Mobile TeleSystems PJSC (MBT) 2017 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the MTS Third Quarter 2017 Financial and Operating -- Financial Results Conference Call. (Operator Instructions)

I will now hand you over to Joshua Tulgan, Director, Corporate Finance and Investor Relations. Sir, please go ahead.

Thank you. Good evening, everyone. Welcome to today's conference call to discuss the company's third quarter 2017 financial and operating results.

As usual, I must remind everyone that except for historical information, comments made during this call 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 more thorough discussion of which are available in MTS' annual report on Form 20-F or the materials we have distributed today.

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 materials used in reference in this conference call are available on our company website.

Now I have the pleasure of presenting Andrey Dubovskov, President and Chief Executive Officer of MTS.

Ladies and gentlemen, thank you for joining us in today's conference call to discuss the company's financial and operating results for the third quarter of 2017. Joining me to discuss our results are Kirill Dmitriev, Vice President, Sales and Customer Services; Alexey Kornya, Vice President, Finance, Investments and M&A; and Vyacheslav Nikolaev, Vice President, Marketing; and Andrey Smelkov, Vice President, Foreign Subsidiaries.

We are pleased to report another strong set of results for MTS. For the period, group revenue increased 2.1% year-over-year to RUB 114.6 billion. Overall, we see a number of factors that continue to give us more optimism about our key markets and we see strong growth in mobile revenues in Russia due to increased usage of variety voice and data products and stable growth in Ukraine as more customers adapt 3G services.

As we previously mentioned, we continue to see signs of improvement in customer sentiment in many of our markets. Overall usage for both voice and data is a strong indicator of an improving business and consumer environment, and we see increased consumption of higher-margin products like international roaming, which helped us increase our adjusted OIBDA by 6.7% to RUB 48.8 billion. In addition, our reduction in retail outlets in Russia and additional improvements in our retail operations also helped support adjusted OIBDA growth. For the period, our adjusted OIBDA margin increased 1.9 percentage points to 42.6%.

Now I turn the call over to Vyacheslav, who will further elaborate in our revenue performance within our business units. Please, Vyacheslav.

Thank you, Andrey. I'd like to highlight a few points, which I believe underline some positive trends in our markets. For the period, in Russia, we rocked a 3.2% increase in revenue year-over-year to RUB 106.3 billion. The key driver was, of course, mobile revenues, which improved 4.4% to RUB 79.2 billion. As Andrey mentioned, we see higher consumption of virtually all products and services. Likewise, more measured retail competition has allowed us to see improved ARPUs from new customers and higher spending in certain customer segments. Sales of good did decrease slightly by 1.5%, largely due to adjustments we made in our handset portfolio in anticipation of further changes in the retail environment.

Fixed line revenue in Russia increased slightly year-over-year. We continue see growth in our B2C segments, particularly in Moscow, but we are still victim to global trends as people continue to give up their fixed land services and rely more on mobile. Nevertheless, according to TMT Consulting, our market share of broadband Internet and pay-TV in Moscow reached 37.6% and 35.3%, respectfully. Over 1.8 million households in Moscow use our GPON services. Our integration business continues to see the effects of its focus to internal projects primarily. Revenue fell to RUB 922 million as all the contracts expire and our IT business focuses more on MTS-related initiatives.

In Ukraine, revenue grew 3.7% to UAH 3 billion. Data penetration continues to rise in the market, and we are now focusing more on profitable growth. Having introduced 3G services to the vast majority of markets, we are in a better position to improve our value proposition to enhance growth prospects in the whole market.

Now I'd like to call -- turn the call to Alexey, who will discuss the group's financial position.

Thank you, Vyacheslav. For the third quarter, we saw a solid growth adjusted to OIBDA growth of 6.7% year-over-year. The main contribution came from Russian market, which demonstrated an impressive 7.8% of OIBDA growth, as OIBDA reached RUB 46.6 billion. And key factors included increased usage of higher-margin products like data services, international roaming and long-distance calling, stable currency dynamics in Russia, slight reduction in SIM card sales year-over-year and a 230 basis points improvement in the gross margin for handsets and accessories.

In Ukraine, OIBDA increased to UAH 1.2 billion, a double-digit OIBDA growth rate of 14.8%. Our margin was generally stable at 41.4%. OIBDA growth in Ukraine was primarily supported by a rise in data consumption, but we also benefited from improvements taking over the past 12 months to enhance profitability. MTS foreign subsidiaries, overall, continue to show positive results in Armenia with realized OIBDA of AMD 7.2 billion or 11% growth year-over-year. In Belarus, too, we realized an OIBDA increase of 22.4% year-over-year, and OIBDA rose to RUB 98 million.

In September, we announced the suspension of business activities in Turkmenistan over the termination of interconnect agreements with TurkmenTelecom with state-owned fixed line incumbent. This has made it impossible for us to provide communication services. The effect of which was evident in the negative dynamics for both revenues and adjusted OIBDA in the market.

In consideration of the iteration's current state, the group has recognized a loss from impairment of noncurrent assets of RUB 1.1 billion. Despite this loss from the impairment, group net profit for the period grew by 43% to RUB 18 billion. The key driver behind the growth was the group's positive year-over-year OIBDA performance. Figures for to date amounted to RUB 55.7 billion, an increase of 14% year-over-year. The main factor was lower CapEx spending of RUB 48.7 billion, which is in line with our guidance of RUB 75 billion for the year.

In September, the extraordinary general meeting of shareholders approved the payment of dividends in the amount of RUB 10.4 per ordinary MTS share or RUB 20.8 per ADR, for a total of RUB 20.8 billion based on first half 2017 financial results. As a result, we have fulfilled our dividend policy and expect to pay RUB 52 billion or RUB 26 per share for 2017 calendar year.

In September, MTS has announced the launch of Rule 10b5-1 Plan, which enables MTS to wholly-owned subsidiaries in digital to repurchase shares of common stocks and ADS by means of share repurchase plan. MTS management has been authorized by the Board of Directors to spend up to RUB 20 billion on the repurchase plan at a discretion until April (inaudible).

Simultaneously, through this aforementioned subsidiaries in digital, we entered into a sales and purchase agreement with Sistema Finance, a subsidiary our parent company Sistema, whereby Sistema Finance agreed to a number of MTS shares in proportion to a number of shares acquired by Stream Digital through a repurchase of plan if the price commensurate with the price paid through our open market repurchases. Based on our past experience with the open market tender, we believe that this is the most logical structure that will allow all shareholders the right to benefit from our market activity.

By the end of the period, Stream Digital has acquired a total of 5.8 million shares of common stock, representing 0.29% of share capital. The total consideration reached nearly RUB 1.7 billion. Since the end of the period as of today, we have acquired an additional 27.9 million shares. As future settlements occur, we will continue to disclose information on shares acquired, and when relevant, monetary consideration in accordance with both Russian and American regulations.

By the end of the period, our total debt stood at RUB 289 billion. Our net debt to last 12 months of OIBDA remain stable at a 1.1 multiple. A factor significantly lower than our regional or global peers. As for changes in our debt portfolio, we were relative quiet during the period. But in early November, MTS issued RUB 15 billion exchange-traded bonds with a maturity of 5 years and 7.7% coupon on MOEX. The rate was significantly lower than our average cost of debt. And as the rate falls here in Russia, we will aggressively seek opportunities to lower our ruble cost of funding.

Now Kirill will address developments related to our sales and retail channels.

Okay. As Alexey discussed, we maintained our store count and roughly 5,700, similar to what we had in Q2. However, year-over-year, this doesn't present a significant reduction in comparison to Q2 as our peak number of stores reached nearly 6,200 in Q4. We do remain committed to reducing this footprint, but we are awaiting certain actions from our competitors before embarking on a massive downsizing of our retail. In the meantime, we are content to increase handset margins and reduce SIM card sales where we can.

For the period, subscribers increased slightly to 78.5 million, which is a sequential increase from Q2 of roughly 0.5 million subscribers, which is seasonally typical for Q3, as we see people buying local SIM cards on the trail to different regions. On the other hand, our subscribers count represent a decline of nearly 500,000 year-over-year. This is the effect of slightly reducing our SIM card sales which, in turn, indicate the falling.

Our growth in revenue is always dependent nowadays on new SIM card sales, but more effects of high usage, better monetization of customers and secure products and services. And the greatest opportunity to create value through OIBDA, for operators relies not only in the reduction of our retail footprint, but to decrease sales of SIM card sales as well. We also continue to work with customers to meet their needs more efficiently. For example, by the end of Q3, we saw over 11 million average users of our My MTS application. This app, nowadays, is firmly established as the market's leading self-care and the platform for the future development of our digital services.

Now I turn over the call to the President.

Thank you, Kirill. Obviously, we have seen systemic improvement in our key markets throughout the year. In terms of revenue, we feel we can tighten our group revenue guidance to 0% to 2% growth. Despite our current situation in Turkmenistan, our Russian and Ukraine operations have demonstrated robust growth in key segments, which gives us optimism for the year. Certainly, microeconomic and currency will remain and will continue into 2018, but this is a -- over the 6 weeks from the end of the period, we feel comfortable that group revenue will reach the upper brand of our regional minus 2% -- plus 2% guidance.

The strong adjustment to OIBDA growth we witnessed in the short half 2017 continues through Q3. Thus, we are prepared to increase our adjusted OIBDA guidance for the year from at least 4% to at least 5% growth. Again, the relevance in Turkmenistan and the smaller contribution from our other known Russian assets will negatively impact adjusted OIBDA performance, but profitability has been stout.

When we disclosed our Q3 results in 2016, our view on the following year was filled with uncertainty. Within a matter of days and weeks of our disclosure, the result of our changes in the macroeconomic outlooks for our key regions, which have totally contributed to the significant growth in revenue and adjusted OIBDA we have realized so far in 2016. But we cannot tell, at this point, whether this represents a simple step up in the market or the start of an ongoing trend. This makes it too early for us to comment on our outlook for 2018. Our best hope is that we have seen a combination of both a step up and positive trend and certain indicators like data penetration, net usage and the other factors are usually indicative of a strength in market.

We have established clear leadership in our key markets. We have always network compared or better than our peers in larger active subscribers base. This ensure that we can realize superior label software stability. Our iteration (inaudible) about, while our pursuit of our 3G strategy almost has to continuously broaden the scope of services we provide to our customers. So we are optimistic that if there are opportunities to -- we have in our market, we will be the ones to seize them.

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

(Operator Instructions) Our first question comes from Vyacheslav Degtyarev of Goldman Sachs.

A couple of questions. Firstly, can you elaborate a bit on where you see the highest competitive risk currently? Is it from the other big 3 operators probably Tele2 or NVNOs that are being launched primarily by the financial institution? And secondly, also if you can elaborate some of the core synergies that you achieved from the digitalization. In which way do you think that your mobile app, My MTS, helps you? Can you quantify this opportunity somehow? So how much was the reduction in your call center over the last 2 years and what is the incremental opportunity here?

So Vyacheslav, thank you very much for your question. Talking about the highest competitive risk. I just want to say that that's not like that on the big 3 issues can be annoying. Tele2, it's -- total like it's in the retail field. So of course, that totally depends on the behavior of our competitors. But unfortunately, finally, the third party who is owned by one of the biggest Russian retailer named (inaudible) and other players in this area are really involved into these process. And based on these issue, we are waiting some kind of a normal situation. But at the end of the day, based on our first quarter results and second quarter results, we can see that we have all possibilities to decrease our mono-brand stores in response to the same process for our competitors. And second question is, can you please?

Okay. Vyascheslav, thank you for the question. Actually, answering your question about the potential quantification of the synergies. I must say that thanks to the launch of My MTS last year and the outstanding penetration result we issued by now, we see a double-digit decline in the number of calls year-over-year. Almost in each month of this year, except from a couple of technical issues at the end of Q2, and we are quite optimistic about the future, I would say the future amendments of, say, of our digital portion, the customers seems to believe that we will be ready to decline the number of -- to reduce the number of the people on the account that are currently using to serve the incoming calls by times. Not by percent, by times in the perspective of the upcoming 3 to 4 years. Something like that. This is all I can tell at the moment. I personally enjoyed the results. I may be not eligible now at the moment to disclose all the figures, but we are quite optimistic that incoming traffic to our contact centers will decline significantly by tens of millions of calls this year over the previous period. Thank you.

Our next question from Ivan Kim, VTB Capital.

Two questions from my side, please. Firstly, on retail. So if multi-brand retail stays, if we have separate (inaudible) we have the enlarged single motor end entity, is it enough, let's say, for you to do something on the retail side? Or you would actually need to see that multi-brand retail downsize very significant, let's say, retail store count come by 50% for you to take further action on your own retail network? So basically, I'm just wondering what needs to happen for you to downsize the retail network further? And secondly, can you please elaborate on the competitive environment? We have the positive trends that we saw through the spring and summer being maintained, and what do you see on the pricing side?

So probably, I will try to answer the first question since it's related to -- actually, I think in the current situation, I would say that things are going in the right direction since the split of the deals or the split of -- that are becoming more and more public on the one hand. But on the other hand, for us, it is critically important not to downsize our retail too early, so to say. If we will take the premature exits in terms of significant reduction of our retail footprint, our competitors would probably, I would say, undermine this position in terms of our competitors' solution to reduce it as well. That's the first point. Second point about our next steps and when are we going to take them. As you probably know, the announcement has been made, that Euroset will be [split] by the end of Q1. We (inaudible) term end of Q2 to finalize this process. So we're going to be very opportunistic in our actions in end of Q1, Q2, to make the right steps. So we have always demonstrated, and this year, we are quite eager to downsize the overall gross subscriptions market pressure. It's something that we are very trained, so to say, or capable of decreasing the number of stores quite rapidly. I would say it takes us months, not years. But you we don't want to perform prematurely in this case, if I may answer your question. Because otherwise, probably, there will no reason for our competitors to do this way and some of the (inaudible) would still stay in the market to be sure I'm not interested in. Thank you.

Okay. I'll take the second question. But I can say that, yes, we still see positive trends of the first half of the year with the elimination of unlimited plans. Though there are 2 factors that has kind of dragging us down. One is we still see some aggression from Tele2. Another one, operators are now -- all operators on the market are now trying smarter unlimited, semi-unlimited tariff plans when they provide unlimited social networks and other things. So I believe that we're going to see more balanced ARPUs going forward. But frankly speaking, I would not really bet on significant increase in this field.

(Operator Instructions)

Operator, if -- are there any more questions?

We have no further questions, dear speakers. Back to you.

Okay. Well, everyone, thank you very much for listening. We welcome you at any time to contact our Investor Relations department if you have any further questions. A webcast of this discussion will be available on our website if you want to replay the call. In the meantime, we appreciate everyone's interest and wish everybody a pleasant day and a pleasant evening. Thank you very much.

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