Mobile TeleSystems PJSC (MBT) 2017 Q1 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Mobile TeleSystems First Quarter 2017 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 Joshua Tulgan. Please go ahead, sir.

Thank you very much, operator, and welcome, everyone, to today's event to discuss the company's first quarter 2017 financial and operating results. As usual, I must remind everybody that except for historical information, comments made during this event may constitute forward-looking statements. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These in turn imply certain risks, a thorough discussion of which are available on MTS' annual report on Form 20-F and the materials which we have distributed today.

MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or previous conference calls or make any adjustments to previously made statements to reflect changes in risks. Copies of the presentations, materials and et cetera that are used and referenced in today's call are available on our company website.

Now I have the pleasure of turning the call to Mr. Andrey 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 2017. Joining me to discuss our results are Kirill Dmitriev, Vice President, Sales and Services; Alexey Kornya, Vice President, Finance and Investments and M&A; Vasyl Latsanych, Vice President, Strategy & Marketing; and Andrei Smelkov, Vice President, Foreign Subsidiaries.

Since we last meet only a couple of months ago, during our Investor Day in London, we'll try and keep our remarks brief and get to questions quickly.

For the period, group revenues declined slightly year-over-year to RUB104.7 billion. From the surface, the clearest reason for this decline was the fact that 2016 was a leap year and the loss of revenue was the equivalent to roughly 1 day's worth of revenue. However, beneath the surface, we see a number of factors that give us optimism for the upcoming year, including year-over-year mobile revenue growth in Russia despite the leap year effect; growth in revenue, and particularly OIBDA in Ukraine, as we continue our focus on develop data subscribers in the market. Overall, strong subscriber dynamics in Russia, Ukraine and Turkmenistan. As we discussed with you in our recent disclosure, microeconomic factors continue to impact our business, but in Q1, we saw definitive signs of improving consumer sentiment. While the number of roaming users remained weak, we saw a definitive uptick in usage, in particular data usage, and this, combined with a stronger ruble, helped us realize an improvement in adjustment group OIBDA of 1.8%.

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

Thank you, Andrey. I'd like to highlight a few points which I believe underline some positive trends in our markets.

For the period, Russia revenue increased 0.9% to RUB97.1 billion. Growth in handset sales, largely due to the higher number of stores in the period, offset declines in the fixed-line business attributable to both the leap year and a steady reduction of the B2O and B2G markets. But the key driver was our mobiles service business. The recent decline in international voice roaming has seemed to stabilize, which may be a sign of improving customer sentiment, while a steady increase in data roaming is a sign of both evolving customer habits and benefits from our marketing efforts.

In Ukraine, revenue grew 2.9% to UAH2.8 billion. There, penetration continues to rise in the market, while our focus last year was on improving profitability. Having built out our 3G network, we believe we are in a better position to improve our value proposition to enhance growth prospects in the markets.

Thank you, Vasyl. Talking about profitability for the period, our profitability was particularly strong in our key markets. In Russia, OIBDA grew a robust 2.4%, up to RUB39.5 million. The growth in service revenue and increased international roaming revenues, in particular strong data usage, was enhanced by a relatively strong and stable ruble, which allowed us to realize higher margins in certain revenue segments.

Retail quotes were also less of an impact as in the previous quarters. We did shut down roughly about 500 stores in first quarter, but these cost savings won't be realized until future periods. In fact, the average number of stores for the period were higher than in first quarter 2016, so retail quotes continued to dampen our OIBDA.

What did help too were higher margins for handsets, as the strengthening of ruble and improving market situation drew more interest among customers in high [volume] and high-margin handsets. In Ukraine, as Vasyl noted, we have realized 4 quarters of substantial OIBDA improvement, as OIBDA rose 62% to UAH1.3 billion. The OIBDA margin now has reached almost 46%, obviously, scale benefits to both our 3G rollout as well as our rebranding have yielded significant benefits, but we also rebound tariffs by reducing promotions in roaming. This growth was also significant in our ruble-denominated results despite the relative decline in the revenue contribution from Ukraine. Because of the relative strength of ruble, we realized close to RUB500 million increase in OIBDA in ruble terms.

Group net profit for the period decreased slightly to RUB12.5 billion. We saw no unusual dynamics year-over-year except the small noncash ForEx gain, given the relative stability of the ruble. Otherwise, costs were in line with previous periods.

It is premature to comment on CapEx and free cash flow, except to reiterate our guidance for the period of spending up to RUB80 billion in capital expenditures.

Quarterly trends are in line with our budget and expectations. We did issue 2 RUB10 billion exchange traded bonds in the period, but overall debt decreased slightly to RUB271 billion of gross debt. Net debt to last 12 months of OIBDA came at a historical constant 1.2 multiple.

Recently, the Board of Directors recommended to shareholder -- annual shareholder meeting that the company pay out dividends of RUB15.6 per share, or RUB31.2 per ADR, based on our full year 2016 financial results. This, again, in line with our policy, which call for up to RUB25, RUB26 per share per calendar year. The board will revisit the topic of dividends for first half 2017 in the fall, but we aim to meet our pledge to the market for a shareholder return.

Thank you, Alexey. I anticipate that people will ask that given our strong Q1 performance, (inaudible) our group revenue and OIBDA guidance of minus 2 to 2 plus -- 2%. Indeed, we are at the upper range of this guidance, but both the market economic situation in our markets of operation remain volatile. In addition, our competitive situation in Russia remains uncertain. While results in Russia are encouraging, our roaming clients, for example, number significantly fewer now than just 2 years ago. Likewise, currency volatility may continue to impact our results.

In retail, we did reduce our store count as a sign to the market that we are ready to do our part to help Russian and our relative market. While our competitors may have made adjustments, we have yet to see a firm commitment to reduce points of sales. Until we see an action from our competitors, we simply cannot commit to further reductions in the current or future periods. Therefore, we think it would be prudent to reaffirm our guidance and revisit this topic later this year. Despite our disappointment in the state of retail market overall, we see a number of positive underlying trends in our markets, which bode well for our performance so far in 2017.

And with that, operator, we'd like to open the call to questions.

(Operator Instructions) Our first question is coming from Roman Arbuzov from UBS.

The first one is on Russia, and it's around gross intake. I was just wondering if you can provide just a little bit more color, what's going on in terms of the gross intake in the market. We saw a negative net intake from both yourselves and from [Vion]. We will see what MegaFon comes out with later in the week. And it's also a seasonally weak quarter, Q1, but do you generally see signs of everybody taking their foot off the gas when it comes to gross intake in the market? So that's the first one.

And then the second one is just a high-level question. Ukraine, clearly the margins and profitability are very strong. You've highlighted a few reasons why that is the case. But do you generally see all operators prioritizing profitability in the market over revenue growth? Is that the way to read what's going on in the Ukraine?

And then just thirdly, just a very quick clarification. If I understood Andrey correctly in his last remark on guidance, is it right that you guys won't be reducing any more stores from now on? So the -- 5,700 mark or so where we've ended up, that's it for now until we see further moves from competitors?

Thank you, Roman, I will try to answer and start with question #1. Actually, I wouldn't say that in Q1, but from us, we have seen a significant shift in the behavior of our competitors so far. Hopefully, some of our competitors will disclose their results. In a few days, we will probably provide more information on that.

As for the negative dynamics of our database, it is more related to the seasonal effect than to some significant changes or shifts in our gross sales. I wouldn't say that in Q1 we have seen or we have gained any significant changes, but we still outlook for the rest of the year and we believe that these changes will arrive in place. Thank you.

Roman, this is Vasyl, and I will take the second question on Ukraine. Margin is getting where it should be. It is not that we prioritize margin over the growth. The market is still within the high-rate 3G penetration speed increase, and we want to keep that on because we still see a lot of market underserved with -- compared to the other markets we operate 3G for years already. So we will be definitely -- the focus is on the service adoption, on top line growth, and then the margin will follow as it is right now. But there will be, for the moment, no upside-down turn to prioritize margin over the top line. Thank you.

Sorry, let me answer the third question. Actually, you got right our point, and it was a statement made by our President. Actually, we still are looking for the opportunities to reduce further on our footprint in the Russian market, but we are still looking forward to get any more weird and more obvious signs of the change from back here from our competition. Actually, we're going to be more opportunistic, I guess. And if we will see any signs that the market situation is not changed only by our hands but is fold by our competition, we definitely will -- we'll continually go down this way. Thank you.

Roman, sorry, that's Andrey. Just wanted to add some information, so let me remind you about the news which were made in 2016, I'm talking about the potential diversity in the Euroset's team. And of course, I think for the next step, we need to wait until the -- this deal will be done in the market, because it's a really huge reason for rationalized retail in Russia, of course, including all our changes in this area.

The next question is coming from Herve Drouet from HSBC.

Yes, 2 questions as well on my side. The first one is on the fixed line business, I mean, which experienced a decline in Q1. I was wondering can you give us a bit of more light on how much of this decline is just due to ruble potential strengths year-on-year, and how much of the -- your [worth of] contract are in U.S. dollar. So I was wondering if you have any figures at constant currency. What will be the profile of -- for the new -- in fixed line at constant currency? And so second question is back in Ukraine, I was wondering, did you experience any more pressure from the regulator? I mean, do you see any potential risk of spillover following some of the constraint on some Russian internet company that were banned? Or do you think it's completely not connected and you don't see any change in term of potential risk on the Ukrainian operation?

That's Alexey. Thank you for (inaudible), I will take the first question on fixed business. We don't have -- in fixed business, we see a normal trend. It's pretty much stable and the only decline attributable to operators business. We don't have U.S. dollar contracts which might impact the results. So the negative comes from B2O segment, and we are growing in B2C.

Okay, and on the interconnect because I think you -- yes, sorry about that, I think -- go ahead.

(inaudible) You go ahead, please.

I was just wondering back to this fixed line, because I thought that part was also due to interconnections revenue, so I was wondering if a part of it was connected to potentially U.S. dollar odd currency contract you may had with some corporate, or if it was not at all connected to that.

Well, if you talk about B2B segment, it's also like more than 90% in rubles. So we -- in our B2B and B2C segment, we are almost all our revenue is coming from ruble-denominated contracts.

Herve, regarding your second question on the Ukrainian risks, no we don't see any pressure. We don't experience any pressure beyond normal regulatory interference with the business. We don't see any risks at the moment. On the contrary, we are cooperating with the regulators to unlock the potential for 5G spectrum -- for, sorry, 4G spectrum and to further introduce more 3G services to Ukrainian customers.

(Operator Instructions) Our next question is coming from Anna [Kazarian] from (inaudible) Capital.

Yes, I have a small one about Ukraine, so you talked about it a little bit. We noted that the margin improved, but I also noted that revenue growth slightly decelerated in this quarter, while we saw a quite strong growth in the previous year. So could you explain why we see this deceleration? And what is your outlook about this market for the full year?

Okay, let me explain on the dynamics of our Ukraine margin. Year-on-year, it was somewhat diverted by promotions of the first quarter with the low margin/high usage roaming activity. So last year, in 2016, we had higher marine use on the back of those promotions and lower margins. So as we normalized the structure, we saw that the revenue decelerated on year-on-year terms. However, we'll see it getting to a normal trend. We will see it in the second quarter and further on, while the margins had a higher year-on-year dynamics on the back of lower first quarter 2016 figures. And then we'll not see that 62% year-on-year growth later. We'll see, also, normalized trends further on. Hope that was understandable.

Our next question is coming from Igor Goncharov from BCS.

Just wanted to ask a relational question on Uzbekistan risks. Clearly, there is no indications given in your press release, but maybe you can kind of guide us as to when we can see any additional information on this issue from regulators or from yourself?

Igor, our response on Uzbekistan will be the same as in previous periods. We are not commenting above what was disclosed. We are -- yes, we are cooperating. We don't have any indications on the timing and on anything else.

(Operator Instructions) There is no further question over the phone.

Okay, operator, thank you very much. Ladies and gentlemen, thanks for joining us today. Obviously, as always, we welcome you to contact me or anyone in our 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, as brief as it was. In the meantime, we appreciate everyone's interest and wish everyone a pleasant day.

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