Mobile TeleSystems PJSC (MBT) 2018 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Mobile TeleSystems Second Quarter 2018 Financial and Operating Results Announcement and Conference Call.

I will now hand over to your host, Ms. Vera Timoshenko, Investor Relations. Madam, please go ahead.

Welcome everybody to MTS call to discuss our financial and operating results for the second quarter of 2018. As usual, I must remind that except for historical information, any 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. This, in turn, imply certain risks, a more thorough discussion of which are available in our 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 presentation and materials used and referenced in this conference call are available on our company's website.

And now I have the pleasure of presenting MTS President and Chief Executive Officer, Mr. Alexey Kornya.

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 of 2018. Joining me to discuss our results are Andrey Kamensky, Vice President, Finance Investments and M&A; and Vyacheslav Nikolaev, Vice President, Marketing; and Kirill Dmitriev, Vice President of Sales and Customer Service.

I would like to start this call with the word of gratitude to Joshua Tulgan, as our Investor Relations Officer for the past 12 years. He was the voice of MTS for the investment community now wider international audience. He was a great orchestrator of all our earnings conference calls; we did more than 40 together. On behalf of the management team, I would like to thank Josh for his excellent job at MTS and wish him every success in his new role as Vice President for External Relations at Sistema.

Let's start with the key highlights for the quarter. In second quarter, the Russian telecom market continued to grow and has since remained on track to outperform the market and strengthen its leadership position.

Improved competitive trends emerged in 2017, smoothly transited into the current year. In second quarter, the overall pricing environment remains healthy and we continue to benefit from growing data consumption in our pool.

We delivered another strong set of financial results. During the second quarter, group revenue increased by 7% to RUB 114 million. The Russian business continued to be the primary driver of growth generating solid revenue results across all segments.

Second quarter group OIBDA was RUB 53.9 billion, up 25.5% compared to the previous year. Obviously, this substantial increase was aided by new IFRS standards. But on a relative basis, we also see a 5.1% increase driven by revenue performance. OIBDA margin was 47.1%.

Now Andrey will provide further details on our financial performance.

Thank you, Alexey. First of all, let me remind everyone that MTS has adopted new IFRS standards from January 2018.

New requirements govern the reporting of customer contracts, our leases and financial instruments. We present our results under these new standards and do not restate our historical reported results.

However, through this year, we are providing pro forma results without the effect of new standards so you can better understand our like-for-like performance.

For the second quarter of this year, we reported group OIBDA of RUB 53.9 billion. These results include the impact of new IFRS standards, which added RUB 7.7 billion and related to consolidation of dealers' commissions and lease expenses.

The impact from this accounting change is fairly consistent throughout the first 2 quarters of 2018.

On a comparable basis, group OIBDA showed a growth of 5.1%. The key drivers of this growth were mobile revenue and the profitability improvement in Ukraine. Strong sales of goods also supported overall group's revenue performance.

Meanwhile, we also saw an increase on cost side largely due to higher advertising expenses in reporting period. Group's net profit for this period decreased by 3% to RUB 14.3 billion under new IFRS standards.

Net profit experienced additional pressure due to the higher level of interest portion in the lease payment structure at the early stage after the adoption of new standards.

On a comparable basis, group's net profit showed the positive dynamics of 2.1% and reached RUB 15 billion.

In the first half of 2018, CapEx including licenses totaled RUB 34.2 billion, while the network throughout progressed well, particularly in Russia.

CapEx to sales ratio was 15.4%. The combined impact from higher CapEx, several acquisitions and investments in Ozon led to lower free cash flow of RUB 30.8 billion versus RUB 40.6 billion a year ago.

Total debt stood at RUB 310.5 billion. In the second quarter, we issued RUB 7.8 billion bond with a coupon rate of 6.85%. We purchased RUB 7.4 billion and even experimented with blockchain smart contracts for our commercial bonds placements for RUB 750 million.

We constantly optimize our debt portfolio. In the second quarter, we signed 2 loan agreements for RUB 50 billion with VTB Bank as well as improved financing terms for 2 existing loans for RUB 35 billion with Sberbank.

As the result of these efforts, weighted average interest rate decreased to 8.1%. Overall, debt levels are consistent with the previous periods, and the ratio on the debt-to-OIBDA stands at 1.1 level. There are no changes in our dividend commitment in 2018. Recently, we paid the annual dividend of RUB 23.04 per share. In July the Board of Directors recommended distribution of semiannual dividends of RUB 2.6 per share based on the first half of 2018 financial results.

Altogether, in 2 installments, we intend to pay RUB 26 per share as we did over the last couple of years.

I will now pass to Slava who will give more color on our key market performance.

Thank you, Andrey. We saw strong top line performance in Russia as revenue was RUB 106.4 billion, a 7.4% increase year-over-year, mainly driven by mobile business. This primarily reflects healthy pricing environment during the second quarter.

We also made a solid progress with our LTE network rollout. We built over 6,000 base stations, mostly LTE. As a result, we saw sustained growth in data usage and ARPU. Better LTE access coupled with attractive data-focused tariff plans stimulate people to consume more data. By the end of Q2, mobile internet penetration increased to 55%, while voice and data tariff penetration reached 49%.

All our major segments in Russia showed positive dynamics. Our fixed business demonstrated modest revenue growth of 0.2%, and we continued to gain market share in broadband Internet and pay TV segments in Moscow, which reached 36% and 41%, respectively.

The number of households using GPON services is also going. Revenue contribution for our new segments, e-gaming and e-ticketing, was mainly in line with the previous quarter. Our integration business grew due to increase in number of contracts.

As for our foreign assets, in all markets, we continue to benefit from growing data consumption supported by subscriber migration to voice and data tariff plans.

In Ukraine, we continued to improve our 3G coverage, and roll out LTE throughout the country. And as a result, we delivered a strong performance with 8.7% of revenue growth, and 16.5% OIBDA growth, excluding the impact of new IFRS standards.

In Armenia, our performance was as expected with a slight improvement in top line by 1.8%. Our OIBDA grew 0.9% in the reporting period but decreased on a like-for-like basis due to additional management bonuses accrued.

In Belarus, we joined a double-digit growth, both in Belarus and OIBDA on both standards. This growth was underpinned by tariff price increase in May [of] (inaudible) 3%, continued growth in data usage and strong sales of handsets and accessories.

Now I'll turn to Kirill who will speak on sales and retail developments.

Thank you, Slava. In Q2, we saw encouraging trends on sales. Sales grew more than 30%, up to RUB 12.3 million. This was mainly driven by the higher priced devices. In general, MTS retail performance reflects all trends in the Russia smartphone market. We now estimate in the first half of the year, smartphone sales in Russia grew by 23%, while in average smartphone price rose by 20% to RUB 15,300. In addition to general trends, at MTS, mobile handsets sales were also supported by wider product range, in particular, a more diverse offering from Chinese brands.

We also used credit installment payment and trading options. MTS Cashback program and other promo activities to stimulate sales. We also observed an increase in smartphone penetration in our subscriber base, which reached 67.4% by the end of Q2.

Another important trend in retail is that shopping malls online and e-commerce shows great promise. Our online sales are growing. And in Q2 they reached RUB 1.8 billion. To support sales of handsets and accessories, we also actively use My MTS as a platform to showcase new models, new offers and financial options. Our self-key application continued to rise in popularity, and this quarter the number of 1-month users hit 12 million mark.

Recently, we integrated into My MTS and other applications like MTS Money, MTS Cashback, and e-ticketing service. We are constantly improving the applications as we are focusing more heavily on customer's experience and digitally savvy plans. We intend to turn our mobile-only subscribers into multiservice users who generate higher ARPU and demonstrate higher loyalty. Regarding our physical store footprint in Q2, the number of all stores and MTS retail remained unchanged.

Now I turn back to Alexey for his closing remarks.

Thank you, Kirill. As we are reporting on this -- on the halfway for 2018, we have more visibility for the second half of the year and feel comfortable to raise our initial guidance.

In terms of revenue, we expect growth in the range of 2% to 4%. We believe that strong OIBDA growth we witness in the first half of 2018, allows us to raise guidance for the full year. Thus, we increase our OIBDA guidance from stable to about 2% growth. On top of that, we estimate that adoption of new IFRS standards will at least add RUB 25 billion into OIBDA.

As for CapEx, we reiterated our guidance, which assumes RUB 160 billion for 2018 and 2019, without the full effect of so-called Yarovaya law.

We stick to our initial estimation of compliance with this law at about RUB 60 billion over the next 5 years. This year we expect minimal spending related to this law. Going forward, as we get more immersed into the process and know all the details when we revisit our estimates.

Though we have raised our full year guidance, I would like to -- I would not like to sound overly optimistic. We continued to face many challenges going forward.

Firstly, the elimination of intercountry roaming, which came as a resolution of the dispute with antimonopoly authority, may cost us up to a few billions of rubles next 12 months starting from September.

Secondly, things remain uncertain over retail development. We do not see any reduction in number of stores from our peers. On the contrary, we see force to leverage branded and third-party distribution networks as a competitive advantage.

For now, we counsel patience. We have not scheduled the optimization of our retail network until the end of 2018, but we have plans to do so when the market is ready. Meanwhile, we are ready to change our approach in line with our peer's movements.

We still believe that retail optimization has a potential to fulfill the value creation in the entire sector. We should also consider other factors that could affect our performance in 2018. Spectrum fees, which are scheduled to increase second half by up to 25% year-on-year terms, high basic act of the previous year -- second half of the previous year.

Solid revision, and of course, market economic situation and potential currency volatility, which is always an issue.

At the end, I would like to say a couple of words about our latest initiatives in digital. Recently, we have consolidated the controlling stated MTS Bank. With the ambition to creating new generation bank. We believe in synergies at the crossroads of telecom, IT and finance. We intend to accelerate the development of innovative financial services for our clients and close collaboration with the bank will help us to accelerate the launch of such services through smooth and streamlined iterations.

To speed up our digital transformation, enhance our IT capabilities and optimize business, we have launched a 5-year strategic program, Internal Digital Automation, or simply IDA.

The goal is to use IT to digitalize business processes within the company, which can help us to increase productivity and drive greater efficiency. As part of this program, we began using robotic process optimization.

But this is only part of the -- all the digital initiatives considered within this program at MTS. We preliminarily calculate the economic impact from OIBDA at billions of rubles through the optimization during the full period of the problem. As you see, we have grounds to be optimistic in the second half of 2018 and beyond. Thank you.

And we are now ready to answer your questions.

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

It seems like competitive environment has intensified recently in the Russian mobile space. What are the rationale to restore the unlimited tariff offerings that you have done last week? Do you think it might lead to the revenue growth deceleration in the second half of this year?

We don't see an overall deceleration of the competitive environment. We remain relatively optimistic, and as for the details of the products, we introduced recently, and we're introducing. Now I'll pass over to Slava.

You know we don't think that introducing a limited tariff plan has anything to do with the duration of the market. We know that a lot of tariff plans existing on the market are indeed unlimited. They include unlimited video usage, unlimited messaging, unlimited social networks. And on top of that, they usually have 5, 7, 10 gigabits. So generally, it is already there. But the market needs transparency. So it's not a new tariff plan. It's completely different tariff plan. It gives you not only unlimited data but it also allows you to speak freely wherever you go and wherever you're calling. So we think that this tariff plan will bring additional value to the market, and to MTS primarily it will bring additional ARPU, and at the same time, we do not expect it to significantly increase the amount of traffic that we have. So we have a very good experience of our previous unlimited tariff plan. Since that time we've moved to different proposals that were demanded by the market. And we are not compatible with unlimited like tariff plan which, where you can share data with other devices or other members of your family. But now I think it's a great time to bring to the market the new transparent and available tariff plan.

Our following question comes from Ivan Kim with VTB Capital.

Question on your retail. So why the gross margin in your retail business went down compared to the first quarter despite the growth in higher-priced devices? Are you pricing the handsets more aggressively? And what are the trends there? That's number one. And number two, on your OI CapEx, I appreciate your comment that it will be minimal spending this year. But if you can provide some sort of a ballpark number or range, it would be great? And also it's interesting that even though the law has to come into force from the October 1 on the data side, which is obviously the more cost heavy, your spending is still minimal. So we understand that it is a gradual implementation, however, still -- it's interesting what sort of cost would fall into 2019 potentially. Because on the one hand, with minimal spending this year it could be high. But on the other hand, it feels like the whole industry is not throwing a lot of money into that right now. And I just don't know what to think about next year.

Okay, this is Kirill. Let me start with answering the first part of your question. Actually, you have absolutely rightly observed the -- small slide in marginality. A few factors have affected this performance. First of all, the market in the first half of the year grew really wide by approximately 22% to 23%, while we behaved more aggressively. We grew above 30% year-over-year which was -- which had actually 2 reasons or 2 targets. On the one hand, we have grown significantly the revenue, and foothold to our stores. On the other hand, this slightly negatively hit our marginality. But I have to -- I would like to stress out that the gross margin on our handset sales is still double-digit. And we have significantly outperformed our sales in absolute numbers. Plus, one extra factor is actually the slight, I would say, change in the portfolio of us and overall the market. The Russian handset market is heavily dominated by 3 main players. One of which is Apple, which you probably know, or I have no need to tell you, is the brand with the lowest margin. So growing on this market and growing the share of Apple devices in our sales, we have the side effect of slight, I would say, falling of our gross marginality. Overall, we -- we think this addition is absolutely balanced and under control. Now I'll pass over to Andrey or Alexey on CapEx.

Okay, let me take this one. That was a long question, sorry for a relatively short answer about the effect of Yarovaya law. We can just reiterate what I said earlier, that this year we see it as a minimal spending. And then one can assume that over the next period there will be relatively equal distribution. That's RUB 60 billion equally distributed over the rest of the period, and one can expect that as we'll get more visibility, we will update the market.

(Operator Instructions) Our next question comes from Svetlana Sukhanova with Sberbank.

I have a small follow up question to a previous answer. When you're talking about RUB 60 billion relatively -- equally distributed for Yarovaya law. Which period do you mean? Do you mean 20 -- or next 5-year period, next 3-year period? So what's on them, that would be my first question.

This will be 5 years starting from summer 2018.

Summer 2018, but you said this year minimal. So okay, understand. The next equally -- over the next 2.5 year. Another question would be again on CapEx. Can you explain the reason why underlying CapEx was up by 15% in Q2, excluding this 4G license payment, excluding everything? Was already some cost for Yarovaya included in that CapEx?

Not really. One, you can see from the previous trends that we were continuously reducing our CapEx over the last 3 years, and we reached the minimum last year. So this year our guidance implies a certain raise of CapEx. And that's what you can see in year-on-year comparable figures.

So should you be treating it like catch up with some kind of -- not -- not underspend but say economy in the previous years?

As we were guiding that 2 year, RUB 160 billion, it gets skewed toward the first year. So I think you can, yes you can guide your...

It in line with guidance, yes, understand. My next question would be about subscribers in Ukraine. Why subscribers in Ukraine decreased in the second quarter, quarter-on-quarter?

Well in the second quarter, there were some -- this -- in certain parts of Ukraine where there were discontinued provisioning of services, or there were breakage of services that led to some decrease of number of customers.

Clear. May I ask, do you mean the regions of Ukraine, like Lugansk, Donetsk or you mean some other regions?

I meant noncontrolled by Ukraine government regions.

Okay, understand. My next question if I may one more would be about MTS Bank, and the recent comments and articles that you might increase your stake in MTS Bank. Can you explain us the rationale, just for why you haven't acquired 100% of MTS Bank when it was increasing your stake to the controlling? And second question's subject would be what's the reason -- what's the underlying reason to increase your stake to the controlling if you have of course such intentions?

Well I think that was part of you know, or part of the speech. And we already -- we're saying that in the past that we see fintech services and financial products is one of the key innovative products which we can bring on the crossroads with the telecom banking. And in order to speed up the bringing products into the market, in order to streamline the processes, in order to have one team. And you know how it is important to work as one team. We think that full consolidation of the power of the bank will contribute towards these goals. So fully in line with the agile principles, one should seek to get and develop products together with unified goals in order to get the best product in the market in the fastest way. And we believe that acquisition of the bank, full consolidation and joining the team will help us to achieve this.

So just to bring continuity, completely understand, okay. When should we be expecting such due, if any?

Well, we have already acquired a controlling stake. And I think the full consolidation of the bank is on the strategic part of our fintech services development. I would abstain from giving you the exact days -- dates.

Our following question comes from Sergey Libin from Raiffeisen Bank.

I also have a follow-up on the bank. So you didn't give any quantified implication on your numbers from this acquisition. So I was wondering whether it is included in your full year guidance, the updated one. And more general, what kind of synergies may be the level, the ballpark number? Maybe the impact on OIBDA or free cash flow, for example, that would be very useful? And secondly, I also had a technical question. So in the e-ticketing and e-sports business, you had a sequential decline in revenue, so I was wondering whether it is due to seasonality or is there something more behind that.

Yes, so answering your first question relating to the bank, the acquisition of the controlling stake happened in July. Therefore, we will consolidate the number -- the bank actually starting from the third quarter. Therefore, the numbers that you can see for the second quarter and the second -- and the first half of this year, they do not include the numbers of the bank. And at that moment actually, we also refrained from reflecting the numbers. We have an estimation but it is that not included in the guidance that you see here in the report. Can you repeat the second question, please?

Yes, that was about your new businesses, e-ticketing and e-sports. So in the second quarter, there was a decline compared to the first quarter in revenues. And I was wondering whether it was influenced by the seasonality or is there something -- some specific factors that had an impact on this new sources' revenues?

Yes, I will take this question. They were actually flat. And yes, this was seasonality. And in addition to this seasonality was World Cup in Russia, which actually stopped a lot of other activity on the entertainment market. So it was even stronger effect than we expected. And we think that everything will come back on track in the third quarter.

Our following question comes from Igor Goncharov with Gazprombank.

I have following questions, hopefully, on the dividend. You might roll out the decision on the dividends within your current dividend policy. At this escalation, I was wondering if can maybe provide some guidance on what ways we'd expect from the new dividend policy, in particular, in one of the meetings, you were saying that general philosophy was to distribute the whole free cash flow of MTS? Should we expect that philosophy will be applied to the new dividend policy as well? And when do you expect to articulate this policy?

Thank you for the question. Historically, we are bringing our new dividend policy to the attention in spring as the new 3-year period comes. So you can expect that next year spring we will come out with new dividend policy. We understand that dividend is an important part of our internal value and value of the company, and in this respect, we are committed to high dividend return towards our shareholders in the future. And as you know, we even increased our returns to shareholders in the form of buybacks over the last 3 years. And this year, we've -- the new buyback program for RUB 30 billion over the next 3 years, which will be effective next year as well.

(Operator Instructions) We have no other questions, your -- speakers, back to you for the conclusion.

Ladies and gentlemen, thank you very much for listening. We welcome you anytime to contact MTS 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. In the meantime, we appreciate your interest and wish everybody a pleasant day.

Ladies and gentlemen, this concludes our conference call. Thank you for your participation. You may now disconnect.