Mobile TeleSystems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.18.14 | About: Mobile TeleSystems (MBT)

Mobile TeleSystems OJSC (NYSE:MBT)

Q4 2013 Earnings Conference Call

March 18, 2014 10:00 AM ET

Executives

Joshua Tulgan – Director, Corporate Finance and IR

Andrei Dubovskov – President and CEO

Vasyl Latsanych – VP, Marketing

Alexey Kornya – VP and CFO

Analysts

Cesar Tiron – Morgan Stanley

J.P. Davids – Barclays Capital

Alexander Kazbegi – Renaissance Capital

Ivan Kim – VTB Capital

Alexander Balakhnin – Goldman Sachs

Imari Love – Morningstar

Igor Semenov – Deutsche Bank AG

Anna Lepetukhina – Sberbank CIB

Olga Bystrova – Credit Suisse

Alexander Vengranovich – FC Otkritie

Operator

Good day, and welcome to the Mobile TeleSystems Fourth Quarter and Full Year 2013 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 Mr. Joshua Tulgan. Please go ahead, sir.

Joshua Tulgan

Thank you very much and welcome to our quarterly conference call to discuss our full year 2013 financial and operating results.

As always before beginning our discussion I need to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

These statements relate to one number of the following issues: the strategic development of MTS’ business activities, both in Russia and abroad; revenue or subscriber dynamics; financial indicators, such as operating income before depreciation and amortization or cash flow projections; operating indicators like average revenue per user or minutes of use; debt instruments and their usage; legal actions and proceedings directed at the company or its representatives; regulatory developments and their impact on the company’s operations; technical matters as they pertain to our communications networks, including equipment licensing or network technologies; activities and lines of business that complement our communications networks; capital expenditures and operating expenses and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available in MTS’ annual report on Form 20-F, which is available on our website or through the U.S. SEC. Important factors could cause the actual results to differ materially from those contained in our projections are forward-looking statements. These statements may include company press releases, earnings presentations, MTS’ Form 20-F, as well as other public filings made by the company with the U.S. SEC, all of these are available on the company website, www.mtsgsm.com, or that of the U.S. SEC at www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks.

Copies of the presentation and materials used and referenced in this conference call are available on our company website. And with that I would like to turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Andrei Dubovskov

Ladies and gentlemen, thank you for joining us on today’s conference call to discuss the company’s financial and operating results for the fourth quarter 2013. Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; and Vasyl Latsanych, Vice President, Chief Marketing Officer and Andrei Smelkov, Vice President International Subsidiary.

Overall in 2015 revenue for the Group grew by 5% nearly RUB 398 billion. Within our markets we see many positive strengths supporting the further growth and strong development of our business units. In all our markets we see rising usage of voice and data adoption in virtually all customer segments. We see benefits in data adoption and OIBDA from our focus in retail in Russia on sales of low cost devices as we lead the market in data attach rate through smartphones.

Except in Afghanistan where we are still building our tower network, both internal data and independent sources confirm MTS leadership in network speed, customer service, brand and other important factors that create our leading customer experience. And fortunately we also see macroeconomic sector that has high power ability to grow, in particular in Ukraine. Macroeconomic and social combined which the absence of 3G likely means that this market might lag relative to the growth of the group.

In sum as we explained in our recent Investor Day we are still confident in our ability to further develop our core markets in Russia, as we fine tune our 3G strategy and continue to create value for our shareholders.

Now Vasyl Latsanych will discuss our business unit performance.

Vasyl Latsanych

Ladies, and gentlemen, in Q4 in our Russian business we grew 7% year-over-year. Driving this growth was our mobile business which grew over 8% year-over-year. According to publicly available data we believe that this maybe the fastest rate of growth in the market. Key drivers include greater adoption of data plans and smartphone penetration among our active subscribers reached 34% and our data attach rate increased to over 42%. This contributed to an increase in data traffic revenue of 49% year-over-year.

Revenue was further aided by a strong holiday performance in our retail chain where sales improved by 9% quarter-on-quarter. Year-over-year revenue from the sales of handset fell but this was because of the fact that we reduced sales of high value handsets throughout 2013. We saw strong additions of high value subscribers for the period. Our sales of SIM cards continued to be both consistent and sustainable. Churn fell slightly to 9% for the quarter and 200 bps reduction from 2012 and MOU increased to 345 minutes. For the year churn fell to 36% which is a level we haven’t seen since 2009 and a market improvement compared to our competitors.

Our fixed business recorded 5% growth year-over-year and 9% quarter-over-quarter. Our Moscow-based business continues to grow from both the migration of customers to our market leading FTTH GPON network and our growing B2G business. By the end of 2014 we have realized 700,000 telephony subscribers and over 240,000 internet pay TV customers for our GPON products in Moscow. GPON subscribers continue to grow and more important show 55% increases in ARPU relative to their previous spend.

In the regions we also saw slight growth due to the ongoing modernization of our network and closer integration of acquired businesses. In Ukraine our performance for the year was volatile. The year-over-year revenues still grew to 3% to nearly UAH 10 million but we obviously saw relative weakness in Q3 and Q4. While recent political developments may have impacted our business, issues with the overall economy began as early as Q2 to impact our performance. For now we too watch anxiously as the situation in Ukraine changes but we have had no issues in providing services to our customers throughout the region, and I would point out that for Q4 OIBDA still grew nearly 6% year-over-year versus revenue growth of roughly 2%. This is a testament to our high quality operations and focus on profitability.

In Armenia for the year 2013 we increased revenues by 3% up to nearly AMD 80 billion. Drivers include our continued efforts to drive voice usage as well as the focus on promotion of daily usage from smartphones and tablets. We continue to sustain our market leadership and the competitive environment remains stable.

In Turkmenistan, we delivered a quarter-on-quarter increase of 2% and revenues up to nearly TMT 72 million. Operating indicators remain volatile as seasonal factors, our entrance into the new territories and other factors impact our business but more importantly we are steadily growing our subscriber base. Further investments in coverage capacity and 3G UMTS will allow us to realize further growth in these markets.

Now Alexey Kornya will further discuss the Group’s profitability and financial performance.

Alexey Kornya

Thank you, Vasyl. For the year OIBDA grew 8% to RUB 175 billion which translated to roughly 300 basis points faster than the rate of revenue growth. While this reflects the few one-offs we overall a 100 basis points improvement in our OIBDA margin through a mix of high margin revenue growth and sustained improvement in our cost efficiencies. In fourth quarter OIBDA grew 11% year-over-year to RUB 45 billion for an OIBDA margin of nearly 43% or our interest – or our highest fourth quarter margin in the recent history.

Reflecting the strength for the year in MTS Russia OIBDA increased 7% to RUB 157.7 billion. We were aided by strong fourth quarter OIBDA margin of 43.7%. Growth in high margin revenue like data traffic revenue improved retail performance in our fixed line services and Moscow continued to enhance the efficiency of our Russian business.

In Ukraine as Andrei mentioned the OIBDA declined in the second half of the year but at a rate less than our top line revenue. Since the crisis in 2009 we have taken extreme measures in Ukraine to make the business more effective than any other in the group. Unlike in Russia the market structure has really required us – provided opportunities to increase our retail presence to expand in the fixed line business. Therefore the business is focused on the mobile while margins are among the highest in the Group.

For 2013 the OIBDA margin was nearly 52% while in fourth quarter normally a low margin period we reported an OIBDA margin of 52.3%. In Armenia we recorded an abnormally lower OIBD for the quarter as we booked cost related to international long distance calling and change in stimulation rates for the full year in the fourth quarter 2013. Organically the unit would have delivered its consistent 50% OIBDA margin and we expect this performance to continue in 2014.

In Turkmenistan we recognized the one-offs due to reconciliation of reserves and related to the liquation of BCCI our subsidiary in the market. Overall we realized greater benefits of scaling the market as our subscriber based network grows.

For the year net income reached nearly RUB 80 billion. This represents 2.7 times improvement from 2012 when our bottom line impacted by our dispute in Uzbekistan but overall net income from our continuing operations grew steadily due to our increase in OIBDA and other factors such as consistent G&A and improvements in our debt portfolio.

In fourth quarter we realized significant non-cash loss of RUB 840 million due to ruble depreciation. Otherwise below OIBDA costs has been consistent with previous quarters. Free cash flow from continuing operations for the full year nearly reached RUB 73 billion all-in-all a 62 increase year-over-year. Fueling this increase was operating cash flow from continuing operations, which increased 19% year-over-year and our improved OIBDA.

Another component for the rise in free cash flow from continuing operations was the profit from the certain litigation related to our acquisition of Bitel. This added RUB 3 billion to our free cash flow from continuing operations for the year. Over the next month we will discuss with the Board of Directors appropriate shareholder remuneration for the calendar year 2014, our dividend continuation which calls for at least 75% of free cash flow to be paid out in two semi-annual installments. We will exclude any of the one-off events such as the Bitel settlement. While final results still need to be considered by the Board of Directors in April-May 2014 on the basis of our adjusted free cash flow we anticipate a substantial increase in our dividend payout for 2014, which will be driven solely by the organic development of the company.

And I also related during our recent Investor Day we have realized improvements in the overall cash position of the company through enhance management of working capital and our continuously improving balance sheet. By the end of the year our total debt decreased to RUB 219 billion. Interest expense for the Group fell for the 12 straight year by 12% compared to 2012. Our net debt to last 12 months adjusted OIBDA ratio remained at 1.0 multiple, due to improvement in operating performance and our success in managing debt portfolio through the year, a redemption of loans and as well the ongoing repurchase of bonds and placements of securities.

Recent developments in global and regional capital markets also reinforced our success in managing our portfolio. Of the great importance is the fact that we face no major principal repayments until 2016, which gives us great flexibility given the geopolitical development.

Andrei Dubovskov

Thank you Alexey, it’s Andrei Dubovskov. In February we welcomed investors and our analysts to Moscow to meet with the leaderships of MTS as introduced our new operating strategy and discussed broad topics related to the development of MTS. For the benefit of those who could not attend I wanted to highlight a few points about our 3G strategy.

Data will continue to drive the growth of our business in Russia and elsewhere. In sum every sale at MTS is a data sale. We’re leveraging our market leading networks our unparalleled retail platform and other means to drive data resale. Differentiation is key element of future growth. Our goal is to offer customer unique products and services to enhance their digital needs. To do so many of our products ranging from our convergence solution is more skewed to banking and financial products for people.

We’re looking aggressively to establish Moscow as a global leader in connectivity and ensure customers have a best-in-class experience with MTS. And dividends, dividends represent our commitment to our shareholders to further grow and develop fixed effectively and efficiently. Despite the strong organic growth of MTS we’re focused on further improving the organization’s capabilities and sustain and perhaps improve upon the strong remuneration policies we have created for the company and its stakeholders.

In February we guided that growth of MTS will be in the 3%-5% range per year for the next few years. This is based on steady growth of the Russian telecommunications market both in mobile and fixed line services. We also anticipate weakness in Ukraine due to diverse market conditions in particular with the absence of 3G LTE license and macroeconomic issues and their impact on the value of the agreement. At the very least we feel that we can outperform the overall market but their risks remained beyond our control.

Naturally, we’re seeing significant macroeconomic volatility across all markets of operation. We do not have particular clarity on what or if any issues may arise over the current political disputes in the region and what sort of community impact this may have. We can only state that the environment can change very quickly and given our operational footprint and we commit to build our footprint and open about risks that may arise.

For now however we feel that our markets are structurally sound. We are comfortable to stand by our guidance and continue to execute our new 3G strategy. With that, I would like to open the call to questions. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will now take our first question from Cesar Tiron from Morgan Stanley. Please go ahead.

Cesar Tiron – Morgan Stanley

Yes, thanks. I have two questions please. First, can you please explain us, how do you explain this acceleration in service revenue growth that we’ve seen in Q4 versus the previous two quarters? And also looking at the EBITDA margin in Russia, what was the key driver of the margin improvement if we look at cost? It seems that at the consolidated level the gross margin is expanding most of the increase, is that the positive contribution of data or is there any positive changes to your interconnect balance in the quarter? Thank you so much.

Alexey Kornya

Okay. Let me start with the second question on the EBITDA improvement so clearly, there is strong contribution towards OIBDA from the top line development from the revenue side and since we’re growing predominantly by high margin data revenues that contributes to our good OIBDA margin performance. Also through the whole this year, we were not very aggressive promoting our handset sales. So if you look year-over-year dynamics we will decrease the overall volume of handset sales that decelerated the overall growth rate while it strongly contributed towards OIBDA margin.

Among another factors, on the third major factor contributing towards strong margin I would name the dealer commission dynamics, which we keep by constraint on the back of low churn and low overall volume of sales. So we’re selling less than anyone in the market, in volume on [big three] and that contributes to a lower dealer commission expense.

Vasyl Latsanych

Okay. Please let me answer the first question? This is Vasyl, so your question was what was the reason for acceleration of service revenue growth in Q4 in Russia? If I am speaking about the Russian business only you could clearly see that we’ve accelerated through the year the number – the subscriber base growth, you can take a look at our numbers it seemed that in second quarter we grew by less than $0.5 million in second quarter but less than 1.5 million and in the third quarter we grew by more than 2 million customers in our base, which have contributed to the growth.

So we have this acceleration of the base, which is contributing to the top line with every next fault. At the same time, we can see that our ARPU was increased from RUB 306 in the fourth quarter 2012 to RUB 315 in the last quarter of 2013 which also had a contribution to the top line. So we may say that overall we have increased the number of relatively higher ARPU customers addition to our base which have resulted in higher revenue increase in Q4 versus the previous periods.

Though I should say that there is no big wonder because that’s also a high season for both customer additions and the customer expenses in Russia. So the Q4 is usually good for growth. We seem to be effectively capturing that growth to our base in the Q4, 2013.

Cesar Tiron – Morgan Stanley

That’s very good. Thank you.

Operator

Thank you. We will now take our next question from JP Davids from Barclays. Please go ahead.

J.P. Davids – Barclays Capital

Hi. Thank you. Two questions please. The first one is really on your LTE roll out and how you think LTE as a product will impact pricing structures if at all over the medium term? The second question is really a follow-on from comments made during the presentation. It’s around the geo-political issues you raised and does it cause you as a management team or does it drive you as a management team to reassess your geographical diversification? Thank you.

Andrei Dubovskov

Thank you for the question it’s Andrei Dubovskov, speaking about the LTE impact no big changes in the market. Our price for LTE services is approximately the same like for 3G services and this is our strong policy and moreover, fortunately or unfortunately, we have no very big contacts speaking about revenue growth in LTE area because unfortunately the penetration of LTE smartphones in the Russian market is very low, approximately 2%-3% and of course, all our development in this area is just for future growth, not in the current time.

Okay and speaking about your next question about geopolitical issues we are not going to change our market in CIS. It has no very big impact on our behavior right now. But speaking about other countries in Europe and Asia, no plans.

J.P. Davids – Barclays Capital

Thank you.

Operator

Thank you. We will now take our next question from Alex Kazbegi from Renaissance Capital. Please go ahead.

Alexander Kazbegi – Renaissance Capital

Yes, good afternoon. Hi. I just wanted to understand so to say, a couple of developments in Q4. If you look at the details on the [upper growth]. First of all, I mean there was a B2G revenues booked for the fixed line, I mean is that recurring, is that just one-offs, how should we think about it? And secondly, also there was an increase in the other value-added services revenues after they have been decreasing quarter after quarter and I believe you said after the third quarter, well that was partially due to the fraud which you have been fighting and I think that was done. Is that again the reason why so to say, the value-added services turned the corner? And again how should we think going forward about those, I mean there would be an increase in that or that was something again of the one-off nature?

And the second question would be on the CapEx side, I mean as you said already, it’s premature probably to change the guidance or think about it. But just for us to understand also what is the – how much of your so to say RUB 90 billion number is a committed number which is a firm number, how much can be changed and how do you look at it in terms of can we reduce something in Ukraine, can we so to say re-distribute something in Russia if indeed the equipment is becoming more expensive so to say or you would rather just try to achieve whatever you want to achieve and then at some stage you will have to increase the guidance because there was probably change in the prices you need to pay in terms of – in their ruble values? Thank you.

Vasyl Latsanych

Alex, hi this is Vasyl. I will try to answer the first question. It was consisting two sub questions. One was the fixed line ARPU due to B2G change. B2G in Q4 is definitely not a constantly recurring type of business, it is a contract that our subsidiary MGTS have been filling and closed the deal. So we have received that, let’s say one contract revenue in that period of time and we are not accounting on that to be coming in the next period, unless there will be other contracts of such nature again concluded and fulfilled by MGTS.

So this is the type of business where there will be volatility from period to period, which will not be recurring but the relatively significant amounts will be subject to contracted obligations for MGTS.

Regarding your second sub question of the first question of other value-added services revenue, if you can take a look at our numbers in 2013, the total was still lower than in 2012 and this is due to our relative aggressive control of content services and the limitation on the fraudulent services. The increase of the Q4 that you’ve seen is definitely a seasonal increase which is very usual for fourth quarter but even after that increase the number is still lower than of respective quarter of the previous year. So we are still consistently controlling the content and other value added services businesses and restricting any kind of fraudulent activity in that area.

Alexey Kornya

And on the second part of this question about CapEx, we indeed believe that it is a bit too premature to estimate our guidance amendment or impact on the guidance of currency movements. We have enough flexibility in our investment program as to the list of the projects and payment terms in order to steer the program to the targeted level. So we do not expect at this point of time that the volatility in the market will impact our CapEx program.

Alexander Kazbegi – Renaissance Capital

But let’s say you haven’t yet decided for instance to reduce the investments allocated to Ukraine for instance?

Alexey Kornya

No, Ukraine is a going concern. They are self-sufficient in terms of funding. So there absolutely no need for the change in the Ukrainian program at this point of time since we already started a significant upgrade of our infrastructure.

Alexander Kazbegi – Renaissance Capital

Okay, very clear. Thank you very much.

Operator

Thank you. (Operator Instructions). We will now take our next question from Ivan Kim from VTB Capital. Please go ahead.

Ivan Kim – VTB Capital

Yes. Good afternoon. Two questions please. One on trends in voice, your voice revenues in Russia in the fourth quarter accelerated slightly, were up 3% year-on-year. I was just wondering what were the key drivers behind that and what do you expect for 2014 now that you’re kind of almost at the end of the first quarter. And then second on the dividend base, so your kind of free cash flow for the year was almost RUB 69 billion and then Alexey you said that it would be – the free cash flow for dividends will be reduced by Bitel settlement so I am getting to RUB 56 billion as a base for the dividends is that correct? Thank you.

Andrei Dubovskov

Ivan, it’s Andrei Dubovskov, I just want to add some information about this issue. Our voice revenues in Q4, I mean growth of voice revenues in Q4 based on very good elasticity of our current subscriber base. Other players in the market did not demonstrate the growth of limited usage in Q4. But for MTS it’s a normal behavior you can see our results in Q4. Thank you.

Alexey Kornya

And as far as dividend is concerned, our minimum threshold for dividends is 75% of free cash flow does not quite give the mass which you indicated. So 75% from 69 billion gives about RUB 52 billion in dividends, that’s around the amount which can be taken as a base. However the final decision on the dividends in the form of recommendation from the Board of Directors will be taken in April-May.

Ivan Kim – VTB Capital

Thank you Alexey. What I meant is that I thought you said, while base not free cash flow already multiplied by 75% but as a free cash flow for the dividend distribution. So basically should we look at 75% of RUB 69 billion or 75% of RUB 56 billion which is less Bitel settlement?

Alexey Kornya

The amount of RUB 69 billion or RUB 68 billion is already less Bitel settlement so together with Bitel settlement the free cash flow amount is RUB 73 billion.

Ivan Kim – VTB Capital

Okay. Clear.

Alexey Kornya

The basis would be probably without one-offs as it is in our kind of policy.

Ivan Kim – VTB Capital

Okay, great. Thank you.

Operator

Thank you. We will now take our next question from Alex Balakhnin from Goldman Sachs. Please go ahead.

Alexander Balakhnin – Goldman Sachs

Yes. Good afternoon. I wanted to ask you on the dynamics of churn. Last year you achieved very good progress with customer retention and I was just wondering if you have reached like a sudden floor in the reduction of the churn rate or you may see some further potential for the churn reduction and if you don’t see this potential what would be the reasons for the tick up in the churn rate on your subscriber base? Your insights here would be very helpful. Thanks.

Vasyl Latsanych

Thank you so much for question. This is Vasyl. I have to say that even the result of 36% which we showed for the last year, as I said in my speech is quite outstanding and unheard in this market for many, many years. I believe that we should not guide you to the further decrease of the churn in Russia. Russia is still predominantly and absolutely predominately prepaid market, SIM cards are still relatively easy to purchase all across the country and double SIM penetration is increasing.

So we should be aware of those factors when considering the future of the churn and I think this existing number is already as good as it can be in this market, as we see that no other competitors are approaching this number so far. We believe that this is rather a plateau and we should expect ourselves to put every effort to stick to this number in the future.

Alexander Balakhnin – Goldman Sachs

May I just follow-up with a quick question. Do you see difference in the churn level, between your smartphone subscriber base and feature phones or simple phones subscriber base where do you see a greater loyal to MTS?

Vasyl Latsanych

Well honestly we see less difference between smartphones and feature phones, but we see more difference when you consider the tariff plans churn. So per tariff plan there are certain tariff plans that have higher churn and certain tariff plans that have lower churn. In our previous conversations we have mentioned that we continue and speed up the penetration of our new tariff plans such as Super MTS, MTS Smart, because those tariff plans are showing consistently lower churn than the older types of tariff plans and flat types of tariff plans. That means that we see rather see the dependence on the tariff plan than on the type of the device and we’re using this instrument to decrease our churn for quite a long period of time and you can see the results so far.

Alexander Balakhnin – Goldman Sachs

Thanks, that’s very helpful.

Operator

Thank you. We will now take our next question from Imari Love from Morningstar. Please go ahead.

Imari Love – Morningstar

Thanks for taking the call. Just as a follow up to the churn issue when you are looking at mobile number portability, what have you seen has been the impact in the first few months, and it sounds like we may be looking to entire churn going forward but relative to what we’re seeing from Megaphone and Vimpelcom how has MTS done in terms of net new subscribers that have ported?

Vasyl Latsanych

Hi Imari, this is Vasyl. The churn as you can see it in the markets of the reported numbers and I know that not all the numbers are reported seems to be lowest on the MTS side which is a good sign of MNP being relatively effective for everyone, still delivering lowest churn in the market. So as you can see MNP has not changed our churn figure, it has helped us to sustain the lowest possible churn figure. But I have to admit that current MNP numbers in Russia, so actually ported numbers are very, very low, are relatively marginal and negligible compared to the overall net-adds and churn numbers in the market. So we would not see any effect on the churn numbers of these MNP ported customers.

Imari Love – Morningstar

Thank you.

Operator

Thank you. (Operator Instructions). We will now take our next question from Igor Semenov from Deutsche Bank. Please go ahead.

Igor Semenov – Deutsche Bank AG

Yes, hi. Thank you very much. Just a couple of follow-ups on the previous questions and one question on the Q1 trends, if you could describe what you’re seeing in Q1 in Russia, do you see any slowdown or trends are rather as positive as Q4 trends? And the follow-ups I have on the fixed line side you said that MGTS has – this B2G revenues are not necessarily recurring I am not quite sure, how do you manage, it’s like – are these contracts, are they not annual, like is there no chance for MGTS to renew those contracts?

And then on the CapEx flexibility I mean if again the RUB 90 billion guidance if you see a significant deterioration in the macro picture slower growth less volume of calls less slower growth of data for example or smartphone adoption, would you be able to reduce your CapEx accordingly, can you calibrate it? Thank you.

Alexey Kornya

Thank you for the questions. On the first question our first quarter trends are within the guidance, mutually within the growth rate guidance which we were giving. So we don’t see any non-usual developments in this respect, that’s the reason why we stick to our guidance and we believe that will be formed. And I will take the third right away, on the CapEx flexibility, as I said, we do have flexibility in our investment program. However at this point of time, we do not see any reasons to revise it. And we have flexibility both in terms of size and payment terms.

And in terms of whether we need to adjust to weakening market or absorb currency movements. So at this point of time we stick to what we guided and we will see the developments through the year.

Andrei Dubovskov

Thank you Alexey. I will continue on the question number two. The MGTS B2G revenue have a project type of nature. So it means that the project was fulfilled during a period of time and then it was properly closed and acts of acceptance were signed. So this amount falls into a certain period of time and it is not a service type of fee that will be recurring in the future periods. That doesn’t mean that MGTS is not doing that kind of services, it is doing as well but then if a big project comes on board we will see the surge of revenue such as last quarter.

It may be in the future as well but it’s subject of next project type of contracts.

Igor Semenov – Deutsche Bank AG

And maybe it would be helpful if we could highlight a couple of examples of this type of non-recurring work?

Andrei Dubovskov

Well the best probably the examples of such delivery of projects is the Moscow City video surveillance project where MGTS was participating in building the video surveillance system in Moscow, which was then recorded as the project completion and payments against this project. But then MGTS will be also servicing the lines of such video surveillance cameras throughout the city or a part of them which will be coming into the normal service revenues of MGTS throughout the time but the numbers will be rather dissolved in the total number of MGTS service revenue, not that much picking up as a service as the project revenue of the completion of the project installation.

Igor Semenov – Deutsche Bank AG

Okay thank you.

Operator

Thank you. We’ll now take our next question from Anna Lepetukhina from Sberbank. Please go head.

Anna Lepetukhina – Sberbank CIB

Yeah hello I have general question if I may. First of all I just wanted to understand, I mean given where we stand right now in terms of ruble weakness what would be your dollar exposure for 2014 and how hedged you are not to see a deterioration in cash flow as a result of this?

Second question is on Ukraine in terms of cash as well whether you can repatriate cash from Ukraine and if you can’t whether it can put any pressure on possible dividend payout given that Ukraine might at least accounts for about 10% of your free cash flow? And my third question is on your interest expenses in fourth quarter. I noticed massive decline of about 26% quarter-on-quarter but at the same time your debt didn’t decrease that much. Can you please explain what was the reason for such decline? Thank you.

Alexey Kornya

On the first question on CapEx I would say rather currency exposure so that we do have exposure in terms of our debt portfolio, our debt portfolio up to 25% in hard currencies predominantly in dollar. So in this aspect the currency moves impact us on this side. We do have also some exposure in terms of our CapEx program so up to 40% of our CapEx expense linked to U.S. dollars.

However we do not think that as far as the CapEx program concerned this is not something we cannot absorb within our kind of build-up circle. And then in terms of debt you can see the impact from that now in our balance sheet and in our income statement.

It’s not a Ukraine concern we’re up until now we did not have any issues with expatriating currency with expatriating cash from Ukraine. And there are no currently signs that such issues might rise.

So as far as interest expense concerned we booked the interest, the negative interest expense on the credit lines which we have not withdrawn and which finished in terms of their timings. So there is a kind of sign up part which will run. And then if we are not withdrawing so we are booking a negative entry. So this is one that is impacting our P&L in our interest expense dynamic.

Anna Lepetukhina – Sberbank CIB

So just to follow on as I understand in the first quarter we should expect interest expenses to normalize and there is basically was one-off?

Alexey Kornya

Yes we have about RUB 1 billion almost. So then you will see that the interest expense will normalize.

Anna Lepetukhina – Sberbank CIB

Thank you.

Operator

Thank you. We’ll now take our next question from Olga Bystrova from Credit Suisse. Please go head.

Olga Bystrova – Credit Suisse

Good afternoon, just wanted to follow up on two questions one on the subscriber growth you’re clearly sort of running very good numbers in the third quarter and the fourth quarter particularly in the fourth quarter can you explain may be or point out to a specific factor which gave you such a strong subscriber growth in the fourth quarter, is that any particular tariff plan that you introduced or this is migration from one of your competitors perhaps.

The second question on profitability guidance given that you are still guiding revenues of 3% to 5% EBITDA growth of more than 2%, clearly probably hoping for sort of better margins but still you leave some room for margin pressure. Which items cost items would you expect to give you margin pressure in this particular situation if there will be let’s say if there will be some discrepancy between the revenue growth and EBITDA growth?

And may be the final new question to ask it’s probably difficult for you to answer but nevertheless are you given the developments in the – are you in the Ukraine, are you foreseeing any potential ownership spectrum, ownership issues there and how could you potentially deal with them? Thank you.

Vasyl Latsanych

Olga, this is Vasyl, I’ll start answering with the question on the reasons for subscriber base growth. In fact we are seeing very nice subscriber based growth numbers throughout 2013 in every quarter the speed was increasing.

So we believe this is the result not of a one quarter activity but of prolonged sustainable actions in the markets – in the market we have taken throughout 2012 and 2013 eventually. Though to be fair we have to mention that we had some aggressive and spectacular activity in the fourth quarter and introducing the Internet bundle tariff plan for two RUB 2 per day Internet smartphone Internet access which as we have seen it’s very good traction in Russian markets and we have also seen the increase of the smartphone sales and smartphone share of sales in our retail network.

At the same time we believe due to the fact that our basic tariff plans such as super MCS has become much more adopted to data the usage of everyday midlevel customer base in Russia.

At the same time there was a further decrease in churn which have contributed to the positive increase of the base growth even without significant increase of the sales and therefore without additional sales acquisition cost on that side.

Alexey Kornya

As far as margin pressure concerned we see that the pressure will come from interconnect potential increase in the interconnect cost on gross margin pressure related to the fact that with the VNG tariffs and the bundling with data people will have flexibility in increasing of net cost in other item which puts pressure on our margin will be inflation related of course but if your salary – if salary is another linked or somehow dependent from inflation costs. And last but not least of the items which I would mark which I would note is that we will not see that strong and good contribution towards our gross margin, towards our margins from the decrease of handset sales which we had in the previous periods.

So we’ll see more flattish dynamics in terms of overall volume or even increase in handset sales that will put on the margins since the handset margins are lower. So and in overall slowing down in revenue dynamics which might take place in the market will impact margins as well.

Andrei Dubovskov

Olga speaking about your question of Crimea and Ukraine I have no possibility to comment in this situation because we have not enough information about the new rules and condition which can be established in this territory but I just want to remind you that we have good relationship with all authorities in Ukraine capital and till now we have no problem with our partners in this country despite of vacation Thank you.

Olga Bystrova – Credit Suisse

Okay. Thank you very much.

Operator

Thank you. We’ll now take our next question from Alexander Vengranovich from Otkritie Capital. Please go head.

Alexander Vengranovich – FC Otkritie

Yes, thank you. I have two questions if I may. The first one is on the effective tax rate so year-over-year you see that the tax rate is going down so can you please tell us how we should look at this going forward? Is the current level sustainable or maybe there were some one-offs in the last two quarters of the year we should plan for some increase in the effective tax rate going forward?

And second question is regarding the instant messenger so like as we see in a couple of media reports that you are planning, that you’re testing your own instant messenger. So can you please probably update us on your plans, whether you are planning to do this on your own where you could also consider some partnerships with other market players here and what are the pros and cons here from your point of view? And whether we need to take it seriously for ‘14? Thank you.

Andrei Dubovskov

I will take the first one on the effective tax rate. And we believe that this is rather sustainable trend which you are seeing and that relates to our reports on realization of our deferred assets primarily in the area of depreciation and amortization. So we think that this is a consistent trend as I said.

The second question on OTT, OTT is a very complex question for every carrier as well it is for MTS. At the moment as you could see we have been posting relatively nice growth of other value added services and also I can say the messaging services are growing as well. Not probably at the pace that we have seen in the past but because messaging becomes more and more included in the new voice and data tariff plans we don’t see that’s being critically relevant any more.

At the same time the OTT services that we see in the market do have some traction and we do foresee them increasing in Russia and therefore we are getting ourselves prepared in a way that you have mentioned as appropriate OTT type of business which we go along with GSMA and we actually announced in Barcelona our intentions to launch the inter operable OTT services first of all messaging services and in the future where we can have other value added services and even voice services based on the GSMA RCS technology.

The risk communication stage, it’s second phase that is being unfolded worldwide now seems to be the new platform that the carriers will be interacting across the globe and we already are testing this interoperability with Vodafone and as I said before agreed on interoperability with one of major Russian players.

We think that this will be a good answer to the increase of popularity of OTT services globally and specifically in Russia. We believe that our services will be of higher quality and of a better value for the customer as we launch it this year.

And this year we prepare ourselves for a launch in our major Moscow and Saint Petersburg market the messaging services along with another major player in Russia.

Alexander Vengranovich – FC Otkritie

Thank you great.

Operator

Thank you. (Operator Instructions). We have no question for the moment.

Andrei Dubovskov

Thank you very much and thank everyone for their attention. We welcome you at any time to contract our Investor Relations department for further questions. A webcast of this discussion will be available on our website if you wish to replay the call.

In the mean time we appreciate everyone’s interest and wish everyone a pleasant evening. Thank you.

Operator

Thank you. That will conclude today’s conference call. Ladies and gentlemen, you may now disconnect.

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