Mobile TeleSystems Public Joint Stock Company
Q2 2018 Earnings Call Transcript

Published: 21 Aug 2018

[Unidentified Company Representative:]

Welcome everybody to MTS call to discuss our financial and operating results for the second quarter of 2018. As usual, I must remind that except for historical information, any comments made during this call may constitute forward-looking statements. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These, in turn, imply certain risks, a more thorough discussion of which are available in our annual report on Form 20-F or the materials that we've 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. Copies of the presentation and materials used and referenced in this conference call are available on our company’s website. And now I have the pleasure of presenting MTS' President and Chief Executive Officer, Mr. Alexey Kornya.

[Alexey Kornya:]

Ladies and gentlemen, thank you for joining us on today’s conference call to discuss the company's financial and operating results for the second quarter of 2018. Joining me to discuss our results are Andrey Kamensky, Vice President, Finance, Investments and M&A; Vyacheslav Nikolaev, Vice President, Marketing; Kirill Dmitriev, Vice President, Sales and Customer Services. I would like to start this call with a word of gratitude to Josh Tulgan as our investor relations officer for the past 12 years. He was the voice of MTS for the investment community and now a wider international audience. He was a great orchestrator of all our earnings conference calls. We did more than 40 together. On behalf of the management team I would like to thank Josh for his excellent job at MTS and wish him every success in his new role as Vice President for External Relations at Sistema. Let's start with the key highlights for the quarter. In second quarter, the Russian telecom market continued to grow and MTS remained on track to outperform the market and strengthen its leadership position. Improved competitive trends emerged in 2017 smoothly transited into the current year. In second quarter, the overall pricing environment remained healthy and we continued to benefit from growing data consumption and ARPU. We delivered another strong set of financial results. During the second quarter, Group revenue increased by 7% to RUB114 billion. The Russian business continued to be the primary driver of growth generating solid revenue results across all segments. Second quarter Group OIBDA was RUB53.9 billion, up 25.5% compared to the previous year. Obviously this substantial increase was aided by new IFRS standards. But on a relative basis, we also see a 5.1% increase driven by revenue performance. OIBDA margin was 47.1%. Now, Andrei will provide further details on our financial performance.

[Andrey Kamensky:]

Thank you, Alexey. First of all, let me remind everyone that MTS has adopted new IFRS standards from January 2018. New requirements govern the reporting of customer contracts, leases and financial instruments. We present our results under these new standards and do not restate our historical reported results. However, through this year, we are providing pro forma results without the effect of new standards, so you can better understand our like-for-like performance. For the second quarter of this year, we reported Group OIBDA of RUB53.9 billion. These results include the impact of new IFRS standards which added RUB7.7 billion related to consolidation of dealer commissions and the lease expenses. The impact from this accounting change is fairly consistent throughout the first two quarters of 2018. On a comparable basis, Group OIBDA showed a growth of 5.1%. The key drivers of this growth were mobile revenue and the profitability improvements in Ukraine. Strong sales of goods also supported overall Group revenue performance. Meanwhile, we also saw an increase on cost side largely due to higher advertising expenses in reporting period. Group net profit for this period decreased by 3% to RUB14.3 billion under new IFRS standards. Net profit experienced additional pressure due to the higher level of interest portion in the lease payment structure at the early stage after the adoption of new standards. On a comparable basis, Group net profit showed positive dynamics of 2.1% and reached RUB15 billion. In the first half of 2018, CapEx excluding licenses totaled RUB34.2 billion while the network roll out progressed well particularly in Russia. CapEx to sales ratio was 15.4%. The combined impact from higher CapEx, several acquisitions and investments in OZON led to lower free cash flow of RUB30.8 billion versus RUB40.6 billion a year ago. Total debt stood at RUB310.5 billion. In the second quarter we issued RUB7.8 billion bond with a coupon rate of 6.85%. We purchased RUB7.4 billion and even experimented with blockchain smart contracts for our commercial bond placements for RUB750 million. We constantly optimize our debt portfolio. In the second quarter we signed two loan agreements for RUB50 billion with VTB Bank, as well as improved financing terms for two existing loans for RUB35 billion with the Sberbank. As a result of these efforts, weighted average interest rate decreased to 8.1%. Overall debt levels are consistent with the previous periods and the ratio net debt-to-OIBDA stands at 1.1 level. There’re no changes in our dividend commitments in 2018. Recently we paid the annual dividend of RUB23.4 per share. In July, the Board of Directors recommended distribution of semiannual dividends of RUB2.6 per share based on the first half of 2018 financial results. Altogether, in two installments we intend to pay RUB26 per share as we did over the last couple of years. I will now pass to Slava who will give more color on our key market performance.

[Vyacheslav Nikolaev:]

Thank you, Andrey. We saw strong top-line performance in Russia as revenue was RUB106.4 billion, a 7.4 increase year-over-year mainly driven by mobile business. This primarily reflects healthy pricing environment during the second quarter. We also made a solid progress with our LTE network rollout. We built over 6,000 base stations, mostly LTE. As a result we saw sustained growth in data usage and ARPU. Better LTE access coupled with attractive data-focused tariff plans, stimulate people to consume more data. By the end of Q2, mobile Internet penetration increased to 55% while voice and data tariff penetration reached 49%. All our major segments in Russia showed positive dynamics. Our fixed business demonstrated modest revenue growth of 0.2% but we continue to gain market share in broadband, Internet and Pay TV segments in Moscow which reached 36% and 41% respectively. The number of households using GPON services is also growing. Revenue contribution for our new segments, e-gaming and e-ticketing, was mainly in line with the previous quarter. Our integration business grew due to increase in number of contacts. As for our foreign assets in all markets we continued to benefit from growing data consumption supported by subscriber migration to voice and data tariff plans. In Ukraine, we continued to improve our 3G coverage and rollout LTE throughout the country and as a result we delivered a strong performance with 8.7% of revenue growth and 16.5% OIBDA growth excluding the impact of new IFRS standards. In Armenia, our performance was as expected with a slight improvement in top-line by 1.8%. OIBDA grew 0.9% in the reporting period but decreased on a like-for-like basis due to additional management bonuses accrued. In Belarus, we enjoyed a solid double-digit growth both in revenues and OIBDA on both standards. This growth was underpinned by tariff price increase in May 3%, continued growth in data usage and strong sales of handsets and accessories. Now I’ll turn to Kirill who will speak on sales and retail development.

[Kirill Dmitriev:]

Thank you, Slava. In Q2, we saw encouraging handset sales. Sales rose more than 30% up to RUB12.3 billion. This was mainly driven by the higher priced devices. In general, MTS retail performance reflects overall trends in the Russian smartphone market. We now estimate in the first half of the year smartphone sales in Russia grew by 23% while an average smartphone price rose by 20% to RUB15.3 thousand. In addition to general trends at MTS, mobile handset sales were also supported by wider product range, in particular a more diverse offering from Chinese brands. We also used credit installment payment and trading options, MTS Cashback program and other form of activities to stimulus sales. We also observed increased smartphone penetration in our subscriber base which reached 67.4% by the end of Q2. Another important trend in retail is that shopping moved online and e-commerce shows great promise. Our online sales are growing and in Q2 they reached RUB1.8 billion. To support sales of handsets and accessories we also actively use My MTS as a platform to showcase new models, new offers and financial options. Our SelfKey application continued to rise in popularity and this quarter the number of one month users hit 12 million mark. Recently we integrated into My MTS other applications like MTS Money, MTS Cashback and e-ticketing service. We are constantly improving the application as we are focusing more heavily on customers’ experience in digital semi plans. We intend to turn our mobile-only subscribers in multiservice users who generate high ARPU and demonstrate higher loyalty. Regarding our physical store footprint in Q2, the number of stores in MTS retail remain unchanged. Now I’ll turn back to Alexey for his closing remarks.

[Alexey Kornya:]

Thank you, Kirill. As we are reporting on the half way for 2018 we have more visibility for the second half of the year and feel comfortable to raise our initial guidance. In terms of revenue we expect growth in the range of 2% to 4%. We believe that strong growth we witnessed in the first half of 2018 allows us to raise guidance for the full year. Thus we increased our EBITDA guidance from stable to about 2% growth. On top of that we estimate that adoption of new IFRS standards will at least add RUB25 billion into OIBDA. As for CapEx, we reiterated our guidance, which assumes RUB160 billion for 2018 and 2019 without the full effect of so-called Yarovaya Law. We stick to our initial estimation of compliance with this law at about RUB60 billion over the next five years. This year we expect minimal spending related to this law. Going forward, we get -- as we get more immersed into the process and know all the details, we will revalidate our estimates. Though we have raised our full year guidance, I would like to -- I would not like to sound overoptimistic. We continue to face many challenges going forward. Firstly, building a nation of inter-country roaming which came as a resolution of the dispute with anti-monopoly authority may cost us up to a few billions of rubles next 12 months starting from September. Secondly, things remain uncertain over retail development. We do not see any reduction in number of stores from our peers. On the contrary, we see force to leverage branded and third-party distribution networks as a competitive advantage. So now with current operations, we cannot share the optimization of our retail network until the end of 2018 but we have plans to do so when the market is ready. Meanwhile we’re ready to change our approach in line with our peers’ movements. We still believe that retail optimization has a potential for further value creation in the entire sector. We should also consider other factors that could affect our performance in 2018; spectrum fees, which are scheduled to increase second half by up to 25% year-on-year terms,, high base effect of the previous year -- second half of the previous year, solid revision and of course market economic institution in potential currency volatility which is always an issue. And the end I would like to say a couple of words about our latest initiatives in digital. Recently we have consolidated the controlling stake at MTS Bank with the ambition to creating new generation bank. We believe at MTS in synergies at the crossroads of telecom, IT and finance. We intend to accelerate the development of innovative financial services for our clients and close attach duration with the bank will help us to accelerate the launch of such services that will smooth and streamline operations. To speed up our digital transformation, enhance our IT capabilities and optimize business, we have launched a five year strategic program Internal Digital Automation or simply IDA. Its goal to use IT to digitalize business processes within the company that can help us to increase productivity and drive greater efficiency. As part of this program, we began using robotic process optimization, but this is only part of the old digital initiatives that are within this program at MTS. We preliminary calculate the economic impact from IDA as billions of rubles through the optimization during the full period of the program. As you’ve seen we’ve grounds to be optimistic in the second half of 2018 and beyond. Thank you. And we are now ready to answer your questions.

[Operator:]

Thank you. Ladies and gentlemen, our first question comes from Slava Degtyarev, Goldman Sachs. Please go ahead.

[Vyacheslav Degtyarev:]

It seems like competitive environment has intensified recently in the Russian mobile space. And what was the rationale to restore unlimited tariff offerings that you have done last week; do you think it might lead to the revenue growth deceleration in the second half of this year?

[Alexey Kornya:]

We don’t see an overall deterioration of the competitive environment. We remain relatively optimistic. And as for the details of the product, we -- products we introduced recently and we’re introducing now, I’ll pass over to Slava.

[Vyacheslav Nikolaev:]

We don’t think that introducing unlimited tariff plans has anything to do with deterioration of the market. We know that a lot of tariff plan existing on the market are indeed unlimited; they include unlimited video usage, unlimited messaging, unlimited social networks and top of that they usually have 5, 7, 10-gigabit. So generally it is already there but the market needs transparency. So it’s not a new tariff plan, it’s completely different tariff plan. It gives you not only unlimited data but it also allows you to speak freely wherever you go and wherever you’re calling. So we think that this tariff plan will bring additional value to the market and to MTS primarily will bring additional ARPU. And at the same time, we do not expect it to significantly increase amount of traffic that we have. So, we are -- we’ve a very good experience of our previous unlimited tariff plan. Since that time, we have moved to different proposals that were demanded by the market and were not compatible with unlimited like tariff plan which -- where you can share data with other devices or other members of your family but now I think it's a great time to bring to the market the new transparent and valuable tariff plan.

[Operator:]

Our following question comes from Ivan Kim, VTB Capital. Go ahead.

[Ivan Kim:]

A question on your retail, so why the gross margins in your retail business went down compared to the first quarter despite the growth in higher priced devices, are you pricing the handsets more aggressively and what are the trends there? That’s number one. And number two, on Yarovaya CapEx I appreciate your comment that it will be a minimal spending this year but if you can provide some sort of a ballpark number or range would be great? And also it’s interesting that even though the law has to come into force from the 1st of October on the data side which is obviously the more cost sort of heavy, your spending is too minimal, so we understand that there is a greater implementation. However, still it’s interesting what sort of cost would fall into 2019 potentially, because on the one hand with minimal spending this year it could be higher but on the other hand it feels like that the whole industry is not throwing a lot of money into that right now, and I just don’t know what to think about next year?

[Kirill Dmitriev:]

This is Kirill Dmitriev. Let me start with answering the first part of your question. Actually you have absolutely rightly observed some small slide in marginality. A few factors have affected this performance. First of all, the market in the half -- first half of the year grew really wide by approximately 22%, 23% while we behaved more aggressively. We grew about 30% year-over-year, which was -- which had actually two reasons or two targets. On the one hand we’ve grown significantly the revenue and foothold to our stores. On the other hand, this slightly negatively hit our marginality. But I have to -- I’d like to stress out that the gross margin on our handset sales is still double-digits. And we have significantly outperformed our sales in absolute numbers, plus one extra factor is actually the slight I’ll say change in the portfolio of us and overall on the market. The Russian handset market is heavily dominated by three main players one of which is Apple, which you probably know or I hadn’t tell you is the brand with the lowest margin. So growing on this market and growing the share of Apple devices in our sales we have the side effect of slight I’d say falling of our gross marginality. Overall, we -- well we think that this at this stage is absolutely balanced and under control. Now I’ll pass over to Andrey or to Alexey on CapEx.

[Andrey Kamensky:]

Let me take this one. That was a long question, sorry for relatively short answer. Without effect of Yarovaya Law, we can just reiterate what I said earlier that this year we see there is a minimal spending and then one can assume over the next year there will be relatively equal distribution, Thus RUB60 billion equally distributed over the rest of the period. And one can expect that as we’ll get more visibility we will update the market.

[Operator:]

[Operator Instructions]. Our phone question comes from Svetlana Sukhanova, Sberbank.

[SvetlanaSukhanova:]

I might have a small follow-up question to a previous answer. When you were talking about RUB60 billion relatively -- equally distributed for Yarovaya Law, which period do you mean, do you mean next five year period, next three year period, so what’s on that? That would be my first question.

[Andrey Kamensky:]

Yes. This will be five years, starting from summer 2018.

[Svetlana Sukhanova:]

Summer 2018, but you said this is minimal so -- okay, understand. The next -- equally over the next four and a half years. Clear, thank you very much. And can you -- another question would be again on CapEx, can you explain the reason why underlying CapEx was up by [15%] in Q2 excluding this 4G license payment, excluding everything. Was already some cost for Yarovaya included in that CapEx?

[Andrey Kamensky:]

Not really, one. You can see from the previous trends that we were continuously reducing our CapEx over the last three years and we reached the minimum last year. So this year our guidance implies certain raise of CapEx and that’s what you can see in year-on-year comparable figures.

[Svetlana Sukhanova:]

So should it be rate increases like catch-up with some kind of -- not underspent but say economies the previous years?

[Andrey Kamensky:]

As we were guiding that two year 160, it is skewed towards the first year. So I think you can drive -- yes, you can drive your …

[Svetlana Sukhanova:]

In line with guidance, yes, understand. Then my next question would be about subscribers in Ukraine. Why subscribers in Ukraine decreased in the second quarter, quarter-on-quarter?

[Alexey Kornya:]

Well in the second quarter there were some -- this -- in certain parts of Ukraine there were discontinued provisioning of services or there were breakage of services that led to some decrease of number of customers.

[Svetlana Sukhanova:]

May I ask do you mean the regions of Ukraine like Lugansk, Donetsk or you mean some other regions?

[Alexey Kornya:]

I mean it’s non-controlled by Ukraine government regions.

[Svetlana Sukhanova:]

Okay, understand. My next question if I may one more would be about MTS Bank and the recent Kommersant article that you might increase your stake in MTS Bank, can you explain the operational, first of all why you haven’t acquired 100% of MTS Bank increasing your stake to the controlling? And second question, the subject would be what’s the reason -- what’s the underlying reason to increase your stake to the controlling, if you have of course such intention?

[Alexey Kornya:]

Well, I think that was part of the speech and we already were saying that in the past that we see fintech services and financial products as one of the key narrative products, which we can bring on the crossroads with the telecom and banking. And in order to speed up bringing products into the market in order to streamline the processes, in order to have one team and you know how it is important to work as one team. We think that a full consolidation of the bank will contribute towards this growth. So, fully in line with agile principles, one should sit together and develop products together with unified goals in order to get the best product in the market in the fastest way. And we believe that acquisition of the Bank, full consolidation and joining the team will help us to achieve this.

[Svetlana Sukhanova:]

Okay. When should we be expecting such deal if any?

[Alexey Kornya:]

Well we definitely acquired controlling stake and I think full consolidation of the Bank is on the strategic part of our fintech services development. I would up-stay from giving you the exact base.

[Operator:]

Our phone question comes from Sergey Libin, Raiffeisen Bank. Please go ahead.

[Sergey Libin:]

I also have a follow-up on the Bank. So you didn’t give any quantified implication on your numbers from this acquisition. So I was wondering whether it is included in your full year guidance, the updated one. And more general, what kind of synergies may be the level of the ballpark number, maybe the impact on OIBDA or free cash flow for example that would be very useful? And secondly I also had a technical question so in the e-ticketing and e-sports business you had a sequential decline in revenue. So I was wondering whether it is pure seasonality or is there something more behind that?

[Alexey Kornya:]

Yes answering your first question relating to the Bank, the acquisition of the controlling stake happened in July therefore we will consolidate the Bank actually starting from the third quarter; therefore the numbers that you can see for the second quarter and the first half of this year, they do not include the numbers of the Bank. And that moment actually we also refrain from reflecting the numbers. We have an estimation but it’s not included the guidance that you see here in the report. And can you repeat the second question please?

[Sergey Libin:]

Yes, that was about your new businesses, e-ticketing and e-sports, so in the second quarter there was a decline compared to the first quarter in revenues, and I was wondering whether it is a season -- it’s influenced by just seasonality or is there something -- some specific factors that had an impact on these new services revenues?

[Andrey Kamensky:]

Yes, I’ll take this question. They were actually flat and yes there was seasonality and in addition to this seasonality was World Cup in Russia, which actually stopped a lot of other activity on the entertainment market. So it was even stronger affect than we expected and we think that everything will come back on track in the third quarter.

[Operator:]

Our following question comes from Igor Goncharov, Investment Bank. Please go ahead.

[Igor Goncharov:]

I have a short question hopefully on the dividends. You made a lot decision on the dividends within your current dividend policy. At this escalation I was wondering if you can maybe provide some guidance on what we should expect from the new dividend policy, in particular in one of the meetings you were saying that general philosophy was to distribute the whole free cash flow of MTS. So do you expect this philosophy would be applied to the new dividend policy as well? And when do you expect to articulate this policy?

[Alexey Kornya:]

Historically, we bring in our new dividend policy to the attention in spring as the new three year period comes, so you can expect that next year spring we will come out with new dividend policy. We understand that dividend is the important part of our internal value and value of the company and in this respect we are committed to high dividend return towards our shareholders in future. And as you know,, we even increased our returns to shareholders in the form of buybacks over the last three years. And this year with the new buyback program for 30 billion over the next two years which will be shifted for next year as well.

[Operator:]

[Operator Instructions]. We have no other questions, your speakers back to you for the conclusion.

[Unidentified Company Representative:]

Ladies and gentlemen, thank you very much for listening. We welcome you at any time to contact MTS Investor Relations department if you have any 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 everybody a pleasant day.