Mobile TeleSystems PJSC (MBT) 2016 Q1 法說會逐字稿

Good day and welcome to the Mobile TeleSystems' First Quarter 2016 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. Tulgan. Please go ahead, sir.

Ladies and gentlemen, welcome to MTS' conference call to discuss the Company's first quarter 2016 financial and operating results. As always, before beginning our discussion, I need to remind everyone that except for historical information, comments made during the 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' business activities, subscriber dynamics, commonly used financial indicators, operating indicators frequently used by telecommunications operators, 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 businesses that complements our core communication networks, capital expenditures and operating expenses, macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available on MTS' annual report on Form 20-F, which is available on our website or through the US Securities and Exchange Commission. 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 US SEC, all of which are available on the Company website, www.mtsgsm.com, or that of the US SEC at www.sec.gov.

MTS disavows any obligation to update any previously made forward-looking 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 in reference in this conference call are available on our Company website. In addition, regarding the topic of Uzbekistan, MTS has made no provision in relation to the investigation conducted by the US Department of Justice and the SEC regarding our 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 this current stage of the investigations, we have no reliable basis to predict any outcome.

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

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the Company's financial and operating results for the first quarter 2016. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer and Vasyl Latsanych, Vice President and Chief Marketing Officer.

We are pleased to announce the beginning of another successful year for MTS. Group revenue increased nearly 8% to over RUB108 billion as we continue to execute on our 3D strategy of data, differentiation and dividends. We continued to see sustained demand for data throughout our key markets which continues to drive growth in both Russia and Ukraine. Macroeconomic factors and competitive issues continue to impact our performance in many ways, but in some, our group revenue performance continues to pace the market.

Despite continued macroeconomic volatility and increased competition, group adjusted OIBDA was roughly stable year-over-year at RUB41.3 billion. While we see weakness in our foreign subsidiaries due to macroeconomic issues or strategic developments, year-over-year growth in Russia OIBDA drove the Group performance. Alexey Kornya will elaborate on this trends later, but first Vasyl Latsanych will discuss our top line performance within our business units. Please, Vasyl.

Ladies and gentlemen, for the year, total revenue in Russia increased by 6.5% to RUB96.3 billion. Our mobile business revenue grew 6.6% as we see a continuation of trends that had previously defined our growth. Amongst those, stronger data usage due to both the growth of the customer usage and the migration of the data to the data plans, as smartphone penetration increased to 50.3%.

Fewer customers in roaming travel abroad less frequently, which impacts us more due to a large market share in roaming. 3.7% growth in subscribers as we focus more on sales through our proprietary retail channels and higher handset sales as we continue to implement our retail strategy in Russia in face of increased competitors behavior.

In Russia, we continue to defend market share in the face of aggressive competitive behavior by executing on our strategy of expanding our own retail footprint and promoting lower priced smartphones.

We still believe that it will be clearly in the best interest of the market to work to reduce overall SIM card sales and focus more on sales to monobrand channels. We believe that all operators would benefit from less pricing pressure and improved profitability if we collectively reduce SIM card sales on a collective retail footprint. However, as we already sell fewer SIM cards than our competitors, we are still compelled to defend our market share.

In our fixed line business, revenue increased slightly by 0.3% to RUB15.4 billion. Growth continues to be driven by our increasing market share in B2C markets, in particular in Moscow where our broadband and pay-TV market shares continue to increase.

In Ukraine, revenue for the period improved by nearly 5% to UAH2.8 billion. The obvious driver is data consumption which is rising as we have rolled out 3G in 19 regional centers in Ukraine. We remind everyone that in Q1 2015 revenues were boosted when we introduced higher termination rates between Ukraine and Russia. So, underlying growth in data was actually stronger. We see a strong take-up of traditional voice tariffs now being offered under the Vodafone brand with revised pricing on international calling.

Among our foreign subsidiaries, we know that revenue in Armenia fell year-over-year by over 16% as macroeconomic factors continue to impact usage of services like international calling and roaming. In Turkmenistan, revenue also declined roughly by 6% due to a slight decline in the active user base and macroeconomic driven factors. In Uzbekistan, however, we continue to see strong revenue growth as we further develop our business in the markets.

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

Thank you, Vasyl. As Andrei noted, [we've sustainable] year-over-year group adjusted OIBDA for the period of RUB41.3 billion. While we saw some reduction in OIBDA contribution from our foreign subsidiaries, Russia witnessed OIBDA growth despite challenges in the market and continued volatility. OIBDA in Russia grew 1.1% year-over-year to RUB38.6 billion. We did see one-off impact due to reimbursement (inaudible) spectrum, but overall OIBDA performance was strong despite volatility and increased competitive behavior.

Our large retail footprint combined with our aggressive pricing of handsets have driven our OIBDA margin to 40.1%. However, our quarter-on-quarter OIBDA dynamic improved 1.5 percentage points in comparison to last year which reflects our overall financial discipline in the face of currency volatility, market economic factors and increase in competition. In Ukraine, adjusted OIBDA declined significantly to UAH803 million. I remind everyone that OIBDA in Ukraine in first quarter [2015] was positively impacted by the pricing of international interconnect services.

However, reduction in the marginality of international dialing is a part of our new tariff packages as well as one-off marketing initiatives and the rollout of our 3G network has pushed the OIBDA margin below 30%. Another significant factor is rebranding costs including licensing fees and we continue to rebrand the business as Vodafone Ukraine. We believe that profitability can eventually return in the short term to the level of the mid 30s.

OIBDA trends in Armenia reflect revenue trends as we see customer usage impacted by the weakened economy through reduction of international dialing and roaming. In Turkmenistan, OIBDA also fell by 16%, as we saw a sequential decline in the active subscriber base, lower voice usage and higher network costs due to currency volatility. In Uzbekistan, our operations delivered positive OIBDA contribution of UZS5.7 billion for the period.

Group net income for the period increased 33% year over year to RUB14.5 billion. In addition to OIBDA trends, primary factors here include reserves related to the cash balances held in distressed banks in Ukraine in the first quarter of 2015 and the non-cash forex gain of RUB2.3 billion for the period due to ruble appreciation.

Free cash flow for the period amounted to RUB20.5 billion, an increase of 37% year-over-year for the period. CapEx spending RUB18 billion or 28% lower than first quarter in 2015 was a key factor, as the cash flow from operations was relatively stable. As we guided in March, we do aim to reduce overall CapEx spending this year to RUB85 billion, which will support free cash flow this year.

In first quarter, the Board of Directors confirmed the Company's new dividend policy and recommended dividend payments for 2015 fiscal year. Under the new dividend policy, management sets a target payout of RUB25, RUB26 per ordinary MTS share, RUB50, RUB52 per ADR per calendar year. The Company guarantees a minimum payout of RUB20 per ordinary MTS share or RUB40 per ADR.

The new policy will cover 2016, 2018. As part of the Company's long stated ambition to make more equal semi-annual payments, the Board recommended a dividend payment of RUB14.01 per share or RUB28.02 per ADR based on full-year 2015 financial results. In accordance with the new dividend policy, the Board will review proposals for an interim dividend in full 2016, which combined with our upcoming proposed payment would translate to RUB25, RUB26 per share.

Likewise, the Board has tasked management to consider the advisability of a share repurchase program as an additional way to create further shareholder value. As part of such a program, the Company could allocate up to RUB30 billion to be spent over the next three years in the repurchase of shares. Such a program would require further approvals by the Board and we will introduce it later this year.

By the end of the period, total debt stood at RUB317 billion, a significant decrease from fourth quarter 2015, but largely due to ruble appreciation in relation to our non-ruble denominated debt as well as some amortized of payments in first quarter. Our net debt to last 12 months OIBDA declined slightly to 1.1 multiple, a comfortable level for the Company and very low in relation to our peers.

We remind investors that 97% of our non-ruble debt position is currently covered by a combination of hedges, short-term deposits and stable long-term investments, all of which are denominated in US dollar or Euro. We remain focused on sustaining a strong balance sheet and identifying further ways to optimize our debt portfolio.

For the [past two years], we have successfully executed on our 3D strategy. Over this time, we had built on our market leadership in Russia through the introduction and the expansion of our model in fixed data networks, investment in retail and our firm commitment to building our brand. In other markets, we continue to expand Internet penetration, most recently in Ukraine, which with the launch of 3G services (inaudible) tender. While we continue to handle the macroeconomic challenges in our markets and [the rational] competitive behavior, we also have cast an eye toward our future technological evolution, customer needs and other factors provide new opportunities for MTS to grow.

As a leading global operator, we are well aware of trends in global telecommunications. Infrastructure is, for example, a key question and our recent launch of our tower rental business is a strong smaller step towards (inaudible) our asset base. For now, we are offering over 5,500 towers and maintain support structures for rent in many regions throughout Russia, but eventually we intend to expand this to include virtually all our assets. Combined with our infrastructure sharing networks such as LTE spectrum sharing, we have taken a pragmatic approach to realizing greater efficiency in our operating and capital expenditures, while taking advantage of incremental revenue opportunities.

[Our road] is increasingly a digital road and we are ready to seize opportunities beyond our core assets and retail networks. Some of the steps towards this have long been realized. We continue to work with MTS Bank to provide our customers with mobile payment solutions, while partner with leading e-commerce company OZON to enhance our online commercial efforts. Yet we also see how bottom topics like the Internet of Things and Big Data is evolving from idea to inception. We see more possibilities to establish platforms for growth in new digital products in this field.

Another contribution to our revenue growth in Russia was RUB2.5 billion realized from our acquisition of NVision, giving us control over our billing system, which will allow us to improve time to market for the new products and realize benefits of scale and additional flexibility in our IT efforts. But NVision is also another step towards diversifying our business activities to enter new markets in IT and system integration.

Later this year, we will more formally introduce our new strategy in addressing an increasingly digital role. For now, we want to remind the investment community that we are not complacent as the world changes. In fact, we are aggressively seizing this opportunities to further grow and develop MTS.

With that, I would like to open the call to questions. Thank you.

Thank you. (Operator Instructions) Alex Kazbegi, Renaissance Capital.

So I joined a bit later. So I think you addressed the issue of the margin in Ukraine. But if I can still just ask you, so in what, so to say, perspective do you expect this margin to come back to, so to say, mid 30s, I think that's what you probably said as far as I understood. So, anything, anyway, just a comment maybe on the evolution of the Ukrainian margin, what should we expect, how much was one-off and when do you think and what is kind of the normalized level you could get there?

Second question would be still on NVision, just to understand also that I think, initially you said that you don't expect significant growth in this integration revenues, yet you're looking for new avenues and new customers. So, given again that it's a very nascent acquisition, just to understand also what kind of ballpark numbers you are aiming for this year in terms of like revenues? I understand that the guidance might not be, so to say, exact from your side, but just to understand also what kind of the gain opportunity that it represents for this year, both on EBITDA side, contribution, revenue contribution?

And the last one, may be just to clarify, the RUB30 billion repurchase program, does that mean you would be buying locals or you're open to buy whatever you would like to, so to say, purchase the ADRs from the locals? Thank you.

The question about the Ukraine, so in short, we has a coincidence of some negative factors in the Ukraine amongst which was the rapid decrease of the international traffic to Ukraine, which unfortunately washed away a high margin interconnect, international interconnect to our business in Ukraine as well as, in general, Ukrainians travel less and they receive less international calls, so this marginal business, high-marginal business was going down in Ukraine. It was partially replaced by internal growth of the voice and data businesses in Ukraine, but that was not enough, so the margin was unfortunately affected.

The other thing is that, this was the set up period for our Vodafone partnership in Ukraine, and the brand introduction and a lot of things we had to do in the market including the advertising campaign, including the shop re-branding and internal re-branding of our business, and that all drove certain one-off costs that were allocated in the first quarter of 2016. We are working hard and count on improvement of the margin already in the second quarter and we did make some market-wide steps like the tariff reintroduction in Ukraine as well as we have done most of the initial investments needed for the new project of rebranding in Ukraine in the first quarter. So, I believe we will see the improvement already in the second quarter and so on, we are determined to improve the performance of this business in the course of 2016.

Vasyl, just before you go, if I can just qualify that given that again this loss of the revenues, which you mentioned, is probably not replicatable, so to say. What it would be then, in normalized margin, you will be looking at that in Ukraine, it probably will be high 30 is the best that is a good estimate.

Alex, let me specify, I think what we are saying is, there is some certain impact of one-off marketing initiatives together with a more longstanding factors; however, one-off factors will go away and we will see improvement already in the second quarter and further through the year, and probably already in the second quarter, or at least in the third quarter, we will see mid 30s, is the target level of marginality in the Ukraine.

Okay.

Talking about your second question about the NVision, let me say that the first target which we have in this year is the following: We are going to have the full control over all the billing system and all IT services in our business. This is the main question for us to have -- to be more flexible, to be more aggressive in this area.

And, at the same time, unfortunately, the NVision revenue, compared with the previous year, I'm talking about comparing between 2014 and 2015, are less than in previous periods, and target is the following: We are going to increase absolute OIBDA of this business, first of all, and secondly, we need to combine all IT integration services which should happen in this asset with our B2B business in MTS. This is the main target. We have now a holistic approach. Talking about the revenue growth in NVision, it's not a separate business for us, it's just a part of our core business in our B2B market.

And as far as the buyback program concerned, we are right now in the process of developing the one and as soon as it will be approved by the Board of the Directors, we will share the details. At this point of time, we don't have any details to share.

Thank you. Roman Arbuzov, UBS.

The first one is on Russia margins. So just from your presentation for Ukraine, you were talking about higher cost of international calling together with higher volume. I was just wondering, do any of these international calling costs, does any of that end up in Russia and help the Russian profitability in any way and then, more generally, on the Russian margin, I appreciate it's hard to comment on sort of competitive results, but then your results really stand out in terms of profitability in Russia versus your competitors.

Are there any particular factors that you think best explain your strong performance versus competitors on the profitability front? So that's OIBDA, and then just a more strategic question on the towers. So the fact that you've set up or offered your towers to third-party for rent, does this rule out you participating in an independent tower company setup at some point down the line or not? Thank you very much.

I will try to answer the question on the OIBDA performance relative to between Russia and Ukraine and international calling. Well, in fact, the decrease of the Ukrainian OIBDA was -- one of the factors of decrease of the Ukrainian OIBDA was the decrease of the international calling from Russia to Ukraine, which also negatively affected Russian OIBDA, but it was then replaced, this negative effect was replaced by several positive effects in the Russian business, which was the overall market development, the more customers acquisition and base increase in Russia as well as much healthier smartphone drive of the data performance -- data penetration and data revenue growth in Russia.

So, in fact, we have managed to cope with the decrease of the effect of the international calling between Russia and Ukraine. And thus, this international calling was a smaller factor for Russian business. Meanwhile, it was a larger factor for Ukrainian business and even larger one for Armenian business. So, these decreases of the Armenian already were driven partially by decrease of Russian calling to respective countries. So, it could not positively affect the Russian performance. The effects on the Russian performance were internal to Russia and were mostly driven by the Russian day-to-day business including voice and data calling.

To add up on Russian OIBDA factors, we think that our revenue structure is more healthier when we speak about what is the difference, which allows us to demonstrate a better OIBDA growth. Also, one should appreciate that there was a one-off factor in first quarter which is a compensation for the frequencies which we mentioned, which helped our OIBDA performance.

(multiple speakers).

That's hundreds of millions, so that's not that much. So, but the key factor, of course, we believe, is healthy structure of our revenue, which is contributing to a positive OIBDA or to the more stable OIBDA development. In second quarter, we'll see some -- a bit weaker OIBDA performance, but still we believe, we are well within the guidance for this year.

Can you just comment on the best revenue structure, what do you mean by that?

Well, I mean, the different structure of the sources of revenue. So, low marginal revenues against higher marginality revenues, that is having historically higher margin and some international calls having a lower margin. Another factor which helped us by the way against competitors is an absence of commissions to mostly brand dealers and I think these are factors -- if you look at the first quarter last year, none of the competitors probably had the commissions to be paid seasonally, while this first quarter, they do have, so that could also impact and this could be also the difference but still I think, generally, we see a number of factors and you cannot say that there is one factor which explains the overall performance.

In addition, I just want to say that our better marginality reflects not in our P&L but in our commercial metrics. For example, talking about our churn, you can see that our churn is much more better than our competitor. But talking about your question about towers, I just want to say that we are positioned like towers company as this.

I think we are the biggest towers company across the Russia and our (inaudible) that later we can offer to the markets all our networks and we can offer much more better terms and conditions for all our competitors and all our structures across the Russia. For example, we have all possibilities to not increase the rents payments for partners. We have all possibilities to not increase in line with inflation rates next year the payments and we have all possibilities to offer to the markets the sizable discounts for their rent payments.

Ivan Kim, VTB Capital.

Two questions from my side. Firstly, what is effect of NVision consolidation on your EBITDA in the first quarter? In other words what is Russia EBITDA excluding NVision. And then secondly, what's -- from the towers, tower portfolio, what (inaudible) on your network is achievable medium term you think if you can share just as a ballpark number? Thank you.

Speaking about (inaudible) EBITDA, this is not meaningful. We talk about a [few hundreds max, less than five] definitely on our OIBDA (inaudible) and without NVision we would have about the same level of OIBDA. So, it's not meaningful.

Sorry, can I have a follow up here, but [this isn't right]. You were paying for billing systems before as your external cost and now it's your internal cost. I mean, I understand that NVision probably doesn't make much of the external EBITDA, of course, but for your EBITDA, it should have had a meaningful effect now.

Well, there are two factors. First, partially our cost went as a CapEx. The second factor that now you have all operational costs of NVision, which used to be with that, which is headcount and so and so forth. So, that is why it doesn't really, in terms of improvement year-over-year with NVision and without NVision, it is not meaningful.

Herve Drouet, HSBC.

Two question on my side. Firstly, on to the CapEx, I know CapEx is kind of seasonal, but last year, we've seen much more linear CapEx. The first quarter CapEx was relatively light. I mean, one of your competitors has reduced his CapEx guidance.

I was wondering compared with the beginning of the year, what assumption you've taken in term of, for example, exchange rate, the ruble to the US dollar? And do you feel if EBITDA is potentially under pressure, there is room to put that cash flow generations with maybe better conditions on the CapEx? That's the first question.

The second question is on Ukraine and about the use of the Vodafone brand. I understand there's been some one-off cost associated with the rebranding and some promotions. I was wondering when you are using the Vodafone brand, do you have a fee to pay which is based on the revenue?

I'll take the first one on the CapEx. Well, we still pursue our policy of having most our build-up on the network in the first half of the year. So, that is why we'll have quite a well equally distributed CapEx through the year. We do not expect that there will be hikes in the fourth quarter, and in this slide, we see irrelative reduction in CapEx comparatively to last year is a sign that we are generally reducing by RUB10 billion CapEx this year.

Now, if you remember, we are guiding a RUB10 billion reduction on CapEx in this year comparatively to the last year and it would be natural for us to have lower CapEx in the first quarter. We will accelerate in the second quarter and in the third quarter and I think that, generally, overall trends in the CapEx spend will be similar to what we saw last year, because our buildup policy as I just mentioned is the same. We're trying to build up (inaudible) through the year as possible.

So, as far as currency impact, we have sufficient instruments at hand in order to steer our CapEx spend towards the target and towards where we wanted to have. We can move certain projects, we can restructure payments and so on, so forth. So, there are different tools how we can steer the CapEx. That is why we expect that we'll have -- we'll get to the target this year. We don't expect that we'll be looking at lighter CapEx in order to boost our free cash flow. I think the combination of our guidances allows us comfortably to achieve the searched free cash flow.

Now, we'll take the second question on the Ukraine and Vodafone relationships. Now we do not pay the revenue sharing to Vodafone. We pay the brand royalty to Vodafone. It was accounted for in the costs and accounted for till 2016. That does not represent the major part of what was the impact on the OIBDA, because, as I said, it was more investments into the beginning of the corporation than the fee that we paid to Vodafone itself.

Is it just a one-off fee you pay and that's it or when you say, but royalties is based on which criterias, it's just one-off or is it just on some certain financial criteria?

No, it is ongoing. When you work on the brands and have a mutual operations for the brand by brand by one side, you pay the royalty to that brand and it's an ongoing payment on an annual basis.

So, I will guess, I mean, usually, when people use brands, it came about 1%, 2% of revenue, in that range. That, I will assume, will impact a bit your margin compared with what it was before when you were not using the brand. Am I correct in that assumption?

You shouldn't make any inferences based on the performance of the first quarter to come up with the fee that we pay to Vodafone. We are not in a position to disclose that. That's the relationships with Vodafone that are being regulated like this and we believe we pay fair amount for using the worldwide renowned brand and establishing a more beneficial presence of ourselves and our business in Ukraine.

Igor Semenov, Deutsche Bank.

Can you possibly remind us again about the NVision revenues for -- is it going to stay at this level for the next few quarters or you will phase out third-party clients sometime later this year? Second question is on towers. Do you have a real interest in your towers from any of the competitors? And thirdly, on churn, you don't disclose it anymore, but directionally, is it flat, is it declining and how quickly -- what kind of dynamic, could you give a bit more color on that? Thank you.

I'll take the first one for NVision. We will -- the level of the structure for revenue in NVision is that's -- about 75% comes from MTS and the figures which we are disclosing, this is gross up figures, they are not net of eliminations. So most of the revenues which we see are coming from MTS, but that is why (multiple speakers).

So, out of [RUB1.25 billion], 75% is to MTS'.

As I'm saying, I'm rounding with about three-fourths coming from intra group transactions. That is why we don't think that third party revenues will significantly impact NVision revenue and will see pretty much stable level at the level where we see. Of course, we are looking at developing the business, that third party revenues is becoming an integral part of our B2B revenue stream as it was discussed earlier. But we will not suggest to think that there is any big volatility in NVision revenues in the upcoming quarters.

Igor, talking about the towers, you're absolutely right, it's a relevant question. The differences between the previous period and current situation is the following: Before, we have the usual practice when we change with our competitors the equal numbers of towers in each regions, in each micro regions, but right now, we're offering all our networks in (inaudible).

And right now, we have another big positive trend in this area, but we think that the much more positive trend will be later when we open to the market all our network. And let me remind you that all our competitors right now are talking about their own towers, companies and the real question for them is to have a choosing what the way will be better for all our competitors.

At the same time, I think when our competitors choose the normal pragmatic way, they will choose our proposal like a trust. And talking about the churn, you know that right now, we are not disclosing our churn rate, because I think that our approach are changed speaking about the current period.

Right now, we are not disclosing a lot of commercial metrics like minute of usage, like average price per minute, like ARPU, et cetera and we think that they are much more relevant for all investors, all analytics and for all shareholders will be to disclose the bigger numbers like voice traffic, data traffic, the numbers of our subscriber base, et cetera. And you have all possibilities to describe these metrics like ARPU, EBITDA, et cetera.

(inaudible) that our churn much more less than churn of our competitors, less than 40%, but we are not ready to talk about the churn later.

Sergey Libin, Raiffeisen Bank.

First of all, I would like to follow-up on the Russian margin question. So, last year, you were saying that you'll be working with almost zero margin in handset retail business. But this quarter, it looks like that you had quite healthy margin on retail business. So, could you explain that, whether it is a one-off or is it some change in your strategy? And secondly, you've had depreciation decline year-over-year in the first quarter despite the aggressive rollouts of the retail network, so could you also explain this?

Okay. On the margin question, we never said that on our margin we go to zero, because if you look at and we disclosed the figures of our gross margin, that's what is the markup on our handset sales. You see, yes, we did reduce that form double-digit to single-digit, but still we enjoy a positive gross margin in the handset sales and with the growth of scale and we quite substantially grew the number and the scale of this business, the loss in marginality is being compensated by this scale. So that is why we have somewhat mitigated the impact from our retail strategy where we reduce substantially margins, still not going into zero gross margin, but partially compensate this effect with the scale.

As we go forward and as we're expanding our network through the year, this positive impact or this relatively good performance in the margin might be reducing because the scale of the business and the costs associated with the rent cost and head count cost will put higher pressure on our margin. However, so far, we saw quite a positive development in the sense that expansion of our handset businesses did not have necessarily a significant negative impact on our OIBDA.

Right. Sorry, can I have another follow-up here. Do you think you should see more pressure starting from the second quarter, because you recently slashed prices on smartphones in your network, so do you think it's going to have a significant impact?

I'm sorry, I didn't quite get the question, what is cash? Can you just repeat?

Yes, so you reduced pricing on some smart phones, on some equipments in your network. So do you see --

No, but there was no extraordinary reduction. We all the time reduced some of the prices for the older smartphones or we get promotional offers from the vendors, but there is nothing that we would slash the price and lose a lot of margin, whereas we were specifically showing the margin in the disclosure materials as relatively stable positive margin with a fluctuation due to seasonal or promotional activities.

Okay. Got it. And yes, my second question was on depreciation, why it decreased year-over-year despite your retail networks expansion?

Okay. We end up with this sizable portion of amortization of assets, intangible assets in Uzbekistan, so that helps to overall reduction in depreciation costs.

Allan Nichols, Morningstar.

More of a big picture item, with the rebound in the price of oil recently, how is that affecting the Russian economy and demand for your services? Thank you.

Well, we think that the key drivers of the performance is not that much macro-economical for our business as the industrial trends, which we see and the competitive situation in the market. And I think that is pretty much the case through all Telecom companies. So they have very limited impact coming from macroeconomic on the consumption, because it is like utility. That is not to say that there is no impact at all, but this impact is a limited one. So, the key drivers usually are overall, just once again, industrial trends like penetration of smartphones, like data adoption rates, changes in people, how people change their behavior and patters of their behavior and so on, so forth. That is why we don't think the short-term macroeconomic volatility can have any impact on the developments.

And no decline in usage, no decline in revenue in rubles, no decline, I think that big decline of our profitability, Russian economy is separately really sustainable. But of course the main problem it's cross currency ratio, it's a problem of denomination, but normal. Speaking about the usage, it's more or less (inaudible).

Thank you. There are no further questions in the queue at this time. I would like to turn the call back to your host.

Okay, everyone. Thank you very much for listening in. We obviously 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. And in the meantime, we appreciate everyone's interest and wish everyone a pleasant day or evening. Thank you very much.

Thank you, ladies and gentlemen. That concludes today's call. And you may now all disconnect.