Mobile TeleSystems Public Joint Stock Company
Q2 2020 Earnings Call Transcript

Published: 19 Aug 2020

[Operator:]

Dear ladies and gentlemen, welcome to the conference call of Mobile TeleSystems. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Polina Ugryumova, Director of Investor Relations, who will lead you through this conference. Please go ahead, ma'am.

[Polina Ugryumova:]

Welcome everybody to today's event to discuss MTS Second Quarter 2020 Financial and Operating Results. As usual, please be aware that except for historical information, any comments made during this call may constitute forward-looking statements. Important factors including related to the COVID-19 pandemic could cause the actual results to differ materially from those contained in our projections or forward-looking statements. This, in turn, implies certain risks and more thorough discussion of which are available in our Annual Report and Form 20-F or the materials we have distributed today. MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. I also want to remind you that you can find copies of the presentation and materials used in reference in this conference call on our Investor Relations website. Today's presenters are Alexey Kornya, President and Chief Executive Officer; Slava Nikolaev, First Vice President for Customer Experience and Marketing and Ecosystem Development; Inessa Galaktionova, our First Vice President for Telecommunications; Andrey Kamensky, Vice President for Finance; and Ilya Filatov, Vice President for Financial Services and CEO of MTS Bank, who will speak in Russian and I will translate. Now, it's my pleasure to introduce Alexey to kick us off.

[Alexey Kornya:]

Welcome everyone and thank you for joining us. Given the ongoing global pandemic, I wanted to begin with an update of where we stand today before turning to our second quarter performance highlights. First and foremost, our guiding principles remain unchanged, protect our employees, support our customers and help society more broadly. As we said on our last call in May, the pandemic have had several major impacts on our company, most notably a steep drop in international roaming and slow down in retail sales and the change in risk profile of the loan book at MTS Bank. While significant uncertainty remains, we have also gained some much needed clarity. On the retail side, following the initial drop in sales in April, recovery kicks off in May that continues into June as social distancing ease. Our operations are now mostly back to normal. Overall, we see the market rebound continue. On the connectivity side, traffic volatility has mostly abated, while we continue to see resilient demand on both mobile and fixed line services. While limited international travel has resumed, roaming headwinds have continued into peak summer travel season. And therefore we expect them to have a material impact on our results in third quarter. Finally, I also wanted to highlight that at global level, we are now living in unprecedented time of digital acceleration. As we look at the bigger picture, current trends only further reinforce my confidence in our two-prong loan growth strategy. Firstly, we are maintaining a leading network, investing in coverage, capacity and quality. Our goal is to provide reliable connectivity when, how and where it is needed. Second, we continue to move with the pace of transformation path we laid out last year. In Fintech, although we’re in the challenging macro cycle, the industry is rapidly moving towards digital sales banking, contactless payments in other areas where we see competitive niche. In media, the shift toward video on demand is accelerating and set to fundamentally reshape the entertainment industry. And in B2B businesses are prioritizing agile and IT approaches, remote work solutions and cloud based workflows. We expect this trend to continue and I am confident we are well positioned to capture some of the digital tailwinds. Turning now to our performance, I am happy to report that despite volatility and headwinds, we successfully delivered growth in second quarter. Group revenue was up 1.3% year-over-year to reach RUB117.7 billion. Importantly, top line growth was driven both by our [technical difficulty] as well as segments beyond connectivity. At the same time, with significant negative impact in the retail, [indiscernible] the overall market slowdown during the pandemic. Group adjusted OIBDA notched up slightly by 0.6% year-over-year and reached RUB51.6 billion. OIBDA was supported by core performance and positive one-off, while negatively impacted by provisions at MTS Bank. Andrey will go into more detail there. Finally, despite recent operational challenges, we continue to execute on our strategy at pace across all fronts. Let me share just few recent highlights. In July, we received the first 5G license in Russia in the specialized millimeter wave spec. While the commercial 5G rollout is still some time away, we are targeting initial limited use case with Internet of Things such as an industrial process automation. In addition, we are also launching 5G smartphone sales in our retail stores to begin driving device penetration on our network. This summer we also launch Marvin, our in-house AI based virtual assistant. This project builds on the expertise in natural language processing we gained from developing our own customer support chatbot. Users can communicate with Marvin via multiple channels, including dedicated app and an MTS branded smart speaker, which is now in initial public use. And in Media we're making steady progress to expand our content offering and strengthening partnership with leading players, such as Channel One, Russia's most watched TV network. With this, I will hand it over to Slava, who will give customer experience and market system update.

[Vyacheslav Nikolaev:]

Thank you very much. And hello, everyone. As Alexey said, everywhere we look today, the world is becoming more digital. Successfully capturing that demand requires a customer centric approach pick up by world class products and services. And that's what we've been doing. As you know, we began this journey several years ago by shifting towards a more open and straightforward approach in customer engagement. For example, with access [indiscernible] to prevent subscribers for being signed up for add on services they didn't really want. And while this can impact revenue in the short-term, it also strengthened the brand trust and loyalty, which is the foundation for our long-term success. More recently, we're seeing that other players begin to move in this direction. We welcome the market to move toward greater transparency, but we are not standing still. We are now moving forward on the next phase, which is leveraging the trust we've built across upsell services beyond connectivity. In Q2, we saw growing adoption across many of our apps and programs. Our Pay TV subscriber base jumps up around 7% quarter-over-quarter to 4.9 million viewers. This was driven in part by our bundle offer, which is called [indiscernible].Our loyalty program MTS cash back saw slightly 73% increase in registered users year-over-year, reaching over 6 million participants. And we're continually expanding that program. For example, we recently launched a promo under which new subscribers can convert unused data balances into cash back rewards. We are also driving penetration of our mobile apps with MTS Bank users, up nearly 60% year-over-year and active users of MyMTS now topping 22 million. These are promising trends as we move forward on our CLV 2.0 strategy. And I also wanted to highlight a few recent major milestones as we take our customers value prop to the next level. Last week we launched a partnership in Russia with Spotify, the world's most popular audio streaming subscription service. Under the partnership we're offering 6 free months of premium service for eligible subscribers with full on payments handled via their MTS account. This exclusive offer is a good example of how we are strengthening our ecosystem through partnership. It also demonstrates that MTS's leading market position and commitment to compliance and transparency makes us a partner of choice for global companies looking to tap into the Russian market. Beyond music, we're also moving forward in video. Fundamentally, the media -- in media, the content is the product and they’re two pillars to our content strategy. The first is our content library. This is absolutely critical for customer retention to keep viewers happy long-term we need a large, diverse lineup of in-demand titles. We have to appeal to every case [technical difficulty] day in and day out, we’ve recently concluded multiple agreements with some of the world's top studios that will multiply the size of our premium content library several fold [ph]. The second half of the equation is customer acquisition. Here the focus is exclusivity. We're taking the multipronged approach that includes first look right, joint development and in certain cases, our own products. We're filling up the pipeline and have half a dozen content projects already underway. As they’ve seem to [indiscernible] from year, they will provide a powerful magnet to draw new viewers to our platform. In addition, on the technical side, we've unified our distribution backend in more than a dozen large cities. So to sum up, we now have all the pieces in place, a scalable platform, an array of channels and a differentiated content search that makes it the right time to expand our marketing, which is why we recently launched a nationwide advertising campaign focused on the MTS online streaming [indiscernible]. Last but not least, in July, we unveiled MTS Premium, a new bundle package that combines offers and services from across our ecosystem. It's free for higher revenue subscribers and RUB199 for a month for others. It includes a subscription to MTS TV, [indiscernible] and an extra 5 gigabytes of mobile data, as well as access to special retail discounts and privileged rates at MTS Bank. We think this will be a compelling offering for many of our subscribers. As we build out our ecosystem, we are also changing how we internally track customer lifetime value. And we already seen some promising indicators. For example, we see ARPU is 1.57x higher and churn is more than 50% lower for users that have subscribed to two or more MTS services versus a single service. [Indiscernible] more the gap grows to more than double the ARPU with churn down by a factor of three or more. So we're making good products. We see potential upside and we’re powering our ecosystem well going forward. Now let me hand it over to Inessa for telephone and B2B updates.

[Inessa Galaktionova:]

Thank you, Slava. While 2020 has been a year of challenges, one thing has been never clear. Connectivity [technical difficulty] is essential to the economy and essential to everybody's life. As we move further into the recovery phase, I’m happy to report [indiscernible] business has remained resilient. And we have successfully adjusted our operations to mitigate the situation. In distribution, we're diversifying our sales channels in line with our long-term mobile strategy. We have added more than 12,000 distribution points in Russia. We have launched new partnerships with e-commerce players such as Ozon and Wildberries. And we have expanded the brick and mortar distribution with partners such as Detsky [ph]. In fixed line, we saw certain new adds as home connectivity became even more critical for work, study and entertainment. In Q2, our broadband base was up an exceptional 8.7% quarter-on-quarter and TV was not far behind that, plus 7%. Altogether, fixed line revenue was up more than 5% year-over-year. We are continuing to enjoy [technical difficulty] in Moscow, where we saw the biggest transition to remote work was an essential estimated market share at over 40% in both broadband and PAY TV. Turning to our mobile voice and data. In Q2, we kept a laser focus on supporting customers [technical difficulty] the cost of traffic to official hotlines and websites. We also [indiscernible] approach, leveraging big data for targeted, personalized engagement. In Q2, we saw incremental improvements in customer loyalty. Quarterly mobile churn moves down about a third of a percentage point. To some extent, this largely reflects [indiscernible] customer looking to switch providers during the pandemic. Despite mobile churn, we saw Russian mobile subscribers [technical difficulty] downward by 1.7% quarter-on-quarter. That said, we think this is a solid performance when taken into account the drop in tourists, migrants and secondary SIM users as well as the obstacle to customer acquisition and return. Despite those factors, we saw nearly 2% year-over-year increase in Russia mobile service revenue, reflecting a healthy ARPU accretion. Moreover, our [indiscernible] indicates many of our customers shifting from dual to single SIM, preferably choose MTS as the sole operator. Overall, while the market remains competitive, we continue to feel comfortable in our leading position. Looking ahead, we expect international roaming, which is the key margin driver, to remain under pressure in the second half of the year. It's also important to keep in mind that given our subscriber base, we have relatively high roaming revenue than some of our peers. We estimate the absolute impact from roaming in Q3 will probably be slightly higher than the historical concentration of summer travel in July and August. At the same time, there could be some minor offsets from greater longer distance calling as Russian [technical difficulty] for domestic vacations. Turning now to retail. Despite the store closure and [indiscernible] traffic in April, Russia retail revenue was down low single-digit at minus 3.4% year-over-year, reflecting a sales rebound in May and June. We also continue to forge ahead on our optimization strategy. By the end of Q2, our footprint has declined by 600 stores year-over-year. That fulfilled our initial guidance for year and 2020. We are not only on track, we are ahead of our schedule. [Technical difficulty] to see long-term opportunities to further right size our [technical difficulty]. At the same time, the retail market in 2020 is highly volatile and there is reduced visibility looking ahead. We are also closely monitoring the situation and so far we have not taken any decisions. That said, we intend to move further in this direction and could consider additional moves this year if the competitive situation allows. Beyond store [indiscernible], we continue to build momentum in diversifying channels and [technical difficulty]. In Q2, we saw exceptional growth in online sales more than doubling year-over-year. But more recently in July, we launched our first MTS showroom in Moscow as a flagship store to [technical difficulty]. Turning to B2B. The corporate segment has also been negatively impacted by roaming as companies scaled back business travel. In addition, [technical difficulty] pressure on the SME side, given the macro cycle. However, we're also seeing a surge in demand in new growth segments. The figures from Q2 are impressive, and [indiscernible] cloud revenue more than doubled year-over-year. Revenue from IoT smart connectivity and vertical solution was up double digits versus the prior year quarter. VPN revenue was also up double digits. MTS market tier [ph], our marketing service for SME saw extraordinary top line growth. And big data, which began as internal enabler, saw external revenue more than double year-over-year. On the enterprise and B2G side in Q2, we won several large contracts worth over a RUB1 billion. In B2G, in particular, we saw revenue up more than a 30% [ph] year-over-year in Q2. This is under penetrated, but addressable market for us and we keep promising prospects in this space with projects underway to bring online social significant facilities [indiscernible] such as schools and medical clinics. To sum up, amidst headwinds, we are demonstrating results. In a changing customer landscape, we are focused on acquisition and retention. As digital accelerates, we are moving forward to capturing new growth opportunities. With that, let me hand it to Ilya for [indiscernible].

[Ilya Filatov:]

Thank you, Inessa. As we mentioned, Fintech was one of the MTS segment most impacted by COVID. In April, the Russian banking industry faced a serious decline in demand for credit products as quarantine restrictions were introduced. However, in May, demand began to rebound and the industry recovery is still ongoing. MTS Bank followed the overall market trend, and we also reduced restoring consumer lending volumes. Over the past year, the Banks assets have increased 29.4%, with our total gross loan portfolio up 30.6% and the gross retail loan portfolio, in particular, up 48.1% to RUB99.3 billion. Obviously, the pandemic slowed the loan portfolio growth in Q2, but we hope to continue moving towards pre-crisis levels and again see growth accelerate in Q3. In June, monthly consumer loans issued by MTS Bank, particularly returned to base line at about 97% of pre-crisis level. Quarantine restrictions [indiscernible] greater share of customer acquisition through digital channels. Today the bank issues around one-third of cash flows from digital channels. In addition, in Q2, the bank join the Russian software payment system, which allows our client to transfer money quickly and commission free. Net interest income in the first 6 months of 2020 increased 40% to RUB7.3 billion, reflecting loan portfolio growth over the past 12 months. At the same time, loan structuring by certain clients and the overall increased level of credit risk led to high bank provisioning in the second quarter. As a result, at the end of the quarter, the bank reported a net loss of RUB0.9 billion. As we expected, cost of risk grew in the second quarter due to additional provisions. Cost of risks for the overall portfolio came in at 11.7% and for retail specifically it was 13.4%. This was above the levels in the first quarter, 6.6% and 8.4%, respectively. The share of non-performing loans in the retail portfolio was 8.1% versus 6.6% in the first quarter. In terms of capitalization, we are at a comfortable level. At the end of H1, the M11 and [indiscernible] consolidated regulatory capital adequacy ratios were 8.9% and 13.7%, respectively, which according to our estimates gives [technical difficulty] in capital reserves versus the minimum regulatory requirements of 4.5% and 8%, respectively. This ratio demonstrates that despite the pandemic, the bank remains resilient. At the present time, we see no need for additional capitalization of the bank. It is also worth mentioning that a few [technical difficulty] BB minus with a stable outlook, noting its strong financial performance and the sustained positive effect of the bank's joint integration with MTS Group. Given the ongoing economic recovery, the bank's conservative just approach to risk management and consistent implementation of the bank's strategy with a focus on development of digital channels. We believe, our Fintech vertical can recover relatively quickly from losses incurred as a result of the pandemic and resume operational and financial growth. Now let me hand it to Andrey for a financial update.

[Andrey Kamensky:]

Thank you, Ilya. Let me begin by walking through some of the impacts at the adjusted OIBDA level and below. Group adjusted OIBDA increased 0.6% year-over-year to RUB51.3 billion, primarily driven by solid performance in core services as well as OpEx savings. Those savings were in part due to our previous efforts. However, we also saw one-off reductions in rental and labor costs amid the pandemic, reflecting dynamics in leases and sales commitments. In addition, we also saw a one-off positive impact from evaluation of a provision we had booked previously in relation to a [technical difficulty] regarding bulk SMS rates for banks. We initially had more conservative expectations and we have now adjusted the provision as we gain greater clarity. At the same time, the positive factors were mostly offset by COVID-19 related factors, in particular, the headwinds in roaming as well as loan provisioning at MTS Bank. Group reported decreased 7.5% year-over-year to RUB11.8 billion. Net profit was supported by core business performance, lower net interest expenses reflecting high interest rates and both the impact from discontinued operations in Ukraine. At the same time, we saw a negative impact from operations with derivatives and the fixed effect that [technical difficulty] rebounded growth in March. On a half year basis, this was partially offset by the positive impact we saw in Q1 as the ruble weakened. Net profit was also negatively impacted by MTS Bank, although we expect bank to return to [technical difficulty] in the second half of 2020. Turning to CapEx. In the second quarter, we continue to invest heavily in network infrastructure with group cash CapEx in the first half of this year coming in at the RUB40.8 billion. This gives a CapEx to sales ratio of just over 70%. Given the traffic dynamics this year, as well as the competitive situation, we plan to continue investing in the second half of the year. Free cash flow remains robust at RUB24.8 billion for the half of the year. Compared to last year, we paid relatively less debt in 2020, although we have also seen a bit higher level of working capital. We continue to have a strong balance sheet with ample liquidity and robust cash flows. We're also maintaining a disciplined approach to debt management. We have a fully local, well insulated net debt position, and we remain opportunistic in the ruble bond [ph] market. The rates are low and demand is healthy. In the second quarter, we issued nearly RUB32 billion of bonds, and we fully repaid the outstanding portion of $750 million Eurobond we issued 10 years ago. Overall, as we discussed before, we are making good progress and steadily bringing down our cost [technical difficulty]. Second quarter, our gross debt with average interest rate declined from 8.1% to 6.7%, down more than 1.4 percentage points year-over-year. As you recall, in 2018, we were the first [indiscernible] in Russia to begin reporting under IRFS 15 and 16 standards. At the same time, in the interest of comparability, we continue disclosing our leverage under the prior standards for the past couple of years. However, recently we have seen many of our global and most of our local peers switch to calculating leverage based on OIBDA, including IFRS 15 and 16. In addition, we have also now established a trend line with 6 quarters of reporting under the new standards on the last 12 months basis. So we feel it's the right time to make the switch as well. On this basis, in the second quarter, our leverage remain steady at 1.3x. Now, I will hand it back to Alexey for his closing remarks.

[Alexey Kornya:]

Thank you, Andrey. Overall, I am encouraged by our performance in the first half of the year. And I’m proud of the team for what we’ve accomplished. I think we can say without exaggeration that in the second quarter we truly lived up to our slogan to be better every day. Given our core resilience and increased visibility into the second half of the year, we are reaffirming our earlier guidance of flat to 3% growth in revenue minus 2% in adjusted OIBDA and around RUB90 billion in cash -- CapEx cash. Finally, despite the tough environment, we are [technical difficulty] delivering a [technical difficulty] year for shareholder returns. We have already paid out a special dividend launched in 2020 buyback program and completed payment of our regular full-year dividend based on 2019 results. In addition, the Board has recommended our secondary payment based on the first half 2020 results. Taken together, we expect to return potentially more than RUB100 million to shareholders this year. We are proud of our track record and in July we were named top 10 most popular stock on MOX for retail investors. We hope our global investor base also feels this way [technical difficulty]. So to sum up, we successfully mitigated the operational challenges in the second quarter. We are in good shape as we have entered the second half of the year and we are confident we will emerge stronger and well-positioned to capture the next growth wave. Thank you. And let me hand it back to Polina for Q&A.

[Polina Ugryumova:]

Thank you, Alexey, and thank you to the rest of the speakers. Before we take questions, I wanted you to give a [indiscernible] that there might be a delay, if your question requires translation. Operator, let's open line -- let's open the line for the questions.

[Operator:]

Thank you. [Operator Instructions] And the first question is from Ondrej Cabejsek, UBS. Your line is now open. Please go ahead.

[Ondrej Cabejsek:]

Hello and congratulations on the results and thanks for the opportunity to ask questions. I have a question or several maybe starting with your OIBDA progression and OIBDA guidance. Can I just understand what you expect in the second half [technical difficulty] break down the drivers here. Your service revenues are growing -- likely to continue growing throughout the year. It's the handset sales that are down the low margins [technical difficulty] down, the adjusted OIBDA numbers include the provisions from the bank. So why exactly do you expect the second half of this year to be much worse than what we saw year-to-date? That's my first question.

[Andrey Kamensky:]

Okay. Is the second question is coming?

[Ondrej Cabejsek:]

Yes, maybe second question was on the service revenue. You noted at your first quarter results calls -- call, sorry, that you seem to be out of the words that compared to April, May and June were much better. That the only negative impact that you saw basically was roaming. So I just wanted to confirm that is still the case and what trends you are seeing in the third quarter? That was my second question. Thank you.

[Alexey Kornya:]

Let me answer the first one. In respect for OIBDA guidance, we think it is too early to revise our guidance at this stage because the heaviest impact from roaming revenues is coming on the third quarter. So we'll have to see that the dynamics of our business both in financial services because micro situation does not allow yet to expect a much stronger or weaker economy. So to sum it up, we think it is reasonable to maintain our guidance taking the first quarter impact, which we expect at this level. And the second question is somehow interrelated. If we hear it right, respect for a third quarter roaming and traffic revenues, we do see some traffic -- roaming traffic appearing due to ease of travel restrictions. However, we -- historically this third quarter is the highest in terms of roaming, that is why in terms of reality that carries the biggest impact on the performance.

[Ondrej Cabejsek:]

Okay. That is clear. Thank you. And if I may follow-up on the first question. Maybe just you need to tell us maybe what’s going on with some of your OpEx items, because again it's your high revenue -- so the high margin revenues are growing as the low margin revenues are declining. And the adjusted OIBDA actually includes the provision. So what’s going on with the other cost items? Can you give us a bit of a color why we should expect margin contraction? Is there anything outside of roaming basically that is driving this outlook?

[Alexey Kornya:]

Ondrej, sorry we cannot get it fully. Can you speak up a little bit clear and slower? Sorry for -- but we cannot comprehend.

[Ondrej Cabejsek:]

Yes. Yes. If I could follow-up on the first question, please. So my point is that your high margin revenue seems to be growing, the service revenues. The lower margin revenues are in decline, sales of goods, et cetera. You adjust for bank provisions in your adjusted OIBDA guidance and still you are guiding for margin contraction. So basically my question is, outside of roaming, is there any other OpEx impact that you could explain why this guidance is still for a margin contraction for this year?

[Alexey Kornya:]

Well, I think we still have to see the recovery in retail. On the other side there were some positive one-off in the second quarter, which we're marked. So we don't see other major factors other than overall [technical difficulty] uncertainty, continued pressure in [indiscernible] roaming. And as I said overall market economy.

[Ondrej Cabejsek:]

All right. That is clear. Thank you.

[Operator:]

The next question is from Vyacheslav Degtyarev, Goldman Sachs. Your line is now open. Please go ahead.

[Vyacheslav Degtyarev:]

Yes, thank you very much for the presentation. Also, a couple of questions. Firstly, how would you assess how much of the cost savings that you did throughout Q2 have a lasting effect in the medium term? And how much of the spending curve will get back in the second half already? And secondly, also on the service revenues. It looks like your underlying service revenue growth in Russia was very resilient in Q2, if probably not accelerated, if adjust timing effects of the tariff reviews you’ve done in Q1 and also the negative roaming effect in Q2. So what was driving that [technical difficulty] acceleration in your view? Is it higher consumption of the services or anything else? Thank you.

[Andrey Kamensky:]

Yes. Thank you very much for the question. Let me start with the first one. As I mentioned, actually, we saw some one-off reductions in our rental and labor costs related to our retail networks. And looking forward as we are saying the situation is actually rebounding, I think that this cost will be back. So the short answer is that I think the major part of this optimization we will see in the second quarter. Although we need some optimization and that will be also that will have an impact in the mid-term low, but the minor versus the comparing these reductions in [technical difficulty] in retail.

[Inessa Galaktionova:]

Okay. I will take the second question regarding service revenue. So some clarification on that on from our side. So first of all, we’ve pretty stable [indiscernible]. We see the healthy growth of ARPU due to penetration of high [indiscernible]. And on top of that we see that -- in the first quarter also we see that [technical difficulty] declining. And actually -- that’s all in terms of trends. And also an additional -- one additional moment, which I also mentioned in my speech that we see the trend that the second [technical difficulty] consumers are [technical difficulty] from second SIM and turning to the MTS SIM card as the main and a single one. So that also brought penetration of new [technical difficulty] for our entire services.

[Vyacheslav Degtyarev:]

Thank you very much.

[Operator:]

And the next question is from Alexander Vengranovich, Renaissance Capital. Your line is now open. Please go ahead.

[Alexander Vengranovich:]

Yes, good afternoon. A couple of questions, please. First one, how would you characterize the post-COVID situation on the mobile market? So obviously, Megaphone [technical difficulty] market share. Do you feel that in the third quarter, the market remains pretty stable more or less in [technical difficulty] COVID? And do you see negative signs of accelerated competition in the market. And the related question here, we feel that there might be an opportunity to [technical difficulty] again here, like all the market players in the first half of the year? And my second question from margin effects. Can you clarify the RUB1.7 billion positive impact [technical difficulty] exactly comes from? Did you pay any leases for the closed stores during the period? And if that -- if you optimize some of the costs, does that automatically mean that this cost will still optimized in the first quarter of this year? Thank you.

[Alexey Kornya:]

Okay. As for the competitive environment, we don't see any change in terms of intensity of competition. So overall, we say it's a stable, normal situation. We see COVID impact on -- in the market, which relates -- which reflects in roaming, as we mentioned already, and partially B2B segment as well. So we cannot say that yet that we are fully back to post-COVID. However, as I said, we see some recovery in terms of traffic distribution. We see some recovery in -- due to ease of travel restriction. So we hope that by the fourth quarter, we will see more kind of post-COVID environment. We do not see any particular opportunities currently for tariff increases. And in particular, we've seen those already, and we are more kind of pushing our customers migrating to high tariffs [technical difficulty] their consumption is a part of our ARPU growth strategy.

[Andrey Kamensky:]

Yes. And answering your second question in terms of the breakdown of RUB1.7 billion positive impact on -- coming from retail. I think it's driven -- it was driven by the closure of the stores in the second quarter. And in terms of the breakdown, the major part of it is coming from the payroll and the rest from the rent and other related costs.

[Alexander Vengranovich:]

So basically, if you reopened most of the stores in the third quarter, that means that this positive impact will be lower than the price, right. Okay.

[Andrey Kamensky:]

Absolutely.

[Operator:]

And the next question is from Ivan Kim, Xtellus Capital. Your line is now open. Please go ahead.

[Ivan Kim:]

Good afternoon. [Technical difficulty] questions from my side. First on the MTS Bank provision in the second half [technical difficulty]. Can you please provide maybe an estimate for what the incremental further provisions will be in the second half of the year? And my second question is regarding CapEx. And I think there was a previous discussion that some of your [technical difficulty] spending can be [technical difficulty]. So the question is whether the CapEx for the year can be lower than RUB90 billion. Thank you.

[Ilya Filatov:]

We think that the majority of the provisions we have expected -- we might have expected to build during the year has been already [technical difficulty] dynamics in July and August we do expect that in the second half of the year or for the full year numbers, the Bank should become positive at the level of the net profit.

[Andrey Kamensky:]

Yes. And coming to your second question about potential for CapEx coming lower for the year, actually, if you [indiscernible] any regulatory factors, they’re very minor. So we see no changes because of that. And as I mentioned in my speech, we -- actually we continue to invest heavily in our network, which proved to be the right case during the pandemic. And we do not change our plan for CapEx, as we mentioned before, which is RUB90 billion for the total year.

[Ivan Kim:]

Great. Thank you.

[Operator:]

And the next question is from [indiscernible], Bank of America. Your line is now open. Please go ahead.

[Unidentified Analyst:]

Good evening and thank you for the presentation. I have two questions, please. First is on MTS Bank. What outlook do you have for net interest margin for H2, given falling interest rates and also high share of the impaired loans in your book? And second, in your OIBDA guidance, do you assume any visible impact of higher share of your fixed revenue, given MTS generated close to 70% EBITDA margin. Thank you.

[Ilya Filatov:]

As we’ve mentioned -- as Ilya has mentioned [technical difficulty] we do estimate that the majority of the provisions we are obliged to do have already booked during Q2 and we do expect the [indiscernible] to become fully [technical difficulty].

[Unidentified Analyst:]

Thank you. And what outlook do you have for net interest margin picking up for [indiscernible] for your margin [technical difficulty].

[Alexey Kornya:]

For the -- your second question in relation to guidance, of course, that includes fixed revenue. Maybe we didn't get the question, but of course that includes all revenues. We include all revenues in our guidance.

[Unidentified Analyst:]

Thank you.

[Operator:]

And we have a follow up question from Ondrej Cabejsek, UBS. Your line is now open.

[Ondrej Cabejsek:]

Yes, thank you. Short question, please on the fixed side in Russia. You saw some pretty good acceleration. Can you comment a bit on the outlook and how sustainable that growth rate is, essentially what the drivers are, et cetera? Thank you.

[Alexey Kornya:]

Acceleration in where? Fixed line?

[Ondrej Cabejsek:]

Yes.

[Alexey Kornya:]

Ondrej, the question -- can you repeat the question, sorry.

[Ondrej Cabejsek:]

So my question is on the fixed line in Russia. You saw some significant acceleration. My question is how sustainable the growth rate is around 5%, because I think a lot of your peers saw some acceleration as well. How sustainable that is from your view and what potential drivers contribute to that [indiscernible]? Thank you.

[Alexey Kornya:]

Okay. Thank you. I think the growth rates for mid single digits are sustainable for this year, and we expect to end up with -- in the second half of the year, somewhere mid single-digit in fixed line.

[Ondrej Cabejsek:]

Okay, thank you.

[Operator:]

[Operator Instructions] And the next question is from Dilya Ibragimova, Citibank. Your line is now open. Please go ahead.

[Dilya Ibragimova:]

Hi. Thanks very much for the opportunity and congratulations for the strong results. My question is perhaps to Slava on the content strategy. Is their ballpark number that you are budgeting either at OpEx or CapEx on the content? I’m looking at exclusive content, specifically. Thanks.

[Vyacheslav Nikolaev:]

Yes. Well, as we are starting with our media, we are quite conservative in our spend for the content. However, it is part of our strategy. So we will invest and that included in our guidance for this year. We would prefer not to disclose the figures, especially taking the COVID situation, did impact this part of our business as well, content production.

[Dilya Ibragimova:]

Okay, thanks. And can I just follow-up on this. Does it tend to be more of an operating cost or capital investment? Thanks.

[Vyacheslav Nikolaev:]

No, there will be both the significant part of that growth in both OpEx items.

[Dilya Ibragimova:]

All right. Thanks very much.

[Operator:]

[Operator Instructions] And we haven't received any further questions at this point. I hand it back to the speakers for closing remarks.

[Polina Ugryumova:]

Ladies and gentlemen, thank you very much for listening. If you have any further questions, we welcome you to contact MTS Investor Relations at any time. A webcast of this discussion will be available soon on our website if you wish to replay the call. In the meantime, we appreciate your interest in MTS and wish a happy rest of the day

[Operator:]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.