Mobile TeleSystems' (MBT) CEO Andrei Dubovskov on Q4 2015 Results - Earnings Call Transcript

| About: Mobile TeleSystems (MBT)

Mobile TeleSystems (NYSE:MBT)

Q4 2015 Earnings Conference Call

March 21, 2016 11:00 ET

Executives

Joshua Tulgan - Investor Relations

Andrei Dubovskov - President and Chief Executive Officer

Alexey Kornya - Vice President and Chief Financial Officer

Vasyl Latsanych - Vice President and Chief Marketing Officer

Andrei Smelkov - Vice President, Foreign Subsidiaries

Analysts

Roman Arbuzov - UBS

Ivan Kim - VTB Capital

Herve Drouet - HSBC

Ksenia Mishankina - UBS

Alex Balakhnin - Goldman Sachs

Igor Semenov - Deutsche Bank

Alex Kazbegi - Renaissance Capital

Svetlana Sukhanova - Sberbank

Igor Goncharov - BCS Financial Group

Robert Procopé - Charlemagne Capital

Operator

Good day, and welcome to the Mobile TeleSystems Fourth Quarter and Full Year 2015 Financial and Operating Results Announcement. 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. Welcome everybody to today’s conference call. Before beginning our discussion, I would like 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 of the following issues: the strategic development of MTS’s business activities; subscriber dynamics; commonly used financial indicators; operating indicators frequently used by telecommunications operators; debt instruments and their usage; legal actions or proceedings directed against 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 in lines of businesses that complement our existing communications networks; capital expenditures and operating expenses; and macroeconomic developments within our markets of operation.

Important factor – a comprehensive overview of these issues is available on MTS’s annual report on Form 20-F, which is available on our website or through the website of the U.S. SEC. Important factors could cause 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 I mentioned, as well as other public filings made by the company with the U.S. Securities and Exchange Commission, all of which 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 presentations and materials used and referenced in this conference call are available on our company website. In addition, I want to also reiterate that we have made no provision in relation to the investigation conducted by the U.S. Department of Justice and SEC regarding MTS’s business activities in Uzbekistan. In accordance with the IAS 37 provisions, contingent to liabilities and contingent to assets, provisions should be recognized when a legal or constructive obligation exists, and such an obligation can be reliably estimated. We continue to cooperate with the authorities on these matters. And at the current stage of the investigations, we have no reliable basis to predict any outcome. We also direct everyone’s attention to the public disclosures we have made on this topic, most recently on November 5, 2015 in our Q3 financial and operating results in November 17 and any previous disclosures on our websites with the SEC and our Form 20-F since 2012.

With that, I will 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 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer; Vasyl Latsanych, Vice President and Chief Marketing Officer; and Andrei Smelkov, Vice President, Foreign Subsidiaries.

We are pleased to announce the conclusion of another successful year for the MTS. Group revenue increased 5% to over RUB431 billion as we continue to execute in our 3G strategy. We continue to see sustained demand for data throughout our markets of operation and we are pleased to finally be able to bring high-speed data services to our customers in Ukraine, with the acquisition of 3G license early last year.

Despite continued macroeconomic volatility, we finished the year 0.7 percentage points above our forecasted adjusted OIBDA margin of 40%. For the year, adjusted group OIBDA slightly declined by 2% to RUB175.5 billion. Key factors which contribute to the decline included currency volatility throughout our operational footprint and regulatory changes in Ukraine. Despite the aggressive behavior by our competitors in Russia, OIBDA for Russia remains stable. Alexey will elaborate on this, but overall, our performance in Russia is a remarkable achievement considering the challenges we faced in the market.

Vasyl will now go through our performance in our key markets.

Vasyl Latsanych

For the year, total revenue in Russia increased by 4.4% to over RUB391 billion. Over the course of the year, we saw a number of macroeconomic factors impact our business, in particular, lower calling activity due to overall reduced business activity and fewer customers in roaming as Russians travel abroad less frequently, which impacts us more due to our large market share in roaming. Nevertheless, our overall mobile business overcame these challenges as revenue increased by 5.2% for the year due to: a 3.6% growth in active subscribers as our active base reached 77.3 million; higher data adoption as smartphone penetration in our networks reached 48% by the end of the year; data traffic revenue growth of nearly 20%; and a 37.4% increase in handset sales.

As we described last year, at the beginning of Q2 2015, there was a change of control of second largest multi-brand retail chain, Svyaznoy, which previously had distributed 15% to 20% of our SIM cards. While we would have been able to compensate on our own with the outright loss of Svyaznoy as a distribution chain, the sale of our competitors to the chain compel us to defend market share and develop new sales propositions to our customers. That included the expansion of our retail footprint to over 5,200 stores, driving up 65% of SIM card sales through proprietary channels; increased smartphone sales and created new proposition to prospective data customers; and the development of the new multi-brand and online sales channels to reach customers.

In 2015, the Big Three and Tele2 likely sold well over 100 million SIM cards in Russia, a market with 140 million people. The sale of so many SIM cards unnecessarily creates churn and drives up cost for all operators. Recall in 2012, when MTS led the change to a revenue sharing approach with dealers, commissions dropped significantly, churn improved by 300 basis points per quarter at MTS. Hence, we saw margins improve by over 200 basis points during this time. We believe that scaling back to all points of sale and significantly reducing SIM cards sale, especially through lesser value multi-brand retailers will have a similar effect on profitability in the sector. In 2012, investments in our own sales channel proved critical in driving profitability improvements and we believe this time we need to follow the same strategy.

In our fixed line business, revenue fell slightly in 2015 by 1.5%. However, we were encouraged by growth of 2.9% year-over-year in fourth quarter 2015. This was driven by our steadily growth in B2C market share. Over the quarter, we increased our broadband subscriber base by close to 100,000 subscribers. Driving this growth is the competition – completion, sorry, of our GPON project in Moscow as well as modernization of our regional FTTB networks.

In Ukraine, revenue for the year declined by 0.6% to slightly above UAH10 billion. For the quarter, revenue increased by 5.4%, our first like-for-like quarter since we ceased operations in what was a lucrative Crimea market. We have begun our build-out of 3G and launched in every major metropolitan market under the Vodafone brand. We have been building our 3G throughout Ukraine and by the end of the year could boast a network on par with our major competitor. We have begun to see quick uptake of 3G services amount with 20% plus of our subscribers who have smartphones and we believe this will benefit us looking head in 2016 and beyond.

Among our foreign subsidies, we know that revenue in Armenia fell year-over-year by over 8% as macroeconomic factors impact usage of services like international calling and roaming. In Turkmenistan, revenue jumped 3.9% for the year, which was driven largely by increased usage, which offset the decrease in lower value exit customers towards the end of the year. In Uzbekistan, however, we saw an impressive revenue growth of over 51% quarter-over-quarter as we reach the expected 1 million subscriber base mark in quarter number four.

I will now hand over to Alexey Kornya who will discuss the group’s profitability and financial performance in more details.

Alexey Kornya

Thank you, Vasyl. As Andrei noted, we saw a significant decline of 2% – or slight decline of 2% of adjusted group OIBDA for the year. The decline of adjusted OIBDA was attributable primarily to the effects of currency volatility and the lower OIBDA contribution from our Ukraine business compared to 2014. Overall, our OIBDA margin in Russia fell to 42.2%, but in absolute term, remains stable year-over-year at roughly RUB165 billion. We consider this a very strong result though as increased traffic data and subscriber growth in both our mobile and consumer fixed line business offset charges related to increased competitiveness, namely our distribution efforts, including higher handset sales and a larger retail footprint as well as the typical inflationary expenses. Quarter-on-quarter OIBDA fell 7.7% due to traditional seasonal factors, but this decline was 1.3 percentage point improvement in comparison to 2014.

In Ukraine, adjusted to OIBDA fell 8.1% year-over-year to UAH0.9 billion in fourth quarter 2015. For the year, adjusted OIBDA declined by 12.3% to UAH4.1 billion. The biggest factor in our decline was the government’s decision to increase fees and costs for spectrum, but we were also impacted by the loss of our Crimea business and operating challenges in Eastern Ukraine, markets in which we held leadership position prior to 2014. Towards the end of the year, we also incurred some additional costs related to the buildup of our 3G network.

Our OIBDA trends in Armenia reflects top line expenses as we see a strong impact in the market from macro trends and the impact on both the overall economy and customer usage trends. In Turkmenistan, profitability declined slightly as OIBDA fell 5.3% from the year to TMT110 million. Here, we see currency volatility and an increase in IT and network maintenance fees as a primary factor in OIBDA performance. In Uzbekistan, our operations delivered a positive OIBDA contribution of UZS2.6 billion in fourth quarter. We remain encouraged by trends in the market and anticipate a great contribution from this market to group results in the coming years.

Group net income declined 3.5% for the year to RUB49.5 billion. In addition to OIBDA trends, primary factors here include an impairment charge related to our Armenian business, higher depreciation and amortization costs, losses from renewed operations in Uzbekistan and higher financing costs, although through short and long-term deposits, we were able to mitigate the effect of non-cash ForEx losses and close to fully hedge our non-ruble debt position.

Free cash flow for the year amounted to close to RUB51 billion. This slight decline from 2014 primarily reflects OIBDA trends, but we obviously saw pressure from our Russian commercial strategy as higher handset sales negatively impact working capital. CapEx overall was higher than we anticipated due to increased investment in Ukraine related to our 3G license, spectrum cost and subsequent network build-out and investment in Uzbekistan. We were pleased to see Russian CapEx decline by nearly RUB6 billion for the year, a decline of 2.4 percentage points as a percentage of sales to below 20% of sales. This by the way allowed us to achieve what seemed to be the lowest CapEx to sales in the market. We believe this overall trend will continue in Russia and will positively contribute to our free cash flow performance going forward.

In fourth quarter, we completed payment of the interim dividend of RUB5.6 per share or roughly RUB11.6 billion based on our first half 2015 results. Overall, during the calendar year 2015, we paid out a record amount of RUB52 billion to our shareholders. Recently, as part of our commitment to shareholder returns, we transferred shares representing 3.29% of the company’s share capital to accounts owned by MTS. Since the shares are not held in – now held in treasury by private joint stock company Mobile TeleSystem, they have no voting rights and as such we are not permitted to pay our dividends on these shares. Eventually, we will cancel these shares.

As for our new dividend policy, we will submit our proposal to the Board of Directors Meeting on April 7. While we cannot discuss the formulation of the policy, management understands that the dividend is a key component of our investment thesis for investors. We are currently reviewing a number of options, including a more even distribution through the year. However, we do intend to sustain our dividend payout level in the foreseeable future.

By the end of the period, total debt stood at RUB348 billion. In fourth quarter, we drew a RUB5 billion credit from Sberbank, but we either repurchased or repaid close to RUB24 billion worth of ruble-denominated bonds from the market. Our net debt to last 12 months OIBDA remains constant with the third quarter at 1.2 multiple, a comfortable level from the company – for the company and lower by industry standard. Recent growth in this coefficient is largely currency-driven due to ruble volatility, but we remind investors that 97% of our non-ruble debt position is currently covered by a combination of hedges, short-term deposits or stable long-term investments, all of which are denominated in U.S. dollars and euros.

We remain focused on sustaining a strong balance sheet and underlying further ways to optimize our – identifying further ways to optimize our debt portfolio.

Andrei Dubovskov

Thank you, Alexey. It’s Andrei Dubovskov. Looking ahead, we see many of the same developments in our markets that have impacted results in 2015. Macroeconomic factors continued to depress our voice usage, while higher value products like roaming will remain constrained by overall customer behavior. Data growth continues in our markets of operation. In markets like Ukraine and Uzbekistan where we are building mobile data network, we can expect a positive impact from data adoptions. In Russia, we will see the continued growth, but obviously competition namely in distribution will cause significant volatility for us. For revenue, we expect group revenue to exceed 4% for 2016. The factors will be overall business activity and customer behavior in this volatile macro environment, growth of data usage in our markets of operations, handset sales and our response to our competitors’ aggressiveness in retail and the growth of B2C broadband and pay-TV services in Russia.

As for group OIBDA, we anticipate adjusted group OIBDA growth at a range from minus 2% to plus 1% for the year. Our markets remain volatile due to a number of factors, including heightened competition in retail distribution in Russia due to aggressive behavior of our competitors; the build-out of our 3G in Ukraine and non-market factors that are impacting our profitability; developments in other foreign subsidiaries; and macroeconomic factors and currency volatility throughout our markets of operation.

As for CapEx, as Alexey discussed, we already see a decline in CapEx spending in Russia in 2015. We completed our GPON project in Moscow and had decelerated our build-out of LTE network. From 2013, 2014 during the time when the value of the ruble and financing costs were more supportive, because of these fronts, we feel comfortable lowering our CapEx spending for 2016 to roughly RUB85 billion. Spending in Ukraine and Uzbekistan will remain higher as we build network in these markets, but the decline in spending in Russia will drive the decline in CapEx.

Despite these challenges, we still look out of – in the seamless structure of markets. It’s unfortunate that, once again, we see a necessary competition in retail in Russia. But we believe that eventually, Russia, like every other major market around the world, will come to rely mostly on proprietary and retail distribution. The greatest opportunity to increase our OIBDA and to have great value for shareholders involves reducing SIM card sales and how we are aligned in an ineffective and unprofitable third-party distribution. Outside of Russia, competition remains relatively stable as most of our peers start to rationalize their businesses and focus on network quality. Ukraine obviously presents unique challenges, but our build-out of data and other markets, combined with our cooperation with Vodafone, should yield positive results.

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

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question. It comes from Roman Arbuzov from UBS. Please go ahead. Your line is now open.

Roman Arbuzov

Thank you very much for taking the question. I had two questions. So, the first one is on the – I think just additional color on sort of a country-by-country basis. So, if you were to look at the Russian profitability in isolation, for example, last week, one of your competitors has reported and given a fairly weak profitability outcome for 2016, whereas you are guiding for basically flattish EBITDA. So, I appreciate it must be hard for you to comment on what your competitors are saying, but then could you please perhaps give some color, what you expect in the financial performance from the Russian business on a standalone basis and how is that offset in the equation from other businesses? That would be helpful. Thank you very much. And just to give more context where I am coming from is that one of your competitors said that their EBITDA in the Russian business could be down as much as 10% in 2016. And my second question is actually on the distribution market in Russia, I was wondering if you could please provide us your longer term vision for the distribution market? And on a practical basis, how do you think the heightened current competitive environment gets actually resolved? So do you think that it’s possible that we reach some sort of a stability situation through just gradual attrition of stores and store closure or do you think to solve the situation some more radical shakeup is required on the distribution side? Thank you very much.

Alexey Kornya

Thank you, Roman. Speaking about our outlook for OIBDA, we know that even though we have indeed a very strong performance. If you look, annualized, we see that we – although on the top side, on the top end of the market, we are still pretty much in trend and in line with where the market is. That is why we cannot comment on the specific performance of our competition. But what we can say on our side that our trends are fully in line with the seasonality and with what we saw in the previous years in terms of quarter-to-quarter performance. As far as our 2016 outlook is concerned, that depends very much on what would be the competitive environment in the market. And then particularly, in distribution field, we allow some decline in OIBDA in absolute terms up to minus 2 percentage points. However, if there is a rationale situation in the market, we see potential even for improvement in growth in terms of OIBDA.

Roman Arbuzov

But just to check, Alexey, you were talking about the group guidance here, not Russia. I mean, I was wondering if you could give us some color on the Russian performance. Is that possible?

Alexey Kornya

Yes. We think that group guidance is very much or predominantly driven by Russia. So in this respect, we see that outside of Russia, we will not have that much negative impact as we saw this year, because this year we were flat on OIBDA in Russia. And the negative factor came from outside of Russia for the reasons we discussed earlier. For the next year, we think that our group OIBDA performance will be more in line with Russia performance.

Andrei Dubovskov

And Roman, this is Andrei Dubovskov. Speaking about your second question, unfortunately right now, we have no possibility to talk about long-term view in Russia, because unfortunately for us, all our steps in this area we are creating, so to say, in response to. You know that the issue for us, it’s a problem with Svyaznoy and dealer set and how long this story will be developing in the Russian market. It depends on behavior of our competitors. And of course, we are already in every time to decrease the number of our monobrand stores, our multi-brand stores, etcetera. But right now, we have no possibility to decreasing this volume, because again all our states we are operating according to our policy in response to. But maybe in the nearest future, all our competitors can ask us how we can increase our top line, first of all, our revenue. And let me remind you, our revenue growth is 5% year-over-year based not only in our sales, but based on our data revenue growth, first of all. And at the same time, again, let me remind you, we are keeping our OIBDA, our profitability in absolute terms in a horizontal level, so to say. It was, if I remember correctly, RUB165 billion year-over-year, and this a key answer. If we have these good results in 2015 despite on the situation in sales area, that means that our strategy are really successful.

Roman Arbuzov

Thank you very much.

Operator

Our next question comes from Ivan Kim, VTB Capital. Please go ahead. Your line is now open.

Ivan Kim

Yes, good evening. Two questions from my side please on both actually on the competition. So can you, first of all, rate on the latest bond operation in Moscow? The effective prices went down, probably not as much as the sort of promotional ones, but structurally they went down. So, do you expect an impact on the revenue dynamics from that this year? And then secondly, one of your rivals decided to play a conversions card and you have a strong fixed line presence, especially in Moscow business. So do you plan a strong push in that direction as well? Thank you.

Vasyl Latsanych

Good evening, Ivan. This is Vasyl. Well, the first question, sorry, I missed it a little bit, but the second question is convergence. Let me answer this first. In fact, we are doing the convergence product for quite a while already. The well-known in Moscow product based on our MGTS network and is the MGTS quad-play, including all of the services of MGTS and an MVNO type of service of mobile communication based on MTS network is available in Moscow for quite a while already. We see that this gets very interesting traction when it’s being sold through the people who sell the fixed line. And it has a limited effect if it is sold just through the stores off-shelf as it usually gets with the mobile services. So, I would say that some – this did not come as a totally unexpected surprise and made us very worried about the market as we are already in that market and we understand and know its capacity is limited and is subject to how you sell it. In fact, yes, we do consider this as a possible scenario for development throughout Russia as we have the presence of our fixed-line networks in most of the Russian regions and we feel very strong about that business. It’s just that we would not expect that to be a breakthrough at the moment as this kind of offer has been in the market for a while and it did not show extreme success so far. And can you please help me with the first question that you have asked, what exactly did you mean?

Ivan Kim

Yes, I meant some price. So, VimpelCom, for example, re-priced their bundled tariffs, unified them, their offers, throughout Russia. MegaFon made some revisions to the bundled prices. And mostly, it was – it resulted in a price reduction in Moscow, but not in other regions, effective pricing I mean. So, I was just wondering whether you see this as a threat overall and a potential impact on your revenue?

Vasyl Latsanych

Well, thank you. In fact, when we have carefully studied all the numbers, we have seen that the competitors have rather adjusted their pricing to be closer to our level, which was initially lower than theirs. This was something a part of our strategy when we wanted to defend our market position, offering very competitive rates and our competitors tried to increase their earnings by monetizing the existing customer base and selling it more expensively. As you could see from their earnings, it probably did not work well that much, so they have decided to slid down to the levels of our pricing, which was more competitive. And we just are seeing them being closer to us but not undermining our current competitive positions. We may be running certain promotions as we normally do and that should not greatly impact the revenue and the margins for the next year in terms of the new pricing and existing customers pricing as we do not seem – it doesn’t seem to be necessary to revise generally our pricing downwards. Rather, we would like to promote it to the customers with one-time offers, time-limited offers, but not revise the whole pricing grades downwards and lose the revenues in order to protect the market position, which we do feel strong about right now.

Ivan Kim

Thank you very much.

Operator

Our next question comes from Herve Drouet from HSBC. Please go ahead. Your line is now open.

Herve Drouet

Yes, good afternoon. Two questions as well on my side. The first one is some of your competitors are indicating a plan of selling towers and sites. I just wanted to have your thoughts on your sites in terms of, do you think there is something you can play a role there or from your strategic perspective, something you are at this stage interested in? And the second question is more on the fixed line segments, I mean, after now, most of the GPON investment has been down. In Russia, the fixed line’s trend is still under a bit of pressure, especially on the revenue side. I mean, do you see some stabilizations coming through? I noticed, for instance, in the Q4, especially the B2B segment, which has been, in the last three previous quarters, under pressure. It looks like now there is a kind of sequential improvement versus Q3. So I was wondering if something you think this trend could be maintained, some of stabilize the revenue in the fixed line B2B markets? Thank you.

Andrei Dubovskov

Herve, thank you for your question. It’s Andrei Dubovskov. Talking about your question about our plans in towers of our company, of course, we are not going to create a new towers company, because right now, we are the biggest towers company across the Russia. And I think that in this case for example, if we are going to be a part of a new towers company, it will be a question about dependability, our behavior of – the behavior of our competitors and the behavior of new shareholders of these tower companies. And I think will be a new competition in the Russian market if somebody or first of all our competitor is going to organize a new market in this area, because at the same time, if a new towers company wants to create a new price policy in the Russian market, we will be ready to reduce this price, for example, at least by twice, why not, because talking about our current presence in the Russia in this area, again, we are the biggest towers company in this market. And talking about your second question let me pass this question to Vasyl.

Vasyl Latsanych

Thank you, Andrei. On the B2B fixed line business, the business is definitely under pressure as the B2B customers are cutting their budgets and revising their spendings as well as the B2G customers are generally under the scrutiny, looking at their current and past costs. In fact, we believe that we are one of the best carriers to set for – to be set for catching of the falling out revenues of the B2B side with a strong B2B – B2C presence. If you look at our network and our customer base, we do enjoy a very significant market share and strong composition in the B2C market, both in Moscow and outside of Moscow. And our networks have recently gone through major upgrade, both in the city and outside in regions. This would allow us to sell more to the B2C market to be more aggressive, selling very high class products with a relevant pricing, which we do at the moment in Moscow and which we are planning to do all over the Russia to counter the loss of the B2B markets, which is pretty much inevitable with the gains in the B2C market where we feel strong.

Herve Drouet

Okay. And just too I had maybe follow-up questions. I mean, if we looked at Q4 versus Q3, I know if we looked at the total, there has been definitely a transfer, to some extent, of B2B to B2C. But Q4 versus Q3 has been in fact an improvement in the B2B revenue in Russia. And I was wondering why I think last year, there was no improvement Q4 over Q3. So I was wondering is there any one-off in Q4 that may have explained this increase versus Q3?

Vasyl Latsanych

Herve, this is the factor of the one-off settlements and one-off contracts. The B2B and B2G markets are very volatile due to certain moments when the contracts are being closed and then paid and that suddenly boost the revenue of a certain quarter. And then in the next quarter or in the year after, you don’t have that contract settlement and suddenly, the profits or the revenue seemed to be going weak. This is not – this should be more equalized. Even per quarter measurements of the B2G and B2B business is not that much relevant as it is for the B2C. But in fact, I would like to point out that Q4 though being weaker on B2B has been totally compensated by B2C developments. So again, we are putting very big bets on the B2C market developments and the compensation for whatever may happen in the B2B and B2G segments.

Herve Drouet

Okay, thank you. That’s clear. Thank you very much.

Operator

Our next question comes from Ksenia Mishankina from UBS. Please go ahead. Your line is now open.

Ksenia Mishankina

Hi, thank you for the presentation. What portion of your short-term debt do you plan to refinance, if any? Thank you.

Alexey Kornya

Ksenia, thank you for the question. It will depend very much on the market condition and situation. Anyway, whatever is the view, you need to be, one way or another, refinanced or fully repaid and that will depend on the cost of that and specific market situation in a particular moment.

Ksenia Mishankina

Okay, thanks. And what is your sort of thresholds for refinancing in terms of cost of borrowing?

Alexey Kornya

As far as hard currency debt denominated, that would be fully repaid. We don’t have any plans for refinancing. As far as the ruble denominated debt is concerned, that depends on the timing of repayments. So, most of our debt comes closer to the end. If we see that it does make sense for us to refinance through short-term borrowings in the market, we will do. Otherwise, we will reduce our cash holdings.

Ksenia Mishankina

Okay, thank you.

Operator

Our next question comes from Alex Balakhnin from Goldman Sachs. Please go ahead. Your line is now open.

Alex Balakhnin

Yes, good evening. One question from me, last year, you ramped up your handset distribution capabilities quite remarkably and the sales of handsets moved up. I was just wondering what’s your level of commitment to that in 2016 I guess or it’s fair to assume that the level you achieved in the fourth quarter is a sort of good amount of handsets you distribute? So, what’s your thinking about the capabilities you have built? Do you need more?

Andrei Dubovskov

Yes, it’s Andrei Dubovskov. You are absolutely right. Our handset sales in 2015 were really big and it was I will say exciting for us because the growth was 37.4% year-over-year, if I remember correctly. But at the same time, let me remind you, it’s very important for us that in absolute terms, this growth in 2015 grow less than the growth of – in compare with our data revenue, for example. That’s really important for us if we are going to explain how we can increase our revenue, how we can support our 5% growth revenue in total. But at the same time, in 2016, our sales policy will depend on our competitors’ behavior, first of all, as I told you earlier. And I think maybe it will be approximately the same level of growth like in 2015. At least we need to increase the penetration from the current level of 60%. I am talking about the data generated to keep into our subscriber base to the selling to maybe 75% till the end of 2016.

Alex Balakhnin

Thank you. That’s helpful.

Andrei Dubovskov

I am sorry. I am talking about the – a level in sales, not in the base. In the base, maybe it will be, I don’t know, around 60%, around 60%.

Alex Balakhnin

Right. And one thing I tried to reconcile with this quite rapid handset sales growth and the increase of handsets on your network is this increase coincided with the slowdown of your data revenues. Is this the timing effect, i.e., more devices were sold towards the end of the quarter so they were not realized for most of the quarter and we will see the acceleration of that line of revenues in 2016 in the first quarter or the pricing started working maybe against you? So basically, your view on how this evolves and whether there is a conflict between two lines would be helpful. Thank you.

Vasyl Latsanych

Alex, thank you for the question. We believe that this game of who grows bigger, faster on the – brighter on the data revenue is overplayed already and basically has less and less reasons to continue to be played. In fact, the data revenue is just one of the factors of the revenue impact in the total revenue of the mobile business. And if you consider more than 60% of the bundled tariff sold in the retail of pretty much every carrier in Russia at the moment, the allocation of the internal revenue streams plays more important role than the growth itself and the market comparison of these growth numbers. Yes, we do enjoy the fastest – the biggest growth throughout the year, which is 20% year-over-year of the data revenues. But we do commit – we do agree and we would like to stress that this is less relevant as a measurement of our success than the top line revenue as a whole. In fact, if you consider all the revenue streams that are forming the top line of the mobile carrier today, these are voice, messaging, data, value-added services and roaming. In most of the cases, four out of them are showing negative trends. Voice is going down. The SMS is going down. The roaming is not feeling very healthy. And even value-added services and content services are not very bright recently.

The only growing subject is data in terms of usage and in terms of adoption. I cannot find a proper translation of the usage and adoption into the revenue streams. Therefore, I would rather suggest that the top line to be considered as the sole results of the activities of the carrier, which are mostly driven by the data revenues within the total bundle of the revenue factors of the carrier. Therefore, I wouldn’t compare quarter-to-quarter anymore. I wouldn’t compare head-to-head to competition anymore, because that more depends on the allocation than on the actual performance. But if you see the top line of a carrier showing positive or being better than the competition, there is a very good proxy for understanding that its data business is doing much better than the competitors’ one. And again, looking at the pricing initiatives inside of the market, especially the pricing which you can see on the shelves and maybe advertising, bear it in mind that our business in Russia is represented by more than 70 million of active customers. Whatever price you see on the shelf, it has very little reflection on the overall earnings of a specific service. It is more up to the base in whole. It is more up to the adoption of its service and of the residual pricing in the base that form the revenue streams and that form the relative growth factors of the carrier quarter-to-quarter or year-over-year.

Alex Balakhnin

That makes sense. Thanks so much.

Operator

Our next question comes from Igor Semenov from Deutsche Bank. Please go ahead. Your line is now open.

Igor Semenov

Yes, hi, thank you very much. Actually, I had a question on data, but I am very happy how you answered that? So in that context, I mean, if you look at your top line, it was basically flat in Q4 and the overall trend has been obviously decelerating. So I am just kind of trying to reconcile this flat Russia mobile with your 4% growth guidance. I mean, it’s – I think it’s like RUB14 billion to RUB18 billion increase in – if I am not mistaken, in the overall revenue. And I just cannot – maybe you could help me build it up. If the service revenues are not really growing, how do you make up that difference when the other lines are not that great overall?

Vasyl Latsanych

Igor, let’s get it down to the numbers. The mobile revenue year-over-year is plus 2%. Well, that is the highest number in the market as far as I understand in this segment. Then the overall group revenue uplift for the next year, which we guide to is comprised of the countries of mobile services of fixed line services of handset and the retail revenue. So in general, yes, overall, the market of mobile-only services is slowing down the growth. And actually, that is as I said a good proxy to understanding that the growth of the data business is also slowing down, but we are trying to catch it with the other services as well the fixed line service, the retail business and the development in the countries. So that’s how we plan to reach the number that we guide to.

Igor Semenov

Okay. And can I also ask in terms of the penetration of bundles within your base, what is it currently? And also, do you see more customers upgrading their bundles to higher value, higher ARPU bundles as their data consumption grows or you see people actually trading down and taking advantage of more generous allocations with lower price points in your bundles, what is the prevailing trend? Thank you.

Vasyl Latsanych

Well, that is something we are very keen on development and that’s something we are watching day to day. In fact, we see more than 60% bundled penetration in our new sales in our retail, which is a very good sign of people getting the right level of adoption of the V&D tariff plans. And the second part of your question is, what’s – well, you also have asked what’s been the base? It’s over 20% as of today and we hope that it will grow during 2016 even faster than it was before. In terms of the size of the bundles, of course, the most popular bundle is the low-end one, the entrance-level one. And we do not want to focus solely on the increase of the size of the bundle currently, because we would see a lot of opportunities fail to enroll people to bundles from their current prepaid tariff plans. So in fact, the current goal is to increase the number of the bundles in their base so they have the higher penetration of the bundles. The up-sell of the bundles is the second stage, which we look at of course, but we don’t set that as the priority for the moment.

Igor Semenov

Okay. Thank you.

Operator

Our next question comes from Alex Kazbegi from Renaissance Capital. Please go ahead. Your line is now open.

Alex Kazbegi

Yes, hi, thank you. First of all, just to clarify, I think Alexey mentioned about the dividend payout level being maintained that would be the goal. I just wonder if you can clarify whether you mean in relative terms or in the absolute terms? And my two questions are, first of all, about the CapEx, just was trying to understand what are the risks to your number of RUB85 billion? I mean, one is that, have you obtained already any kind of, so to say, contracts for the vendors? So, are you fairly comfortable so to say, there won’t be any offsetting changes throughout the year towards the high end, if you wish? And also you have been quite successful in negotiating the joint network usage or net joint, so to say, master usage or frequency usage with your competitors/colleagues from the other companies. Is that also factored in, in this number or could we see, so to say, improvement on this side? Do you plan, so to say, more sharing, which could reduce the CapEx further? So just want to understand again what the risk here on the upside or the downside? And the last question is on the Ukraine, if I look at your EBITDA margin and the margins, so to say, performance, it’s more like – it’s more a trend than anything else. I mean, I understand that you have the higher fees there with the 3G rollout, but similar things can be said about your competitors and their margin has been actually improving year-on-year. So, my question is that what are the specific factors which led to, so to say, more deterioration directionally to your margin and should we expect improvements in 2016 and why would that be? Thank you very much.

Alexey Kornya

Alex, on the dividends, I think we are not yet in position to go that much into details. So we’re just looking at, right now, generally maintaining or sustaining the dividend payout in, what, 4 months and so forth. That’s already – that’s a bit too premature to discuss after – before the discussion on the board, which will recommend the dividends for this year to the General Shareholders Meeting, in which we will approve the dividend policy. As far as the CapEx sensitivity is concerned, we think that we have – apart from the risks on upside and downside, we have a number of tools how we can steer and how we can achieve the goal, which is a possibility to renegotiate the terms of payments, to negotiate the products and specific investment ideas. We can move the projects itself and so on and so forth. So, we have a number of instruments, a number of tools how to achieve the goal, so which we also kind of demonstrated in the previous periods. So that we will be pretty much in line with – so that we can be pretty much in line with the CapEx guidance which we are giving. That is why we see, yes, that there are certain risks, but that will drive our CapEx to the goal.

Andrei Dubovskov

Alex, its Andrei Dubovskov. Let me add some information about your CapEx question, I just want to clarify some points. I hope you remember our 2015 experience when, in the half of year, we spent at least 80% of all our CapEx based on our previous relationship and previous collaboration with our main vendors and that allowed us to the good results in CapEx to sales. And let me remind you that our CapEx to sales in 2015 was less than 20%. And of course, we have very good experience in this area and we have all possibilities to keep this level maybe less in 2016. And talking about – Alexey, it will be your question, okay?

Alexey Kornya

Yes. And speaking about Ukraine, I think there are important factors. If you look at the dynamics of OIBDA is that we had a quite strong presence in Crimea, in the consolidation of Crimea, from our durations served us more than other players in the market. The same true is for the eastern part of Ukraine where we had the highest share of the market than other countries. It’s a – there is some instability in this part of the Ukraine is also hurting us more than others. And the last one is that we do see that our overall marginality is still pretty much high in the market, although that’s certain if you look through dynamics perspective. And we will see probably that surely pressure coming to Ukraine in profitability or marginality in 2016. From a number of factors is external, as I said regulatory pressure and so on and so forth and internal, the structure of our market and the composition of our revenue split in the market.

Alex Kazbegi

But on the other hand, the Crimea and the Eastern Ukraine, they are, so to say – I wouldn’t say, things of the distant past, but definitely, they are things of the past. So, those effects should be already – should have been already absorbed probably now, I don’t think that’s – those things should be already a sunk cost and done deal so to say and this could start improving now?

Alexey Kornya

Alex, if you look at the year-on-year, then in 2014, we had this deal through the year, Crimea, in the most stable situation in the eastern part, which contributed positively to our 2014 marginality. While in 2015, we already did not have this in part. So this is why, if you look at the dynamics, then you see these factors playing.

Alex Kazbegi

Yes, okay. Okay, thank you very much.

Operator

Our next question comes from Sveta Zharikova from Sberbank. Please go ahead. Your line is now open.

Svetlana Sukhanova

Thank you very much. Svetlana Sukhanova from Sberbank. My question would be about impact of the roaming revenues to OIBDA, when I look at Slide 7, I see the bridge in the OIBDA margin bridge that the largest impact during the year to your OIBDA margin was from roaming revenues. But from my understanding, the roaming revenues are not more than 10% of your revenues, while international roaming is not more than 3% of revenues. So, I cannot reconcile numbers to get to this 1.5 percentage point impact on your OIBDA margin. Can you please kindly elaborate on this?

Alexey Kornya

Our roaming revenues are higher. They are around – more than 15%, that’s around 20%, slightly lower. That’s including intra-country roaming, not only external roaming. And then of course, that’s quite a material part of our roaming. And as it’s falling, then external and internal, you have the pressure on OIBDA coming from this slide.

Svetlana Sukhanova

But two follow-up questions here. Do you disclose the share of international roaming here? So, if it is close – if overall roaming is close to 20%, do you disclose share of international roaming?

Alexey Kornya

So, we are not giving separately intra-country roaming and international roaming. We are giving the total together. So we have roaming of our own subscribers, which is international and intra-country, you get roaming of incoming subscribers on our network. So that’s all together falling within the line of roaming revenues. And as you have the same, by the way, with the voice revenues, if you have significant reduction of those lines in terms of year-on-year dynamics in the revenues, then of course the profitability of that assuming they are getting the same share of costs and so on and so forth will be falling. So, all three constitute significant part of revenues, as I mentioned, close to 20%. And the dynamics and the revenue, together with the cost side, define the impact which is shown here.

Svetlana Sukhanova

Thank you very much for this. Much, much clearer now. My second question, if I may and I hope you will excuse me for this question would be about Uzbekistan. If there is any legal development about this, given the funds, the settlement, which VimpelCom has paid? Have you – any new information regarding the investigation, which is going on in the Uzbekistan and potential impact on MTS?

Alexey Kornya

No, there is no new information. All – as Josh mentioned, opening the conference call, nothing new.

Svetlana Sukhanova

Fair enough. Thank you very much.

Operator

Our next question comes from Igor Goncharov from BCS Financial Group. Please go ahead. Your line is now open.

Igor Goncharov

Yes, thank you very much for the opportunity. My question relates to the growth in the data revenues, which was discussed before. I fully understand your argument that this revenue line, by itself, is becoming less and less representative because of the high increase in share of bundles. But this argument is probably in the several last quarters and yet specifically in this quarter, we saw a noticeable decline in your data revenues as you reported – sorry, not decline, decline in a year-to-year growth rate in your data revenues, especially compared to the competitors who didn’t show such a decline in this quarter. My question is basically, was there something special about this quarter? Was there any one-offs or MTS related reasons that would explain the decline in the growth rate of data revenues in Russia in the fourth quarter 2015? Thank you.

Vasyl Latsanych

Igor, this is Vasyl. I think this is the overall misled situation with the data revenues separately from the other services. As I said before, this is integral part of the bundles that we sell and the bundles would be divided to certain services, such as data and voice, artificially. And the more bundles are sold, the more artificial level of division there is in the overall revenue of a carrier. Well, just to support that, I have to say that there was no one-offs, nothing special specific to MTS. On contrary, we had achieved some record growth of LTE device penetration in 2015 and the end of the year. We have achieved more usage than we had before. And actually, I don’t think that there is a good explanation and a reason to this separate line, separately from the overall performance of the carrier of the mobile services. So, there is no explanation that I could put forward for this or that growth of the data services in 2015. And but I would like to draw attention to the fact that previously, all of the carriers were posting higher numbers due to lower base. And as the base of this service and the penetration gets higher, the growth rate slows down naturally, which does not mean that the absolute number of the users or the megabits – megabytes or even the money that we could associate with these megabytes go down, but it’s just a factor of the base growing bigger and the overall growth number percentage point quarter-over-quarter or year-over-year naturally declining.

Igor Goncharov

That’s very clear. Thank you very much.

Operator

Our next question comes from Robert Procopé from CCL Investments. Please go ahead. Your line is now open.

Robert Procopé

Hi, it’s Rob Procopé from Charlemagne Capital. Thanks for the call. Two questions. Firstly, has the NVision deal closed at the year end and where do we see that in the cash flow? And secondly, did I understand correctly that you expect the retail business to grow at similar pace in ‘16 as it did in ‘15? And if so, what are the implications to working capital? Should we see a similar sort of working capital build as a result of that? Thank you.

Alexey Kornya

We don’t see that the NVision deal will have any material impact on our OIBDA and free cash flow.

Robert Procopé

Sorry, Alexey, I was – has it closed at the year end at the balance sheet date or not is it in the cash flow?

Alexey Kornya

Yes, that’s fully closed. That’s fully closed. That’s fully closed. But only partial is yet – is in the financial statements, because that was closed through the year, not at the beginning of the year, but anyway, the material – the impact is not material in our view.

Robert Procopé

And where do you see that in the cash flow? Is that – is that in the line item purchase of intangibles, just to be clear?

Alexey Kornya

Yes, that’s – I think that goes somewhere in – okay, let me get back to you in a minute and so far we will answer on your second question.

Robert Procopé

Thank you.

Alexey Kornya

Yes, you will see that in the financing activity of our cash flow because this is a related party transaction and related party transaction on the MS4 – on the IFRS goes into financing activity.

Robert Procopé

Okay.

Alexey Kornya

Speaking about growth in the retail, we will probably see that it is somewhat outpacing in 2016, will be outpacing the growth in our overall mobile services, but we are not giving the specific split because we don’t see any practical sense in that.

Robert Procopé

So, will it require a sort of similar investment in working capital this year as it did last year?

Alexey Kornya

Well, not probably that size of investment in the working capital, but some limited investment in working capital, yes.

Robert Procopé

Okay, thank you.

Operator

[Operator Instructions] Our next question comes from Ksenia Mishankina from UBS. Please go ahead. Your line is now open.

Ksenia Mishankina

Hi. I just had one follow-up. Can I just check the amount of hard currency debts out of the total short-term debt in 2016 please? Thank you.

Alexey Kornya

Well, as it is indicated in our presentation, at the end of the year, we had 97% of our debt, hard currency that is being hedged. So, we had a very limited open hard currency position, while the size of our gross debt in hard currency is approximately 25%, 30%. But once again, just to stress that point, that is hedged either through hedges, direct hedges or through long and short-term investments and deposits.

Ksenia Mishankina

Sorry, I just wanted to check the – in terms of the short-term debt, the amount of hard currency that – you are saying you will be repaying hard currency debt?

Alexey Kornya

It’s not significant. We will – what I said we will repay only what is coming due in 2016 and we talk about probably RUB100 million, RUB200 million, not more.

Ksenia Mishankina

Thank you.

Joshua Tulgan

Operator?

Operator

Yes.

Joshua Tulgan

No, go on, I am sorry.

Operator

Our next question comes from Roman Arbuzov from UBS. Please go ahead.

Roman Arbuzov

Thank you very much. I just had a couple of quick follow-ups. In terms of NVision, how – what is the revenue contribution of NVision to group in 2016 please? And do you plan to divest any part of the NVision business? And secondly, on Uzbekistan, you gave us access on financial guidance for Uzbekistan in 2015, in terms of what to expect at EBITDA level in absolute terms? So I was wondering if you can give us just some sort of steer for 2016 as well. And then thirdly, just on the distribution, do you see yourself opening more stores in 2016 into the Russian distribution? Thank you.

Andrei Dubovskov

Roman, it’s Andrei Dubovskov. Talking about your first question about the contribution – the part of contribution into our revenue growth in 2015, it was approximately RUB5 billion. And we are not waiting for some reason how we can increase the revenue in 2016 significantly, because it’s IT business, it’s not a service revenue. It depends on our relationship with a lot of our partners in B2B market. Of course, we are going to create a new area, a new business in this area related to our current B2B clients, related to our partners in the market. And of course, it depends on how we can create this business like a new business. I think maybe the revenue contribution in 2016 will be maybe RUB1 billion or RUB2 billion more than in 2015.

Roman Arbuzov

Sorry, but haven’t you closed the transaction in December? So wouldn’t the contribution from NVision be quite limited in 2015?

Alexey Kornya

Yes, you are absolutely right. We talk about the external not intra-group revenues. However, if you take the pro rata share of those RUB5 billion, that’s of course a much smaller amount.

Roman Arbuzov

Okay, thank you. So maybe RUB7 billion versus a small amount in 2016?

Alexey Kornya

Effectively – sorry just to put the point into this discussion. So effectively, we talk about less than RUB1 billion in our financial statement. But overall, if you look through the – from the group perspective for the year, we talked about the amount, which was mentioned earlier by Andrei, RUB5 billion or so.

Andrei Dubovskov

And as for Uzbekistan, this is Andrei Dubovskov. As for Uzbekistan forecast, we expect, as we mentioned, of course a positive OIBDA for the full year 2016. Percentage wise, it should be around 15%, 20% of OIBDA margin and we expect also our revenue growth by 1.5x to 2x from revenue came from this year.

Joshua Tulgan

Operator, do we have any other questions?

Operator

We have another question now, if we have time and the question comes from Igor Semenov from Deutsche Bank.

Igor Semenov

Yes, hi, thank you very much again for the follow-up. Yes, I just wanted to follow-up on the roaming. This 20% sounds a little too high. I mean, in your 20-F, for 2014, the roaming was about 9%, including guest roaming and roaming for own subscribers. So, I don’t think it would increase so substantially in 2015 given the macro and the reduction in tourism. And the second question is I just wanted to follow-up on – and see if – what should be the accurate amount? And the second question is I wanted to ask on the – on MTS Bank, what’s your plans for 2016 and do you see further injections – cash injections into MTS Bank this year? Thank you.

Alexey Kornya

Igor, right, we were saying about 20% of roaming falling year-on-year, which was a disclosed figure. And because of that significant fall, that contributes into this waterfall chart and into that calculation, which gives the effect on the roaming revenue, effect on OIBDA dynamics. Sorry if we were misunderstood.

Igor Semenov

Okay, thank you. And on MTS Bank?

Alexey Kornya

Yes. Well, as far as the MTS Bank and financial products development concerned, we are closely monitoring the situation. We don’t see, at this point of time, any need for cash injection. We will have to see how the overall macroeconomic and the financial sector dynamics will be developing. And we will be reacting depending on that situation, which will have inevitable effect on the core financial sector, but once again, at this point of time, we don’t see such need.

Igor Semenov

Thank you very much.

Joshua Tulgan

Well, operator, if there are no more questions?

Operator

No, we do not have any further questions.

Joshua Tulgan

Okay. Everyone, thank you very much for joining the call. We, of course, welcome you at any time to contact 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 meantime, we appreciate everyone’s interest and wish everyone a pleasant day and evening. Cheers.

Operator

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

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