Mobile TeleSystems PJSC (MBT) 2015 Q3 法說會逐字稿

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

Thank you very much, and welcome to MTS's conference call to discuss the Company's third quarter 2015 financial and operating results.

Before beginning our discussion, as always, 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 and/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 MTS's Annual Report on Form 20-F, which is available on our Website or through the US SEC.

In addition, with the goal of providing some further clarity in relation to recent business developments regarding business activities in Uzbekistan by our peers, I'd like to add an additional comment. MTS has made no provision in relation to the investigation conducted by the US Department of Justice and the SEC regarding MTS's business activities in Uzbekistan.

In accordance with IAS 37 provisions, contingent liabilities and contingent assets, a provision should be recognized when a legal or constructive obligation exists and such an obligation can be reliably estimated. MTS continues to cooperate with the authorities. At the current stage of the investigations, MTS has no reliable basis to predict any outcome.

I also want to direct everyone's attention to the public disclosures we have made on this topic, most recently on November 5th, 2015, and previous disclosures on our Website with the US SEC and our Form 20-F since 2012.

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 any other public filings made by the Company with the US SEC, all of which are available on the Company 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 made -- or make any adjustments to previously made statements to reflect changes in risks. Copies of the materials used and referenced in this conference call are available on our Company Website.

And now, 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 third quarter 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer, and Vasyl Latsanych, Vice President, Chief Marketing Officer.

In the third quarter of 2015, we delivered a 7.4% year-over-year increase in Group revenue to RUB115 billion. This growth was driven by strong data adoption across our operating markets. And in Russia, our top line was supported by increasing smartphone sales across our retail network.

Group adjusted OIBDA was RUB48 billion, a slight decline year over year as a result of previously highlighted factors, including the impact of inflationary costs, reduced profitability in our non-Russian businesses, and the impact of our new commercial policies in retail.

However, Q on Q, both revenue and OIBDA increased by more than 12%, which allowed MTS to once again outpace the market.

Vasyl will now go through the performance in our key markets.

Good evening, ladies and gentlemen. For the quarter, total revenue in Russia increase by 4.7% year over year to RUB103.9 billion. Revenue in our mobile business equaled to 6.4% as data usage continues to drive the growth.

Data usage continues to be part -- a primary driver of growth. Data traffic revenue increased by more than 20% year over year as smartphone penetration exceeded 47%.

We continue to invest in our proprietary retail network, which at the end of the quarter comprised almost 4,700 stores plus enhanced online channels. We have been aggressive in smartphone pricing in order to both drive further data penetration and also counter aggressive and disruptive moves of our competitors in distribution.

As a result, sales of smartphones in our shops surged by 1.5 -- 1.7 times year over year. And our share in the mobile retail market doubled. This in turn led to an increase in handsets and accessory sales of 58.8% year over year.

We experienced a 4.6% decline in fixed line revenues year over year. This was primarily due to one-off impact of the B2G project revenues we have recognized at the MGTS level in Q3 2014.

Overall sales in the B2B, B2G, and B2O segments fell by 11.3%. However, our residential business performed very strong, as B2C sales grew 3.6% year over year. And B2C ARPU improved by 5.1%. We continue to grow our broadband subscriber base through the development of GPON in Moscow and sales and marketing efforts aimed at growing penetration of double- and triple-play products, migrating customers to our digital TV platform, and upselling subscribers to tariff plans with higher speeds.

The number of paid TV subscribers declined year over year as a result of lower-value subscribers, including social package subscribers, defecting as we promoted our digital TV platform products. However, following the dip in Q4 2014, the number of subscribers has recovered steadily every quarter since. Still, the sustained decline in the number of fixed telephony users and the output they generate continued to put pressure on the overall performance of this segment.

In Ukraine, we have seen an improvement in data traffic revenues as customers have embraced the GPRS and 3G data products we have offered through a roaming partnership with the local provider TriMob since the beginning of the year.

We launched proprietary 3G networks in a number of cities over the past few months, including Odessa and Chernovtsy. And we plan to expand this to Kiev and all other major metropolitan areas by the end of the year.

We maintained leading market positions in Turkmenistan and Armenia despite competitor and macroeconomic pressure. And we continued to build out our operation and increase subscribers and sales in our Uzbekistan subsidiary.

I'll 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 1.9% year over year to RUB48 billion. This decline of adjusted OIBDA was attributable to the shift of our commercial strategies in Russia, currency factors, and lower OIBDA contribution from our Ukraine business compared to 2014. In addition, we saw higher operating expenses due to network expansion and inflationary pressure in all our -- in all of the markets we operate.

Nevertheless, we have seen strong results relative to the market, as the OIBDA for the Group increased in line with revenue by more than 12% quarter on quarter.

In Russia, OIBDA for the period was RUB44.5 billion, or 2.1% below third quarter 2014, as handset sales accounted for the majority of the decline. An increase of handset sales contributed to 2.2 percentage point decline on OIBDA margin year over year. On a quarterly basis, we delivered an 8% improvement in OIBDA due to increase in roaming revenues as well as fewer low-value subscriber additions.

In Ukraine, adjusted OIBDA fell in line with top-line trends and the decline in [total connect] revenues due to lower outgoing international traffic.

We would also like to remind everyone that, in 2014, we realized revenues from Crimea for nearly half of the quarter. So, organically, we are performing better.

OIBDA in Armenia and Turkmenistan was in line with trends in previous quarters and was impacted by traditional seasonal factors. Appreciation of local currencies versus the ruble contributed to the Group margin, but macroeconomic factors continue to impact our foreign subsidiaries, in particular Armenian performance.

Our Uzbekistan operations continued to deliver according to plan and are on track to become profitable in 2016.

Group net income declined 6.6% year over year to RUB14.4 billion, due to the impact of OIBDA dynamics and a noncash RUB3.3 billion ForEx loss based on the value of our non-ruble-denominated debt.

Free cash flow for the first nine months amounted to RUB29.2 billion, and CapEx reached RUB73.1 billion. As mentioned previously, we have accelerated our network buildout in first half 2015 from second half 2015. So, our run rate is higher compared to last year.

For the full year 2015, we expect CapEx to be in line with our guidance of RUB92 billion. This includes the planned construction of 3G networks in Ukraine.

In fourth quarter, we completed payment of the interim dividend of RUB5.6 per share or roughly RUB11.6 billion based on our first half 2015 results. During the calendar year 2015, we paid out a record amount of RUB52 billion to shareholders. We remain committed to our dividend policy and to sustain this level for the share -- for a level for the foreseeable future.

By the end of the period, total debt stood at RUB345.4 billion, 8.3% higher than second quarter, due to increase in the value of foreign-currency-denominated debt on the back of the ruble depreciation.

We also drew down RUB5 billion from a credit line with Sberbank. And as a result of this, our net debt to last 12 months OIBDA grew from 1 time multiple to 1.2 multiple, which is the comparable -- comfortable level for the Company and low by industry standards.

Thank you, Alexey. It's Andrei Dubovskov. And further, we are announcing the extension of our partnership with Vodafone. Under this extended agreement, we are effectively abandoning our Ukraine operations to introduce new products and services under the Vodafone brand.

[We had a launch in] 3G services for enrollment agreement with TriMob, previously the sole 3G operator in Ukraine since January. Upon acquiring our own 3G license in February, we have (inaudible) ways to realize our strategic goals of data and differentiation.

In recent market developments, we believe that this partnership presents the best opportunity to provide our customers and the market a new value proposition based on Vodafone's globally recognized brand and our long experience in the market.

This summer, we began our 3G buildout in Ukraine. And efforts are currently being made to the brand, our service centers, and phones. Soon we will launch our first Vodafone branded products and continue efforts to transform our business to the customer. Vodafone [advised] on a number of commercial and operational issues. But, we will continue to lead and manage the operations. Our business in Ukraine will remain part of MTS.

In the meantime, we continue to see resilient markets in our countries of operations, and as my colleagues have discussed, we are seeing strong top-line growth through a sustained increase in usage of voice and data products and vigorous sales of data generating devices in Russia.

Strong momentum in sales allows us to raise both our Group and Russia revenue guidance to more than 4%. We also reiterate our Group OIBDA margin guidance of more than 40% as we continue to execute on our market-leading commercial strategies.

And with that, we'll open the call to questions.

(Operator Instructions). Ivan Kim, VTB Capital.

Yes, hi. Two questions from my side, please. Firstly, on the working capital, so given the significant increase in the sales on the handsets, the working capital has significantly increased as well. So, I was just wondering, would it be something that could affect the dividends next year, or you would look at it as something temporary and probably fund it through debt? That's the first question.

And the second question is on the retail -- mobile retail market. So, we're probably about six months now into this aggressive sales mode. So, how can you evaluate the results of the retail market changes so far? Do you think there is any change of strategy by the rival retail networks? And probably, if you can say something on the timeline for this aggressive smartphone pricing. Thank you.

Ivan, thank you for the question. It's Alexey. I'll take the first one on the working capital. I think there are two factors impacting working capital dynamics. The first one, we demonstrated the very active expansion in our retail markets, and particularly in our market share in handset sales.

We increased our sales by 60% year -- by 60% year over year, right? And that, of course, required certain working capital contribution into such an expansion by volume of sales.

And the second factor is, as we mentioned, our shift in construction cycle so that we are putting more work in progress through this summer and in the first half of the year so that we have this work in progress on balance by the mid of the year and by the end of the summer. So, we'll see that this part of the working capital declining as well as the high sales of the fourth quarter contributing also to a decline in working capital.

So, we'll see in the fourth quarter improvements in working capital. And I would say we will not see that much demand for working capital in the next year as well.

Thank you, Alexey. I will continue on the second question. This is Vasyl. I believe that the journey we have embarked on with the retail activities is not a short-term journey to judge in the first couple of months the results, not even in the first couple of quarters as well.

The aim is to normalize the trades in the whole country where we would be having a fair share of high-quality connections. And we are aiming in the long term to have less point of sales throughout Russia and less connections as a whole, thus having less costs on the sides of the subscriber acquisitions.

That's in a process we may say is going pretty well, as we can say that our smartphone sales have increased by 1.7 times, which is remarkable. And we have commanded a very healthy portion of this market.

You can see that in the reports where suddenly MTS retail network and franchise network started to be if not the most significant player, probably one of the most significant players in the retail market selling the smartphones to the publics. And we have the more smartphones settling down into our network, bringing the smartphone penetration number to 47% in the end of third quarter and beyond as we speak.

Also, I must say that this is converted into healthy base growth, where you can see that, on the background of the base increase, we have at the same time decrease of the churn number. And the numbers are very relevant to each other.

So, we believe that, in overall, though not getting in some high margin in the sales -- smartphone sales process, we do see the customers settling in our network, using the services, bringing their newly purchased smartphones to MTS, and therefore bringing us more revenue, including so-precious data revenue, which increased 20% year over year.

So, overall, the geopolitical environment of the trade has not changed much. But, we see more and more the existing channels turn from a multibrand, a real multibrand selling everyone channels, into sort of monobrands or in this case duobrand as we have it in Russia channel servicing certain carriers upon certain agreements.

That is probably an intermediate stage, after which we will see more division throughout the market. So, the retailers will be preferring to serve one of the carriers more than the others and at the end of the day maybe even looking at the separation of the retail networks to the respective carriers. But, that is a very far-looking statement.

I would say that, at this moment, we do not see any significant changes. We do see certain decrease of the overall number of the retail outlets. And that is countered by the increase of the number and of the rates of the RTK, our own MTS retail network. Thank you.

Thank you.

Herve Drouet, HSBC.

Yes, good afternoon. Two questions also on my side. Firstly, if we start to look at 2016, the revenue guidance you have increased for the end of the year, do you think it's a trend where we might see as well in 2016 -- we are almost at the end of 2015. Do you think we might see more growth to come at 2016?

And on the margins, while a lot of these revenues coming from handset sales, do you believe the above 40% OBIDA margins looking forward, after 2015, will be sustainable in the medium to long term?

And finally, regarding dividend, and you are currently thinking about a new dividend policy. I was wondering, on which element will you think about dividend policy? Will it be on the same element as the current one, which is based on the free cash flow or a minimum certain level, or will there be other type of criteria that will be considered, like, for example, net debt to OIBDA? Thank you.

So, thank you for the question. It's a number of questions. And let me take the first question about the revenue guidance for 2016. It's Andrei Dubovskov. You know that MTS usually has a really conservative approach speaking about our guidance and speaking about our profitability and revenue. And in my opinion, it's too early to talk about our guidance for 2016. But, speaking about our current situation, it's no question about our revenue based on our current results. Maybe the fourth quarter will be a little better than we achieved. But, of course, again, it's too early to talk about the 2016.

And do you see any improvements in the outlook in Russia? Do you think there is more room to be a bit more optimistic looking forward?

No, all our results based on our own achievements, we outperformed the market and outperformed our competitors. And fortunately, unfortunately, we are not looking for the -- some kind of sustainability in a positive trend in Russian economy.

And speaking about margins, I think that we will see margins going forward, at least as we stand right now, round about 40%. There are some potential upsides to that. There are some potential downsides. But, at least where we see it stands right now with the current trends. Once again, it's around 40%.

And as far as dividend's concerned, we appreciate that dividend yield, which will grow -- or dividend payout is a substantial part of our value. That is why we are committed to the dividend, to high dividend payout on the back of our performance.

The key driver for us will be free cash flow, while we're thinking we are far from the situation where debt will put any restrictions on our dividend policy. However, we -- historically, we don't like the idea of paying out dividends from the debt. Still, what is the key in our dividend is sustaining the dividend payout is the cornerstone part of our value creation.

Thank you very much.

Alex Balakhnin, Goldman Sachs.

Yes, good evening. Two questions from me, if I may. First, can you explain how this really works when you sell your handsets and your service increase? Basically, do you give some installments? Well, like, did you sell in installments? And what is the sort of typical length of those? Basically, if you can walk us through the mechanics of that, this would be helpful.

And second question is, well, again on dividend policy. In February 2014, you came with the -- like, the manifest of over RUB90 billion remuneration 2014, 2015. That was quite a powerful testimony of your expectations on free cash flow.

Is it potentially possible that your next dividend policy will be also -- well, your communication on dividends will be formulated in terms of the actual amount, or you would rather link it to the free cash flow you generate as a business? Thank you.

Hi, Alex. This is Vasyl. Regarding your first question, well, no, we don't have any special installment methodologies for products with the customers. Our -- all of our handsets are either sold at the face value, full price paid at the purchase, or through a bank credit, and we get the money from the bank immediately.

So, that means that we are not deferring any payments through the handsets. And the maximum that our customers can get is a bonus for the purchase in a volume of a certain amount of data or minutes or both for the first couple of weeks of the usage. But, that is usually -- that is sort of included in the welcome package. And it is not a discount from existing prices that people buy their handsets for.

And speaking about dividends, we -- it is clearly too early to say the exact parameters or give much the exact figures. However, we'll try in our dividend communication try to be as transparent as it is possible, basing that there is certain uncertainty or there is an uncertainty in the market always.

However, speaking about our previous dividend policy, where we tried to put as much transparency towards our commitments, we are looking at being as well as much as market allows transparent in our dividend policy and in our dividend commitments.

Thank you. And if I just may quickly follow up on the first question, I see the receivables numbers growing. So, just wondering why exactly this is happening. And [all the while], I appreciate you increase your presence on handsets market. But, normally, the retail business tends to have the negative working capital.

So, I would expect that scaling up the business would be actually positive for your working capital generation. Is this -- sorry, for your free cash flow generation through working capital. Is there any reason why this is not applicable to you, well, probably specifically now? Maybe that will change going forward?

Well, speaking generally about working capital, clearly, expansion in retail requires certain working capital investments. And -- but, we see that as temporary. So, as you expand, that is a one-off investment. And then that working capital becomes working for you indefinitely.

So, as far as the trade receivables are concerned, we don't see substantial growth in the amount other than in the volume of handsets and accessories. But, that doesn't go on the trade receivables line usually. So, the trade receivables is about 9% increased, which is pretty much in line with the seasonality trends and top-line growth.

Okay. Thank you so much.

Dmitry Tikhonov, Commerzbank.

Hello. Two questions from my side. One, would you consider potentially in the future selling your towers or at least part of them? And also, maybe if you could put some color as well on the case regarding the Uzbekistan, shall we expect you to create provisioning, like some of your peers did, or shall we just basically wait for the actual outcome of this case? Thank you.

It's Andrei Dubovskov. And thank you for your question. Speaking about the possibility to sell our towers, in our opinion, it's a really good idea, but not for operator, but for investors.

You know that the profitability of this Company usually around the world, it's approximately 40%, 50% and more percentage. And what does it mean for operators? For operators, it's a real good way to lose their own money, to lose their profitability, and to lower their commitment to this new company.

Of course, maybe somebody wants to attract one-off effect, a big money. But, one, two, three years later, all this money will disappear. And this potential possibility for MTS, it's really unacceptable.

At the same time, you know that at least 25%, 30% of all our towers we share with our competitors right now. And it's a good result based on our normal regional [share]. And the second reason why we're not going to sell our towers is the following. You know that the current telecommunication (inaudible) is based on the, so to say, low landscapes, low base, macrocell, femtocell base stations, etc.

And for example, (inaudible) our (inaudible) would be at usually this network based not only -- not rooftops only and not on the towers only, but on the advertising construction, etc. That's really the reason to create new towers, to construct new towers for [a number of operators] are disappearing. And of course, I think maybe it's a good use for investors, new investors reaching the object where they're going to [lose] their money, but not for operators.

Thank you.

Speaking about Uzbekistan, we can just reiterate what was said earlier that MTS continues to cooperate with authorities. In its current stage of the investigations, we don't have any reliable basis for making any provisions or predictions in outcome.

Okay. Thank you very much.

Ksenia Mishankina, UBS.

My question has just been answered. Thank you.

Alex Kasbegi, Renaissance Capital Group.

Yes, good afternoon. Just one question probably from me. Wondering again from your smartphone sales, how many of them actually also buy the data packages? I mean, not all of them do that, or there is a proportion where some people just buy the smartphones?

And related to that, I was just wondering again, maybe you can just give us a bit of a strategy, so to say, look in terms of, with this big push into the smartphones, 47% smartphone penetration now, and at the same time pushing more of unlimited data products and data tariffs, I think there is one-off. So, for RUB200 now on the 4G, how do you expect, so to say, the revenue growth to pan out from the data side with this proliferation of the unlimited tariffs? Thank you.

Thank you, Alex. This is Vasyl. Regarding your second part of your question, that's -- let's start with that. There is no unlimited data plans as of general offer on the market. There are plans that offer unlimited night Internet, which is a sort of segment -- it's called nonstop, a segment type of offer. But, there is all -- there are also promotional tariff for unlimited 4G during the time where we build the 4G and we enhance the 4G adoption in the market.

So, these are short-term marketing tools. We don't look into expanding into full-time a long-term campaign. So, we do expect people to upgrade us, upsell their packages, and have more revenue, given the customers will get used to their 3G and 4G services on their new smartphones.

On the -- how many of them buy data packages, in fact, we try to sell the data package with every smartphone we sell. We give people the possibility immediately activate the package or defer the activation. But, most of the smartphones settle in our networks. Most of our sales come to our network as the customers. And those customers are using the services. And as we are still pretty early into this huge smartphone sale effort, we see most of the customers settling in the network and using the services.

Let's see how it goes along because we have to admit that there is an increased portion of the smartphone customers who are not using the data services specifically but using the voice and SMS services only, which probably hints that this push creates some additional potential for upselling the data package to existing customers who recently bought a smartphone but did not connect the data plan or did not start using data plans, even if they paid for it.

So, we do see certain potential for developing it for the next couple of months and quarters, even in the existing presold base already. Thank you.

Would you have an idea of how many of them have not activated the data plans? Is it, like, big proportion, or is it -- we are talking about small compared to the overall sales of the headsets?

That is a relatively sizable proportion, and it's growing. So, that is probably the result of us being very aggressive and efficient in selling smartphones and converting people from feature phones to smartphones. And that probably leaves a room for improvement in giving them enough reasons to use the data services as they purchase their new smartphones.

Okay. And just to clarify on the unlimited ones, you mean that those are just lasting for a certain period of time, and then they will -- you would defer or revert to tiered ones.

That is our plan.

Okay. Thank you.

Dalibor Vavruska, Citigroup.

Hello, good afternoon, good evening. Just a quick question. If you look at the operational performance of the big three operators, there's some difference, but generally, the trend is quite comparable. So, I'm just wondering if there is some deviation, say, in next year, what do you think is the most important things for you to get it right compared to competitors? What do you think is going to potentially drive the next sort of difference in the performance? Thank you.

Hi, Dalibor. That's a very sophisticated question, honestly. But, let me think about it. It's by far one of the biggest differences that we see in the market is the quality of the customer base gained and developed by each carrier.

We see carriers going after the low-level market with a high churn and high rotation of the customers. And those carriers may be losing customers to a competition, including the Tele2 introduction in Moscow. Meanwhile, MTS, as a difference to MTS, we've expected to create in the market as the high stickiness, high loyalty base that is using just more than one or more than two services, including the increase of the joint services, the converging services of mobile and fixed line that will also retain customers and develop customers.

And since our footprint in the fixed line and in the fixed television in Russia, we believe that we are best positioned to increase the customer value and increase the customer stickiness and loyalty throughout the times of 2016 and beyond.

Okay. Thank you.

Sergey Libin, Raiffeisen Centrobank.

Hello, good evening. So, my first question is on Uzbekistan. In the guidance, you still expect a negative RUB90 billion sum for the full year. So, does it mean that you expect something specifically negative in the fourth quarter, or is it just for the reason of being conservative?

And secondly, just if you can provide any update on Telecom Serbia privatization, that would be very helpful. Thank you.

Speaking about Uzbekistan outlook, again, we do not have any -- we don't think that there is the figures which we are giving are driving to the conclusion that we expect any deterioration of the performance. But, we think we're just being conservative, not revising our outlook.

And as we said, we're right now going above our initial plans. As we said, we thought about achieving breakeven in 2016. However, we see that already in 2015 in the third quarter, we approach that breakeven level very closely.

So, I would just say that we believe that, in Uzbekistan, we are going better than the initial plans. And we do not expect any specific events which will deteriorate our performance there.

And speaking about the second question, Sergey, I hope you understand that it has no possibility to comment any updates or issues speaking about our relationships with Telecom Serbia privatization, etc. According to our nondisclosure agreement, that's totally unacceptable. Thank you.

Okay. Understand. Thank you.

Igor Goncharov, BCS Financial Group.

Yes, thank you very much for the questions. I have two questions. One is in relation to Moscow operations. At least one of your competitors [started operations] in Moscow four weeks ago. I was wondering if, by now, [you're feeling] any implications around (inaudible) changes in the dynamics of the net (inaudible) -- .

-- Sergey, excuse me. You're going to have to speak up or repeat your question. You're breaking up.

Okay. Do you hear me now? Hello?

Yes, please continue.

Yes, my first question relates to the Moscow operations. One of your competitors started operations four weeks ago. I was wondering if you, by now, see any implications of this launch on your own operations in Moscow including, as an example, net connections in Moscow or any other operating parameters. That's question number one.

Question number two relates to Ukraine and your partnership with Vodafone. I was wondering if this partnership may have any ownership implications for your Ukrainian business in the future. Thank you.

It's Andrei Dubovskov. Thank you for the question. So, talking about the Tele2 appearance in Moscow, we have [now some fluctuations] in our sales in the Moscow market regarding to the Tele2 appearance.

And in my opinion, through the end of this year, (inaudible) implications [or some changes], etc. But, [keeping in mind] that, 2016, maybe our new competitors are going to defer their commercial policy to increase the pressure in the Moscow market. Maybe in 2016, it will be more -- they will be more flexible. But, right now, [no sudden] changes in the Moscow market (inaudible). Thank you.

Well, I'll take the second question. This is Vasyl. Well, our cooperation in Ukraine with Vodafone is the nonequity cooperation where we are partnering up to create new services to enhance our presence in the data buildup environment and 3G network buildup in Ukraine, as well as we believe that (inaudible) plans of Vodafone will increase our current market position, will enhance our current market position.

As of the current relationships, we are not obliged to any equity exchange or sell or buy with Vodafone in these assets. And we are not in any kind of negotiations about that right now. Thank you.

Thank you very much.

Igor Semenov, Deutsche Bank.

Yes, thank you very much. Now, my questions have all been answered. Thank you.

(Operator Instructions). Boris Vilidnitsky, Barclays.

Hi, good afternoon, everyone. Thank you for letting me ask a question. A couple of questions from me. So, just looking at the numbers, looks like mobile revenue was up 1% in Russia. We saw data traffic revenue about -- up about 20% or so. And you had device sales are up 58%. So, does this basically mean that most of the new purchases are done by customers who already had smartphones or existing customers that have already used data with MTS?

And if so, then is this basically a defensive strategy basically to prevent customers from deflecting to competitors? So, you're basically getting the revenues from the other devices and maybe tying customers still a little bit longer and within MTS. But, in reality, the revenue generation is just from the devices. Thank you.

Well, it's still 1% increase year over year in mobile revenues. So, the revenue generation is not only from handsets. It also comes from the services. And the leading role is the data services, of course.

In terms of the handset penetration, the sales, of course, the majority of the sales goes into the base. And that's pretty normal for a market with more than 150% mobile penetration. And the 47% penetration rate with the smartphones is a result of selling the smartphones into existing base.

We have figured out that, quite a while ago, that selling the smartphones into existing base is cheaper, more productive than trying to hunt the customers from the other carriers.

Nevertheless, if you take a look at the market dynamics and consider the market shares dynamics of the mobile revenue in Russia, you will notice that we are growing period over period, which is probably a good sign of us acting aggressively and fruitfully on certain gain of the customers in these markets on top of just penetrating the smartphones into existing base.

Okay. Thank you.

(Operator Instructions).

Operator, was that the last question?

We have no further questions at this time.

Thank you then very much, ladies and gentlemen. Obviously, we welcome you at any time to contact our Investor Relations department for any further questions. A Webcast of this discussion will be available on our Website if you wish to replay the call. In the meantime, we appreciate everyone's interest and wish everyone a pleasant day or evening.

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