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Mobile TeleSystems (NYSE:MBT)

Q1 2014 Earnings Conference Call

May 27, 2014 07:00 AM ET

Executives

Joshua Tulgan - Corporate Finance & IR

Andrei Dubovskov - President and CEO

Alexey Kornya - VP and CFO

Vasyl Latsanych - VP and CMO

Analyst

Cesar Tiron - Morgan Stanley

J.P. Davids - Barclays

Alex Kazbegi - Renaissance Capital

Ivan Kim - VTB

Herve Drouet - HSBC

Anna Lepetukhina - Sberbank

Ksenia Mishankina - UBS

Olga Bystrova - Credit Suisse

Igor Semenov - Deutsche Bank

Operator

Good day ladies and gentlemen and welcome to the Mobile TeleSystems first quarter 2014 conference call for the financial and operational results. Today's conference is being recorded. At this time I would like to turn the conference over to Joshua Tulgan. Please go ahead, sir.

Joshua Tulgan

Thank you very much and everyone, welcome to today's conference call. Before beginning our discussion, I must again remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks.

These statements may relate to one of the following issues. The strategic development of MTS' business activities both in Russia and abroad; revenue and/or subscriber dynamics; financial indicators such as operating income before depreciation and amortization or cash flow projections; debt instruments and their usage; legal actions or proceedings directed at the Company or its representatives; regulatory developments and their impact on the Company's operations in the markets in which we operate; technical matters that pertain to our communications network, including equipment licensing or network technologies; activities in lines of business that complement our communication networks; capital expenditures and operating expenses and macroeconomic developments within our markets of operation.

A comprehensive overview of these issues is available on MTS' annual report and Form-20F which is available on our website or through the website of the US SEC. Important factors could cause the actual results to differ materially from those contained in our projections or our forward-looking statements. These statements may include the press releases, earnings presentation, our Form 20-F as well as other public filings made by the Company with the US SEC, all of which are available on the Company website, www.mtsgsm.com or that of the US SEC at www.sec.gov.

MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or to make any adjustments to previously made statements to reflect changes in risk. Copies of the presentations and materials cited and referenced in this conference call are available on our Company website.

With that, it's my pleasure 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 first quarter 2014. Joining me today, are Alexey Kornya, Vice President and Chief Financial Officer; Vasyl Latsanych, Vice President and Chief Marketing Officer and Joshua Tulgan, Corporate Finance and Investor Relations.

For the period we witnessed a continuation of the drivers of growth and profitability that have been seen over the previous one, two years.

Revenue for the Group grew 5% year over year to RUB97.6 billion. In each of our markets of operations, we continue to see many positive trends. In all of our markets, we see rise in the usage of voice and strong data adaption 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 penetration through smartphones.

Except in Turkmenistan, where we are still building our networks, both internal data and independent sources confirm MTS' leadership on network speed, customer service, brand and other important factors that contribute to our leading customer experience, high level of profitability in each our markets.

Naturally, we must acknowledge the macroeconomic issues that we face. Since last year, estimates of GDP performance in our core markets have moved downward. We have witnessed currency volatility in Russia and the Ukraine. This may impact our performance, but for now we continue to see steady profitable growth throughout our markets of operation.

But this is not necessarily new for us. As we have seen in the past, our sensible strategy, organizational strength and focus on efficiency will provide us with the flexibility to manage our macroeconomic risks and should continue us to create value for our shareholders.

Now Vasyl Latsanych will discuss our business review and performance.

Vasyl Latsanych

Good day, ladies and gentlemen. In Q1 our Russian business grew 5% year over year to RUB87.3 billion. Driving this growth was our mobile business, which grew over 7% year over year. Key drivers includes greater adoption of data plans, as smartphone penetration among our active subscribers reached almost 35% and our data attach rates increased to over 42%. This contributed to an increase in data traffic revenue of 42% year over year.

Sales of handsets increased 8% year over year reflecting rising demand for higher quality low cost smartphones. We continued to strong additions of high value subscribers for the period. Our sales of SIM cards continued to both consistent and sustainable. Churn in Russia was stable at 9.1% for the quarter, which was still lower than in Q1 2013 by 40 basis points.

Our fixed business recorded a slight decline under 2% year over year. Steady growth in our Moscow-based GPON additions and the migration of older ADSL customers were offset by the falling number of traditional fixed line telephony services.

At the end of the period, we realized 900,000 telephony subscribers and over 300,000 Internet pay TV customers through our GPON network in Moscow.

In the region, we have seen modest growth due to the ongoing modernization of our network and closer integration of acquired businesses.

In Ukraine, we continued to see volatility in the market. Revenues grew year over year by 1.4% to UAH2.4 million. Ironically in ruble terms, we saw growth of 5.4% in the Ukraine because during the quarter, ruble depreciation versus US dollar was stronger than hryvna versus US dollar which is important as we report revenues of subsidiaries using cross currency-rates.

While recent political developments may have impacted our business, issues with the overall economy began as early as Q3 last year to impact our performance. For now we too watch anxiously as the situation in the Ukraine evolves. However, we have had no issues in providing a full range of services to our customers throughout the region.

In Armenia, revenue fell by over 3% year over year to nearly AMD17.1 million. Again relative weakness in the ruble mitigated this impact to our revenues, but the Armenian market is becoming more competitive. Likewise the slowing macroeconomic environment may impact our business, but we remain the dominant operator in this market.

In Turkmenistan, we delivered a year-over-year increase of 36% in revenues up to nearly TMT66 million. Operating indicators are characteristically volatile for an early stage business, but more importantly we are steadily growing our subscriber base. Further investment in coverage, capacity and 3G UMTS will allow us to realize further growth in this market.

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

Alexey Kornya

Thank you, Vasyl. For the period, OIBDA grew in line with revenue at 5% to over RUB41 billion. Despite many factors including a slowing economy in Russia, political change in Ukraine and currency volatility in many of our markets, we still delivered a slight improvement year on year in our OIBDA margin at 42.5%.

For the year, in MTS Russia, OIBDA increased 5% to nearly RUB38 billion. For the most part, first quarter seemed to be typical first quarter as many seasonal factors were visible despite our strong profitability. Rise in high margin data revenues and reduction of sales and marketing expenses offset the rising pressure on handset margin due to currency factors and high G&A costs.

With the ruble now stable, we can see that our business is defensive towards strong currency volatility and can draw many positive conclusions about the integrity of revenue and cost structure.

In Ukraine, OIBDA increased by 1% to over UAH1.2 billion. Despite the political environment, we sustained a high level of profitability with an OIBDA margin of 51.1%. Like in Russia we believe that this business is also very well positioned to withstand any further currency volatility we may see through the year. Overall, however our operations remained pleasantly consistent through the quarter and we witnessed no disruption in our ability to manage cost or our obligation to vendors and financial partners.

In Armenia, OIBDA fell by 12.8 year on year to AMD7.8 billion. As we explained in the fourth quarter, we recorded abnormally lower OIBDA for the past few years as we increased termination charges for international calling between our businesses mainly in Armenia and Russia. The current pricing will continue so we anticipate the OIBDA margin going forward to be in the mid-40s.

Organically, the unit remains strongly profitable and we anticipate stable margins going forward.

In Turkmenistan, we saw a return to a normalized OIBDA level for the business unit following our one-off gains in the fourth quarter due to a cancellation of results related to the liquidation of BCTI, our subsidiary in the market.

Overall, we delivered an OIBDA of nearly TMT26 million with a margin of 39%, so far our highest since we launched our networks in 2012.

For the period, net income was roughly stable year over year at RUB13 billion. All in all depreciation was the key factor in depressing our earnings as we realized non-cash ForEx loss of nearly RUB3.8 billion.

Nevertheless, most factors such as the D&A were largely in line with our previous periods and we were able to realize some improvements relative to our cash management.

Free cash flow from continuing operations for the first three months improved by 40% to almost RUB34 billion. Although CapEx spending for the period was roughly RUB2 billion less than last year, we still see sustained improvement in the Company's ability to generate strong cash flow.

Cash flow from continued operations increased by 20% year over year, which like 2013 is the result of sustained improvement to our operations.

We now after the period recommend a dividend to annual shareholder meeting to be held in June in the amount of nearly RUB38.5 billion. That translates to RUB18.6 per share or RUB37.2 per ADR.

Due to changes in Russian law, our record date this year will be later, July 7, 2014 and the payout will be within 25 days after the record date. For the fiscal year 2013, MTS then will be paid over RUB49 billion, for an increase of over 53% year on year.

By the end of the period our total debt stood at RUB221.6 billion, a slight increase from the second quarter due to currency translation.

Our net debt to last 12 months adjusted OIBDA ratio fell to 0.8 times multiple due to both a slight increase in total debt, our strong cash position of roughly RUB37 billion and sustained improvement in the operating performance.

We forecast only minor obligations for the next 18 months and retain a great deal of financial strength with our balance sheet. In fact we have even recently reduced our obligation of borrowing from a strong cash position to repay a new rejuvenated debt facility and redeemed a relatively expensive RUB15 billion bond.

Andrei Dubovskov

Thank you, Alexey. In other corporate news, we recently announced the acquisition of a 10.8% stakes in Ozon Holdings, the leading e-commerce company in Russia. OZON Holdings operates five subsidiaries; the leading online retail site, OZON.ru; Sapato.ru, leading site for shoes, accessories; OZON.travel and two subsidiaries that handle the logistics and offer e-commerce solutions for third parties.

E-commerce in Russia is poised to grow roughly 3 times by 2018, and online sales increasingly account for a higher percentage of total retail turnover. We believe an investment in OZON and a closer partnership makes sense as we seek to leverage their strength to improve our own sales mix and tap this lucrative sales channel.

Upon completion of the transaction, we intend to establish a partnership with OZON to provide exclusive access to the Company's sales channels for MTS products and services. This will enhance our online presence. MTS will leverage OZON's logistical infrastructure, its proprietary delivery services, IT capabilities and industry expertise to improve MTS' own online store.

Our partnership will also enable both companies to realize scale benefits in critical e-commerce categories such as smartphones, tablets and consumer electronic devices. We see significant upside in leveraging our own resources and integrated marketing programs to bring greater value to our customers.

Our parent company, Sistema, also acquired a similar stake in OZON. While some have raised questions about potential conflicts of interests, we view the dual acquisition as a more transparent way to achieve our goals, with (indiscernible) and other sectors benefiting from improved e-commerce. Sistema has its own financial and operating interests to distinguish them from ours. We believe equal input into OZON will ensure we can pursue our own interests more directly.

Naturally, we continue to see significant macroeconomic volatility across all markets of operation. We do not have further clarity on what, if any, issues may arise over the current political issues in the region and what sort of economic impact this may cause. We can only state that the environment can change very quickly, given our directional footprint, and we commit to being very forthright and open about what risks may arise.

For now, however, we feel that our markets remain structurally sound. I want to emphasize that Q1 was really no different than previous quarters. For some time, we have faced a declining macroeconomic environment. We have seen political risks arise in the region previously. Regulatory challenges have arisen, and the nature of competition has affected different technologies and different players.

Yet, no matter the challenges, MTS has always delivered. We have pledged top line growth and we have delivered. We guided for increased profitability and we have delivered. And we have promised improved cash flows and a greater organic return to shareholders, a promise upon which we have continued to deliver.

And no matter the challenges, MTS has delivered. And for now, we are comfortable standing by our guidance and continue in focus to our executing on our strategy.

With that, I would like to open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Cesar Tiron of Morgan Stanley. Please go ahead.

Cesar Tiron - Morgan Stanley

Yes. Hi. I have two questions, please. The first question would be on whether you can discuss the latest trends in MNP and also tell us if you think that MTS users which have multiple SIM cards have been relatively using more their MTS SIM cards in the quarter, which probably also explains some of the weakness in revenues that one of your competitors reported.

The second question would be on fixed line, and I would like to understand the weakness in the quarter. So I appreciate that we need to look at the long-term efforts with GPON, but if you can just give some clarity on what has driven the weakness in fixed in this quarter in Russia. Thank you.

Vasyl Latsanych

Cesar, thank you for the question. This is Vasyl. I will answer the first question, regarding the MNP. MNP is carefully studied by us as a phenomenon in this market, and as we participate in its implementation we realize that so far it has totally negligible effect on the overall performance of all the carriers. We may see a couple of tens of thousands of customers migrated over from one carrier to another carrier since the launch of the product, but these numbers represent literally nothing in terms of both customer base and revenues.

Unfortunately, we don't have a good understanding of who are our dual SIM customers, to have a very good insight on whether they are increasing or changing their calling patterns and behaviors, so I cannot comment on this part of the question. But so far, MNP is not anyhow a reflection of a market situation or a change in preferences of our customers.

We have had a second question. As I understood, this was the fixed line and the business environment. In fact, we had some greater sales in the past to the government institutions and some one-offs in -- one-off big sales which we recorded in MGTS business. This was, as I said, one off so it was not continued in this reported quarter, and therefore you might have seen certain decline which can be attributed to business or B2G markets.

Operator

Thank you. Our next question comes from J.P. Davids of Barclays.

J.P. Davids - Barclays Capital

Two questions please. Firstly, on OZON, can you discuss why this is a best fit for MTS rather than any of its competitors, or possibly even building up your own e-commerce business and logical infrastructure?

The second question is on dividends. On slide 7 of your presentation pack you highlight macro volatility, and then on slide 12 you comment that the dividend could be impacted by your macro environment. So, to that end, can you provide some color on what level of volatility might force you to reassess the dividend outlook? Thank you.

Vasyl Latsanych

Thank you for the question. This is Vasyl again. Since I am becoming the Board Member of OZON, I feel obliged to answer this question. OZON is a sort of early stage Amazon in Russian market, where this is probably the only store -- online store in this country that is targeting itself to become a hyper store selling all kinds of consumer goods, apparel, electronics, services, and so on, so forth.

We believe that this area will develop quite dramatically over the next couple of years. And also, if you rank the existing online stores, OZON will be much, much higher, with a huge distance from anybody else who would try to enter that market or who would be there competing.

Therefore, we believe that OZON would be definitely the best match if we wanted to first invest into that area, second get hold of it and develop together. We honestly would not find a second best in this area, because OZON, like Amazon in US, is clearly outstanding, standing out of the competition.

Alexey Kornya

In respect of dividend -- this is Alexey Kornya -- we maintain our guidance towards dividends and our commitments to dividend payments in 2014/2015, over RUB90 billion, and the high dividend payment and the second dividend payment in this year. And the wording in the presentation relates to some disclaimer coming out from our dividend policy, and our dividend plans were not revised and we are not expecting that they are to be revised, subject to macroeconomic volatility.

Andrei Dubovskov

And in addition to this topic, I just want to add some information. Of course, we are not going to increase our debt, and at the same time we are not going to be less -- to have less aggressive behavior in Russian market, speaking about our capital expenditure. It will be approximately the same than in previous period, and again no increase in our debt level.

J.P. Davids - Barclays Capital

One quick follow-up on OZON, if you don't mind. Did you consider going into e-commerce yourself, as MTS? And if so, what stopped you from trying to replicate the same business model? Thank you.

Vasyl Latsanych

Yes, thank you for question. For sure we did. For many years, we are trying to set up our own Internet store selling our handsets and services and some small electronic toys. Honestly speaking, we did not see a lot of success so far. This market is very competitive and it's very fast moving, so there needs to be a very professional approach to this market if you mean electronics.

On the other things, when I'm speaking of the hypermarket, I've listed the categories that OZON is in at the moment, not to mention the travel, the shoes or other things that they are already in. We honestly have no idea and no experience how to develop that market from the scratch. So it would be probably a lot of investment in the resources and time to get ourselves in a competitive position there. I believe it is -- when there is a possibility that [achieves] some existing experience which we did.

Operator

Our next question comes from Alexander Kazbegi from Renaissance Capital.

Alex Kazbegi - Renaissance Capital

My question is about -- one question is about Ukraine. I was wondering, your data revenues in Ukraine in the absence of 3G has pretty much flattened over the past three quarters, more or less giving the same, so to say, revenue number. Is that basically what we should expect looking out, again -- given, again, there is no 3G or there are some remedies to -- you think that even with the current network you can still increase the data revenue growth there?

Second question would be, again, I understand it's very speculative, but since the question about Uzbekistan seems to be coming up, just to understand again -- whether you take that or not, that of course will be a different question. But if you were to take the opportunity to go back to the market, would that imply some follow-on investment? What size would that be?

And a in general question is why would you be interested even in going back to the market which has the capital controls, where you can hardly see your money coming back from there? So that if you could elaborate on that one, it would be very helpful.

And the last very small one, on OZON, just to understand also whether you do have an exclusive agreement with them, or OZON can actually also have agreements with the other mobile players as well at the moment. Thank you.

Vasyl Latsanych

Let me quickly answer the OZON question. Yes, we do have the agreement where we can be either exclusive or managing the relationships with the other carriers.

Alex Kazbegi - Renaissance Capital

Okay.

Andrei Dubovskov

Alex, its Andrei Dubovskov, and thank you for the question. Talking about the Uzbekistan issue, I hope you understand that we are under the legal dispute with Uzbek government, and of course we have no possibility to talk about this process more detailed than we do it.

Alex Kazbegi - Renaissance Capital

Sure. But let's say if you were to go back, would it mean additional investment on your side, or again you can't talk about this, really?

Andrei Dubovskov

Well, it's too early to talk about the possibility, and in the current situation I hope you understand we have no (multiple speakers) to talk about it.

Alex Kazbegi - Renaissance Capital

Yes. No, that's fine.

Andrei Dubovskov

Thank you.

Vasyl Latsanych

And coming back to your first question, regarding the Ukraine and data revenue, we must say that this for sure is all an achievement on a 2G network, an EDGE network, which we may attribute to the fact that we have been modernizing our network for the past couple of quarters. That can be also regarded to the fact that this modernization was a bit delayed, and in fact we probably missed certain data opportunity growth in the past and now we are catching up.

I don't think we should expect very strong growth of data business in Ukraine, because for sure it is limited by technology. But luckily, we can monetize the existing network, and we think that we have certain ways of improving the data business in Ukraine before we get a 3G license there. But I don't think the numbers will be mind-blowing, because the network is still very limiting.

Operator

Our next question is from Ivan Kim of VTB.

Ivan Kim - VTB

Two questions, please. The first one, could you comment on the smartphone penetration trajectory, because it's increased only marginally compared to the yearend, so despite the push of the lower-end handsets, from what I understand? So can you elaborate on what trends are there and what you expect at yearend 2014?

And then secondly, on CapEx in Russia and Ukraine, so this year CapEx forecast looks chunky still, especially, I guess, for Ukrainian market, which doesn't illustrate much growth. So do you reassess it? Is it possible that you reassess it and actually you spend less than the guidance? And when you think you and the market will know that? Thank you.

Vasyl Latsanych

Ivan, thank you for the question. The smartphone question, honestly, I don't see any weakening situation there, because we were growing some 9-plus percentage points in the year 2013 and the beginning of the year 2014 shows pretty much the same kind of numbers, same traction. So I don't think it's weakening, though we also should take into account that if you compare quarter to quarter, for sure first quarter would be weaker on handset sales than the fourth quarter.

So, in fact, including the smartphone sales, including the higher-value sales, so we don't think we're getting weaker on that market. We are growing pretty much according to what we expect, and it should not be any weaker than the year before.

Ivan Kim - VTB

So what do you expect for yearend, please, or if you can share that forecast?

Vasyl Latsanych

Well, as I said, we had 9-plus percentage points last year and I think we should be around the same this year, should not be worse if no macroeconomical impact, which so far we are not seeing hitting drastically.

Ivan Kim - VTB

Okay. Very good. Thank you.

Andrei Dubovskov

Ivan, its Andrei speaking about the CapEx in Ukraine. You're absolutely right; forecast looks high. Of course, we are not going to spend much more money than we need in Ukraine, at least in situation of absence of our 3G license in Ukraine.

But let me remind you that we have two main projects in Russia. It's our GPON project in Moscow, PSDN network. And the [Nokia] network, of course it's a really huge investment in the Russian market, and we need to have the really strong competitive position against our competitors in Russia. And that's the reason why we're not going to decrease our capital expenditure in our Company, I mean Group of MTS.

But talking about Ukraine market separately, you're right; we did not need spend money in this stage.

Operator

Our next question comes from Herve Drouet of HSBC.

Herve Drouet - HSBC

Yes. Two questions as well on my side. The first one, if we looked at your results compared with your guidance looking forward, you will anticipate some decelerating growth in the coming quarters. I was wondering, compared with where you are, where do you think the pressure may come? Will it be more coming from Russia or the CIS countries, rather? And especially on the margins, the Q1 margins were quite stable, so I was wondering if you can give a bit more light, looking forwards, where you might see a bit on the risk side the growth prospects, especially on OIBDA side.

And second question is on the fixed line segment. When will you think you will be able to stabilize your subscriber numbers and potentially increase it again? At which level you think your GPON networks need to be in place to enable that to happen? And at the moment, if you can tell us who in the fixed line segment is gaining market share in a Russian context. Thank you.

Alexey Kornya

Thank you for the question. Let me take the first one. In the first quarter, we have not yet seen the effect from hryvnia devaluation in our financial results. Even more, there was some strengthening of hryvnia against rubles. So the key risks and the key challenges coming for us are coming from hryvnia devaluation, which came in place in the second quarter.

So we will see a strong impact from this factor into the second quarter and further through the year. However, taking the limited size of Ukrainian operations in our overall Group results, we think that this impact also will be somewhat limited, even might be immaterial on a standalone basis.

And that is why we think that it is too early yet to draw any conclusions on the potential effect from this factor on our overall performance. I think that we are basically reconfirming our guidance. We believe that we are well on track and think it's too early to talk about any risks coming from hryvnia effect for our guidance.

Herve Drouet - HSBC

Okay.

Vasyl Latsanych

Regarding the second question about the fixed line, we are still going through the modernization of the network throughout Russia, and also Moscow business is going through a dramatic change from ADSL operations to GPON. On that change, we think that certain losses of customers who would not be willing to buy the new set-top boxes or to upgrade their existing tariff plans to our new tariff plans are possible.

So I really would hesitate to set certain milestones for us to reverse trends and to change the business, but I do believe that we will see gradual improvement quarter over quarter. Thank you.

Herve Drouet - HSBC

All right. And any light on who is, at the moment, taking market share in the fixed line segment?

Vasyl Latsanych

Well, at the moment we do see that there is quite active behavior of the local players. We don't think -- we do not see any country-wide national player to be anyhow more active or more successful than we are.

Operator

Our next question comes from Anna Lepetukhina of Sberbank. Please go ahead.

Anna Lepetukhina - Sberbank

Yes. Hello. My first question is can you please comment what trends you see in mobile services in the B2B segment in Russia? Do you see any competition increase, or are things more or less stable? And do you see any threat for your share in this segment decreasing due to behavior of your competitors?

And my second question is on cash conversion, can you please explain what was the reason for such an improvement in cash conversion and whether it is sustainable because while EBITDA increased 5%, net operating cash flow increased almost 20%? And my third question is on decline, continuing decline in other value added services revenues. Growth has slowed down in other parts already in first quarter 2013 further as I understand because you are fighting strong but how much strong is there and for how long you anticipate to see decline in these revenues? Thank you.

Vasyl Latsanych

This is Vasyl. I will take the question on the trends of mobile B2B markets in Russia. I think we are not in a position to say that the competition is any stronger than it used to be. It used to be always very, very competitive market. The big and medium sized companies are doing tenders and pictures every once in a while and we always participate. Our position there is very defensive. We want to defend our huge market share in Russia. We believe that these long-term relationships and also conversion offers that we sold to the customers are still catering for their needs and they wouldn’t need to switch from us to any other customer, any other carrier.

At the same time, we are for sure participating in every pitch that is out in the market to service for the new customers and trying to increase our base but with our way over 50% market share, it is quite a difficult task to increase that any further. Though we do see that in certain regions, we have some possibilities opening up for ourselves where we get stronger by upgrade to better 3G and 4G and we can come back to the customers with improved offers.

But so far I would not expect this competition to get any wilder and the prices to be cut any more significant than it used to be before. Therefore I don’t think that this segment is under the big pressure for depreciation in the upcoming periods. Just to mention, M&P was probably on your mind when you asked that question, M&P is available to everyone, so whoever trying to pull the customer from us using the M&P tool will also get the same kind of response from us and we will be pulling the customers from their side using M&P as a tool. But M&P as a tool does not add any differentiation or value proposition we make for the customer because it’s available to everyone.

Your third question is probably also in my area; this decline in value added services which is a clear reflection of our policy to tame the fraudulent business which we were consistently doing for the last couple of quarters already. We have started that first in the markets and we have seen our competitors following the suit and it actually ended up with certain legislation introduced from the beginning of May which is further cutting this business. So I do believe that within next couple of quarters, we will see a reduction of content business, which also partially may be reflected in other value added service businesses. It depends on the settlement principles. I don’t think this is going to be any more dramatic than we have before because we have cleaned that up long before the new law introduction came in force.

Andrei Dubovskov

Hi, it’s Andrei Dubovskov. I want to add some information in the discussion. You can compare old subscriber base of each operator from Russia and the range of value added services and the question who is really beaten their (indiscernible) revenue of value added services will be clear.

Alexey Kornya

As far as cash conversion question concerned, this came as a result of our continuous program on working capital improvement. We saw cash conversion steadily improving with some quick improvements in one quarter and slow improvements in other quarter but still if you look at year-over-year dynamics, we do see improvements in our cash conversion and particularly in mobile business. And if you talk about look specifically first quarter, that came as a result of our reduction in construction and progress and that there is conversion. So that we expect trend will continue -- saying that we expect the trend will continue although the exact parameters will not be necessarily that high in the first quarter.

Anna Lepetukhina - Sberbank

Sorry but just to follow-up on cash conversion, so when we look for the full year, should we expect cash conversion to be at similar levels that we saw in 2013 or even improve, because if I look at 2013 numbers, working capital actually decreased and had negative impact on net operating cash flow. So, how we should look at it this year?

Alexey Kornya

We expect that we will improve in this parameter again on the yearly basis or at least being at the same level. However we believe that we do have right now reasons to believe that we’ll see overall improvement.

Operator

Our next question is from Ksenia Mishankina from UBS.

Ksenia Mishankina - UBS

Hi, thank you for the presentation. Could you please comment on the overall CapEx and borrowing plans for 2014 and 2015 thank you?

Alexey Kornya

We have enough free cash flow -- we have enough free cash flow generated through our operations to -- not to have any significant raise of capital through the year. So what we have right now is sufficient for us until the year end to pay our dividends and to realize our capital expenditure program. So currently we do not have any specific plans.

Ksenia Mishankina - UBS

Thank you. And for the CapEx plans, for 2014 - 2015, just your guidance please?

Alexey Kornya

Pardon. Could you just repeat the question?

Ksenia Mishankina - UBS

Yes. So for the CapEx plans for this year, can you just provide your guidance please?

Alexey Kornya

We maintain our guidance which is about 85 billion to 90 billion for this year and as I said there might be some redistribution within this guidance, but we are not revising our guidance for the full year for the Company.

Operator

(Operator Instructions) The next question is from Olga Bystrova of Credit Suisse. Please go ahead.

Olga Bystrova - Credit Suisse

I have two questions and one follow-up for me. First one on the potential upcoming spectrum tenders, the LTE spectrum tenders; in Russia there were couple of press reports, I think month or so ago about regional spectrum government considering distributing -- allocating some regional spectrum and the press was now suggesting that you might be participating. Just wanted to see whether there is a likelihood of that, what is your view on this and whether the principles of allocating spectrum in Russia any change in the near term?

The second question is about data pricing. It looks like data pricing is sort of stabilizing for the second quarter in a row, meaning it’s declining significantly less than in the past. Can you little bit talk what are the drivers behind deceleration of declines so to speak and whether this indicates that we’re reaching the bottom of pricing in Russia or there is a different customer pattern in terms of taking maybe higher usages tariff plans for new customers.

And the final follow-up question the VAS [ph] revenues that was already asked. Just want to check how SMS revenues within that group is behaving, whether there is a significant deceleration of growth or maybe even decline relative to what we’ve seen before? Thank you very much.

Andrei Dubovskov

It’s Andrei Dubovskov. We are not making some changes. (indiscernible) speaking about frequencies. But I just want to remind you that we have the huge frequency band in Moscow LTE, TDE and of course we are going to use all our capabilities in LTE vehicle in Russia. And I hope you know that approximately two months ago Russian government approved the rules and according to these rules we have all possibility to use our 1800 frequency band not for 2G this year but for LTE network also and of course we’re going to use this frequency band for LTE network access.

Vasyl Latsanych

Olga thank you the questions on the value-added services. I will tackle those. The data pricing stabilization was something we actually already promised in one our calls, that we will be doing certain actions to stabilize the data pricing and to slowdown the decline of that market. The previous decline was the result of our initial very high position in APPMB or average price per megabyte in this market, but limited our users from using our internet because of the pricing issue. It was sort of out of the market price. We believe that we have a certain competitive edge in getting our network better, faster and at the same time our prices better tuned to the customers’ needs.

At the same time, after achieving certain position and balance of the quality in price, we decided on holding that stable position and selling the packages that are of different sizes that the average price per megabyte within those packages, the construction was so that the average price per megabyte would be holding pretty much stable. So this is a conscious policy as from what I’ve seen in the markets and the behavior of our competitors, they are pretty much concerned as well about the decline of the eight average price per megabyte and don’t show clear signs of getting that market into a more competitive five year type spurt [ph].

I think that we should be seeing that market stabilizing for the future couple of quarters or maybe even increasing if market allows. The other barriers, value-added service revenue -- you mentioned about the SMS traffic. We have stopped showing the SMS revenues separately from general revenues just to reflect the fact that we are selling more and more all-inclusive tariff plans, the voice, data and SMS tariff plans. And these SMSs are getting more as a part of the offer than as a P2P pay-as-you-go type of service. With this we do not see decline in the SMS usage so far and we believe that we managed to lock the revenues at the level at which we were pretty comfortable to see the SMSs relatively stable throughout the 2014 in terms of the revenue, but this revenue again is more and more difficult to extrapolate, to take apart from the overall voice and data and SMS services revenue.

Operator

(Operator Instructions) Our next question comes from Igor Semenov of Deutsche Bank.

Igor Semenov - Deutsche Bank

Just wanted to ask you simple question on the trends you’re seeing so far in the second quarter. What are the trends relative to Q1 in terms of subscriber growth? Are you still taking share or has something changed in terms of the ARPU trends and usage, is it still more or less the same as Q1 or is it already declining or maybe it’s, I don’t know, improving? Can you talk little bit about that, what you’re seeing? Thank you.

Vasyl Latsanych

Igor, this is Vasyl. I’ll take that question. It’s pretty broad question. So let me try to address it from different perspectives. In terms of the subscriber numbers, we have shown a base increase or the net additions to the base in 2013. We’re seeing additional customers come in 2014 in the first quarter. The trends have not reversed or changed to that time. So we do see very slight additional customers coming, slight number of additional customers -- small number of additional customers come in to our base. But just to remind you, the penetration in Russia is incredibly high and the existing base of carriers are so big that these variations are nearly intangible. They’re not really seen.

In terms of the ARPU, we have shown 2% year-over-year growth and I believe that this is rather small, but the number showing is a stability in this market. We are working hard to keep the ARPU at the existing level and give us a slight increase because of our -- due to our activities in the data markets first of all and offset certain content and other value-added services revenues decline.

We are set to continue this policy -- to continue the policy of holding to the level of voice APPMs or APPMBs just to make sure that the market is not decreasing. Meanwhile the existing trends are showing that we are pretty successful in holding that position so far.

Igor Semenov - Deutsche Bank

But as penetration of smartphone increasing -- you used to say that with people upgrading smartphones the ARPU increase has so far been stable. So you’re not expecting this trend to improve somehow towards the end of the year?

Vasyl Latsanych

I don’t think there is a large room for improvement. Bear in mind the economical which is not very going up and nice. I think that what we are seeing here is a very stable performance versus the possible downward trends in the overall economy and the pricing pressure we have been through in year 2013.

Operator

There are no further questions over the telephone at this time.

Joshua Tulgan

Thank you very much ladies and gentlemen and we welcome you at any time to contact our Investor Relations department for any 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 your interest and wish everyone a pleasant day. Thank you. Operator

Operator

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

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