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Mobile TeleSystems (NYSE:MBT)

Q4 2005 Earnings Conference Call

March 27th 2006, 9:00 AM.

Executives:

Vassily Sidorov, President and Chief Executive Officer

Eric Franke, Chief Operating Officer

Grzegorz Esz, Chief Marketing Officer

Beyes Fedoisky (phonetic) Acting Chief Financial Officer

Mark Burdon, Chief Financial Officer of Ukrainian Operations

Andrey Karvanion, Vice President for Corporate Communication.

Analysts:

Sean Gardiner, Morgan Stanley

Vladimir Postolovsky, UBS

Rizwan Ali, Bear Stearns

Sergei Arsenyev, Goldman Sachs

Herve Drouet, HSBC

Jean Lemardeley, JP Morgan

Alexei Yakovitsky, Deutsche Bank

Andrei Bogdanov, Alfa Bank

Evgeny Golossnoy, Troika Dialog

Juri Holliyokcos, Credit Suisse

Anna Bossong, CA-IB

Haggard Eskoyva, Credit Suisse

Operator

Thank you for holding ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2005 Financial and Operating Results. Throughout today’s presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If anyone has difficulty hearing the presentation, please press the “*” followed by the “0” on your telephone. I will now hand the conference over to Mr. Andrey Karvanion. Thank you, sir. Please go ahead.

Andrey Karvanion, Vice President for Corporate Communication

Good day ladies and gentlemen and welcome to MTS's Q4 and Full Year 2005 financial results conference call. I would like to introduce MTS's executive team today. Vassily Sidorov, President and Chief Executive Officer; Eric Franke, Chief Operating Officer; Grzegorz Esz, Chief Marketing Officer; Beyes Fedoisky (phonetic) Acting Chief Financial Officer; Mark Burdon, Chief Financial Officer of our Ukrainian Operation; and myself, Andrey Karvanion, Vice President for Corporate Communication.

Before getting started, I would like to remind everyone the statements made during the conference call reflect the opinion of management as of the date of this call. Future developments may render the statements outdated. However, we do not intend to update the guidance provided today before our next quarterly conference call.

Please note that the reconciliation of operating income before depreciation and amortization for operating income can be found on the Company’s website. By now, you should have received a copy of our press release by mail. If not, the press release as well as the management presentation can be found on our website at www.mtsgsm.com in the Investor Relations Financial Reports section.

Now, I would like to pass the call over to Vassily Sidorov, President and Chief Executive Officer of MTS.

Vassily Sidorov, President and Chief Executive Officer

Thank you Andrey. Good evening ladies and gentlemen. I would like to start with a brief overview of 2005 and then Grzegorz and the boys will take you through financial and operating KPI’s of Q4 and annual results in more detail. Grzegorz will also give you a brief update on the recent marketing activities and competitive dynamics. After that we will be happy to answer any of your questions.

Let me start by going through what I consider to be key achievements of 2005. Our main goals in 2005 were to retain leadership, integrate the business and lay the foundation for strengthening the Company’s lead and further international expansion in 2006-2008. The latter included executing a number of crucial integration measures, such as the full-fledged rollout of our new management system, migration of our pre-paid customers to a new billing platform, consolidation of call centers and radical enhancement of customer service quality and other key operational processes. These measures were successfully implemented.

Our financial results for 2005 demonstrate solid growth of our topline in earnings. Our revenues for the year were up 29% at $5.011 billion. OIBDA was up 21% at 2.539 billion, and net income was up 14% year-on-year at $1.126 billion. The OIBDA margin for the year was 50.7%. The growth of our topline by $1.1 billion in 2005 was unrivaled by anyone in our peer group.

We added more than 24 million subscribers to the company’s consolidated subscriber base in 2005. At year-end, we operated in 82 out of 86 regions for which we hold licenses in Russia. We added a further 2 million subs in the first two months of this year.

Our marketing initiatives of Q4 last year and Q1 of this year have been geared toward strengthening our customers’ loyalty and enhancing the effectiveness of our services. The Company’s subscriber market share at the end of 2005 stood at 35.1% and stable in the first two months of this year.

In Ukraine, the competitive environment has changed with the entry of an aggressive new player: Astelit in February 2005, and the acquisition of Wellcom by Vimpelcom in November of ‘05. Despite increased competition, MT continues to post strong results with impressive revenue and earning growth. Our goals for 2006 are revenue and subscriber leadership in Ukraine.

Our operations in Uzbekistan showed a healthy subscriber and topline growth dynamic. Our subscriber market share was at the level of 55% at yearend 2005. In Turkmenistan, MTS brought its ownership in BCTI to a 100% in November. We are well placed to continue being market leaders in this country as we invest in strengthening both our network and distribution channels.

Our expansion into some of the former Soviet Union countries has introduced us to new and at times unpredicted risks, as represented most acutely by the events in Kyrgyzstan. In this regard I would like to reaffirm our position in detail.

The acquisition that we announced in December 2005 was completed after proper due diligence, and in accordance with the international and Kyrgyz legislation. We reiterate that the seizure of Bitel’s offices was unlawful, and we will continue to defend our ownership title through courts over proper jurisdictions. Currently, MTS has no operational control of its offices in Kyrgyzstan.

There are a number of regulatory challenges to be faced in Russia in 2006, including polling Party Pays, Mobile Number Portability, and MVNO regulations. CPP is to be introduced on July 1, the exact terms are currently being worked out. These terms may potentially have a negative effect on our profitability as revenues may decrease without a similar reduction in associated costs. In Ukraine, the implementation of a universal service fund charge is contemplated for this year.

The liquidity of our stock increased in 2005 with the sale of the remaining stakes by T-Mobile in September, and recently MTS was added to the RTS index with a 5.7% rating, which should further increase our stock’s liquidity.

We’ve recently added a number of high caliber professionals to our management team. Andrey Karvanion, the Company’s new VP for Corporate Communications in charge of Public and Investor Relations; George Johnson, the new Director of Marketing that will work alongside Grzegorz Esz , the Company’s freshly appointed CMO. Andrey has a wealth of experience in Corporate Communications after having run one of the top five PR agencies. George used to be the Chief Marketing Officer of Kyivstar prior to his move to MTS, and Grzegorz has been acting CMO of MTS for the past four months.

To summarize, we feel that our achievements in 2005 coupled with competitive lessons learnt should be a solid foundation for robust performance in more of our operating markets in 2006. We remain committed to increasing shareholder value. The focal points for 2006 are customer loyalty, revenue growth, and operational efficiency. The Company’s capital structure should support our ability to combine non-organic growth with increasing cash returns to our shareholders. On this note, I would like to hand back to Andrey. Thank you.

Andrey Karvanion, Vice President for Corporate Communication

Thank you, Vassily. Now I would like to pass the call over to Grzegorz Esz, Chief Marketing Officer of MTS.

Grzegorz Esz, Chief Marketing Officer

Thank you Andrey. Good day to everyone. MTS led the market in Q4 both in terms of growth sales and net acquisitions, which resulted in strengthening position of market share leader in Russia on the level of 35%. Total number of subscribers at yearend: 44.2 million and 58.2 million for the group. The main contributor to strong acquisitions was New Year promotion with $0.02 on net cost price market. Very strong sales uptake in the month of December resulted in $1.6 decline in ARPU from 8.9 to 7.3 in Q4, due to high number of customers without the chance to talk the full month. The drop in ARPU is also driven by seasonality, lower growth economy. Ukraine has experienced the same impact and their growth is from $10.8 to $9.1 in Q4.

Minutes of use, lower Q4 to Q3 from 130 to 123, but continues to grow in content segment from 309 to 348. The decline of seven minutes in pre-paid segment from 99 to 92 was again due to a strong mass market growth as uptake in December. Successful growth in sales during New Year promotion allowed MTS to reach 7.7 million growth, which was 33% higher than Q3. The plus point of this promotional offer was $0.02 bonus calls, which was actually the main driver of effective price per minute: EPPM, decline of 14% versus Q3. Churn for the year was 20.7%, and Q4 was 5.2%. Percentage of churn for the fourth quarter has also been affected by the strong growth in this quarter.

Value-added service revenues increased by 6.6% Q4 versus Q3, which resulted in $0.90 per user in both quarters. Year-on-year growth is 20.7%, increase is driven by rollout for detailers coverage and growth of content usage. Year 2005 was very competitive, which resulted in an increase of mobile penetration in Russia from 51% to 87%, and 29% to 63% in Ukraine. Such strong competition caused price erosion and drop of EPPM and ARPU respectively. Main growth was driven by prepaid offers, reflected later in mix of prepaid subscribers growing from 77% to 88% of the customer base.

Dilution of the customer base was one of the strongest drivers of ARPU and MOU decline. Key marketing initiatives were targeted to sales promotions, implementation of new tariff plans and strong development of value-added services and CRM campaigns. Rollout of GPRS to 63 regions, we have added another eight in the beginning of 2006. I-mode service and other content services set sound ground for fast development of value-added services in 2006, both in Russia and Ukraine.

In Ukraine where value added services share at yearend 2005 reached 14.9%. We started the year with strong campaign of value-added services, which resulted in 16% growth of GPRS traffic January to December. We’ll continue focusing on stimulating usage and recharging, thus we launched very innovative Russian market promotion called MTS Premier, later followed by MTS Bonds in March. We can already see quite satisfactory results. Sales campaign “three favorite numbers” brings MTS majority share in net adds in first two months of 2006.

Many directions in marketing are applied according to specific market situations in Russia and in Ukraine. In Russia, penetration already reached very high numbers and incremental new users are only coming from regions where MTS holds strong position. Therefore, main marketing growth are targeted to revenue growth via usage stimulation, CRM and value-added services.

We will change visual identity and strengthen our brand values to increase brand loyalty focusing both on mass market and high value segments. Upcoming rebalancing of the tariffs after CPP implementation will be used as a vehicle to review and simplify our price plans. Therefore, ARPU is expected to decline at a much slower pace than 2004 or 2005, and should be reaching $6 to $7. Ukraine due to still low level of penetration, is a market, which is focused on subscriber acquisitions, and taking the rollout of network quality, coverage and capacity. Thank you, Andrey.

Andrey Karvanion, Vice President for Corporate Communication

Thank you Grzegorz. I am passing the call over to Beyes Fedoisky, Acting Chief Financial Officer of MTS.

Beyes Fedoisky, Acting Chief Financial Officer of MTS

Thank you Andrey, good day ladies and gentlemen. MTS 2005 and yearend results show another year of significant growth for the group. Revenues reached $5.011 billion, was a year-on-year increase of 29%. OIBDA increased by 21% and net income from operations increased by 14%. The company’s Q4 results reflected the usual trends with a significant growth in the number of net subscriber additions and the decline in roaming revenue. As Q3 is the highest season for roaming revenue in all the countries in which we operate. The consolidated group revenue for Q4 was $1.333 billion, with OIBDA margin reaching 46% or 630 million in absolute terms.

Despite the decline in total revenue in line with these expectations, the airtime revenue remained approximately at the same level as in Q3 and we see that as a very positive sign. The company’s total revenue for the quarter in Russia was $954 million, in Ukraine revenue was $338 million representing a slight increase over Q3. The contribution to our consolidated revenues for Q4 from our operations in Uzbekistan and Turkmenistan were $26 million and $80 million respectively.

Value-added services totaled approximately $650 million in 2005, up from $430 million in 2004. This growth was due to the increased volume of point-to-point SMS, as well as launch in 2005 of a number of new services including i-mode and GPRS service to our prepaid customers and various promotional activities.

We see the trends towards value-added services increasing as a percentage of revenue as well as in absolute terms to continue in 2006. In Q4, we had growth additions of 11.1 million subscribers for the whole group. And inline with achieving this healthy growth, our gross margin decreased slightly when compared to the prior quarter, from 80.6% to 78.9%.

And the main drivers for this was the growth in costs associated with the new subscribers attracted in the quarter, i.e. in December during our New Year promotional campaigns. These new subscribers have mostly started to contribute to our revenues only in Q1 of ’06. In addition to the impact on the gross margin, the significant number of new subscribers required additional sales and marketing expenses. For example, in Russia, the subscriber acquisition cost or SAC were $19.8, up from $18.6 in Q3. This reflects the increased emphasis on promotional activity, importance to the campaign in Q4 of 2004 when the focus was on free minutes and giveaways.

In Ukraine, SAC declined from $15.7 to $9.4, largely reflecting the significant increase in acquisitions the vast majority of which were prepaid subscribers, which have significantly lower stock than contract subscribers as we do not provide handset subsidies for such customers. There was the usual significant seasonal increase in Q4 in overall traffic volume and the corresponding increase in interconnect and line rental expenses, which grew for the group by $15 million or approximately 12%. The negative OIBDA factor was compensated by $31 million or 53.2% decrease in roaming expenses related to the seasonal decline as I just mentioned.

With regard to general and administrative expenses, there was an increase in Q4 by $30 million or 7% on Q on Q consolidated basis. The main reason for this growth was increase in repair and maintenance expenses and some other less significant increases in P&L line items. As a result of the seasonal factors mentioned, OIBDA for the group decreased in Q4. In 2006, we expect a slight OIBDA margin decline to high 40’s range near 50%, driven by several factors such as general expenses inflation in Russia and Ukraine, and in particular some specific cost items impacted by inflation. For example, advertising expenses, premises rental cost plus some increases in interconnect rates as well as line rental cost, uses of increased volume of traffic and number of lines rented.

However, at the same time and in order to address the potential decline in our OIBDA margins, we have launched several cost cutting and process optimization projects. Such as outsourcing some of non-core functions, reducing headcounts and consolidating our call centres in Russia. We are very focussed on cost efficiency and we have set a target of 1-2% of OIBDA per year to be saved from various cost optimization measures, we have taken one right now.

Now I would like to move on from OIBDA to discuss other areas of our operations: Balance sheet. Overall our position remained strong with an available cash balance at the end of the quarter of $78 million representing a 384 million decrease, when compared to the previous quarter. The main reason for the decrease were a 100 million payout of outstanding 2004 dividends and a $230 million repayment of debts related to syndicated facility and debt financing in Ukraine.

In respect to CapEx, in the past quarters we spent $808 million on the acquisitions of property, plant and equipment as well as intangible assets. This is $202 million more than was spent in Q3. The main reason for this increase was the timing of payments for assets acquired, as was planed for 2005, we spent slight over $2 billion on CapEx for the year.

Our free cash flow figure for the year was negative $700 million comparing to negative $4 million in 2004, mainly due to significant growth in CapEx by $822 million year-over-year. In 2006, we expect CapEx to be lower than $2 billion. We also expect growth of cash generated by operating activities and this to be excluding potential acquisitions free cash flow positive for 2006.

The company’s net debt to OIBDA ratio at the end of 2005 was 1.1. Our ratio cost of borrowing has been basically flat during 2005 at around 7%. This is in line with our continue effort to improve our credit ratings and corporate governance centres, as well as to utilize various market tools, including the hedging of our closing interest rates from our syndicated loan to minimize exposure to any interest rate increases. In the third quarter of 2006, we are planning to refinance a part of our old existing debt and obtain additional financing in the form of syndicated loan facilities to serve our CapEx and acquisition plans.

In conclusion, I would like to emphasize that 2005 was another year of strong financial and operational results and growth for MTS. And we as a management are intending to further enhance these results in 2006. And I will now hand the call back to Andrey Karvanion. Andrey?

Andrey Karvanion, Vice President for Corporate Communication

Thank you Beyes. Ladies and gentlemen we are now open for questions, please.

Question-and-Answer Session

Operator

Operator Instruction The first question comes from Sean Gardiner, please state your company name followed by your question.

Q - Sean Gardiner

Hi, thank you, its Morgan Stanley. Just only two questions, on the CapEx, you said less than 2 billion, is it possibly, try give us the bottom end of the range, I mean less than 2 billion is quite wide, so its been indicates on, how much you think the minimum you have to spend in 2006? And then secondly on your margin guidance for 2006, does that include any potential restructuring charges you might have to take in order to improve your cost efficiencies going forward? Thank you.

A - Vassily Sidorov

On the first question, regarding CapEx, when we guided and we are still guiding towards just under 2 billion, we are really implying just under 2 billion, just underneath by 50 million less or $100 million less, but it is not going to go significantly lower than that other unless we are really successful in our negotiations with the vendors, which is not impossible, but will be a tough call, so just under $2 billion for this year. As far as margin guidance is concerned, there are no further restructuring charges as such that we foresee for this year, our high 40’s margin guidance remains intact save for the caveat mentioned by Beyes that we have implemented this cost-cutting program, which should yield anywhere from 1% to 2% of additional OIBDA in the 12 months into the project’s execution, part of which will fall on ’06 part on ’07.

Q - Sean Gardiner

That says that the cost related to that project isn’t included in your guidance?

A - Vassily Sidorov

It is not, but its insignificant, its totally immaterial, plus also it is also contingent on the successful implementation of the cost-cutting measures.

Q - Sean Gardiner

Thank you guys, thank you very much.

Operator

Thank you, the next question comes from Vladimir Postolovsky, please state your company name followed by your question.

Q - Vladimir Postolovsky

Good afternoon gentlemen, its UBS. Couple of questions from me, the first one is, I think we are coming back to that every quarter but another question on pricing discipline. I think you have been saying that you see that improving in a market in yet another quarter and ODDM came down by 14% sequentially in Russia, you also recently launched promotion, I believe, where you owe for people for a deposit of $5, $10 worth of free call and for deposit of $10, $20 worth of the free call, which effectively sounds to me like another package that is offering free minutes, so do you see competitive situation changing, are you readjusting your figures based on its pricing discipline or should be improving that rapidly or just you expect that in GSM, why we are seeing all that I have just mentioned? The second question, you mentioned you have the response charge that is contemplated in Ukraine, any guidance as to what size would that be? Thank you very much.

A - Vassily Sidorov

On the first question with regards to pricing, our New Year promotion had $0.02 on that benefit, for example right now MegaPhone has $0.03 tariffs, so $0.02 price point, which we already are announcing in Q4 was the price point, which is not stopping up the price war. So $0.02 promotion was limited in time, from November to end of January and in fact of APPM or ARPU as you mentioned is consisting of two elements. One element is yes, there is a cost of promotion for the quarter, but the biggest is seasonality and strong of increase of growth in one month, which is December. So again I would like to stress those, all those facts, not only dropping price point. Moving on to the promotion, which we run right now, which is MTS Bonus or MTS Premier, this is a promotion target to all MTS user, our expectation is that number of customers that who will be joining this promotion is going to be on the single percentage levels, their promotion brings the benefits of delayed benefit for the end user, which is then increasing our churn and regional of pricing policy set to a level where its stimulates to increase ARPU from customers. So looking from this perspective at those three elements, we do not see that such a promotion is again eroding a price or is stimulating the competition to run on a much lower APPM level. Vitalcom launched the tariff a week ago, which is similar in direction, they are also stimulating usage of customers, they give free minutes. I do not see that this offer is undercutting our offer, or I do not see the stress price for after implementing of those units within. With regard to universal service front in Ukraine, the legislation is only in its draft form at this point, and is contemplated at 2%, which is something that the operators are in discussion with the regulator as we already have additional levies use with a pension fund charge, which was increased from 6% to 7.5% last year, so this is at the early stages.

Q - Vladimir Postolovsky

Thank you very much.

Operator

Thank you, the next question comes from Rizwan Ali, please state your company name followed by your question.

Q - Rizwan Ali

Its Bear Stearns, my question was regarding CPP, you mentioned that implementation of CPP is going to have a negative impact on your revenues and your margin, and I just want to know why would that be the case? Second question is about the CFO’s replacement, where are you in the process of finding a permanent replacement for the CFO?

A - Vassily Sidorov

Okay, let me start with the CPP part. The reason why we are alleging that there is a possibility that the introduction of CPP if phrased in such a way and the terms are still being more solved by the regulators, that are detrimental, so this is to the whole industry not to us as such but to the whole mobile part of the telecommunications industry in Russia. We have a negative effect on margins on the back of the fact that if the fixed to mobile rates are insufficient to cover our costs and offset the traffic through distribution, which will take effect from the back of the CPP. If this pricing is insufficient to cover costs, we will have a dual effect of both distribution of traffic from mobile to fixed, and from making calls, outgoing calls from your cell phone to making those calls from a fixed line, calling back is illustrated by the fact that the termination charges are going to be materially lower sequentially than the current market APPM. At the same time the cost structure, and the termination charges should not change materially, these revenue are other process fixed and mobile, which puts additional pressure on one hand the topline and on other hand the margins. Now that aside, are still have several weeks or maybe couple of months to work with the regulators and as much as we can and lobby for more favorable outcome of this regulation, so that it doesn’t hurt us as mobile operators in the industry. I do not have probabilities to what the outcome is going to be, but we are alerting you to the fact that this may come into effect on July 1 and then the effect may be, would at best be neutral and at worst be negative for the business. Okay, as far as the CFO search is concerned, we are in the final phase of negotiations with a few candidates, unfortunately they are in positions within public companies and we’re therefore not yet at liberty unfortunately to disclose the names until we sign a contract with one of them. We expect this to be completed very shortly.

Q - Rizwan Ali

Thank you very much.

Operator

Thank you, the next question comes from Sergei Arsenyey, please state your company name followed by your question.

Q - Sergei Arsenyey

Hi good afternoon, this is Arsenyey from Goldman Sachs. Can I just follow-up on the question on the subscriber acquisition cost in Russia? You are reporting an increase year-on-year, yet the ARPU is going down, went down on the year-on-year basis by 35%. Do you believe, I mean normally in the situations like this when your ARPU is going down by so much, subscriber acquisition cost go down as well alongside it. Do you believe its worth paying – continue to pay that much money for a subscriber essentially much lower quality subscriber and is this the trend that we’ll see, or continue seeing in 2006? So that’s the first question. My second question is just to clarify on the guidance on the OIBDA margin guidance front. The OIBDA margin guidance that you are giving, does it include that potential USO fund payment in Ukraine, additional potential 2% that you have mentioned? So that’s it.

A - Vassily Sidorov

I will go with the second one, the guidance of high 40’s or just under 50% OIBDA margin does not include introduction of the potential up to 2%, you know its service fund obligation as we don’t know when it comes into effect and if does at all.

A - Grzegorz Esz

On the first question, SAC year-on-year has declined from $21 to $18.8 in Russia. The question whether its worthwhile to invest in lowering ARPU customers, such amount of SAC? Obviously yes. And SAC, the return on investment in customers is in single months, so from my experience from other markets, this is within benchmarks. The main driver of decrease in 2004 to 2005 is actually reduction on dealer commissions, and marketing part, which is advertising cost of subscriber acquisition cost has increase from $7.1 in 2004 to $7.5 in 2005. Situation here in Russia is the following that there is high demand on for advertising with a very low supply, there are very few TV channels, therefore, there is inflation of media, which happens in 2005. I hope it answers your question.

Q - Sergei Arsenyey

Well, if you look I mean I take the point by the year-on-year subscriber acquisition cost, but if you look in the fourth quarter, your fourth quarter 2004 subscriber had an ARPU of over $11, and you had SAC of $19.4, if you look at the fourth quarter of ’05 you are reporting 7.3 and 19.8, again the return part is deteriorating quite rapidly over the last 4, 5 quarters. The question is, is this going to continue going forward, especially when you guide towards $6, $7 ARPU. I think what we have seen in the market is that when ARPUs go down to $6 to $7, we’ll see a substantial decline in subscriber acquisition cost, mainly the trend that MTS is trying is very, very different.

A - Vassily Sidorov

Let me alert you to the fact that in Q4 a year ago, on the back of the heavy promotional campaigns, the quality of our subscriber intake was quite different from what it was at the end of last year, okay, and this needs to be taken into account when you look at the figures and look at the potential quality of these incremental subs that we added at the end of last year in 2004. I think generally we will see stability in SAC and we should not see unreasonable dynamics, that being said one, I think it would be not completely comparing oranges to oranges when we referred to Q4 of ‘04 and ‘05.

Q - Sergei Arsenyey

All right, thank you very much.

Operator

Thank you, the next question comes from Herve Drouet, please state your company name followed by your question.

Q - Herve Drouet

Hi good afternoon this is Herve Drouet from HSBC. Thank you very much for the detailed presentations country by country, that’s well appreciated. I was wondering, can you give us as well the incremental ARPU blended overall, but also per country as well for the first quarter to get an idea on how incremental ARPU is evolving as well over time? And my second question is if you can give us an update in terms of your expansion plan either of your mother company Sistema or either through just MTS? Thank you.

A - Vassily Sidorov

With the second question on expansion, we have stated before that our strategy is in fact pretty aggressive or ambitious in terms of propelling MTS to a top ten market cap mobile operator by 2010. That requires going after significant markets for MTS as such, obviously we are looking at the GSM operators and that’s our business and Sistema is also looking at other fixed line opportunities, and potentially some acquisitions may be made for Sistema, some for MTS, but I think the agreement with Sistema as the largest shareholder is that we always have a lot of first refusals so to speak on any GSM acquisition opportunity we are looking at.

Q - Herve Drouet

Is it possible – I mean that seems different or potentially that’s been highlighted by the market, is it possible for you at this stage to give a list already of opportunities you are currently looking at?

A - Vassily Sidorov

I think generally not to be too precise about it, but the things that we have alluded to, publicly are some opportunities in the Southeast Asian region, opportunities in India but so far not transpired into any real deals. We are looking into bidding for the third GSM license in Egypt, and we are in some other high growth markets outside of the former Soviet Union, obviously there are also six former Soviet Republics that we have not entered, and they offer significant growth potential, but there the market size. The onset market for us is 30 million, which is of course much lower than some of the other bigger countries that we are looking at right now.

Q - Herve Drouet

Okay, and some of the incremental ARPU?

A - Eric Franke

Incremental ARPU is different in markets and in the regions, so for the Q4 Russia I can give a bracket number for new customers it will be between $5 to $7 dollars, for Ukraine it will be between $4 to $6.

Q - Herve Drouet

Okay, can you remind me a year ago where the incremental ARPU was if you have the data Q4 of ’04?

A - Vassily Sidorov

Unfortunately I don’t have it on my hand so let me come back to you later with this data.

Q - Herve Drouet

Okay thank you.

A - Vassily Sidorov

Thanks.

Operator

Thank you, the next question comes from Jean Lemardeley, please state your company name followed by your question.

Q - Jean Lemardeley

Yes, JP Morgan, three questions. First on the $6 to $7 ARPU guidance you provided, can you provide for those the high end and low end of the range, the underlying assumptions for subscribers, for we are using for pricing if you could provide that that would be interesting. And would it cause to go all the way down to $6? On can you give us also on your plans to move to ruble based pricing, it seemed like a good idea with the ruble continue to strengthen? And finally the Ukraine, just if we look at our year results whether the key start is under performance in the number of metric, subscriber market sales on ARPU so you had a much bigger drop sequential and then from third to fourth quarter? And finally your margins are now eight full points below there is in the fourth quarter so if you could comments around just Keystar (phonetic) and how do you see that in Ukraine?

A - Vassily Sidorov

Okay lets well start with the last part of your question, your last question first with Ukraine. We saw that the dynamics of Keystar had during the year were more aggressive and this is something that we are now interacting as you will see from a number of things, there are number of initiatives to deal with, quality, innovation, particularly focusing on coverage and distribution for us, so we would see in terms of how we see the dynamics of the market going forward than you will see a much more aggressive year will then see for 2006, particularly focusing on those areas. In terms of EBITDA margin, there is always been a differential, they have a different approach to certain accounting policies, they have higher ownership in buildings and by the vehicles and the CapEx policies slightly different to ours. So basically our performance in terms of EBITDA margin was inline with our normal seasonal performance in Q4.

Q - Jean Lemardeley

So presumably is your accounting policy, buy versus lease, I guess policy is different, at one point it should have an impact on CapEx sales ratios, do you expect CapEx and sales ratios to be lower than some of your key benchmarks?

A - Vassily Sidorov

That’s true but you will see that if you look at the history than Keystar has seven quarters of higher CapEx in UMC over the last eight quarters.

Q - Jean Lemardeley

So where do you think your CapEx sales ratio to evolve to in Ukraine?

A - Vassily Sidorov

Basically next year will be improved significantly, that’s much guidance as I can give. Coming back to the first question about our expectation for guidance for 2006, ARPU level, the brackets I have provided is $6 to $7 for ARPU, the main reason for decline in ARPU is as I said still the impact of dilution of the customer base to prepaid, what happens with more one minutes of use they will - our expectations they will decline at the much lower pace then 2004, 2005, as I said earlier corporate segment is significantly increasing, minutes of use. The prepaid segment is on the level of 90 minutes so coming to the last question, which is effective price per minute, I will say that this is again the year where we are going to be revising our tariff, we will be revising our tariff also because we have CPP coming in the middle of the year, and we have to revise our competitive position in all the regions, and also we have to take into account how, to what extend we have to be rebalancing our tariff after CPP implementation.

Q - Jean Lemardeley

You think with CPP you would then use – you would start to pay a termination to the other mobile operators?

A - Vassily Sidorov

Yes, of course, I am not sure if I understood the question correctly. We have termination agreement or interconnect between mobile carriers. Coming back to the ruble tariffs, it is coming in the second half of the year, I agree with you, yes this is a good idea to switch the ruble tariff, its Russia, inflation is not skyrocketing so it is actually meeting customer demands and expectations.

Q - Jean Lemardeley

So what would you say that to have positive effect on your US dollar APPM, wouldn’t they?

A - Vassily Sidorov

Firstly, it could have a stabilizing effect in our APPM, of course.

Q - Jean Lemardeley

Right, will that implication is going probably in place on APPM or would be balancing as your tariffs, looks like they are going back phase?

A - Vassily Sidorov

I am not ready to answer to your question because the regulations from the government are not yet finalized, let me give you one example of how this could change. For example we can have much more minutes, terminated on mobile network with a lower termination charge from fixed operator to mobile operators, lower than what we are charging right now the end user. So therefore, there is a positive price elasticity effect because customers from fixed lines are calling mobile, so we have more minutes but we have them at lower price that we received from the fixed operator, so then this could be a negative one side of negative CPP impact on APPM. The positive side we can have is that mobile usage is going to be increasing, so therefore ARPU should include in this case maintain on the same level.

Q - Jean Lemardeley

Okay, and finally could you make a comment about the claims by Euro said that the stimulation in Russia is actually 2 to 1 in that, penetration, actual real penetration is much lower than what most people assume at this point, do you think that’s reasonable or you think, would you disagree radically was there assessment stated in the Russian market?

A - Vassily Sidorov

I am sure what they implied to the one but we certainly think that between 20% or 30% of the overall market customer base uses more than one Sim card.

Q - Jean Lemardeley

The claim is basically that there is over two Sim card in circulation for every user in Russia.

A - Vassily Sidorov

No, that does not imply, it implies that more than between 20% to 30% using more than one Sim card between operators or between regions or within one operator, that gives you roughly lets say 25% access penetration figure, is the normal state of penetration.

Q - Jean Lemardeley

I understand what you are saying but would you think of what do you think what they are saying, do you think that’s unreasonable?

A - Vassily Sidorov

Well, I can only answer for R&L, that maybe they have their own reasons to believe that their announces is right, we think of it quite differently.

Q - Jean Lemardeley

Thank you

Operator

Thank you, the next question comes from Alexei Yakovitsky, please state your company name followed by your question.

Q - Alexei Yakovitsky

Yes good evening this is Alexei Yakovitsky from Deutsche Bank. I have some questions if I may. You show you dramatic you using as we see in Ukraine versus the previous quarter, are there any one-off factors here, or should we expect most of this improvements do you expect to be carried into 2006. That’s the first question, and I want to go back to CapEx, you said that your CapEx will be just under 2 billion in 2006 and in your presentation you state that your CapEx from net adds should not exceed $120. This implies that you expect to add about 16 new editions in 2006, lets assume your prospect unless you add 10 million this year, does assume your CapEx is unlikely to exceed the 1.2 billion or if you add 12 million then your CapEx is unlikely to exceed 1.5 billion, is this a correct way to interpret your guidance given this you are throwing this $120 figure on that or should it be more complex. In other words, regardless of how many subs you actually add, you are going to spend just under 2 billion. Thank you, and in addition to this question, how connected is your ARPU guidance to your CapEx and your underlying subscribers assumptions? Thank you.

A - Vassily Sidorov

Okay, the next question for Ukraine, basically there are no real one-offs, we are working with our dealers to control dealer commission, and we are looking at handset subsidies which we took them in Q4 overall. In terms of guidance for going forward then if you take the same for the year then I think apart from some pressure as seen in Russia in terms of marketing expenditure, 2006 will be broadly inline with 2005, with seasonal fluctuations within the quarters

Q - Alexei Yakovitsky

This is for Ukraine, right?

A - Vassily Sidorov

This is for Ukraine, yes.

Q - Alexei Yakovitsky

Thank you.

A - Vassily Sidorov

Thank you, Alexei, as far as CapEx is concerned, we are expecting to add approximately the number of subscribers that you mentioned, actually 60 million, which gives us the estimate of about $120 or just under $120 per net add. Obviously there are some, the big drama between capacity and coverage, and the link between those subscribers, and the ultimate CapEx figure is certainly more complex than just multiplying subscriber by $120 because you have a CapEx driven largely by traffic – and traffic patterns rather than subscriber numbers as such. So there is the MOU part of the equation as well and the way we look at the MOU dynamic for this year, but it is unlikely, it looks like its slightly the subscriber intake subsides materially, these are your expectation now we may be able to review our CapEx figure and obviously we will, we are unlikely as regarding now go beyond $120 spending $120 overall CapEx per net add.

A - Vassily Sidorov

Yes, a huge part of our CapEx that we planning to spend next year is not really subscriber number related so that means that we can definitely say there is a cap in the CapEx, we will not spend more even if we have more subscribers. So if you do reverse engineering of your figures, you may end up to the wrong conclusions, most of the CapEx that we are going to spend next year is guided to quality improvements, introduction of new services etc, and not really on the subscriber numbers. We will add slightly less CapEx next year on coverage, but as I already say most of it is just for quality improvement. So the relationship between the subscribers and the CapEx that we use to do when you are looking at a fast growing market, is in this case not any more relevant.

Q - Alexei Yakovitsky

Okay, thank you.

Operator

Thank you, the next question comes from Alex Kanakzo (phonetic) please go ahead with your question sir.

Q - Alex Kanakzo

Good afternoon, I have two questions, first if it is at net income for fourth quarter ’04 has been illustrated. Could you explain the reason for their statement, and second it also appears that handset subsidies have increased, could you elaborate on this issue?

A - Vassily Sidorov

Yeah in Ukraine we’ve subsidized handsets for the contract subscribers, normally we have been running in slightly an excessive $100, we are looking at keeping that dime for the fourth quarter and we would see that continuing into 2006.

A - Grzegorz Esz

And on your second question about the restatement of 2004 numbers, on your restatement on your review side, I actually do recall was there a restatement due to the change in the estimates of the subscribers life within the network and related to recalculation of the deferred connection fees. Is that the only quote unquote the statement of the revenues, I recall, thank you.

Q - Alex Kanakzo

And may I ask one follow-up question. Could you - what is the handset subsidy for subscriber in Ukraine, and could you also explain why as the question regarding Bitel acquisition has not been resolved so far?

A - Vassily Sidorov

So the handset subsidy were our post-paid subscriber for Q4 was just under $100, the acquisition cost was $95 and the last part of that is the handset subsidy. As far as the acquisition with Bitel, as we’ve mentioned we are using all legal means to protect our ownership guide in the quarter well, and as we force jurisdictions and that implies that it’s taking time to protect the current the raiders that took over the assets are not yet willing to give it up because you could have a reason for that, and the reason we think should be are legally blinding decision by the appropriate courts and appropriate jurisdictions, and therefore we are pursuing, pursuing this in quarter alone, unfortunately things takes times, we would have like to just take a lot of less time.

Q - Alex Kanakzo

Okay, thank you very much

Operator

Thank you, the next question comes from Andrei Bogdanov, please state your company name followed by your question

Q – Andrei Bogdanov

Andrei Bongdanov from Alfa Bank. I have two questions if I may. One, can you just clarify in absolute terms in dollars not on the proposition of the ARPU, what’s your target if you have any for VAS in Russia and Ukraine both. I guess now it was about 15% of ARPU but once again in absolute terms going forward. And the second question is today what’s the interview of (indiscernible) said that by this May you will have the umbrella brand for telephone companies. My question is do you expect any kind of impact on your margin from business in margin terms from this rebranding because if I can recall, Ukraine was very successful, if you have any kind of thoughts on that side? Thank you

A - Vassily Sidorov

Andrei, let me start with the umbrella brand. We do believe that the introduction of an umbrella brand and the rejuvenation of our brand as part of that, we will have very positive effect in the business going forward in terms of subscriber loyalty, in terms of remembering the little things that will help our brand getting a bit stronger, we still believe we have a very strongly positioned brand in terms of leadership, in terms of reliability, in terms of quality, associations and there are some things that can be added and can be strengthened in our brand proposition, which we are doing within the framework of well under this umbrella brand. In terms of the costs of the project as such, most of them come out of our quarterly budget and the cost for extra to the ordinary marketing budget will not be that material to significantly adversely affect the margin for this year and our margin guidance includes those costs for ’06.

A – Grzegorz Esz

So with regards to value-added services for the year 2005 it was $1, Q4 was $0.90, what goes forward, those were the numbers for Russia. I will not give the detailed breakdown of how much value-added services we are going to have within our forecasted December quarter for ARPU in terms of revenues. What I said in the beginning was that we are really dedicated to grow ARPU, we have value-added services and I think this is one of our core strategies to maintain profitability and grow the business forward.

A - Vassily Sidorov

I will just add to that, we are seeing a good dynamic and that is not really the theme of this telephone call, but we are seeing good dynamic right now as we speak, and the accounts of the business becomes the focus on value-added services for us has shifted from going up to many different services to focusing on the core, things that are really in demand and making sure that they work across the country side so that we come with federal propositions and federal bundle and this strategy seems to have started to payoff starting from Q1 of this year.

Q – Andrei Bogdanov

Okay thank you.

Operator

Thank you, the next question comes from Evgeny Golossnoy, please state your company name followed by your question.

Q - Evgeny Golossnoy

Yes, Evgeny Golossnoy from Troika Dialog. My question is related to interconnect turns, you mentioned that they are going to its become worse in 2006, I wonder if you just please explain how that can be and that you see more ready to be paying for termination of course with other mobiles and with fixed lines. At the same time you applied for long distance license, meaning that you will be able to gain more from long distance calls. How then can be that you expect the interconnect to rise, does that mean that the volume of business generated by the customers will improve, like in this case if it does, those will be the billable minutes and the cost will be borne by the clients?

A - Eric Franke

Let me take this question. With regards to mobile-to-mobile interconnect rates, they are already here in the market, we have current interconnect agreements with all the players. I do not see the risk of them worsening. This is the market where we negotiate based on the commercial terms with the other players. With regards to fixed to mobile termination I think that Vassily was saying this earlier that after CPP, we are going to have a regulated price point for the fixed line customer, the price point will be regulated of the fixed call to mobile network. This regulation will also impact the interconnect regime, for us its actually the revenue from the fixed mobile operators for terminating the calls on our mobile network. So in this sense, this is where we have not finally got a direction from the regulator from the government. So this is an open question this year with regards to CPP, and the discussion whether its going to worsen or be better, this is now too early to say. We are working with different scenarios and we are also educating other players in the market on what would be the best model.

A - Vassily Sidorov

Not to paint too bad a picture, this is the one of those things that if done right can work actually for the positive of all the businesses in the market, but we think that we would like to alert you to the fact that these are days of a bit of uncertainty, which should go away in the next month, month and a half, maybe two months at most, and then we’ll be able to say exactly how it is going to turn out. We think it is prudent for us, so alert you to the fact that there is this element of uncertainty out there.

Q - Evgeny Golossnoy

Okay, and I have a lot (indiscernible) does that mean that the possible improvement or what kind of interconnection is not included in the EBITDA margin guidance for 2006? Or is it?

A - Vassily Sidorov

No it does not. The CPP model or the effects of CPP on the business model for this year are not included right now for obvious reasons, we do not know the variables put into the formula.

Q - Evgeny Golossnoy

Okay thank you.

Operator

Thank you, the next question comes from Juri Holliyokcos (phonetic) please state your company name followed by your question.

Q – Juri Holliyokcos

Credit Suisse, actually my first question, which has been addressed about the CPP in fact on OIBDA margin. My second question is given that the company plans to grow quite substantially and has ambitious expansion plans, I assume that that would be funded by combination of debt and equity. Could you give us a guidance as to where you would expect you net debt to OIBDA by the end of the year? And the third question is if you could answer during the call subsequent to the call. Could you please clarify cash tax paid in 2005 and cash interest paid in 2005 because these numbers tend to be different from P&L and cash flow numbers provided in the statements? Thanks.

A - Vassily Sidorov

Okay, as far as how much the covenants allow us to borrow, we can go up to two times net debt OIBDA, now that does not mean that we want to fully utilize the shareholders and obviously there are other means of financing those acquisitions such as leveraging the target themselves such as partners and bringing in additional financing at the level of these operating companies. Now, obviously how much would give up towards the yearend will be driven by on the one hand the acquisitions that materialize if at all, and on other hand by the dividends that we that the shareholders will decide due to pay out, so it’s probably too preliminary to give you any particular guidance on this.

Q – Juri Holliyokcos

Okay thanks, so you basically imply that you wouldn’t go over and above the covenants, that’s clear but you very kind of corporate policies how you can go this year?

A - Vassily Sidorov

Well, we certainly will not go beyond our covenants but as I said, it does not mean that we are limited in terms of our financing possibilities to this covenant threshold since we are financing from our partners and we can join up with the companies that we acquire or take stakes in.

Q – Juri Holliyokcos

Okay thanks. And the second question on cash tax paid and cash interest paid if you could address this probably subsequent to the call that would be helpful?

A - Vassily Sidorov

Okay, we will address that thank you.

Operator

Thank you, the next question comes from Anna Bossong, please state your company name followed by your question

Q – Anna Bossong

Yes, hello, its CA-IB. My first question is on your ARPU guidance of $6 to $7, is that relating, is it a blended figure or Russia or Ukraine, I am not sure what that relates to? And secondly I noticed that your net interest charges rose by 17% quarter-on-quarter in the fourth quarter, I am just wondering are there any one-off in that or is that just in relation to the debt rising and can you give us a percentage of total revenues, which comes from incoming calls so we can gauge the effective CPP? That’s all.

A - Vassily Sidorov

Alright, we will answer your second question first related to the net interest charges, there are two things you have to consider, one you are looking at the interest expenses, number one is as you correctly pointed out the net debt basically the debt we carry at the end of ’05 has increased particularly on back of some of their financing we undertook for UMC operations for Ukrainian business so this is an increase in interest expense and the second thing you also have to take into account as part of our interest is being capitalized, that is in accordance with year–end GAAP requirements. So those two factors basically have its timing difference, but all in all there is an increase in debt and related to this interest expense growth in Q4.

Q – Anna Bossong

Is it possible to have this amount to capitalize in the third and fourth quarter?

A - Vassily Sidorov

Yes, that’s hopefully if you will ask this question to our ER people, we will get you the exact numbers.

Q – Anna Bossong

Okay thanks.

A - Vassily Sidorov

ARPU question, $6 to $7 guidelines was blended for Russia. With regards to Ukraine I will pass it over to Mark Burdon.

A – Mark Burdon

Anna, one question, as we have interconnect rates are being discussed in Ukraine and adjusted as part of the Ukraine Telecom beautiful campaign, but our anticipation for next year would be somewhere in the $7.5 to $8 range for ARPU. If as we expect the interconnect runs as we expect.

Q – Anna Bossong

Okay thanks.

A – Mark Burdon

Thanks.

A – Vassily Sidorov

And the percentage for incoming calls is around 12% for Russia.

Q – Anna Bossong

Lovely, thanks very much.

A - Vassily Sidorov

And the last question please.

Operator

Thank you, the next question is coming from Olga Eskoyva (phonetic) please state your company name followed by your question.

Q - Auga Eskoyva

Olga Eskoyva from Credit Suisse. My question relates to what’s the potential net impact of your cost-cutting programs and potential increase in marketing expenses that are likely to being incurred due to saturation in the market and your increasing campaigns, etc. What you think, you said that you expect 1 to 2 percentage point margin improvement on the back of cost-cutting programs, is that a net improvement or this basically will be partially offset by the increased sales and marketing cost in your view?

A - Vassily Sidorov

I think that includes the 1% to 2% as we said over the 12-month lifespan of the implementation of the cost-cutting measures will accrue regardless of the dynamic of sales and marketing expense such as just in the back of these cost-cutting measures, which will allow different functions within the company obviously, business marketing.

Q - Auga Eskoyva

Okay. Can I just ask clarifying questions, first of all on your revenue payback charges, the way you see them, currently in Russia, its 2.2 times for the full year and about 1.5 times in the Ukraine, where do you see these figures going forward?

A - Vassily Sidorov

So what revenue payback target its actually -?

Q - Auga Eskoyva

Yeah, revenue payback stock over ARPU metrics, where do you see its going forward from the current 2005 figures?

A - Vassily Sidorov

I don’t think it would be prudent for us, we wouldn’t particularly use this measure internally, honestly, and I would refrain from giving extra guidance on this.

Q - Auga Eskoyva

Okay and then if I may, the last question in terms of net impact on margins from cost-cutting and potentially increasing sales and marketing expenses, if you see them as such, do you think in the next couple of years your margins overall would be going down or up?

A - Vassily Sidorov

Okay, lets just go back for a second, there are three new factors affecting the margin expansion or conjunction, one was marketing going revenue terms over in OIBDA then but also on the competition in terms of how pricing wise people behave and how the pricing environment develops, one. Second part depends on the cost efficiency of our operations, which is much more in our hands, which is much more controllable by the management of the company and the board of directors, and the third aspect is the regulation, I have already told changes that may potentially affect both of the topline and or the bottomline. And depending how they play out, margins may evolve differently, and I think its completely prudent for us to go beyond the timing horizon that we will be using in’06 or such that you further go in for margins. I think there is going to be a lot more clarity as I think we go up towards Q3 Q4 this year, on how regulation goes, how the pricing environment evolves, and how successful cost-cutting measures will be, and the back of it you will be in a much better position, we will be in a much position to judge what the margin outlook is going to for ‘07 and beyond.

Q - Auga Eskoyva

Okay, thank you so much and the last question on OIBDA. I think in other words stated that you might you see dividends split in 2005 versus 2004. And I think there was some information that will be about 41% threshold this year. Is that a correct statement and what do you see over next couple of years evolving as well.

A - Vassily Sidorov

I think generally what has been confirmed by the largest shareholder is that the payoff ratio of over 40% of your GAAP net income that has been proven in fact over the past three years is as good a guidance as any for this year as well.

Q - Auga Eskoyva

Okay, thank you very much.

Andrey Karvanion, Vice President for Corporate Communication

Thank you everyone. Let me conclude the conference call and both the dial-in and web replay of this call are available, please contact our Investor Relations department if you have any follow-up questions, and good bye everyone and thank you.

Operator

Thank you ladies and gentlemen, this concludes the fourth quarter and full year 2005 financial and operating results. Thanks you for participating, you may now disconnect.

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Source: Mobile TeleSystems Q4 2005 Earnings Conference Call Transcript (MBT)
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