Mobile TeleSystems' (MBT) CEO Andrei Dubovskov on Q2 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Mobile TeleSystems (MBT)

Mobile TeleSystems OJSC (NYSE:MBT)

Q2 2014 Earnings Conference Call

August 20, 2014 10:00 AM ET

Executives

Joshua Tulgan - Director, Corporate Finance and IR

Andrei Dubovskov - President and CEO

Vasyl Latsanych - VP and CMO

Alexey Kornya - VP and CFO

Analysts

J.P. Davids - Barclays Capital

Imari Love - Morningstar

Ivan Kim - VTB Capital

Alex Kazbegi - Renaissance Capital

Herve Drouet - HSBC

Igor Semenov - Deutsche Bank

Alexander Vengranovich - Otkritie Capital

Olga Bystrova - Credit Suisse

Anna Lepetukhina - Sberbank CIB

Operator

Good day, and welcome to the Mobile TeleSystems’ Second Quarter 2014 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

Welcome everyone to MTS’ second quarter financial and operating results conference call.

Before beginning our discussion, as always, 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 may relate to one number of the following issues: the strategic development of MTS’ business activities in Russia and abroad; revenue and/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 value added service indicators; 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; technical matters as they pertain to our communications networks, including equipment licensing or network technologies; activities and lines of business that complements 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 Web site or through the U.S. Securities and Exchange Commission. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include Company press releases, earnings presentations, our Form 20-F, as well as other public filings made by the Company with the U.S. SEC, all of which are available on the Company Web site, www.mtsgsm.com, or that of the 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 Web site.

With that, I’ll turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

Andrei Dubovskov

Thanks Josh. Ladies and gentlemen, thank you for joining us on today’s conference call to discuss the Company’s financial and operating results for the second quarter 2014.

Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Vasyl Latsanych, our Vice President, Chief Marketing Officer; Vasily Latsanich, our Head of Marketing Department; and Andrei Smelkov, Vice President International Subsidiary.

During the quarter, we increased our Group revenues by 1% year-on-year to RUB98.9 billion, realized strong growth in our core Russian markets and positive dynamics in Ukraine and Turkmenistan despite macroeconomic issues. Growth in our markets, however, was offset by significant hryvna depreciation in Ukraine and slight weakness in our Armenia market. Our core mobile businesses remain vigilant to macroeconomic factors in our markets. Despite the number of factors outside the realm of our control, they had delivered positive revenue growth and stronger stability in each of our markets. Judging from our competitor reporting, we are also performing our peers. Nevertheless, macroeconomic factors are beginning to impact our results which force us to review our guidance and outlook for the year.

And now, Vasyl Latsanych will discuss our business unit performance. Please, Vasily.

Vasyl Latsanych

Good day, ladies and gentlemen. In Q2, our Russian business grew 5% year-over-year to RUB 90.4 billion. Driving this growth were exceptionally strong mobile service revenues, which increased over 6% year-over-year. Key drivers included: greater adoption of data plans as smartphone penetration among our active subscribers reached 37 percentage points, up-selling existing subscribers on data plans and through high data consumption, increase of the quality of our subscriber base as we added over 4.5 million subscribers during the year; and stable churn dynamics.

Sale with handsets and accessories, including slightly year-over-year -- increased slightly year-over-year to RUB5.9 billion. For the quarter, revenues were slightly off due to seasonal factors. We also took decision on further reduce low margin wholesale through the regional dealers. Overall, in spite of the macroeconomic factors, sales of smartphones in units increased by 52% year-over-year a factor which continues to drive smartphones penetration in our base among lower value users.

Our fixed line revenues declined slightly by 1% year-over-year to RUB15.6 billion, this dynamic however reflects the positive one-off effect from the recognition of our revenues from our video monitoring project in Moscow in the second quarter of year 2013. Net of this effect, we increased our revenues through the ongoing modernization of our regional network to full fiber, increased penetration of double-play and triple-play product throughout the market; the continued migration of pay TV subscribers from analogue to digital TV platform and an increase in the number of GPON subscribers in Moscow.

By the end of the period, we were providing broadband by a GPON over 360,000 households and pay TV over 90,000 households in Moscow. Our residential fixed line ARPU figures, which grew by 8% year-over-year that defines our success in the integration and modernization of acquired regional businesses. Since early 2013, where actual pace of modernization began, we increased our broadband footprint in the regions by 680,000 household and pay TV footprints by 560,000 households. And thought the total number of the fixed line subscribers is declining to the so called social package and lower value subscribers. The quality of the base is improving as we see the influx of subscribers using FV TV and digital TV solution. We continued to seek greater challenges in our Ukrainian business units. We delivered growth year-over-year, in our local currency its revenues grew 2% year-over-year, UAH2.56 billion as MTS expanded its subscriber base.

In Armenia revenue fell by over 4% year-over-year to AMD18.9 billion, macro-economic slowed down and tightened competition are having impact on our performance, but we maintain the leading market share. During the quarter we responded to higher levels of competition by increasing the share of [indiscernible] and data packages included in the bundled which led to a decline of our ARPU number.

Sequentially however we increased our revenue market share in the market. In Turkmenistan we continued to see positive dynamics as we increased revenues by 11% to nearly 69 million now. Market developments have allowed us to discontinue promotional campaigns related to our initial launch which allowed us to increase ARPU by 7% year-over-year.

Thank you ladies and gentlemen and now Alexey Kornya will further discuss the Group’s profitability and financial performance.

Alexey Kornya

Thank you Vasyl. In second quarter 2014 the EBITDA declined by 3% or RUB43.2 billion. As a reminder in the second quarter of 2013 we realized one off gain related to compensation we received from the settlement of Bitel. Without this effect our EBITDA declined just slightly by 0.6%, primarily due to currency factors, mainly depreciation of Ukrainian Hryvnia. Our EBITDA margin net of Bitel settlement declined year-over-year by nearly 0.9 percentage points to 43.7%. In Russia EBITDA grew by 3% year-over-year to RUB40.3 billion. This reflects our sustained revenue growth and increased share of high margin that revenues in the revenue mix.

On a quarterly basis EBITDA increased by 7% due to seasonally higher contribution from roaming and B2B customers. In Ukraine EBITDA declined by 3% to over UAH1.3 billion, during the quarter profitability was pressured by an increase in frequency fees and high electricity costs. We also saw a currency devaluation effect on some of cost items including roaming and sim cards which are denominated in non Hryvnia currencies.

Overall for the quarter we delivered an EBITDA margin of 49.8% which showcases an enhanced strength of our operations. In Armenia our EBITDA fell by 13% year-over-year to AMD9 billion. As in previous quarters the decline in the EBITDA was related to the increase in termination rates with MTS Russia we implemented in the fourth quarter 2013. Going forward this will continue to weight down on the margins though organically the unit continues to show strong profitability.

In Turkmenistan we delivered EBITDA of TMT30.7 million for a margin of 44.3%. Increase in the EBITDA was driven by growth in revenues and measures introduced to decrease cost including network maintenance cost and line rental fees.

For the period net income from continuing operations increased quarter-on-quarter 62% to RUB21.1 billion, primarily we benefited from a non-cash FOREX gain in the amount of RUB4.2 billion due to rubles due to ruble appreciation this the previous quarter. Quarterly dynamics was also aided by low interest expense as we redeemed the remaining amount of RUB15 billion bond in prepaid portion of a euro denominated facility.

For the past year we have also engaged in interest rate hedging and this undoubtedly had yielded a positive effect for us. Operating cash flows for the first six months of 2014 increased by 3% relative to the same period in 2013. Overall free cash flow grew 4% year-over-year but if we adjust free cash flows to exclude one-off effect from Bitel settlement in second quarter 2013, we see an adjusted free cash flow increase of nearly 12% year-over-year.

In August the MTS Board of Directors recommended to the shareholder meeting to be held on September 30, 2014 to improve interim dividends based on the first half 2014 results, in the amount of RUB6.2 for ordinary MTS share or RUB12.4 per ADR for a total of RUB12.8 billion. The Board also recommended to set the record date for the shareholders and ADR holders in title to receive interim dividends as October 14, 2014. According to the new requirements of the Russian law the payout will be within 25 days after the record date.

By the end of the period our total debt increased slightly to 24.2 billion. Our net debt to last 12 month’s adjusted EBITDA remained at a comfortable level of 0.9 multiple. Over the last quarter, we achieved strong progress in debt management in minimization of interest payments. Our interest coverage ratio based on last 12 months EBITDA rose from 9.6 in first quarter 2013 to 11.7 in second quarter 2014. So improvement in our EBITDA, strong debt management practices. Overall, healthy operational trends limited principal payments in the next 12 months and now success in debt portfolio management places MTS in a strong position to manage the uncertain macroeconomic environment we are facing.

Now, I am passing over to Andrey Smelkov.

Andrei Smelkov

Thank you, Alexey. I am very pleased to announce that MTS has signed a settlement agreement with Republic of Uzbekistan Government its return to the market. The agreement will establish a joint venture which will be majority owned by MTS with the Government of Uzbekistan. The joint venture will operate using assets, equipment and infrastructure previously owned by Uzdunrobita, our former subsidiary in the market. According to the agreement, the new venture will receive 2G, 3G and LTE licenses sufficient numbering capacity and all necessary permits to enable us to start the network by the end of the year.

Upon fulfillment of all of the conditions and transfer of 50.01% stake in the joint venture to MTS, both MTS and the Government of Uzbekistan will discontinue related ongoing legal proceedings. The settlement will be governed by the English law. For now, we are actively working to rebuild our staff and capabilities and preparation for the transfer of assets to our new enterprise. During our third quarter disclosure in November, we can provide further information on the market and our prospects.

But we still believe that we can capture value in this market to one of the largest and as of now the most underserved markets in the CIS. Thank you.

Andrei Dubovskov

Thank you, Andrei. It’s Andrei Duboskov. Obviously the key issue we need to address in Ukraine. In early August, we announced the succession of operations in Crimea. In June, when regulations [arose to] align Crimea in lowest resource of the Russian Federation, it had become increasingly difficult to manage MTS Ukraine Federations. Our Ukrainian subsidiary’s ability to provision services was compromised by issues ranging from a regular electricity delivery to new business regulations.

But then in early August, an operator called Win-Mobile began operations in Crimea by using frequencies that had been used by MTS Ukraine earlier. In this environment despite our best effort, it became physically impossible to continue to provide telecommunication services. So we decided to suspend our business operations. Throughout the summer, we have been communicating with our clients about these increasing difficulties. Although our network asset remained, we have reduced our staff employees operations until the political environment becomes clearer.

Since early summer, we have had increasing difficulty in parts of Eastern Ukraine as well. The basic electricity deliveries remain our main problem in areas around Lugansk and Donetsk while the fighting has also damaged some network components. However these problems are solvable. Within 24 hours in the succession in fighting in Slavyansk, we were able to restore our network. Naturally, we hope a peaceful resolution as soon as possible so as to safeguard the safety of our customers and employees and resume network services for so many people affected by the fighting.

Overall, it’s still difficult to gauge the effect in our operations from this ongoing conflict. Crimea has accounted for close to 10% of our revenues in Ukraine in 2013. But in other areas, people have orders to keep phones handy when services are available. As soon as it’s practical, we would be happy to provide more information on what impact we may see in the second half of the year. For now, however, as our results indicate, our business remains strong and we are fully committed to further develop in this market.

Developments in Ukraine, however, force us to alter our full year guidance. Given their sustained currency weakness and microeconomic weakness, we have already seen a decline in ruble terms in our Ukraine business. While we expect Russia still to grow at the high end of our initial guidance of 3% to 5%, developments in Ukraine will lead to a growth to at least 1% in revenue for 2014.

We should anticipate stable EBITDA over a year. Growth in our Russian markets will be offset by the decrease in profitability in our non-Russian assets. And there is the absence of certain positive one offs realized in 2013. Our CapEx spending should come in at RUB90 billion, which is consistent with the guidance we gave at the beginning of the year.

With that, we would like to open the call to questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) We will now take our first question from J.P. Davids from Barclays. Please go ahead your line is open.

J.P. Davids - Barclays Capital

Good afternoon. I’ve got two questions please the first question is focused on Russia. Given the increasingly challenging macro backdrop, do you see customers in the market changing their focus from customer and quality of service to clearly on products, and related to that, clearly VimpelCom’s been relatively aggressive on average price per minute. Is this a course of concern in terms of market share? The second question is really around your medium term outlook. Clearly you haven’t revised that today. Can you give us a bit of color on what we should think around medium term growth prospects? Thank you.

Andrei Dubovskov

It’s Andrei Dubovskov. Thank you for the question, talking about your short question, about customer the favor. More or less, you are right. And this is the reason why we are not going to increase our price level, and how would you know that trends in the markets, unfortunately for our competitors. But talking about however the favor, I am going to do the same, and speaking about the limited usage. Again, you are right, one of our competitors really aggressive in this areas, but MTS really much more aggressive in this area than with GOCOM. I just want to remind you that our minute of usage in second part of 2014 was 342 minutes it’s a highest level of minutes of usage in the Russian market in big three.

Second question I will pass to Aleksey Kornya.

Aleksey Kornya

Okay, thank you. We are not changing our medium term outlook. But we think it is too early to say anything about any potential implication for our medium term outlook. So we maintained that at this point of time.

J.P. Davids - Barclays Capital

Thank you.

Operator

We will now take our next question from Imari Love from Morningstar. Please go ahead your line is open.

Imari Love - Morningstar

Thanks for taking the call. Quickly on Uzbekistan, when you exited, it was roughly 4.5% of your OIBDA. Given that you’re starting for scratch, where do you see that ending up maybe four to five years from now roughly around that same percentage, or do you think it will be a little bit lower than that going forward?

Aleksey Kornya

Thank you for the question. We believe that in the medium term we would expect to see low single-digit share of revenues coming from this market.

Imari Love - Morningstar

And OIBDA?

Aleksey Kornya

About the same, also the contribution from this market, we expect will be bought on revenue and OIBDA in the area of low single-digit.

Imari Love - Morningstar

Thank you.

Operator

We will now take our next question from Ivan Kim from VTB Capital. Please go ahead your line is open.

Ivan Kim - VTB Capital

Good afternoon. On the macroeconomic outlook for the second half, do you see the corporate customers already tighten belt, and do you see the budget cuts and any impact on your revenue for the second half? And then secondly, what percentage of your subscriber base is on MTS Smart there at the moment roughly and when do you expect the transition -- more general question on this, do you expect the transition to bundles would be mostly over? Thank you.

Vasyl Latsanych

Okay, this is Vasyl, and I’ll try to answer that question. In terms of our corporate business customers, we do not see yet any tremendous moves. But we do realize that everybody is further macro going down. We may see some slowdown in the growth of the business segment, specifically in the area of roaming and increased data consumption. We do believe though that we are set better for this even difficult time if it comes then our competitors because we do have greater connections and greater base of the big corporate market, big corporate customers, which do tend to be adjusting their behavior, they’ve also compensating to the overall macro when their business is still very important. So they are not going to falling down anyway. In terms of the -- the second question was more about, was it about the APPM?

Ivan Kim - VTB Capital

No, it’s actually was on the percentage of your subscriber base on MTS Smart there so at the moment roughly and when do you think that more generally transition to bundles would be over? Thank you.

Vasyl Latsanych

Okay, thank you for that question. To be honest, for Russia, which is in that term up slightly be high in the European counterparts in the markets. We do believe that there is more, it’s just beginning. So we may be speaking at the moment for some teens-percentages going higher in some more modern parts of Russia, like Moscow, St. Petersburg and big cities, and for sure lower in some rural areas. But effects of the year 2014 is that the first year we’ll have hit the mark of these kind of tariffs and promote this very heavily and that should be bundled with many handsets and made many promotional activities.

So I think some tentacle results were due to come in 2015 because that will be the flagship of whatever we do in the market at the moment going for the bundled tariffs, which would secure our data revenues which would protect our messaging revenues and at the same time give good generous bundles to our voice customers, will be our major activity in the market for the rest of 2014 and 2015. So I think this question will be right to answer at somewhere in the end of 2015 when we have all of our activities worked on already and penetrated into markets.

Ivan Kim - VTB Capital

Thank you.

Operator

We will now take our next question from Alex Kazbegi from Renaissance Capital. Please go ahead your line is open.

Alex Kazbegi - Renaissance Capital

Thank you. Two questions also from me, one would be on Ukraine. So, can you just remind us in terms of any renewals of licenses frequencies anything which should be coming up over the next 12 months, which you think could potentially out of the increase in price or changed or whatever there were few might be seeing there? And the second question would be just on the margins again. Just again noticing that your margin in Russia went down, and you said it’s due to network expansion, this regarding your guidance on the EBITDA in general. Do you see that as a recurring state or do you think that it’s a network expansion state when you achieve scale and those additional costs will go away and the margin will still have a potential for improvement? And with regards to that and also in terms of overall margins is that. I think you mentioned also that on your approach to the MTS then [given] a bit more stringent approval of the cards. Again is that a sign that we should possibly expect or worry about the bad debts or MTS raising in the coming quarters, or is there something else? Thank you very much.

Andrei Dubovskov

Alex, its Andrei Dubovskov. Thank you for the question. I am going to talk about the first question, and second question I will pass to Alexey Kornya. According to the latest Ukrainian government decision, right now they have increase in the prices for our current frequencies band. And this is the reason why, our profitability in Ukraine, are slightly less than in previous periods. Talking about our next licenses, 3G or other, we have no information. We have no additional information right now. But of course, we are ready to invest to Ukrainian markets, if this license will be in the market.

Alex Kazbegi - Renaissance Capital

But even the 2G license, the renewal of the 2G license, is not due yet, right?

Andrei Dubovskov

Talking about our current licenses, our frequency permissions, we have no limitation, time limitation or other limitations, right now.

Alex Kazbegi - Renaissance Capital

Okay, that’s great.

Alexey Kornya

As far as margin concerned, we see that right now in Russia margins relatively stable, the duration that within 1 percentage point. So, going forward we expect that, as we’ve been guiding that they will be about stable level, or slightly declining. But that will be within, again 1 percentage point year. So, stable or slightly within 1 percentage point reduction that what we expect, and that will be very much defined by top line growth rates.

Alex Kazbegi - Renaissance Capital

And on the cards and the provisions, do you expect any worsening there, why so to say strict rules to approve new cards?

Vasyl Latsanych

This is Vasyl and I will answer that question. In fact, we were very rapidly expanding for the last three years with our card business and PoS loans business. We do see that with the revenue expansion, NPL is growing and we also see that the market is tightening up and given less credit at the moment and performing more scrutiny to the customers who come for a loan first time or are come to a loan without the good credit history. We do believe that this is right in the possibility of some economic slowdown. So we will be following, actually we did not follow, we did initiate that’s huge and started off performing some scrutiny on our process of issuing the cards and making sure that as we have reached certain capacity of the cards issued in the market, we do not have an increase of NPL in the future, but we rather work on the quality of our portfolio and have better customers for the future couple of quarters which might be generally getting tight in their banking business.

Operator

We will now take our next question from Herve Drouet from HSBC. Please go ahead. Your line is open.

Herve Drouet - HSBC

Also two questions on my side. The first one is back to Russia and looking at the guidance, you are giving the new guidance for Russia. I mean it looks like for the second half, you expect a bit of moderations on the growth but still something not that far off what you’ve done in the first half for Russia. I was wondering I mean where do you see risk in terms of segments if the macroeconomic impact more than it had on in H1, do you think will be more to mobile segments, and do you think the fixed line segments which now is less under decline and previously could start maybe potentially to offset some of the pressure and you may get on the mobile side and is it your perception that I’m trying to get at is my first question? And second question is regarding your CapEx. Just wanted to check with you if your current CapEx guidance includes the start up cost in Uzbekistan? So just to clarify that please.

Alexey Kornya

Let me start on the second and the first, we will ask Vasyl. On CapEx, we do not expect any material, at least this year, CapEx impact from our reentrance in Uzbekistan. So we can easily absorb it within our current guidance, CapEx guidance. So these are not material amounts if this and when it happens.

Herve Drouet - HSBC

And regarding the question on the…

Andrei Dubovskov

Sorry? It’s Andrei Dubovskov. In addition, let me remind you that we are not going to invest to Uzbekistan and all our financing in Uzbekistan. We will cover from Uzbek credit from Uzbek banks.

Vasyl Latsanych

All right. Then the question on the segments, the other segments and potential change in their behavior. Yes, we do believe that some of the high mids and high segments might be affected by the economic, the overall economical downturn and again especially in their roaming charges and potentially in some other international calls and some other high value services. But this is why we do the lot of efforts to penetrate the voice and data service plans. So that into those segments to secure some revenue that would be inevitable to us to sustain the market share in that segment. And if you take a look at our current ARPUs of being close to RUB400 and RUB450, you will understand that this is relatively small section of the expenditures of our customers and that should not be affected in the first and in the second place whenever economical downturn goes throughout Russia and that I’m speaking that about the mobile business.

Meanwhile the fixed business is relatively speaking even in better shape because the fixed line and the TV ARPUs in Russia are generally very low in the first place because of the very high competition that goes there locally within the local players. So we do have the TV ARPUs and the broadband ARPUs I would say already pretty much adjusted to very small span. And I don’t think they have any potential for a decrease. You would actually even see that their ARPU has increased in the recent couple of quarters on the broadband and on the TV and that is because we are working on adjustments of our current pricing to the market level where sometimes we might be even lower than the markets. So we do not hear of being attacked in those segments because we are already performing their relative to the markets either on par or too low. Thank you.

Herve Drouet - HSBC

And just maybe a follow up question just on Uzbekistan, just wanted to check with you. Will the operations be fully consolidated under MTS financials?

Vasyl Latsanych

Yes, we will consolidate on the full consolidation with the launch.

Operator

We will now take our next question from Igor Semenov from Deutsche Bank. Please go ahead. Your line is open.

Igor Semenov - Deutsche Bank

Just wanted to ask again about Ukraine. Can you tell us a little bit more about what’s going on in recent weeks. What is the rate of the decline in the business relative to the same period last year, sort of July, early August and how more significant the decline it is compared to full Q2? Thank you. And I am talking about the impact in local currency.

Andrei Dubovskov

Igor, I think there are two aspects. First operational trends, we do not see principal change in operational trends. As we said, we will feel pressure coming from instability in macroeconomic difficult situation on the market. So we’ll probably see operational trends further declining. However, we are not right now in the position to quantify them. And the another factor which is by far more material now, group parameters is hryvnia devaluation as we saw in recent days or recent couple of weeks that it continue to further devalue, so it might put additional pressure on now group performance. However, we believe that our guidance already absorbs further forecast of hryvnia devaluation until the year end. So -- if it’s not dramatic development in hryvnia, I think we will stay within our guidance.

Igor Semenov - Deutsche Bank

And is there any update on the sanctions against Russian company as you are in contact with the authorities, what is their feedback and intentions if you may talk about that? Thank you.

Andrei Dubovskov

We don’t have any other information than the information which you have. So it’s just the same.

Operator

We will now take our next question from [indiscernible] from UBS. Please go ahead. Your line is open.

Unidentified Analyst

I have few questions. Could you please indicate your CapEx guidance for full year 2015? Do you plan any bond buybacks and what are your issuance plans in the local market? Thank you.

Alexey Kornya

Thank you. As far as CapEx guidance medium-term concern, we are not changing. At this point of time, we believe that there is a relatively uncertainty yet and we will have to see but now we change at this point of time which is around RUB85 billion over the next couple of years after 2014. And we are looking at both buybacks opportunistically. So if there is a good opportunity in the market, we might be doing some portion of buyback. And we are not planning at this point of time any new issuance. We have -- at the end of second quarter we had more than 70 billion in cash reserves. So we don’t need any refinancing until the year end with all CapEx and other needs taken in the account.

Operator

We will now take our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead. Your line is open.

Alexander Vengranovich - Otkritie Capital

A couple of questions Ukraine and Crimea. So first can you please explain to me the accounting of Crimean operations in the third quarter going forward, should there be any changes to the classification of that revenues probably they will come to Russia? This is the first question. Second regarding the Ukrainian operations. What percentage of your subscriber base in Ukraine is currently affected by the military actions in the Eastern Ukraine? And I assume you have some technical problems regarding upgrades in the network also there. Can you explain whether you had any shutdown of the network and [indiscernible] actions will help? And the third question is about the Ukrainian hryvnia to Ruble exchange rate which you assume for your guidance [indiscernible] main operations for this year? Thank you.

Andrei Dubovskov

It’s a lot of questions including all in one issue. First of all I hope you understand that our current Crimean results are including our group results right now. Talking about [indiscernible] it depends on a lot of issues which we need to take into account in the near future, including government decision, including some issues which can appear in the nearer future. But right now all Ukrainian results are included in our group results.

Talking about the percentage of subscriber base which impacted by fight in Eastern Ukraine. It is difficult to talk about this issue; because it has no information how many of our current subscribers right now are located in these areas. You know that some subscribers migrating to the central Ukrainian territories, some subscribers migrate into Russia, and let’s wait and see. I think we need to explore this situation more deeply later.

Talking about the technical problems this is real technical problems of absence of electricity and some objects, some problems with technical, especially in fighting regions, this is the real problems and during last some months, we’re talking about with our clients and authorities.

And speaking about the hryvnia exchange rates, Alexey Kornya will talk about it.

Alexey Kornya

We’re focusing and we’re putting in our focus some slight decline in hryvnia -- the value of hryvnia. We would not put the exact exchange rate hryvnia to ruble but giving you some idea that’s about UAH15 $4 by the end of the year.

Operator

We will now take our next question from Olga Bystrova from Credit Suisse. Please go ahead your line is open.

Olga Bystrova - Credit Suisse

I have couple of questions. One is you continue to see quite a strong subscriber base growth in Russia, I just wanted to see on which plans do you see majority of subscribers signing up, is that bundles and if it is whether it’s Smart or Smart Plus bundles or its sort of per unit per minute usage plans. The second question you mentioned that you’re not sort of doing the same what some other competitors are doing which you mentioned increasing prices. Are you in this environment seeing some impact on your gross additions because of the moves of competitors? And maybe you can elaborate specifically what kind of price increases you’re seeing in the market that concerns you so to speak.

And the final question that is on the voice revenues, some of your competitors have seen more dramatic deterioration in voice revenue trends. You also see deterioration but not as material. And I was just wondering maybe you can talk to us about drivers of declining trends in voice revenues.

Vasyl Latsanych

This is Vasyl and I believe these questions are more in my area. So the first one about what is the major attraction tariff plan in our base. It has been for quite a while already to attracting most of our customers to our most prominent and most successful tariff for the entire 2013 and ’12. It is Super MTS with zero or free or net calling throughout the territory or some actions given throughout Russia.

We believe that this represents very good value for money for our customers and that is also reflected in the fact that we did not have to have to create additions in the market which we believe we’re not holding. We’re not selling most of the new SIM cards in the market. But due to the fact that we only sell those SIM cards with the good value tariffs and we do watch very carefully that our quality of the sales is not dropping and we’re having only the new real customers, active customers connected.

Our churn as you can see gets very low compared to the market and is very stable and even with the increase of our market share is not increasing following the trend of the market share increase. That means that we’re not washing the base down but we’re having very high quality connections that we don’t need to increase the number of the connections in that specific case. Because we do believe that whole market might be slowly getting smaller in terms of the connections, meanwhile our share with respect to the increases but without any loss of the quality.

In terms of the customers behavior our Super MTS tariff plan represents very good value because people can talk for free on that literally as much as they want. So they don’t need to seek any better opportunity because there is no better opportunity to talk on the national central free. Meanwhile our ultimate tariffs are very competitive and that creates a good form between ourselves and our customers. So this again gets reflected in the churn figures which you can see are not increasing and in spite of the competition sometimes getting more aggressive as said in the beginning of this call our current [ATPM] levels based at 90 per minute and our current churn stays at 9.4 percentage point and we do not see any news out there, so we do not need to readjust our policy with this most successful tariff plans.

In terms of the voice and data as you ask, this is very important tariff plan but as I said before for the future, we’re seeing certain relatively low percentage of the new connections made that tariff plan and relatively low because we would like that to be much higher, it is still in the, still much below 50% and base penetrations is still much below 20% as I said before. We would like that to increase the focus of that because that secures our future revenues in all main three areas voice, SMS and messaging and data.

As our couple of competitors did increase their prices, we could see in the market, we did not follow this because we believe that at this time when people are very actively looking at what is the good opportunity in the market in terms of value for money, we should not be refrain the customers and increasing the tariff plans especially on those customers which are with us for long time. And we did see that some of our competitors did change many tariff plans very concerning those customers that are staying with those carriers for more than half year or sometimes even a year. We do not follow that practice so far, we believe that will create a good bond between us and our customers which again gets reflected in the low churn figures.

Operator

We will take our next question from [indiscernible] from BCS. Please go ahead, your line is open.

Unidentified Analyst

My question relate to the mid-term guidance which you have reiterated during the conference call. This guidance has been given before the public announcement of the redemption of the Uzbekistan operation and despite remember it was about 3%, 5% growth in revenue terms in 2015, 2016 and 2% 3% growth in OIBDA terms. My question is this guidance the reiterated guidance should be guidance of growth net of that operations. So does it include the effect of consolidation or resumption of Uzbekistan operation.

Alexey Kornya

At this point of time it does not include resumption of Uzbekistan operations, it is not yet clear as for when and how that happens.

Operator

We will now take our next question from Anna Lepetukhina from Sberbank. Please go ahead, your line is open.

Anna Lepetukhina - Sberbank CIB

I have two questions. My first question is whether you’re able to evaluate cash from Ukraine and if possible when was the last time you paid dividends from Ukraine and Russia?

And my second question is on CapEx side, despite lower revenues and EBITDA growth you reiterated your CapEx to be in the new book. I am just trying to understand is it logical to assume that you will reallocate some of CapEx from Ukraine to Russia. And also whether it includes any potential investments in Uzbekistan that you might need to make this year. And whether there is scope for scaling down investments, market economic situation will start impacting your financial in Russia in second half of the year.

Alexey Kornya

We’re not placing any principle difficulties with the capital repatriation although that is not clear how the recent law will describe the capital repatriation since the law stipulated that specific area. However as I said this year we’ve received some dividends from Ukraine. A few tens of millions and we do not as I said the principle obstacles to that going forward mid-term.

As for reallocating CapEx from Ukraine to Russia, yes we do consider some minor reallocation in terms of that EBIT higher spend in Russia but these are not material amounts and they are not impacting our guidance in no way.

Andrei Dubovskov

Let me clarify situation, necessity to invest money to Uzbekistan or absence of this necessity actually. First of all new joint venture will inherit the network from our former subsidiary -- and including network of course.

And let me remind you that network capacity was calculated for 9 million customers. Of course now we’ll not get 9 million customers at least in initial stage of our development. And that means that we’ll need to invest a lot of money to increase capacity of our network. This is first of all.

Second of all, we’re going to attract loan on the local market in Uzbekistan in order to finance our operations before we’ll come to EBITDA breakeven. And that means we’re not going to invest externally to Uzbekistan at all.

Anna Lepetukhina - Sberbank CIB

But can I just ask a follow up on CapEx in Ukraine. So basically can we assume that you plan to invest what was guided at the beginning of the year despite the situation in Ukraine at it stands right now.

Alexey Kornya

Yes.

Operator

(Operator Instructions). We will now take our next question from Olga Bystrova from Credit Suisse. Please go ahead, your line is open.

Olga Bystrova - Credit Suisse

I had a third question that wasn’t answered, I think was forgotten about the trends in voice revenues that you -- sort of if you could talk to us about drivers that you think are responsible for deterioration of those trends and whether you think it will be, you will see worsening trends going forward from here or this is the level of growth that you’re likely to see in voice revenues through the end of the year?

Vasyl Latsanych

This is Vasyl, I did not really get your question. Could you please explain where you have seen those trends that you would like to get explained?

Olga Bystrova - Credit Suisse

Yes, when you report the numbers you show sort of revenues separately from service revenues and those numbers imply effective flat voice revenues for you in the second quarter; it’s a slight worsening over from the first quarter competitors have seen much worse. So just want to see what are you seeing on your network in terms of drivers of voice revenues? And how we should think about it going forward?

Vasyl Latsanych

The fact is that our voice revenue is relatively flat already couple of quarters and we do believe that this is where we did hit certain market fluctuation with our voice services, though you would still see that our MOU usage goes up, as you could see we have increased it by 5.2 percentage points and that probably tells you that the voice gets consumed actively and it does actually increase the consumption. The revenue impact is rather because of the increase of the free or cheap calling versus the more expensive calling directions as I said before, I will actually tell the international calling, long distance calling and some of the roaming calling.

We see our task is to secure this revenue that we do not have any significant deterioration of our voice revenue with the help of the voice and data tariff plans, meanwhile increase the data revenues, therefore facilitate the increase the total revenues of the business.

Operator

We have no further questions at this time.

Joshua Tulgan

Then operator Thank you much Ladies and gentlemen, we welcome all of you at anytime to contact our investor relations department for further questions. A webcast of this discussion will be available on our Web site 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. Thank you for your participation ladies and gentlemen, you may now disconnect.

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