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Executives

Andrei Dubovskov - President and CEO

Alexey Kornya - VP, CFO

Aleksander Popovskiy - VP, COO

Michael Hecker - VP, Strategy, Corporate Development and M&A

Oleg Raspopov - VP, Foreign Subsidiaries

Analysts

JP Davids - Barclays

Cesar Tiron - Morgan Stanley

Alexander Vengranovich - Otkritie Capital

Herve Drouet - HSBC

Alex Balakhnin - Goldman Sachs

Tibor Bokor - ING Bank

Tatiana Boroditskaya - UBS

Ivan Kim - VTB Capital

Thomas Heath - Handelsbanken

Anna Lepetukhina - Troika Dialog

Igor Semenov - Deutsche Bank

Anna Kurbatova - Gazprombank

Mobile TeleSystems (MBT) Q2 2012 Earnings Call August 28, 2012 10:00 AM ET

Unidentified Company Representative

Welcome to today's conference call to discuss the company's second quarter 2012 financial and operating results. 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 both in Russia and abroad, revenue and our subscriber growth, loan facilities and their usage, legal actions or proceedings directed against the company or its representatives, regulatory developments and their impact on the company's operations in markets in which we operate, financial indicators such as operating income before depreciation and amortization, average revenue per user, cash flow projects and/or return on invested capital, technical matters that they pertain to our mobile communications networks including equipment licensing our network technologies, capital expenditures and operating expenses and macro-economic developments within our markets of operation. A comprehensive overview of these issues is available in MTS's annual report and Form 20-F which is available on our website or to the US SEC.

Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include company press releases, earnings presentations, MTS's Form 20-F as well as other public filings made by the company with the United States SEC, all of which are available on the company website www.mtsgsm.com or that of the US SEC at www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statement uttered on this conference call or make any adjustments to previously made statements to reflect changes in risk. Copies of the presentations and materials used and referenced in this conference call are available on our company website.

I'll now turn the call over to 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 of the second quarter 2012.

Joining me today are Alexey Kornya, Vice President, Chief Financial Officer; Aleksander Popovskiy, Vice President, Chief Operating Officer; Michael Hecker, Vice President, Strategy, Corporate Development and M&A; and Оleg Raspopov, Vice President Foreign Subsidiaries.

(Inaudible) and other strong set of results for MTS Group for the second quarter. Group revenue for the quarter to reach over $3.1 billion USD in spite of a significant weakening of our core currencies versus the USED. We saw sustained growth in usage of voice and data products in each of our markets of operation. We also see signs of stability and moderate competitive pressures in our markets. For the period total revenue in Russia increased in ruble terms by 9% year-over-year to 82.8 billion rubles. (inaudible) city voice usage, higher value subscribers through our efforts to optimize dealer relationships and sell more through MTS's proprietary retail chain and growth in headset sales including sales of higher value smartphones. Year-over-year our mobile business grew by 10% to 69.3 billion rubles. As we predicted, we continue to see benefits in our mobile business through a combination of strong tariff plans, prudent sales strategies and continued investments in our networks.

We see strength in upselling our mass market subscribers to better voice plans as ARPU and MOU by 12% and 15% year-over-year respectively. We also are attracting better subscribers through our own retail and partner channels. Net subscribers also contributed to the rise in ARPU and demonstrate more loyalty.

For the period churn rate percent 11.3% to 10.5% and modem sales remain strong despite the cancellation of subsidies. Sustained investment in our networks makes entails the logical choice for customers who want to speak and access to the internet.

Our fixed line business remains stable year-over-year both residential and corporate ARPUs sales slightly due to increased competition and the addition of lower value customers also added roughly 50,000 new subscribers. We remain focused on network improvement both in Moscow and the regions. The work being done to upgrade to full fiber in our networks, we are confident that better networks will all last to further grow this business and increase customer value.

In Ukraine, revenue growth continued at 7% year-over-year to nearly 2.4 billion US. Handsets in the market continues to favor us as we saw definite year-over-year growth in ARPU, MOU, and data traffic. We also were able to benefit for the euro 2012 through higher (inaudible) overall contribution from (inaudible). Data traffic grew 9% year-over-year which is strong given the fact that there is no 3G yet in the market. in Armenia, revenue increased by 2% year-over-year to 19.1 billion. The market continued to trend towards stable as we improved churn and subscribers increased their calling and data usage.

In Uzbekistan, we did recognize the full quarter of revenue and OIBDA as we witness separation of impact of our district with regulatory authorities only in the third quarter. Operationally realized a strong quarter of revenue increased 22% year-over-year. as four further in Uzbekistan, I will speak to this topic later.

Now Alexey Kornya will further discuss the group's stability and financial performance.

Alexey Kornya

Thank you Andrei. In the first quarter we grew group OIBDA 5% year-over-year to $1.37 billion US dollars despite a year-over-year weakening of the ruble/USD rate of nearly 11%. Our adjusted OIBDA margin for the period reached 44%, an increase of 2.4 percentage points from second quarter 2011. Overall we are seeing success in our efforts to increase profitability in our Russian business and realize greater efficiencies across the group. In Russia, OIBDA rose 14% to 36.9 billion rubles. For the first half of the year, OIBDA has grown twice as fast as revenues as we are optimizing our operations to extract more value in our core market. our OIBDA margin increased from 42.7% to 44.6% in second quarter 2012. We continue to see benefits from growth in higher margin at revenues, higher margins in retail across the board of course discipline. Sequential OIBDA margin gains are largely attributable to seasonal factors. OIBDA trends are now in CIS markets were in line with the seasonal dynamics and are reflective of the topline performance and competitive factors. In Ukraine, OIBDA reached 1.2 billion and we realized the margin of 51.9%. while our business in Ukraine continues to grow profitably, we realized the one time margin benefit of roughly 2 percentage points due to the reduction of reserve held against interconnect. In Uzbekistan, we altered our churn policies to minimize taxes against numbering capacity, which allowed us to improve our margin sequentially. In Armenia, our OIBDA margin has returned to historical levels as we realized the one-time benefit due to the equipment swap in first quarter 2012. While we are obviously pleased with our strong performance at the overall profitability of the group, we do see second quarter as a peak margin. In second quarter we realized approximately 1.5 additional percentage points of OIBDA as one-offs from a number of adjustments related to a variety of things including sales of handsets and equipment previously held in the reserve, employee bonus released for the financial year 201, sale of real estate premise and therefore mentioned the reduction in interconnect expense in Ukraine.

As we have mentioned, we feel there is likelihood that margins will weaken in the second half of the year due to further expansion in our retail footprint in particular the build out of additional flagship stores and opening new stores in population centers as few as 20,000 inhabitants and increasing handset sales.

Increased labor cost based on new laws regarding social taxes. The full impact of our transition to new dealer commission structure and continuously rising rent and maintenance cost as we expand our mobile and fixed networks. Obviously to the developments in Uzbekistan where the margins was 49.7% for the first half of the year will not help our margin performance.

Net income excluding adjustments related to Uzbekistan reached $397 million for the period. Because of the 2.5% depreciation of the ruble, we were forced to realize a non-cash loss of ForEx of nearly $200 million of ForEx. Otherwise line item slide depreciation and amortization as well as interest expense slightly improved for the period. However, given now limited ability to conduct operations in Uzbekistan, we determined that the portion of MTS's long lead assets and tangible assets and goodwill are impaired and we record that the charge of 579 million for the period. In addition, MTS has provided for tax and other liabilities that are likely to resolve from the various legal precedence currently on go in Uzbekistan in the amount of 500 million. The total amount of impairment in provisions is about equal to the total book value of our assets and Uzbekistan. The cumulative effect is a net loss for the period of $682 million. As MTS has stated, there have been limitations in the amounts of earnings we have been able to recreate through dividends and other means due to a specific market conditions in Uzbekistan. Therefore, we do not see any risk for the liquidity position of the group as a whole.

At the end of the first quarter, our total debt decreased to $7.3 US billion. We had no principal repayment during the quarter but currency fluctuations, the repurchase of ruble bond in the amount of 13.2 billion rubles, preparations for our financial year 2011 dividend payments and improvement in OIBDA allowed us to improve our net debt to OIBDA ratio to 1.1 multiple.

We will continue to pursue opportunities to optimize our portfolio. In July, we paid out financial year 2011 dividend in the amount of 14.71 rubles to ordinary MTS shares or 30.4 billion rubles in total. Free cash flow for year to date is nearly $1.1 which is over 33% higher than this period in 2011 despite a significantly weaker ruble. In the first half of the year, CapEx exceeded $1.1 billion. Investments are largely being focused on expanding our 3G network and preparing for our 4G rollout, identifying new sights, connecting base stations to fiber and proceeding with the implementation of our GPON project in Moscow.

Andrei Dubovskov

Thank you Alexey. As Alexey has explained, we obviously had difficulties with our business in Uzbekistan. I will not account the history in executive developments. I will show to you our disclosures in our websites for a more detailed chorology of events.

That being said, what has happened so far in Uzbekistan has been a travesty of law and justice for foreign investors. Over the past eight years, MTS has been at the forefront of the development of telecommunication in Uzbekistan. In addition to the mighty spend accrued in the business, MTS has invested over $1.1 billion USD provide 9.5 million customers as short the population in this country with the latest VOIP and data telecommunication services.

Over the past eight years, MTS categorized fully with authorities on various audit, inspections and queries. In fact, as recently as February 2012, MTS (inaudible) with tax authorities over a multi-year audit and that resulted in an adjustment of roughly 1.2 million USD entices Uzbekistan for really pay to authorities.

Sadly our subscriber has been subjected to numerous actions by various authorities that have eventually led us to suspend our operations. While impaired strongly and to manage their own doing alerted by as the various Uzbekistan authorities and has challenged and intends to continue to challenge the legality of their actions. MTS has fully complied with their 11 court decisions. We continue to challenge the allegations against MTS-Uzbekistan and make use for MTS process with Uzbekistan. We are also evaluating other appropriate legal strategies to defend our legitimate rights and investments interests.

For now, our primary focus remains the well-being of our employees. We were successful in freeing our acting CEO (inaudible) a Russian citizen with the help of the Russian Ministry of Foreign Affairs. But four of our colleagues remains in jail in Uzbekistan. We have engaged at various stockholders both here and abroad to build support for their release. That process in Uzbekistan is ongoing. However, we believe that we face a significant loss of value in our business regardless of the outcome. Our decision to write-off a portion of the asset value and take provisions for claims reflects this. Nevertheless we are committed to defending our rights. We have no hesitation to challenge any authority or OIBDA appreciated with this unwarranted attack on what has been a good corporate citizen in Uzbekistan and the driver of growth in job creation and generation in Uzbek economy.

On a more positive note, we came to an agreement with government authorities in Turkmenistan over the re-launch of our network. In late September, we re-launched services under the MTS band. We do not anticipate large costs to get the network up and running; our asset remains intact and in good condition. Overall we expect just under 40 million USD in CapEx in the market through 2015. Our goal by year end is to attract approximately 440,000 customers and realize over 3 million USD in revenue. While this may seem small in comparison to the total sight of MTS, it’s a reasonable step in leveraging our expertise in the markets with realizing a high quality asset and turning a negative situation in a positive for MTS, its employees and its shareholders.

In Russia we continue to see opportunities to create value in our business. By the end of this year, we will increase our retail footprint by up to 500 stores. Many of these stores will be open in cities and towns as small as 20,000 people. The opportunity here leaves for margin, higher margin that of Russia. We have already extended our 3G networks and daily starts of communities and integrate demand for data enabled devices. The combination of 3G networks and the retail presence will help us drive sales of smartphones and increase smartphone penetration which will in turn lead to higher-value customers.

Ladies and gentlemen thank you for your time and now I will open the call to questions.

Question-and-Answer Session

Operator

Thank you gentlemen. (Operator Instructions). and we'll take our first question from JP Davids from Barclays. Please go ahead, sir.

JP Davids - Barclays

Two questions please. The first one on the Uzbek impairment. Just in terms of your dividend outlook for 2012, will this impairment be looked at or considered when you payout dividends at the end of 2012 with the knowledge that you do have a dividend payout ratio as guidance, sort of an EPS payout ratio. The second question is a broader question on mobile data and more specifically when you move into the LTE world in Russia, do you see this as an opportunity to accelerate usage amongst your base or to price the product differently? Thank you.

Alexey Kornya

At this time it is too early to speculate of what will be the final impact of events in Uzbekistan, on our full year financial and operating results, we sincerely will affect our proposal to the board of directors; I'll recommend the dividend payments. Under the internal policies, dividends are defined as a percentage of net income and under Russian law; we can pay dividends from our net income, under Russian accounting standards and the percentage of retained earnings. While we have the option to revisit our internal policies, we also possess enough funds in our retained earnings to sustain the level of dividend payments which we historically had. So at this point as I said, I think it’s a bit to pretty much speculate about what will be effect of this issuance in our dividends.

Aleksander Popovskiy

On LTE, yes, we already move into LTE world, as you probably know, we just announced our first LTE launch on the first September in Moscow, this will be our own LTE network which will be fully operational since the first of September this year. and we of course see LTE as an opportunity both for accelerating usage of course, this is logical because of the higher speed and IRP also, in two ways. The first opportunity of course LTE arrives is the quality standard of mobile data to new level which gives us moral ride to price it differently to switch more towards tiered pricing and to price it eventually higher than we used for 3G networks. And the other way is that by releasing our existing 3G network from huge big screen traffic which we mostly uploaded to LTE networks, we raise the level of customer experience for smartphones which gives us of course high potential for (inaudible) and for gross penetration of mobile data.

Andrei Dubovskov

Some notes about pricing, its Andrei Dubovskov, according to our price policy in Moscow region, we are not going to establish very big differences between pricing 3G or 4G network. Thank you.

Operator

And we'll take our next question from Cesar Tiron from Morgan Stanley.

Cesar Tiron - Morgan Stanley

Congratulations on this alternating numbers. Actually would like to know if you can go through those exceptional items at the EBITDA level one more time and say if your expectations of lower margin in H2 2012 is compared to H1 or compared to Q2? Thank you very much.

Andrei Dubovskov

Well that’s both, that relates our lower expectations second half of the year against first half of the year, and further as we’ll see in the second half, third and fourth quarter, we expect that they will be quicker than our second quarter. Even though third quarter can be quite a key because of seasonality I think we’ll see the main impression on our margin somewhere in the fourth quarter and basically that still allows us to show quite a good profitability level and we believe as a respect of our margin, we'll be at the very high end of our guidance.

Cesar Tiron - Morgan Stanley

Thank you. Do you mind to go through those exceptional items one more time?

Andrei Dubovskov

Well, you mean which positively affected our financials or…?

Cesar Tiron - Morgan Stanley

Yes.

Andrei Dubovskov

Well we expect they come out. Okay, then we had sale of equipment, against which we previously reserved. Then the release of employee bonus for full financial year 2011. We had the sale of real estate premise in GTS and reduction of interconnect expense in Ukraine due to release of some reserve held against interconnect.

Cesar Tiron - Morgan Stanley

And the total impact was 150 basis points, 1.5%.

Alexey Kornya

That was around 1.5 percentage points.

Operator

And we'll take our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead.

Alexander Vengranovich - Otkritie Capital

Thank you and good afternoon. I just wanted to elaborate on your 4G network development. I know that you are new now in the negotiation Scartel with regard to potential usage of their frequencies. Could you please explain a bit whether you think that the frequencies you got from LTE auctions and the frequencies you have got in Moscow are enough to develop your network or do you think you still need to work as MVNO and as Scartel network? Thank you.

Michael Hecker

We are pleased with the frequency that we have received in the FDD and TDD area. We have altogether received 50 megahertz in the FDD spectrum and we are already as you know, up there with the double digit amount on the TDD area. That is for the time being a very good spectrum base to offer a superior customer experience as it has been outlined by Aleksander Popovskiy earlier and with regard to further activities mentioned by you with regard to Scartel, we would not like to comment on anything like that.

Operator

And we'll take our next question from Herve Drouet from HSBC. Please go ahead.

Herve Drouet - HSBC

Yes, sir, good afternoon. My first question is regarding the non-cash impairment for Uzbekistan, the $579 million. Just want to see to confirm that it corresponds to the full net book value of your subsidiary or is there still a remaining part which potentially could be further write-off in the following quarter? And the second question is regarding its objective in Turkmenistan, if you can repeat what are your annual objective in term of subscribers, but also on the revenue and financials for Turkmenistan? Thank you.

Alexey Kornya

Okay, let`s (inaudible). As for the size of the impairment, it basically about the size of total net book value, which we have on balance against our Uzbek as it doesn't equal one by one, but it is basically about this figure. So, we will not see any sizeable potential impairment in the future.

Herve Drouet - HSBC

Oka thank you and for the second question, please?

Oleg Raspopov

As to Turkmenistan, Оleg Raspopov, VP for Foreign Subsidiaries, as for Turkmenistan as we are launching the day after tomorrow, launching in half test mode so called so is fully commercial, the only exception that we will not be able to reach new subscribers. We do intend to secure on former subscribers, existing subscribers to test our network, I mean the whole network of the company and as well as our sales and customer care network, and the lot and launch full scale only by the end of next month. As to the targets for subscribers, quite conservative, we are going 0.5 million to 2.5 million before the end of this year. In terms of revenue up to 3.5 million, in terms of CapEx we are keeping our work you see for the launch, for the rejoining. We will not spend more than 1.5 million. In terms of you see CapEx cash till the end of this year, we are not going to spend anything.

Herve Drouet - HSBC

Right and is there any, maybe mid-medium term objectives you can share with us as well?

Oleg Raspopov

Not more than 40 million in terms of CapEx cash till 2015.

Herve Drouet - HSBC

Right and in term of subs, what you would expect there in let say two years' time? Is there any objective you can share?

Oleg Raspopov

I can hardly speculate on this actually issue because the market is already rather competitive, the competition is rather strong. Let us you see look, return to this issue after the third quarter.

Operator

And we'll take our next question from Alex Balakhnin from Goldman Sachs. Please go ahead.

Alex Balakhnin - Goldman Sachs

Yes, good afternoon, I have a few questions. First is, just wanted to follow-up on your dividends and the implication of Uzbekistan development. Correct me if I am wrong, but when you had the write-down of assets really to Turkmenistan, you adjusted your net income for the amount you written down. Should we apply the same logics here or the situation is complete different?

And also wanted to ask you on how should we currently think about your Uzbekistan operations, so you don’t have license and so you can’t book revenues, but do you have any course to run the network?

And lastly, I just wanted to get a better understanding on your margin working. So, your previous EBITDA margin guidance of 41% to 42% implies that your second half EBITDA margin will be lower, both sequentially and year-on-year. Is your previous guidance remains in place, I understand Uzbekistan developments don’t help here, but in general, do you see any operational trends in your core markets like Russia and Ukraine which you didn’t see in May when you gave this guidance? That's it from me.

Alexey Kornya

On dividend question, again we believe that this is a bit too early to speculate on this topic. Yes, you remember correctly the logic which was applied when the re-adjustments against net income when Turkmenistan was written off. However, this does not necessarily mean that the same logic will be implied for the case with Uzbekistan because of the size of the impairment or of the impact on P&L. At the same time, it doesn't mean vice versa. So, it does not mean that we will not apply this logic. We believe that a big value of MTS is associated with our dividend value and with our sustained dividend payments and relatively high dividend yield. So we are appreciating that and that is why we will of course looking, sustaining, considering heavily to keep up with this value expectations.

As for the margin questions…

Andrei Dubovskov

Alexey thank you. If it's possible, I'm going to explain our position in this issue, because previously we've had some questions about this, maybe it was not clear. Speaking about our margin guidance, we are not going to change because you know that we have new laws, in Russia concerning the social taxes. First of all and secondly it's a process of rise in rent and maintenance cost as we expand our mobile and fixed networks to add some information about further expansion of our retail footprint, in particular, the build out of an additional 500 outlets by the end of this year and of course it’s some problems in Uzbekistan. It’s a lot of reasons which are not going to change our position much in guidance. Thank you.

Alex Balakhnin - Goldman Sachs

And so basically just to sum it up, so your previous 41% - 42% margin is unchanged you just wanted to highlight the issues you wanted, you are dealing with right?

Andrei Dubovskov

Yes of course.

Alex Balakhnin - Goldman Sachs

On Uzbekistan, cost of running that operations will you have to have some cost related to that, as of now obviously?

Oleg Raspopov

Let me answer. Oleg Raspopov here. Yes, we do have uses of course for keeping you see our networking (inaudible) of course you see present here of course, we have already reduced more than by half our staff, and become of the operation also you see some of the staff on leave without allowance. So in this way we managed to reduce our cost. As to keeping network intact you’ve seen the major course about guarding this network. The payments we are actually doing to the police. You see and we do expect that you see money, we do have you see resources, we do have you see in our accounts and this company on this particular purpose there will be enough for us till the end of this year.

Operator

And we will take our next question from Tibor Bokor from ING Bank. Please go ahead.

Tibor Bokor - ING Bank

I have a question on Ukraine. Do you see any disruptive move from any of your competitors; I know we heard recently from one of the biggest competitors that they are going to invest in to margins in Ukraine for next three quarters. Do you already see that on the market and should we expect your margins to be under pressure for the rest of the year? Also, what sort of impact of net devaluation should we expect on your business in Ukraine? Thank you.

Andrei Dubovskov

We can't comment on our competitors but we continue to offer strong value proposition in Ukraine as we have customers and increase customer value. In my opinion speaking about the revenue and margin in H2 in Ukraine, it will be stable situation no less, no more because that would be the end margin 50%, in my opinion it's a very comfortable situation for our business in Ukraine.

Speaking about the revenue, it will be a little better than in current quarter because now we have good results in ARPU and MOU and it can support our position in Ukraine business. Thank you.

Tibor Bokor - ING Bank

And about devaluation, how big risk do you see?

Alexey Kornya

Okay we think that if there is material devalue of (inaudible) in the end of the year, we'll some impact on our marginality. However we do not expect that it will be big one more than one percentage point or so on the quarterly basis. So, that is why generally taking the materiality of Ukraine and overall business and taking that if devalue happens, it happens at the very end of the year. We don't think that it will have any significant impact on our group results.

Operator

And we'll take our next question from Tatiana Boroditskaya from UBS. Please go ahead.

Tatiana Boroditskaya - UBS

Good afternoon thank you very much for your presentation. Tatiana Boroditskaya from UBS. Serial questions from my side. Could you please clarify if you intend to raise any debt in financial markets in next 12 months and if you have done or intend to do any debt buybacks and also if you have any M&A targets in mind or anything like that?

Alexey Kornya

We might need to have some minor debt rising by the year-end, but we'll do it through already open credit facilities, the lateral open credit facilities, and it will not be of big amounts and no buybacks expected. We are not planning any buyback in the foreseeable future. And as for M&A targets, we are looking at M&A targets within our general strategy building conversion play in the market of our operation, which is a small fixed line operations in those cities or in those regions where we are not fully present.

Operator

And we'll take our next question from Ivan Kim from VTB Capital. Please go ahead.

Ivan Kim - VTB Capital

Yes, good afternoon. Two questions please. First on Ukraine, can you roughly quantify the effect of the euro on the topline, and second on the regulator front in Russia, what effect do you expect from the potential abolition of international roaming? Thank you.

Andrei Dubovskov

Ivan, speaking about euro in Ukraine, it's not significant value. I think it's not more than 0.5% of all our revenue in Ukraine in that period. Ivan, please clarify your next question about regulatory environment in Russia. What do you mean?

Ivan Kim - VTB Capital

Yes, just the ministry potentially can cancel the inter-network roaming, so basically for a person who is going travelling within Russia to cancel that roaming which is currently in place, and I am just wondering what kind of effect on your P&L can happen from this abolition?

Aleksander Popovskiy

So, first of all we didn't expect a significant impact on our P&L from this. So, it will have some influence on the overall market conditions. It will have influence on the market, but the particular way in which we are currently discussing this with the regulators is not that strong in terms of potential impact. And those measures that they will have to do in order to make it possible will I would say also very beneficial for operators and we will have a reasonable compensation for this regulatory change.

Operator

And we'll take our next question from Thomas Heath from Handelsbanken. Please go ahead.

Thomas Heath - Handelsbanken

First, follow-up, what sort of compensation would be possible for changes in inter-connect between regions as you just touched upon? And then second question on smartphone penetration, comparing Moscow to other regions in Russia, you say 27% of handsets are now smartphones and in your sold 17% of all the handsets in your network. Could you perhaps give some color on the difference between Moscow and other regions? Thank you.

Aleksander Popovskiy

Aleksander Popovskiy, I will continue on regulations. So I didn’t mean of course financial compensation, I mean regulatory compensations. For example, they will have to redesign the way how interconnect fees in the market are being setup, are being paid between different operators. They will have to enable using core network infrastructure, infrastructure which is now mandatory to have in each particular region, then we will have an opportunity to use the same core network for different regions. We will provide some savings for us. So overall, it can be neutral or even positive effect for the industry and for operators.

Thomas Heath - Handelsbanken

Thank you and on smartphones in Moscow versus regions?

Andrei Dubovskov

Smartphone penetration of all registered mobile phones on MTS network, right now, it's approximately 22% - 23%. But more important for us, the sale for smartphones through MTS retail network, as a percent of total handsets sold in units are more than 30% and speaking about the differences between Moscow and the regions, it's not big differences because a lot of smartphones and our subscribers located in big cities like Novosibirsk, Krasnoyarsk etcetera and in my opinion till the end of this year, it will be approximately the same situation, 23% - 25%. Thank you.

Thomas Heath - Handelsbanken

You're starting up LTE with the TDD technology now. What sort of timeframe do you think you could use broadly 2.6 and 800 and also what do you expect to be able to use, the 1800 band and if so when? Thank you.

Michael Hecker

Yes this is Michael Hecker. As you know, we are going to launch the TDD, now we're fortunately already in the next week in Moscow as kind of advance going to market in the biggest area, in the biggest market of the country. With regard to the other FTD bands, we are at the moment in our strategic set up for the roll out into in the 2600 area which will take place next year. Exact details on that would follow in the Q3 disclosure.

Regarding the 800 and 700 area, we are also investigating that at the moment. It depends a little bit on the limitations we have in those bands from spectrum limitation still from some air radio navigation. There are pockets or there are spaces where we can already today start 800 and there are some other spaces where we cannot start yet 800, where it will take small amount of time until we can also go to market there. That is something that differs from city to city sometimes from basically street to street. But overall we believe that we have a very, very good starting perspective for the next year with our extremely strong position in Moscow, with the TDD network and FTD coming up and in the rest of the country with FTD so, that we are very, very happy about the opportunity that we can now serve our customers with LTE and in those spectrum bands.

Thomas Heath - Handelsbanken

On 1800 do you see a future for LTE 1800 in Russia?

Andrei Dubovskov

Well, we would not like to comment on the discussions that you are obviously referring to that are ongoing in the regulatory area. We do believe that so far very progressive approach of the Russian regulatory authorities and the legislation behind it will also continue with regard to 1800 and other opportunities. So this will over long-term as we hope and believe even more strengthen our strategic spectrum situation that we already enjoy.

Operator

We'll take our next question from (inaudible).

Unidentified Analyst

First, could you please remind us of the guidance for 2012 revenue side and EBITDA wise both rates of growth and margin?

Secondly, could you please specify what would be your net income if there were no Uzbek write-offs and then there were different figures voiced at this presentation and a different figure has appeared on Bloomberg?

And finally, I couldn't quite understand what you said about the extraordinary items? Were those items that had an impact on the second quarter results or this is something you expect in the second quarter to take place and affect your results in the second half of the year and specifically if 1.5 percentage point impact took place in the second quarter then your increase in the EBITDA margin was roughly 2.2 percentage points, that means that probably two-thirds of the improvement in the EBITDA margin came from these extraordinary items, what's the way to interpret your phrases about extraordinary items? Yes, thank you.

Alexey Kornya

To remind your guidance is 5% to 7% on top-line and 41% 42% on EBITDA margin and we also have guidance on our CapEx, CapEx to sales is 20%, 22%. As for EBITDA margin, we were indicating that we expect to see the upper end of our guidance at the end of the year, our full year results. As for net income without Uzbek write-off, the amount in the second quarter would be about $360 million, net income not low as our figure with impairment. And about extraordinary items, you are getting it about right. If you take only positive extraordinary items, there were a few which had negative impact as well, which was about 0.4 percentage points. So on total, we enjoyed about 1 - 1.1 net effect of one-offs and coming from that, that's about half of our improvement.

Operator

We'll take our next question from Anna Lepetukhina from Troika Dialog. Please go ahead.

Anna Lepetukhina - Troika Dialog

Yes, hello, I have two questions. My first question is on Russian operations. First of all, I noticed that in second quarter sales of handsets increased almost 60% year-on-year. As far as I understood it contradicts your previous strategy to reduce sales of handsets. Can you please explain the reason for such growth? Also, can you please explain what is going on with voice services whether you continue promoting on net calling or you are focusing on other promotions or have an intention to promote something else? And also my other question is on CapEx. In first half of 2012, CapEx increased almost 40%. Do you stick to your guidance for CapEx of 20% to 22% of framing it for the full year, because it implies that in second half of the year, you should kind of decrease CapEx?

Alexey Kornya

Thank you. On our retail topline dynamics, one has to say that second quarter is usually quite stronger in terms of revenues than the first one, besides we significantly improved our like sales capacity in our retail business. There is sales stall and on top of that as I indicated, we realized some volume of handsets which were previously reserved with the discount which gives us also some top-line improvement in retail. At the same time, as we said, our strategy in retail is to reduce the wholesale part of our retail part. So, we are not actively pursuing the strategy of wholesale part in our retail business, but we are focusing more and more on sales pressure. So, taking that all, we see quite a good improvement on our top line.

Andrei Dubovskov

Speaking about your next question, its Andrei Dubovskov, speaking about the voice in Russia, in my opinion the best explanation of this issue is our results in ARPU and MOU. And I am going to remind you that speaking about our results quarter-over-quarter, it’s approximately 12% growing in ARPU and 15% growing in MOU.

Alexey Kornya

As for CapEx guidance, we stick to our current CapEx guidance, although we allow that we might see figure than higher than 22% the CapEx sales slightly, but right now we'll have yet to see how we will finish the year with our build up, so at this point there is not enough visibility to assume that we'll be for sure about that figure, but we allow that it might be a bit (inaudible) higher.

Anna Lepetukhina - Troika Dialog

When I look at cash from operating activities, I noted that second quarter in a row you improved cash conversion ratio. Can you please explain the reason for this and whether it can be sustained for the second half of the year?

Alexey Kornya

Well actually our cash conversion ratio for the second quarter was lower than for the first one and this is due to a higher turnover, because as you grow in turnover, you will have higher prepayments or higher working capital needs and taking our growth in retail as well it consumes our working capital. So, in the second quarter actually, we had lower than in the first one, but we were about 80%, which is generally average figure for us through the year.

Operator

And we'll take our next question from Igor Semenov from Deutsche Bank. Please go ahead, sir.

Igor Semenov - Deutsche Bank

Yes, just wanted to go back to this outlook for the second half, you said, you talked about the costs, but you also mentioned that the revenue outlook, the wording of your statement implies some sort of issues on the revenue side. Can you comment in a bit more detail about this, what do you see different this year from last year? Do you start to detect already some sort of softness in your revenues and in which area? And also just to go back to Uzbekistan running costs, can you quantify how much you expect to spend in running close to the third quarter assuming that the network will be down? Thank you.

Andrei Dubovskov

Well, we don’t expect any significant slowdown in our topline. I think there are two reasons to be bit cautious on that. First there is a slow market economic development we should expect in the market and which is forecasted in the market genuinely. So that will have some impact on our topline, although limited.

And second reason is that we had very strong second half of last year which was stronger than the first half in terms of revenue and growth. So we’ll see some comparative ways when we’ll compare year-to-year, we’ll see probably some reduction while we still seek to our confident in our guidance and I wouldn’t say that this is serious matter that will see serious slowdown in our topline. It is just some bit low in terms of year-on-year growth rates.

Igor Semenov - Deutsche Bank

Okay and on running costs in Uzbekistan?

Andrei Dubovskov

(Inaudible) thank you for your question. I will explain this and of course so mostly you see utilities I told you, utility and security expenses and also of course rents for our equipment. And so we are going as I told you to spend you see not more than for this period which is not more than you see 3 million equivalent United States dollars per month. So everybody (inaudible).

Operator

(Operator Instructions). We have one final question in the queue from Anna Kurbatova from Gazprombank. Please go ahead.

Anna Kurbatova - Gazprombank

About LTE and CapEx of combined. For the market it's still unclear of the future cost of frequency conversion. I wonder if you have some kind of better visibility of in this regards of obtaining LTE license in July and if you probably could tell us something about the role of the former or existing 4G mobile consortium, in this regard. So, what steps are being done and when you as a company and the management expect more or less clarity in terms of future cost of consumption? Thank you.

Aleksander Popovskiy

Okay so, starting from the CapEx. So we have a clear target for CapEx royalty, in our new just acquired LTE licenses. It is 15 billion rubles per year and we think that this amount of money will be enough both for network development and for frequency commission. So this you can treat as sort of natural limit for our capital expenses on LTE. About how will be this frequency conversion held on, so it is still in the process of discussion and between different market players, so we don't have any final solution and we don't have any final view on the role of existing 4G mobile consortium, whether it will be somewhat transformed or whether we will design a new organization, it is not clear at the moment.

Unidentified Company Representative

Thank you very much, ladies and gentlemen. We welcome you at any time to contact the 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 your interest and wish you all a present day or evening. Thank you, operator.

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