Thank you.

So, Alex, thank you for your question. Speaking about our CapEx to sales margin (inaudible), you are absolutely right; historically, during last some years, it was 22%, 23%. And our approach is based on our understanding that every next year we will decrease our capital expenditure, approximately by RUB5 billion.

But let me remind you that, for example in 2014, it was the time when we have the highest level of capital expenditure -- approximately RUB92 billion. And our approaching for this year was to reduce this number to RUB85 billion.

But you know about our Ukraine story, and we have no possibility to avoid our involvement into this market, speaking about the competitor situation in Ukraine; our commitments; our license, et cetera. But, of course, we are going to reduce our capital expenditure during next [some] years, at least for RUB5 billion, because you know we are going to finalize our GPON project in Moscow till the end of this year.

At the same time, we are not going to spend money to 2G network. And speaking about our 3G network, we're -- that's a really good competitive level. And the next area for investment -- this is LTE. But you know that the LTE penetration -- (inaudible) penetration in the Russian market right now, approximately 7% -- maybe 10%, 12% in Moscow.

That mean that our current level -- talking about numbers of LTE base stations -- that's enough for current market trends. And of course, if in 2016, 2017, this level will be much more higher than in current level, it means that we need to spend a little more capital expenditure.

But our commitment is the following. We are going to decrease our capital expenditure during next [some] years at least by RUB5 billion every year.

Thank you, Andrei.

There are no further questions in the phone queue at this time. I would like to turn the call back to --

One moment, Operator. We have to -- Operator, one moment. We have to follow up on that question.

No problem. I beg your pardon.

Speaking about Uzbekistan, so far we are growing above our plans, which we had -- we -- during the -- discussed during the decision to reenter the market. So, we are exceeding our plans and in this respect -- both on top line and OIBDA. And in this respect we don't feel that we are underperforming in terms of market share gain, or whatsoever.

And speaking about investments, as part of our settlement deal we had agreement with local financial institutions, which are providing financing in the initial stage of our reentrance in Uzbekistan. So, we do not need any external financing from outside of Uzbekistan, and we are not planning any.

Okay. Thank you very much, ladies and gentlemen, for your questions. 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 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.