Mobile TeleSystems PJSC (MBT) 2019 Q3 法說會逐字稿

Dear ladies and gentlemen, welcome to the conference call of Mobile TeleSystems PJSC. At our customers' request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Polina Ugryumova, who will lead you through this conference. Please go ahead, madam.

Welcome, everybody, to today's event to discuss MTS third quarter 2019 financial and operating results. As usual, I must remind everyone 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. These, 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 obligations 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. You can find copies of the presentation and materials used and referenced in this conference call on our Investor Relations website.

Today's presenters are Alexey Kornya, President and CEO; Slava Nikolaev, First Vice President for Customer Experience and Marketing; Inessa Galaktionova, First Vice President for Telecommunications; and Andrey Kamensky, Vice President for Finance.

Now I will hand it over to Alexey to kick us off.

Welcome, everyone, and thank you for joining us today. As usual, I will begin with group highlights. Slava, Inessa and Andrey will then give a detailed business and financial update. Finally, I will wrap up before we take questions.

I'm happy to report that we successfully maintained our momentum in 2019 and delivered an overall solid set of results in third quarter. Total group revenue was up 4.6% year-over-year in third quarter, reaching RUB 134 billion. Revenue growth was supported by core operational performance in our largest markets as well as a noticeable contribution from MTS Bank. Additionally, we saw OIBDA growth accelerate to 5.9% in third quarter year-over-year to reach RUB 62.8 billion.

We also made good progress on our long-term strategic initiatives. In connectivity, we continued investing in 4G network development and we launched the first 5G pilot zones in Russia with sub-6 gigahertz coverage. In entertainment, we appointed Igor Mishin as our new Vice President for Media. Igor brings to the team decades of industry experience, and I'm confident he's the right fit to lead our efforts in this area.

In FinTech, we further deepened our integration with MTS Bank at both an organizational and product level. In B2B digital, we continued building our nationwide narrowband Internet of Things network, which has now reached around 30,000 base stations with enabled functionality. Finally, more recently, in artificial intelligence, we were happy to be one of the 6 founding members and the only telecom operator to join the Russian artificial intelligence alliance. Going forward, this will be the premier industry association for joint action aimed in simplifying the rollout of artificial intelligence technology in Russia.

With that, I will hand it over to Slava.

Thank you, Alexey. In Q3, we continued to take steps to refresh our brand and enhance the user experience across the MTS ecosystem. Let me go over a few of the highlights.

2 years ago, we launched our MTS Cashback loyalty program, and we are now focusing on rapidly expanding participation in line with our overall ecosystem's strategy. We're seeing rapid progress. In Q3, we reached 4.2 million participants. And more recently, in October, we passed a major milestone of 5 million registered users.

Our loyalty program is also a key enabler for us as we gain traction in daily banking. In June, we launched cashback-branded virtual debit and credit card products, and we're taking a digital-first approach to the consumer experience. In just a few clicks, a customer can apply for a virtual card, get approved and begin making purchases via Apple or Google Play. We are already seeing promising early results. And since the launch of our cashback cards, monthly issuance of virtual cards by the bank have more than doubled.

In Q3, we also continued to see growing adoption of our MyMTS app, reaching over 19 million active users by the end of the quarter. MyMTS is our primary digital gateway for customer care as well as a key ecosystem hub for cross-selling services. We're making good progress in driving penetration, which now is reaching a substantial share of our subscriber base.

Turning to entertainment. In Q3, we signed a 10-year branding agreement for a major new venue in Moscow, the MTS Live Arena. The new facility is planned to open its doors next year and will have a capacity of 11,500 people. From a product standpoint, this will be complementary to our live experiential services, including e-ticketing. It will also provide a flagship platform for brand positioning and product promotion for the 20 million residents of the Moscow metro area.

Now let me hand it over to Inessa for a business update.

Thank you, Slava. Let me begin with Russia. Country revenue in Q3 grew 2.4% year-over-year to RUB 121.9 billion. This was driven both by our core connectivity business as well as a strong contribution from MTS Bank. We saw double-digit top line growth year-over-year. OIBDA in Russia grew 3.2% year-over-year to RUB 57.3 billion, with margins slightly increasing to 47%. As expected, organic mobile service revenue growth accelerated in Q3, reflecting ongoing price adjustment in the industry as well as easy comps as regulatory headwinds began to moderate. Overall, our core performance is somewhat better than we expected at the beginning of the year. Looking ahead, we think that growth rates in Q4 will likely be at least comparable with Q3 dynamics.

Turning now to retail. As we forecasted earlier, in Q2, we have seen a significant slowdown in the Russian mobile device market. Against a higher base from our retail ramp-up last year, in Q3 2019, we saw a 3.6% year-over-year decline in sales of handsets and accessories. For the year in total, we expect dynamics to be largely pleasant. Given this environment as well as the long-term trend towards low churn, we'll continue to move towards in diversifying our SIM distribution channels. This is aimed to enable optimization of our retail network going forward.

In Q3, we expanded SIM sales through multiple third-party channels, including our nationwide partnership with Svyaznoy. As we have seen early promising results, a good example is our partnership with (inaudible). Our kiosk in their stores are showing very healthy conversion of foot traffic into SIM sales, even on day 1 of operation. We're also pushing new adds for consumer IoT devices such as smartwatches. Overall, in Q3, net subscribers were up by around 0.7 million quarter-on-quarter, which we see as a significant achievement in competitive 4-player market.

Strategically, we continue to focus on attracting high-value customers. And in Q3, we saw promising metrics with a high percentage of new adds remaining active for at least 2 months. Year-over-year, the number of gross adds converting to 2-month subscribers increased by 10%. Combined, these developments give us confidence in moving forward our own retail optimization.

We confirm our earlier guidance of 200 to 300 stores closure by the end of 2019. And depending on how market conditions evolve, we see room for further optimization. We are currently targeting up to 600 total closure by the end of 2020, including our activity this year.

Finally, we continue to strengthen our customer relationship through conversions. Since May, we have been offering conversion tariffs nationwide in Russia. We're seeing healthy steady growth in our conversion base, which today stands at about 1 million subscribers across mobile, fixed and satellite.

Going to our international markets. Ukraine also saw solid performance with double-digit growth in both revenue and OIBDA of near 30%. In Armenia, revenue was down 1.9% year-over-year in a market facing tough competition and regulatory changes. OIBDA grew 1.7% driven by continuing OpEx optimization. Finally, in Belarus, which is not consolidated, we continue to enjoy double-digit growth in revenue and high single digits in OIBDA.

Now I will pass it to Andrey.

Thank you, Inessa. Let me start with a few highlights from the bank, then I will turn back to the group.

MTS Bank continued to see rapid expansion in the third quarter as we execute on our broader FinTech strategy. In the first 9 months of 2019, net interest income rose nearly 20% year-over-year to RUB 8.2 billion. This reflects steady ongoing growth in gross loans, which were up 49% year-over-year in Q3.

Taking a closer look at the breakdown of the bank's portfolio mix. The key growth driver was retail loans, which grew 85% year-over-year to reach RUB 79.7 billion. This reflects our strategic focus on the consumer segment where we are making significant progress in growing our customer base. At the end of the quarter, we reached about 2 million bank clients.

Coming back to the group. Group net profit came in at RUB 18.4 billion, largely flat year-over-year when excluding the one-off provision in the third quarter of the previous year. Net profit was supported by strong operational performance, which was offset by a negative impact from higher interest expenses. While some of this impact reflects high underlying financing costs, the majority is related to IFRS 9 reporting requirements regarding improved loan terms. In particular, there was a onetime derecognition in the third quarter of 2019 triggered by crossing the threshold for substantial debt modification. In addition, there was a high base effect due to the recording of improved loan terms in the year ago quarter.

Turning to CapEx. Capital spending for the first 9 months of the year totaled RUB 61 billion driven by continuing investments to improve network coverage and quality. CapEx revenue ratio stood at a healthy 16%. Excluding the SEC DOJ payment, underlying free cash flow in the first 9 months of the year increased by 67% to RUB 67 billion versus the year ago period. This was supported by strong cash generation in our core business. In addition, there was a little base effect due to a relatively high acquisition activity in the 9 months of the previous year. At the same time, we saw a net positive cash effect related to MTS Bank funding and lending activities. In 9 months of this year, the total impact of MTS Bank on group free cash flow amounted to around RUB 10 billion.

Turning to the balance sheet. In Q3, we continue to take prudent steps to optimize our debt portfolio. In the reporting period, we issued RUB 10 billion in exchange-traded bonds with a maturity of 7 years and a coupon rate of 7.9% interest rate. We also restructured credit facilities with Sberbank and VTB totaling RUB 120 billion. Total group debt at the end of the quarter stood at RUB 376 billion, with the weighted average interest rate decreasing to 7.8% from 8.1% in the second quarter. And we see potential for further improvement if macro trends continue towards a lower interest rate environment. As an early indicator, we achieved a coupon rate of 6.85% in our most recent bond issuance in October with a 4-year maturity, and we will continue to proactively seek timely opportunities in this direction. Overall, our net debt to last 12 months adjusted OIBDA ratio stood at 1.6% at the end of the quarter, excluding the effects of IFRS 15 and 16, and we feel very comfortable operating that business at that level.

Now I will turn it back to Alexey for his closing remarks.

I am encouraged by our progress and achievements. Given our year-to-date performance as well as improved visibility towards the full year results, I feel confident in raising our 2019 guidance to 6%, 7% growth in revenue and 4% to 5% growth in OIBDA. I am also happy to note that we have now completed our second dividend payment in 2019. This fulfills our commitment for the first calendar year of our updated 3-year dividend policy.

Finally, I also wanted to take this opportunity to thank our investors for their patience and feedback during the review of our equity capital market strategy. In October, the MTS Board confirmed the continued stability of our current listing structure on the New York and Moscow Stock Exchanges. We see this as the right fit in light of our new growth strategy with its focus on expanding our offerings of digital products and services. We will be sharing more about our updated strategy next week at our Investor Day in Moscow. We look forward to seeing some of you there. Thank you.

And let's open up the line for questions.

Operator, we are now ready to take questions.

(Operator Instructions) The first question is from Cesar Tiron, Bank of America Merrill Lynch.

I have 3 questions, if that's okay. One is on pricing in Russia, the other one on digital strategy and then on distribution. So pricing in Russia, do you think it's possible to see an end of these unlimited data price plans, which have been around for about 5 quarters now? Second, on digital strategy, we've seen a very strong takeup of the MyMTS app in Q3. Can you please discuss what drove this? And also, any progress you're making with online sales? And then third, on distribution, if we see less pressure from Tele2 in 2020, do you think it's realistic to assume that you'll be able to close down a couple of more stores?

Yes. It's Alexey. I'll take the first one, and then Slava will talk a little bit more on digital strategy and Inessa on SIM distribution. As far as pricing is concerned, we see quite a stable situation in the market. We think that the market is not -- we wouldn't be overly optimistic. However, we don't see that the market goes into extremes of competition. So the environment is pretty much stable. Neither too much positive, we don't see much of the room for growth in pricing, but we don't see also that there is some really disruptive activities there in the market.

And as far as the unlimited tariff plans are concerned, so far, they are driving our ARPU quite strongly higher. And we see positive contribution from them in the ARPU and in the overall top line performance. So whether that's -- when the time comes into phasing out from unlimited tariff plans, I think it's a little bit too early. However, at a certain stage of the market development, we might see such a step.

Okay. Regarding the digital strategy. On MyMTS, we are very happy with the current speed of getting new subscribers to MyMTS. But as we are making new developments in the application, including banking capabilities and some other features, we believe that the growth will continue at generally pretty much the same pace as the last couple of years. You've probably seen that it's a very steady improvement.

Regarding the e-commerce, I would pass it to Inessa.

Yes. I will just clarify if we understand the question correctly. This is about online sales of our shop, if that's correct, yes?

Exactly.

Okay. So yes, we had run that activity year-on-year growth more than 7%, but it's actually a revenue of handset. But definitely, for that channel, we have more ambition targets. So we do expect double-digit growth of that channel in the coming year because a lot of things were actually making changes in that activity. On top of the handset sales, we do expect some good growth of SIM cards via this channel. So right now, we're quite satisfied, but our ambitions is much higher than we have results right now.

In terms of SIM distribution, actually, the situation does not differ this quarter from the last quarter, et cetera. Yes, there is a competition on the market. As we mentioned, we are ready to optimize our retail chain as soon as we are happy with the quality of our sales and if the alternative channels, which we're developing is going to bring us good consumers. Right now, we are satisfied with the results. As you see, our sub base year-on-year grew by 700,000 people. So we are comfortable in confirming our activity to close shops, and our intention to close, as I mentioned in my speech, in the coming year up to 600 shops.

The next question is from Ondrej Cabejšek, UBS.

A couple of questions from me, please. First, 2 on Ukraine. So you've accelerated quite significantly, whereas your competitors actually slowed down in the third quarter. Do you attribute this purely to the distribution efforts where you rolled out some network in the second quarter? What exactly do you attribute this to? And then if you could update us a bit on the sale of -- potential sale of this operation because the local authority gave approval for change in control? Second question is if you could just walk us through your thinking now around dividend progression given the fact that you said earlier this year that you would not continue any sort of buybacks.

It's Alexey. On Ukraine, I think it'll be significant -- we are seeing that a lot of activities, which we initiated in the past, now bringing results in the performance of our Ukrainian business unit. That includes the rollout of our network. That includes a strengthening of our distribution. That includes activities related to intensifying penetration of V&D tariffs in smartphone penetration into our customer base and so on and so forth. So the set of the activities, which we have been taking, including a competitive network rollout, so we are at par in terms of network, with the leader of the market are bringing the results. And now we see acceleration of growth and a very strong performance in terms of top line and OIBDA in Ukraine and very much satisfied with that performance and believe that this trend will have a potential to continue, and we'll see strong fourth quarter results in Ukraine as well.

As far as the potential Ukrainian sale concerned, there is nothing that we can tell you at specific at this conference call today. We are -- our approach to geographical expansion is -- or vice versa is opportunistic as we're seeing many times. So depending on the specific opportunities, we might consider both movements in the expansion or reducing our geographical footprint. However, we do confirm that there are certain talks about Ukraine are running.

Dividend progression. We stick to our dividend policy, which was announced some time ago. And we don't see -- right now, we don't see any indications or any reasons for changing or we don't have any reasons to upgrade this at current moment.

I wasn't thinking of there being an upgrade. But in terms of -- you had the floor over the past few years. For the previous dividend policy, you always paid dividend right at the floor. I presume one of the reasons was that there were pretty extensive buybacks going on. So now that you explicitly said you don't plan on continuing the buyback, do you see potential for paying above the dividend policy floor? That's my real question.

So the question whether we are planning buybacks. Right now, there is nothing -- I cannot exclude that we'll -- we can, and that is a part of our dividend policy. We are saying that we commit to certain dividend payments, and there is something -- and there is some upside potentially on that in the form of buybacks. However, at this point of time, we don't have any specific decisions for that.

The next question is from Alexander Vengranovich, Renaissance Capital.

So 2 questions from my side. First one is probably a bit specific, but it will be great if you can help to answer it. So the question is on the impact of the closing of the stores. So just can you help us to estimate actually the financial impact of each store closure on your results? And in particular, do you typically close the store when the rental agreement expires and you don't need to pay any termination fee for the closure? And if that's true, what sort of a kind of a monthly or quarterly savings you might currently envisage if you close each store? So that might be helpful just to get a kind of a rough estimate of the impact. And the second thing on the OIBDA number, which came pretty strong, I think, in the third quarter. So I understand there is obviously some operating leverage behind, but if you can share some additional color on what really drove OIBDA improvement in the third quarter in Russia and the Ukraine, outside of the revenue generation initiatives.

Thank you for the question. It's Inessa. I will take the first one on retail optimization. So actually, I would like to say that -- then we say about retail optimization. We move things not about just saving on the rental cost. We actually are trying to push the market itself and also our efforts and our aim from just pushing sales to retains -- to retain customers, yes? So we actually would like to move ourselves and also to show the good example to the market that it's not more on gaining some new customers rather on retaining our own. That's why we think that it will bring the whole market a more healthy situation and not just the savings on the rental cost, yes?

And also, the second one, this is about renting time. Yes, in case the question, is it influencing the closure? Yes, of course, because this is the end of the year, and we also need to take into account some rent timing. That's why in Q3, the results may be not so outstanding in terms of number of the shops we close. But as we mentioned, we absolutely keep our obligation and our, how to say, efforts and words that we do commit that we will close until the end of the year up to -- from 200 to 300 stores, as we promised.

And actually, the question on OIBDA in the third quarter. I think the answer is, actually, there's no specific or one-off effect there. OIBDA dynamic is a reflection of the strong performance on the revenue level. It was a very good quarter for us in Russia both and the Ukraine. So actually, that's it. Practically, there's nothing on top of that.

The next question is from Vyacheslav Degtyarev from Goldman Sachs.

It's Slava from Goldman Sachs. Can you elaborate on Q3 free cash flow dynamics? Looks like a very significant increase. How much of that is one-off driven? And what do you expect for Q4 and going forward into 2020, at least in terms of the direction of the free cash flow progression? And also, secondly, hypothetically, again on Ukraine, what could be proceeds used for in case you dispose Ukrainian business? If we are talking about potential buyback, dividends, M&A and deleveraging, can you outline some of the priorities between those 4 opportunities?

So this is Andrey. Let me start with the free cash flow dynamic. Again, this quarter was very good for us in free cash flow as well. As I said in my speech, actually, you should take into account the effect of the bank because, of course, the free cash flow of the bank is a bit different than the free cash flow of the operational company like MTS. So if I talk about the third quarter itself, the effect of the bank is around RUB 10 billion. If I take it out, the rest is coming from our operational business, which is our retail network and the operational business. So again, there's no specific or one-off item there.

And the second question is very speculative. As I said, there is nothing specific we are ready to tell you at this moment. So there is no sense in speculating around that.

The next question is from Maria Sukhanova, BCS.

I have a question on 5G. First, could you probably update us on what is the current stage of negotiations and discussions? And which spectrum will be used and like in what form it will be developed in Russia? And second, is there any visibility on when we'll see first spectrum auctions?

Alexey. On 5G, right now, the position of the government on how to distribute 5G spectrum is not finalized, and all players in the market are in the discussion how we can join our forces in order to -- all 4 players in the market, how we can join our forces in order to accelerate the development of 5G in the country, including clearing up the spectrum from military use, the way it is right now really on. We see that there are 3 bands, which are relevant for 5G discussion in at least in short term in Russia. This is 3.5, which is pretty much occupied by other use. So it's not really available and will not be freely available in the nearest future. 4.9, which is partially, can be used in millimeter band in 20, 25, 29. So this -- the position of the government, the latter one is not clear as well.

So to summarize, I think that we'll -- probably, by the end of the year, early next year, we'll see the position of the government, how they see approach with the 5G spectrum. And at this time, we are actively consulting between all key -- all players in the market and the government on how to help to encourage the development of 5G in the country.

The next question is from on Ondrej Cabejšek, UBS.

Just a short follow-up on the unlimited tariffs from me, please. If you could disclose what percentage of the total base is on these today and what sort of usage you see on these numbers relative to the general base. By which, in fact, I'm asking, have you seen any pressure on the CapEx from these unlimited tariffs so far?

It's Slava. I will answer on that. On the percentage of subscriber base, I cannot give you the exact number, but I'm pretty sure that it's below 20% of the base, definitely, because it's high ARPU tariffs and it's not growing very fast. At the same time, the usage depends very much on the region, but it usually does not exceed 20 gigabytes. And we actually see that people, that when they subscribe to these tariffs that we see their usage going up but not drastically. So it doesn't really damage the quality of our network. That's why we kind of keep this proposition that long. But I would second the opinion of Alexey that we think that the market will come at some point to the stage where these tariffs could be lifted.

And just to add on Slava's comments, there are some tariff plans in our set of tariffs, which has a higher usage per customer than unlimited tariff plans.

The next question is from Igor Goncharov, Gazprombank.

One technical question. Can you please update us on your thinking towards the destiny of the quasi-treasury shares? There have been -- you have addressed this issue a number of times, but there seems to be still limited progress on that. What are your plans on this?

I think actually, the answer is the same as it used to be. Strategically, we believe that it will be high. It would be good if we can cancel them. But so far, there is no immediate decision taken on this subject.

Okay. And any time line for this? Because clearly, one of the kind of consequence of this is that when you pay dividends to your mother company, those dividends are getting taxed and canceling those shares would be one of the ways to optimize this redundant taxation.

Actually, I don't want to speculate on the future decisions. Again, I will repeat that so far, there is no decision on this aspect because in terms of the most critical issues, I think, for us, it was this year to identify our capital market strategy. We're still considering the effect -- the issue that we are raising. But so far, there's no decision yet.

At the moment, there are no further questions. (Operator Instructions) The next question is from Dilya Ibragimova, Citibank.

Just had a very quick question on MTS Bank. You mentioned that one of the drivers of the loan book growth is the cashback offers. I was just wondering if you could break down the growth or increase in loan portfolio, how much of that is coming from this cashback versus the -- or maybe there are other use cases that are driving that? And second, what you see as an acceptable cost of risk going forward? And maybe a third question on the same topic. Do you think that -- do you expect the loan book to continue growing at the same rate as we have seen so far, maybe in absolute terms rather than in percentage terms?

Excuse me. Could you repeat the second question? We didn't get it quite.

Yes. What is acceptable cost of risk for you going forward, especially as we go into the environment where the rates are coming down overall on the market? Cost of risk, acceptable cost of risk.

Okay. On -- effect of MTS Bank on our cashback program is right now very limited. Most of participants out of 5 million customers, which are clients which are part of our loyalty program, cashback program, are coming not from the bank. So bank has a minor contribution into that.

And as far as for cost of risk, in the bank, we show our cost of risk ratio in our NPLs in our disclosure. We believe that we are at a very conservative level at this point of time. We have very high coverage ratio as well. In this sense, we -- for the next year, we continue to take a relatively conservative approach, taking this pace -- the stage of the market development. So we are taking -- not taking additional risks in expanding our portfolio. So we are even decreasing the risk, which we are taking, is the plans for the fourth quarter and going forward comparatively to the level of risks we've been taking last year, for example.

The next question is from Sergey Libin, Raiffeisen Bank.

My question is also on MTS Bank and its impact on the free cash flow. So you said the bank's impact is RUB 10 billion. And I wanted to ask to give some breakdown of that. Is it kind of a one-off situation or seasonal? Or is it recurring? And probably what effect do you expect for the whole year? And maybe the dynamics for next year, at least the direction of that? That would be very helpful.

Okay. When I was talking about the impact of MTS Bank on the free cash flow, actually, if you look at the cash flow breakdown, you will see specific clients, which are about the bank deposits and loans. So when I was giving the number of RUB 10 billion, that's actually the amount that you can see there. And of course, this is the reflection of the liquidity managed by the bank. So this is the deposits taken by the bank from the interbank market, for example. So again, this is the standard activity of the bank and how the bank manages its own liquidity. Therefore, while we consider the free cash flow impact, I would rather take it out and consider the free cash flow of operational business without this impact.

As we have no further questions, I would like to hand back to the speakers.

Ladies and gentlemen, thank you very much for listening. If you have any further questions, we welcome you to contact MTS Investor Relations at any time. A webcast of this discussion will be available soon on our website if you wish to replay the call. In the meantime, we appreciate your interest and wish everybody a pleasant day. Thank you.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.