Mobile TeleSystems PJSC (MBT) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Mobile TeleSystems' Second Quarter 2016 Financial and Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joshua Tulgan. Please go ahead, sir.

Good evening, ladies and gentlemen, and welcome to MTS' conference call to discuss the Company's second quarter 2016 financial and operating results. As always, before beginning our discussion, I'm compelled to remind everyone that except for historical information, any statements 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' business activities in Russia and abroad; subscriber dynamics and other commonly used financial and operating 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 businesses that complements our communication networks; capital expenditures and operating expenses; and of course, 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 MTS 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.

And 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 2016. Joining me today are Alexey Kornya, Vice President Finance, Investments, M&A; Vasyl Latsanych, Vice President Strategy & Marketing; and new member of our team Kirill Dmitriev, Vice President. He is responsible for sales in our company.

For Q2, we are pleased to report strong top line growth of 5.3%. Total Group revenue increased to RUB108.1 billion. Factors that have allowed us to build on our successful [3G strategy] and set the pace for the market include: strong retail sales, as we effectively manage sustained aggressive behavior in distribution markets in Russian; stable service revenue despite on-going weaker usage in certain mobile market segments; growth in B2C home Internet and pay-TV market despite continued declines in our fixed voice segment; and growth in Ukraine through the speedy adoption of 3G data services.

Macroeconomic factors and competitive issues continue to impact our performance in many ways, in particular voice and messaging usage and roaming; but in sum, our Group revenue performance currently outpaced the market.

OIBDA performance was slightly weaker in Q2 than anticipated as we witnessed a 4.3% decline in OIBDA for an OIBDA margin of nearly 38%. Our guidance for the year was predicated on changes in the retail environment, but so far we have seen only sustained aggressive behavior in the retail space.

Retail competition has both the growth margin and OIBDA directly, but it also has a sustained impact on effective pricing. These factors, combined with the continued macroeconomic volatility throughout our markets, dampened our performance for the period.

Now, I'll turn the call over to Vasyl, who will further elaborate on our revenue performance within our business units.

Thank you, Andrei. Good day, ladies and gentlemen. For the period, total revenue in Russia increased by 3.3% to RUB97.4 billion. Our mobile business revenues grew slightly during the period 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 migration to data plans, as smartphone penetration reached over 51%; 3.2% 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 of upgrading existing feature phone users, as well as attracting new active voice and data users.

In Russia, we continue to defend our market share by executing on our strategy of expanding of 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 through mono-brand channels, which would reduce pricing pressure and improve profitability for all operators.

As we have a long demonstrated, we continue to improve market share despite selling fewer SIM cards than our competitors. In our fixed line business, revenue decreased by 2.8% to RUB15.3 billion. We see continuous growth from our B2C broadband and pay-TV market as market shares in Moscow in both home internet and pay-TV rose. However, overall B2B and B2G spendings have fallen down due to macro economical factors, which reduced overall voice calling.

In Ukraine, revenue for the period increased by 13.5% to UAH2.7 billion. Key drivers include an increase of subscribers and data consumption, which is rising as we have rolled out 3G to all major population centers throughout Ukraine. Among our foreign subsidiaries, revenue in Armenia declined 18.6% year-over-year, while in Turkmenistan, we saw a 7.5% decline. Both markets remain exposed to macroeconomic trends, which continue to weaken voice and data usage.

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 witnessed a decline in year-over-year group OIBDA of 4.3% to RUB40.9 billion. While the decline we have seen in the contribution from our foreign subsidiaries has stabilized, Russia witnessed OIBDA decline due to factors we've long identified as having a negative impact on our OIBDA this year.

In Russia, OIBDA declined by 3.7% to RUB39.7 billion. Two factors primarily hurt our OIBDA: currency depreciation year-over-year, in particular the ruble to Euro and the impact of roaming cost and our retail expansion and the force to manage increased completion within marketplace.

Through the first half of 2016, we've opened an additional 500 stores in our larger retail footprint combined with our aggressive pricing in handsets, the margin of which fell to 10% contributed to the decline in OIBDA. Likewise, higher roaming costs due to relative weakness of the ruble for the period in relation to 2015 contributed most to our OIBDA margin decline, achieving 40.8%.

Overall, for the first half of 2016, we are only down 2.2% on OIBDA, which is close to our previous guidance of minus 2%. This we anticipated as we have seen so far no improvement in the competitive environment. Underlying trends remained structurally sound. OIBDA deterioration derives primarily from irrational retail activity unlike other markets with other substitution, new entrants or other regulatory factors pressure profitability.

We also see significant pressure from roaming; both decreased usage and higher cost due to currency volatility that will continue to impact OIBDA in the third quarter. However, we feel that we accomplished what we needed to do in implementing our retail strategy and we hope that the market takes steps towards repair in the second half of 2016.

In Ukraine, OIBDA declined to UAH827 million. We continue to reduce marginality of our revenue due to tariffs that promote international dialing and cost related to the roll out of our 3G network. Another significant factor is rebranding cost including licensing fees as we continue to rebrand the business as Vodafone Ukraine. We believe that profitability can eventually reach to Ukraine and in second half 2016, we will see better profitability in Ukraine than in the first half of this year.

OIBDA trends in Armenia reflect revenue trends as we see customer usage impacted by the weakened economy through a reduction of international dialing and roaming. Macro-economic factors also continued to put pressure on marginality in Turkmenistan where OIBDA declined 17.2% year-over-year.

Group net profit for the period decreased year-over-year to RUB9.1 billion. Primary this decline was attributable to a number of factors including: OIBDA trends; the accelerated realization of up to RUB3.1 billion of interest expense due to our repurchase of $267 million of our 2020 Eurobond notes; a smaller non-cash ForEx gain compared to second half 2015 of roughly RUB1 billion for the period due to relative ruble weakness vis-a-vis our non-ruble denominated debt.

Free cash flow to date amounted to RUB24 billion, an increase of 22% year-over-year for the period. CapEx equaled nearly RUB40 billion, lower than in first half 2015, but in line with our guidance of RUB85 billion for the year.

Spending is lower in each of our markets as we focus on incremental investments in our more developed data markets and have completed our launch of our core 3G network in Ukraine.

Recently, we paid out dividends of RUB25 billion (sic - see press release, "28 billion") or RUB14.01 per share. The Board of Directors also recommends that an Extraordinary General Meeting of Shareholders approve the semi-annual dividend payment of close to RUB24 billion or RUB 11.99 per share, which would satisfy our commitment to deliver RUB25, RUB26 per share in dividends over the course of calendar year 2016.

By the end of the period, total debt stood at RUB276 billion (sic - see press release, "274.5 billion") net of leases and debt issuance cost, which is trending lower due to our ongoing debt repayments as well as a financial policies. Our net debt to last 12 months adjusted OIBDA remained stable at a manageable 1.1 multiple, a comfortable level for the Company and very low in relation to our peers.

Virtually, our entire non-ruble debt position is currently covered by a combination of hedges, short-term deposits and stable long-terms investments, all of which are denominated in US dollars and euro. Adding to this, we repurchased, as I mentioned, our $267 million of our 2020 Eurobonds in second quarter to take advantage of a favorable market and our strong liquidity position to provide hedges against currency volatility and balance sheet flexibility. We remain focused on sustaining a strong balance sheet and identifying further ways to optimize our debt portfolio.

Thank you Alexey, as recently announced, we have decided to dispose of our stake in UMS LLC, our 50.01% owned subsidiary in Uzbekistan for nominal sum of money. As we disclosed previously, we reached the decision based totally on a number of business decisions related to the medium and long-term development of our business.

As Alexey indicated, these types of developments within the Group necessitate that we revisit our outlook for the year. In accordance with IFRS 5 disclosure requirements, from Q3 2016 the Group shall present financial results in a manner that enables users of the financial statements to evaluate the effects of discontinued operations. Results of discontinued operations shall be excluded from the results of continuing operations and presented separately as a single amount on the statement of comprehensive income.

In simple terms, we will present financial and operating figures in Q3 2016 without our previous operations in Uzbekistan from the beginning of 2015. Therefore, we are amending our Group revenue outlook to 2% or 3% growth to reflect the exclusion of UMS LLC and in consideration of other factors like the subscriber growth in Russia, rising data usage and sustained data adoption in Russia and Ukraine, increased sales of handsets in Russia, and the rising share in Moscow B2C broadband/pay-TV markets.

As for OIBDA, the effect of excluding Uzbekistan will be more visible. We forecast minus 4% decline in total OIBDA due primarily to sustained competitive pressures in the Russian distribution market and the Company's strategic efforts to sustain market share; the build-out of 3G in Ukraine and non-market factors impacting our profitability; developments in foreign subsidiaries and macroeconomic developments and currency volatility throughout our markets of operation. As for CapEx, we see no changes to our appliance and reaffirm our guidance of RUB85 billion.

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

(Operator Instructions) Roman Arbuzov, UBS.

Thank you very much for taking the questions. I have two please. So the first one is on distribution. Distribution is clearly on everybody's mind and is having a lot of attention. So in a hypothetical scenario where your competitors actually take some real steps forward on this front, and we see an improvement in the competitive environment in distribution, could you please help us understand the financial upside of such a move.

In your presentation on slide 7, you talk about the 80 bps impact on your margin from the retail development. So is it correct, for example, to think that if you were to undo the retail expansion, which you've started from Q2 2015, and also raise the handset prices back up to 20%, 30% gross margins, then you would be getting something in the region of RUB3 billion to RUB4 million of additional [OIBDA] in absolute terms, is that the right way to think about it and if you could just provide some numbers around here, that'll be very, very helpful?

And then secondly, also related to distribution, just on the top line side, you've mentioned that the competitive intensity in distribution is actually also weighing on the topline. So, do you think that if we see the improvement in distribution, do you think you will be able to raise prices as well? Thank you very much.

Ladies and gentlemen, Krill Dmitriev on line. So let me briefly answer the question. Actually, as you see from the second quarter of 2015, we observe the growing battle between the key players owning the Russian markets, which actually caused our steps towards the expansion of our retail chain and growth of the sales.

Answering your question, yes, the potential change of the strategies of our competitors will definitely positively impact both -- first of all OIBDA of our Company and possibility of our competition. We expect to see the potential decision on the change of the market maybe in the next year, let me put it this way. And we also asses that the decline of the sales market in Russia which we mentioned in our note, will deliver positive impact on OIBDA, which can be estimated at the level of, let me put it this way, roughly dozens of billions of Rubles annually.

Actually the pricing on the market is currently mostly impacted not by the prices on the mobile sources, but by the prices of the handsets. And yes, if the market change will happen, we will definitely see -- probably we'll see the positive impact of the OIBDA margin of our retail.

Can you just follow-up on that? So you've mentioned dozens of billions of rubles, did I here that right?

This is the estimation for the whole market.

All right, for the whole the market. Can you, I mean, from MTS' perspective, could you maybe tell us what is retails as a percent of revenues, just to understand the retail cost base for MTS, is that possible?

Would you please repeat the question? Thanks.

Sure. So I'm just trying to understand either in absolute numbers or the percent of revenues, what is retail? So for example, are retail costs let's say 6% or 7% of your total Russian revenues, is that a good estimate?

On the topline side, it is 10%.

So as a percent of your total Russian revenues, so 10% is retail cost, right?

It's Alexey Kornya jumping in. It is a percent of our total group revenue and it is actually presented in our disclosure materials that sales of good represent and we have sales of goods only in Russia represent 10% of our total Group revenue.

I meant something else. I just meant the stores, the rents and then the personnel and utility expenses in maintaining 5,800 stores, what is that as a percent of your or in absolute billions of rubles, can you tell us what that is?

Let me specify, you ask what is the share of our cost base is represented by our distribution network?

Basically yes.

I think it is a very complicated analysis. You cannot easily separate that way through your overall cost base because for example how you calculate the cost of sales of SIM cards so on and so forth. So that is why we are not disclosing this figure and we don't believe that any estimate would represent the reliable figure because that would be based on a number of assumptions.

Herve Drouet, HSBC.

Two questions as well on my side and maybe more technical, just on the financial. I've got a bit of difficulties to reconcile some numbers. Can you explain to me on the interest, I mean in one of your slides you explained basically your weighted average interest rates per country and with a decline of those interest rates?

In Q2, there has been a significant increase on the interest costs. I was wondering -- I mean, were there some element that explains that? Where there some one off? Is it linked to some of the purchase of your bonds, that might explain that or some hedging cost?

And also, as well a bit of a technical question on the tax side, if you can explain as well the reasons why tax accrual for the Q2 has been a bit higher than what we've seen seasonally and quarter-on-quarter? Thank you.

Okay, thank you, it's Alexey. In respect of interest expense, indeed we realized and accelerated interest accrual due to our buyback and the amount of those accelerated accrual is RUB3.8 billion. So, that's the major contribution to growth of our interest expense in the second half.

Just a follow-up on that, would we expect similar type of events coming in the second half or do you think it's been just a one-off for you to buyback those bonds or do you think it can follow over the course of the year?

It is a one-off purely because of buyback exercise which we had seen in the second quarter. So, we will not have anything like that. Effectively, we will even slightly reduce interest expense in the future. Those RUB3.8 billion which we recognized in the second quarter will go away from further periods, but they will be equally distributed. This reduction will be equally distributed up until 2020. So, you will not see that meaningfully.

But as far as the specific accelerated interest expense is concerned, that is a one-off for this quarter. And as far as tax expense is concerned, second quarter growth comparatively to first quarter is reflected or is shown because of some deferred taxes accrued for our dividends in Ukraine.

Could you mention how much those deferred tax were?

We accrued deferred tax for non-distributed income in Ukraine. This is a financial kind of mathematics. So, if you are not distributing, your net income, as we do in Ukraine, you need to accrue deferred tax for these retained non-distributed income for the future period, as you would pay that in the future in the form of dividends and then you will not charge the tax in the specific period. Did I explain it clearly?

Yes. I understand the logic, but in terms of the amount, could you specify. Just from Ukraine how much the amount of deferred accrual tax was in term of -- out of the Group tax.

RUB600 million.

Alex Balakhnin, Goldman Sachs.

Good afternoon, few questions from me if I may. First is, you mentioned roaming which impacted your financial performance. I was wondering, what was the net impact of lower roaming revenue on your total revenues, if you can quantify that.

And my other question is on the service revenue growth in Russia. What can you do in the next couple of quarters to come back to the growth on service revenues? And lastly, probably a little bit technical question, your [OIBDA] decline guidance. I would assume that Uzbekistan is deconsolidated retrospectively. So you basically take 2015 ex-Uzbekistan and 2016 ex-Uzbekistan and that's going to be minus 4%, is that the correct understanding? Thank you.

Hi, this is Vasyl. The first question, I'll take it. It's very simple that roaming in total represents 7% of our total revenue, but as we have indicated in the papers, there was quite a big impact on the overall revenue and OIBDA driven by the decrease of the usage and of the users of roaming in the last year and it continues to be stagnating this year.

So in total, we lost some 30-and-more-percent of traffic. Meanwhile, the customers have shifted from cheaper countries to more expensive countries for us, meaning the impact on OIBDA was even more dramatic than on the revenue, unfortunately. That is totally market and macro economically driven factor and we are hardly influencing it in the general number, though we have undertaken a number of initiatives to keep on promoting the roaming service to the mass market, to the B2C customers. Meanwhile the B2B and B2G customers need to be cutting it back on the backdrop of the economical stagnation. Thank you.

Alex, it is Andrei Dubovskov. Speaking to your next question about our growth in service revenue. I just want to remind you that in the current time, we had no negative service revenue growth and (technical difficulty) and unfortunately you know that we need re-guide our estimation about our top lines in our business and we are waiting for the 2% or 3% revenue growth in Russia also. It means that the growth in the service revenue will be around zero, maybe a little less maybe a little more, but it will be not a question about your store growth, it will be a question about how we tend to keep our current level.

And the next question is our guidance for OIBDA decline. Let me pass this question to Alexey.

Yes, Alexander. We confirm that our guidance now accounts for full deconsolidation of UMS operations from MTS financial statements both in 2015 and in 2016. In accordance as we mentioned with IFRS 5, we will deconsolidate UMS operations from MTS financial statements for all periods, and will present it as a single line in our financials, which is discontinued operations in our P&L. So that is why that will affect the comparatives year-on-year, and that is why that affects our guidance.

Ivan Kim, VTB Capital.

Yes, good afternoon. First, I just wanted to ask with regards to your potential share buyback program. What is the comfortable net leverage for you. And I understand that you won't have to borrow for the buyback, because you have a lot of cash at hand, but that will still increase your net leverage, given that all or most of the free cash flow is distributed for dividends.

Secondly, I just wanted to ask on the fixed revenue and apparently if I heard it correctly, the decline is mostly driven by the voice in B2B. I was wondering what revenue trajectory you're seeing in B2C. I mean is it increasing overall without any numbers. I understand that you don't disclose that.

And maybe if you can elaborate a little on the potential for convergence in the markets, and Moscow in particular, and whether you could do it more proactively in the future. And just one technical question, if I may, on external NVision revenue in the second quarter, how much was that? Thank you.

Let me take the first one on the potential buyback program. We are currently in discussion with the Board of Directors, whether in the middle of (inaudible) we might have this program. So we will decide on that within the next two months whether we'd do any buyback this year or not. As far as sources of funding concerned, we don't think that if we decide that we do buyback this year that it will be funded fully from that. We believe that our free cash flow will allow at least partially to fund such exercise if we decide that we want to do that. If I may, the third topic, it's very quick, we are not disclosing those figures.

Thank you Alexey. It's Vasyl. I will start with a couple of words on the fixed lines. The revenue on the fixed line really consist of B2C and B2B market, where B2B market is unfortunately under pressure from macroeconomic and general will to make some visible savings in the B2G segment and more and more scrutiny from the B2B segment to our business.

In fact, if you look at the numbers; in the Q2 of 2015, we were enjoying revenue of RUB8.3 billion, which has stripped down to RUB7.8 billion in Q2 2016. Meanwhile, the B2C revenue increased from RUB7.4 billion to RUB7.5 billion, which is an increase on the backdrop of a decline in the B2C telephony as well as you pointed out the decline is quite expected in the B2B, but we have to admit that B2C decline is also underway in the market.

We generally manage to successfully replenish that fallen out revenue with the revenue of home broadband and TV services. And I would just note that during the recent year, we have totally reversed the trend, stopped falling of the TV subscriber base and TV revenues and further increased the number of the subscribers and the revenue of B2C broadband customers.

This is Dmitriev, let me jump in. Actually, I would like to add a couple of routes on the reasons for this growth. As you may observe, in the second quarter 2016, we have enjoyed successful growth of our GPON subscribers mainly in Moscow because this one (inaudible) in your question. And actually, I think that's it. Thank you.

If I may, I will elaborate on the third topic, why we are not disclosing the NVision external revenues, a few words. The key reason for that, it is not something which we want to discuss, but the fact that we don't think that it is of any strategic importance, external integrated service revenue on their own. Where we strategically focus is that we are selling these services of telecoms and integration altogether. And we don't have any, for example, sales force on its own or any sales force in NVision.

The whole sales is going through MTS salespeople and they go together within B2B team. So it is just to stress that external NVision revenues is not something will offer strategic importance. What is of importance for us is that we integrate it together with MTS core business and by that, promoting our core business. That is why we don't think that it makes any sense to focus on this specific type of revenues. And we just add integration revenue as a separate line for transparency reasons, so that we are not mixing it up with other revenue streams.

Alexander Vengranovich, Otkritie Capital.

Also a couple of questions from me. So first on your retail network, you had quite a significant build-up of retail in the first half of the year. Do you still plan to continue that build up in the second half of the year? Because I didn't get it from your previous comments and if you can share with us what is the average cost of opening of average store which are opening right now and what average fixed operating costs you have associated with opening of each store? So, that could be helpful to model that.

And also the second, pretty technical question. I see your cash flow statement for the first half 2016 that you had some notable increase in trade and other receivables, is there any specific reason behind that? Thank you.

So, let me start answering the first part of your question. Actually, regarding the retail network expansion, you asked if you are still planning to continue the same pace we have kept in the first half in terms of the opening of the stores, I would like to answer this (inaudible). Yes, through the end of this year according to our previously approved strategy, we are quite aggressively rolling out the additional outlets across Russia.

And as you probably see, we have delivered the heaviest development amongst our competition when looking at the past 12 months results. But our decision on the further steps to be taken in this direction, will vastly depend on the few factors. On the strategic moves from our competition first of all, on the potential split or some other changes in the ownership of the multi-brand networks in Russia and to some other factors.

So far, we see that the positive outcome of this aggressive roll out is -- it is positive in terms of the subscriber base growth and top line delivery and the quality of the new subscribers we can buy for these.

Regarding the figures on the cost -- of the average cost of the opening of a store, so let me put it this way, an average store, quite on average costs us approximately RUB1 million roughly. Regarding the fixed operating cost per store it -- well I wouldn't like to go into so much detail because we can calculate it this way, in different cities across Russia, this level of course may differ quite heavily. Thanks

Speaking about the third technical question on other receivables, we saw the major growth in receivables coming from roaming, so out of total about 3%-plus growth in the receivables, 2.5% comes at the expense of roaming, due to high roaming season and specific roaming promotions which we've done.

[Alex Bourdeau], Verno Capital.

My question relates to the implantation of anti-terror law. Have you had any new discussions with authorities or internally? And could you please share any feedback with us, (inaudible) (0:42:28) trying to estimate the final impact on the industry and your thoughts from this perspective, some numbers will be very much appreciated? Thank you.

Alex, thank you for your question. It's Andrei Dubovskov. We have no right now further discussions, because according to the latest news from this area, there are no some indications there are no some conditions from the Russian government how we need to implement this requirement. And no estimations, no elaborations from our side right now.

Olga Bystrova, Credit Suisse.

Yes, good evening. So I just want to discuss a little bit more distribution. Again, some of it may have been answered, but I want to try to ask the question slightly differently. I mean, you obviously have been suggesting to the market that you would like distribution to repair itself and to improve. However, the pace of your distribution rollout has remained the same over the past couple of years and even maybe accelerated in the second quarter. I just want to, I mean I understand why you're doing it, but I want to understand, why do you think competitors will make the first step to try to repair distribution without you making a similar efforts? And what do you expect to see from competitors first, for you to change the decision on your strategy in distribution? So that's one question.

Second question is given, let's say, that your Russian OIBDA has declined almost 4%, could you roughly split the impact of the retail on that and roaming cost increase? And then finally on the Ukraine margins, you were outlining a couple of factors that were impacted margins in Ukraine currently in some areas it's 3G, in some cases it's interconnect and roaming Vodafone branding et cetera, can you suggest to us which items do you expect to continue to impact Ukrainian margins in the second half of the year and which ones you expect to improve a little bit toward the year-end? Thank you.

Kirill Dmitriev, so thanks for your question. Let me start with the first part of it, regarding distribution channels and our outlook for the future. So let me remind you that, the reason for this aggressive expansion was the change of ownership in one of the major Russian multi-brand retailer called Svyaznoy, second quarter last year and our aggressive increase of the stores across Russia was our answer to this challenge, which would potentially put on the huge risk of the leadership loss our business in Russia.

And yes, in the quarter two, we have accelerated the growth of our or expansion of our retail network, but this is according to the previously agreed plan or strategy, if you like it. This is the natural way for us to force the competition to listen to our signals to the market, meaning that after they will realize completely that there is no way of wining the market via increasing the footprint of distribution across Russia, they will definitely reacted in the way we would like them to make.

This is kind of in-between step for us to make them listen to the previously announced plans for us, actually to decrease, to make the subscription market in Russia lower than currently. So let me put it this way.

Yes and what if they don't do that? What if the response will be the opposite of what you're trying to achieve?

We did it quarter two to potentially have the outcome in quarter one next year, for example, or quarter four for this year. We're already receiving the signals from the market and maybe you have read it in the newspapers that there are some rumors about the split of Euroset which will be potentially one of the key flags to us to -- which will indicate to us that we are on the right way.

Okay. So you have a high conviction that the strategy will work for you?

The potential red flag for us, the potential indicator will be the decrease of the mono-brand to multi-brand shops of our competitors. I mean, more or less, significant one, which is not dependent on the seasonality and so forth and so on.

Alex Kazbegi, Renaissance Capital.

Excuse me. We did not yet take the answers on the OIBDA, which Olga asked us, so if I may, I'll addressed those questions. Speaking overall about OIBDA, we clearly showed in our management presentation that we have a heavier factor coming from roaming and overall macroeconomic impact on our margin rather than from distribution.

Overall, distribution expansion is responsible probably for about one percentage point decline, while roaming expense and overall activity in roaming as well as currency movements are responsible for two percentage points. For example, if we talk about second quarter, we had a 30% growth in exchange rate or decline, depending on where you look.

So the exchange rate, euro to ruble, second quarter 2015 to second quarter 2016 was a 28% change, While in first quarter that was just 17%. So that's adding quite a sizable pressure on our margin. And as the third quarter is the highest season for the roaming, we'll see continued pressure in the third quarter coming from roaming and for overall, our margin.

Speaking about which factors are -- thinking about Ukraine margins, we expect that to recover, as I mentioned, in the second half of the year, and we'll see margins full year somewhere in the mid-30s, toward the mid-30s, which assumes certain good recovery in the second half of the year. And we do have certain rebranding costs and promotion costs, which are one-off costs and which will go away, while overall macro situation and other fixed costs will retain.

Alexey, let me just add a couple of words about the Ukrainian business. The costs that have impacted the OIBDA in the Q1 and Q2 are partially one-off. As Alexey noted, those are related to rebranding and to the early phase of the 3G rollouts and some of the costs that we had to incur with the 3G rollout throughout Ukraine.

But those were also coupled with the roaming cost increase because of the ForEx and because of the increase of the general traffic going out of Ukraine and some decrease of traffic going into Ukraine, which will be then impacting positively marginality, but unfortunately, that traffic declined. Our actions are, as outlined in the area of tariff adjustments and changes, we do work on the increase of certain tariff plans, specifically for roaming and for international calling in Ukraine to react to the euro and dollar cost increase in certain markets as well as after we have been redone all the shops in Ukraine, which is mostly incurred as the cost. We think this one-off will go away, and we will see improvements throughout this year and next year in Ukrainian balance. Thank you.

Igor Goncharov, BCS Financial Group.

I have 2 questions on international businesses; one is on Uzbekistan, one is on Ukraine. On Uzbekistan, is there any kind of updates on the potential results of the investigation that international authorities have been carrying out? And if there is no update, what is the approximate timing we should expect any indications in this respect? That's number one.

Number two is on Ukraine. Can you maybe elaborate a bit on progress of the rebranding? You mentioned that some of the shops have been basically already rebranded. Can you maybe give some quantitative indicators of how this progresses and when do you expect full rebranding to be completed? Thank you.

On Uzbekistan, let me take this one. We don't have any update, and we don't have anything to say you to bring any clarity when such updates can be.

Okay. So let me answer the first question regarding the rebranding process in Ukraine. We can reassure that the full rebranding will be finished, will be finalized by the end of this year. Currently, it is a process of rebranding taking place in almost every big cities. We have approximately 500 mono-branded outlets in Ukraine, and all of them will be fully refurbished and put under Vodafone closer to the end of November, maybe December.

Even now, we don't put any brand of MTS on air in any way of advertising. And if you will go into a Ukrainian shop, you will see that approximately, I don't know, 90% of the total tariff plans we are selling through them are currently Vodafone, so.

Okay, thank you very much. Just to clarify, is it correct to understand that starting from the end of this year or beginning of the next year, basically MTS brand will not be used in Ukraine for your operations? It will be fully replaced by Vodafone brands, not only in relation to 3G but also in relation to normal voice services?

In [royalty] yes, you're absolutely correct.

Alex Kazbegi, Renaissance Capital.

One question is just if you have something to say about this regulatory possible initiative from the fixed to mobile interconnect changes and how do you see that, and what's the timeline if you see any changes on that?

Secondly, just looking back, because again, you invested quite a lot of money in GPON. You're clearly investing a lot of money now in building the distribution network on the mobile side. If I look at GPON -- I mean, I understand, of course, that the number of subscribers in B2C is increasing. It probably would have been much worse if you have not done that investment. That's always probably a good explanation saying why the overall revenues remained flat.

But, a more looking-forward question, is there anything else you would expect from GPON to deliver? Let's say, having great network, anything on the B2B, big data, anything where you could see something substantial, so to say, still coming through, which we haven't seen yet and maybe on the B2C as well? Presumably, the [churn] of the subscriber is decreased then presumably, you're monetizing them better, but how do you see that, so to say? How do you see that investment has worked out for you?

And the same on the mobile side or the distribution side, which I think bugs everybody in a sense that I don't think I understand that it looks like -- clearly, it's a prisoner's dilemma. But clearly, so to say, investing more money, which, with a diminishing return, has to stop somewhere. That's at least how I see it.

So question again is that if you look back on your investments in the retail, giving the smartphones to the population instead of the feature phones, have you seen significant uptake in data usage? Have you seen, so to say, the positive signs of that strategy overall? And how do you see that, so to say, if you wish? That's probably all.

Alex, good evening, it's Andrey Dubovskov. It's a very long question. And of course, we need to share these questions for the separate topics. Speaking about the first question about the [computations] in the frequency mobile interconnection rate, there are a lot of hidden situations in the government, a lot of -- some changes behind the curtain.

But unfortunately for us, we have approximately the same information like you, no clear or no direct messages from government how it will be implemented in the market. But of course, we are ready to do it in the same manner like our competitors. As you know, a situation when we have a much more negative impact from these changes than our competitors. That's all unfortunately.

And talking about the GPON, let me pass this question to Vasyl.

Hi Alex, this is Vasyl. Let me take the second question. It was really complex, so I'll try to tap it quickly. The idea of the GPON was, as you might remember, in a couple of parts, one was to really replace the legacy technology, which was no longer productive for Moscow; for such a big city and advanced city, we had a couple of lines, and they were literally doomed.

But when we have replaced that, we wanted to replace the service to the B2C market with a better quality and potentially higher ARPUs in the first place, which I think we did, and we are doing very successfully, increasing the number of broadband and basically going for a leadership in both broadband and TV services in Moscow because of GPON has a great potential nobody else can match.

But at the same time, you are right. There are some other works that the GPON performs better than any other technology, and we are very much counting on that. Specifically the B2B and B2G tasks, which are massive, not point to point like could be represented only by a high-quality network, which has a distribution equal to GPON, which there is no one else does.

So in fact, we are talking about, let's say, street cameras, traffic cameras and other video surveillance technologies, which are very popular in large cities like London, New York, Abu Dhabi or Moscow. So most of these cameras can be serviced by GPON with a higher quality, better reliability and better performance than any other -- with any other network because there is no network, let me repeat, with the presence of GPON in Moscow.

Now the smart city infrastructure is extremely interesting for the development in Moscow. So this B2G and municipal services based on the GPON represents certain very good potential, which we pilot and test in different environments, but specifically, Moscow represented the biggest portion of all of the potential business in Russia in this area, of course.

Now the B2C market should still not be dropped with a simple broadband and TV services. So we are increasing the quality and going from the standard definition to HD and now piloting the 4K on GPON delivered to the customers of Moscow with their MTS TV subscription. We have learned the examples from China Telecom delivery of 4K services in certain Chinese cities, and we see that as being a huge driver for both acquisition and development of the customers.

And 4K is on the top list of our colleagues at MGTS to be delivered over the MGTS GPON network to the whole Moscow customers. On top of that, there are certain synergy effects that GPON represents in Moscow and of that the most significant one is the presence all over the Moscow for quick connection of B2B customers. Meaning that if a B2B customer wants to be connected somewhere in the city, we would be quickly and easily connecting him better than any other competitor that we'll have to draw the line to that customer because we are normally already there with our GPON network.

And also, there is a potential for synergy for existing mobile network with the further development of femtocells, of small and picocells, streetlights, light pole installations. The GPON represents great presence of fiber optics, basically next to every lamp pole in Moscow. And we can deliver quick rollout of these services without extra costs and extra efforts for backhauling. Thank you.

Just to quickly ask on this one. So if all materializes, which never does, but let's say, if all those materializes; incremental revenues, is it 5% of what you have now on the fixed line or is it 15%? What's the ballpark?

Well, I'm not in a position now to say how many exactly rubles, dollars or percentage points we would win back with these services. I can only say that on the backdrop of falling voice business, which represents largest portion of all earnings of MGTS. All of these efforts are, first of all, in a place to catch the fall and to sustain the business with improved margin as normally broadband present better margin than phone services. But at the same time, those additional things are not necessarily revenue-driven. Sometimes, they improve the margin of the whole entity of the group. Let's say, the thing for backhauling of the base stations is a cost advantage to MTS, not a revenue advantage to MGTS.

(Operator Instructions) Roman Arbuzov, UBS.

Thank you very much for the follow up opportunity. I just I just had two very quick technical questions. The first one is on OIBDA reconciliation. So what I'm talking about is the difference between the sum of the stand-alone countries at OIBDA level compared to the total that you report and the difference is typically around RUB 2 billion, but this quarter, it was around RUB 3 billion. So just wanted to check what's driving that, and should we expect this to be the normalized going forward, please?

And then secondly, just on working capital, could you please just give us some sort of an understanding for the working capital dynamics for the rest of the year and for 2016 overall? Thank you.

So starting with the second one on the working capital dynamics, we expect that it will stay or might slightly improve this year. But generally, expect that it will be stable. We have some improvements on the back of lower CapEx, on the back of continued efforts with improving efficiency on our working capital, and we have expansion of our working capital with the expansion of our retail networks. So those factors altogether keep the working capital stable. Speaking about the OIBDA reconciliation. Yes, sorry?

Sorry, just to clarify on working capital, so therefore, you expect a reversal of the big negative that we saw in 2Q? You expect a reversal of that in the second half, right?

Yes. Well, I'm talking more year-on-year. So I'm not that much focused on the quarterly dynamics. I would say that year-on-year because there are a lot of seasonality with the accrual of roaming and so on and so forth. So like we see, the full year dynamics being pretty much stable, expected to be stable.

And as far as the OIBDA reconciliation is concerned, there are two major factors. There are certain intra-group, I would say, reconciliations or intra-group business being deducted, and deduct some headquarter cost which are being distributed among different businesses.

So as you said you expect this relatively elevated level to carry on? So what we saw in the [quarter] is normalized?

Yes. I think we should expect that being -- continue at the level where it is.

Thank you. At this time we don't have any further question.

Okay. Everyone, thank you again very much for your time and interest. Obviously, we welcome you at any time to contact the Investor Relations Department if you have any 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. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.