Mobile TeleSystems Public Joint Stock Company
Q1 2016 Earnings Call Transcript

Published: 19 May 2016

[Operator:]

Good day and welcome to the Mobile TeleSystems’ First Quarter 2016 Financial and Operating Results Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the call over to Mr. Tulgan. Please go ahead, sir.

[Joshua Tulgan:]

Ladies and gentlemen, welcome to MTS’ conference call to discuss the Company's first quarter 2016 financial and operating results. As always before beginning our discussion, I need like to remind everyone that except for historical information, comments made during the 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’ business activities, subscriber dynamics; commonly used financial indicators, operating frequently used by telecommunications operators, debt instruments and their usage; legal actions or proceedings directed against the Company or its representatives; regulatory developments and their impact on the Company’s operations; technical matters as they pertain to our communications networks, including equipment licensing or network technologies; activities in-lines of business that complement our communications networks; capital expenditures, and operating expenses, macroeconomic developments within our markets of operation. A comprehensive overview of these issues is available in our MTS' Annual Report on Form 20-F, which is now available on our website or through the U.S. Securities and Exchange Commission. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These statements may include the company press releases, earnings presentations, our Form 20-F, as well as other public filings made by the Company with the U.S. SEC, all of which are available on the Company website, www.mtsgsm.com or that of the U.S. SEC at www.sec.gov. MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. Copies of the presentations and materials used, and referenced in this conference are available on our Company website. In addition, regarding the topic of Uzbekistan, MTS has made no provision in relation to the investigation conducted by the U.S. Department of Justice and the SEC regarding our business activities in Uzbekistan. In accordance with IAS 37 Provisions Contingent Liabilities and Contingent Assets, a provision should be recognized when a illegal or constructive obligation exists and such an obligation can be reliably estimated. MTS continues to cooperate with the authorities at this current stage of the investigations. We have no reliable basis to predict any outcome. I’ll now turn the call over to Mr. Andrei Dubovskov, President and Chief Executive Officer of MTS.

[Andrei Dubovskov:]

Ladies and gentlemen, thank you for joining us on today’s conference call to discuss the company’s financial and operating results for the first quarter 2016. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer and Vasyl Latsanych, Vice President and Chief Marketing Officer. We are pleased to announce the beginning of another successful year for the MTS. Group revenue increased nearly 8% to over RUB108 billion as we continue to execute in our 3G strategy or data differentiation and dividends. We continue to see sustained demand for data throughout our key markets which continues to driver growth in both Russia and Ukraine. Macroeconomic matters and competitive issues continue to impact our performance in many ways, but in some our group trading [ph] performance continues to pace the markets well. Despite continued macroeconomic volatility and increased competition Group Adjusted OIBDA was stable year-over-year at RUB41.3 billion. While we see weakness in our falling subsidiaries due to macroeconomic issues or strategic development. Year-over-year growth in Russia OIBDA growth, the Group performance. [indiscernible] translator Vasyl Latsanych will discuss our top line performance within our business units.

[Vasyl Latsanych:]

Ladies and gentlemen, for the year total revenue in Russian increased by 6.5% year to RUB96.3 billion. Our mobile business revenue grew 6.6% as we see a continuation of trends that had previously defined our growth. Amongst those, stronger data usage due to both the growth of the customer’s sage and the migration to the data plans as smartphone penetration increased to 50.3%. Fewer customers in roaming the tablet growth [indiscernible] which impacts us more due to our large market share in roaming. 3.7% growth in subscribers as we focus more on sales through our proprietary retail channels and higher handset sales as we continue to implement our retail strategy in Russia in face of increased competitors behavior. In Russia we continue to defend market share in the face of aggressive competitor behavior by executing on our strategy of expanding our own resale footprint and promoting lower priced smartphones. We still believe that it would be clearly in the best interest of the market to work to reduce overall SIM cost sales and focus more on sales to monoband channels. We believe that all operators would benefit from less pricing pressure and improve profitability if we collectively reduce SIM costs sales and our collective retail footprint. However, as we already sell fewer SIM card than our competitors were so compelled to defend the market share. In our fixed line business, revenue increased slightly by 0.3% to RUB15.4 billion. Growth continues to be driven by our increasing market share in B2C markets in particular in Moscow, where our broadband and pay-TV market shares continue to increase. In Ukraine revenue for the period improved by nearly 5% to 2.8 billion [ph] the obvious driver is data consumption, which is rising as we have rolled out 3G in 19 regional centers in Ukraine. We remind everyone to that in Q1 2015 revenues were boosted when we introduced higher termination rates between Ukraine and Russia, so underlying growth in data was actually stronger. We see a strong take up of traditional voice tariffs now being offered under the Vodafone brand with revised pricing on international calling. Among our foreign subsidiaries we know that revenue in our medium spell year-over-year by over 16% as macro economic factors continue to impact usage of services like international calling and roaming. In Turkmenistan revenue also declined roughly by 6% due to a slight decline in the active user base and macroeconomic driven factors. In Uzbekistan, however, we continue to see strong revenue growth as we further develop our business in the markets. I will now hand over to Alexey Kornya who will discuss the group’s profitability and financial performance in more details.

[Alexey Kornya:]

Thank you, Vasyl. As Andrei noted, we saw stable year-over-year group adjusted OIBDA for the period of RUB41.3 billion. While we saw some reduction in OIBDA contribution from our foreign subsidiaries, Russia witnessed OIBDA growth despite challenges in the market and continued volatility. We believe Russia grew 1.1% year-over-year to RUB38.6 billion. We did see one of the impact due to the reimbursement for private [ph] spectrum. But overall, OIBDA performance was strong despite volatility and increased competitive behavior. Our larger [ph] sale footprint combined with our aggressive pricing of handsets help drive our OIBDA margins to 40.1%. However, our quarter-over-quarter OIBDA dynamic improved 1.5 percentage points in comparison to last year, which reflects our overall financial discipline in the phase of current volatility, macroeconomic factors and aggressive competition. In Ukraine, adjusted OIBDA declined significantly to 803 million hryvnia. I remind everyone the two OIBDA in Ukraine [indiscernible] if you see was positively impacted by the pricing of international interconnect services. However, reduction in the marginality of international dialing is a part of our new tariff packages as well as one of marketing initiatives and the rollout of our 3G network has pushed the OIBDA margin below 30%. And other significant factor is rebranding costs including licensing fees. And we continue to rebrand the business as Vodafone Ukraine. We believe this profitability can eventually return in the short term to the level of the mid-30s. OIBDA trends in Armenia reflect revenue trends as we see customer usage impacted by the weakened economy through a reduction of international and roaming. In Turkmenistan OIBDA also fell by 16% as we saw a sequential in the active subscriber base, lower voice usage and higher network cost due to the currency volatility. In Uzbekistan, our operations delivered a positive OIBDA contribution of 5.7 billion sums [ph] for the period. Group net income for the period increased 33% year-over-year to RUB14.5 billion. In addition to OIBDA trends primary factors here include reserves related to the cash balances held in distressed banks in Ukrainian in the first quarter 2015 and the non-cash ForEx gain of RUB2.3 billion for the period due to ruble appreciation. Free cash flow for the period amounted to RUB20.5 billion an increase of 37% year-over-year for the period. CapEx spending of RUB18 billion or 28% lower than first quarter in 2015 was a key factor as the cash flow from operations was relatively stable. As we guided in March, we do aim to reduce overall CapEx spending this year to RUB85 billion which will support free cash flow of this year. In first quarter, the board of directors confirm the company’s new dividend policy in the dividend payments for 2015 fiscal year. Under the new dividend policy management sets a target payout of RUB25, RUB26 for ordinary MTS share, RUB50, RUB52 per year per calendar year. The company granted the minimum payout of RUB20 per ordinary MTS share or RUB40 per year. The new policy will cover 2016 to 2018. It’s part of the company’s long stay, its ambition to make more equal semiannual payments the board recommended a dividend payment of RUB14 [indiscernible] per share or RUB28 [indiscernible] for ADR based on full year 2015 financial results. In accordance with the new dividend policy, the board will review proposals when entering dividend for 2016, which combines with our upcoming proposed payment would translate to RUB25, RUB26 per share. Likewise, the board has decided management to consider their visibility of share repurchase program is an additional way to create further shareholder value. As part of such program, the company could [indiscernible] up to RUB30 billion to be spend over the next three years as a repurchase of shares. Such a program would require approvals by the board the we will introduce it later this year. By then those period total debt stood at RUB317 billion, a significant decrease from fourth quarter of 2015, but largely due to ruble appreciation in relation to our non-ruble denominated debt as well as some amortization of payments in first quarter. Our net debt to up 12 months OIBDA declined slightly to 1.1 multiple, a comfortable level for the company and very in relation to our peers. We reminded we are sort of 97% of our non-ruble position is currently covered by a combination of hedges short-term deposits and the stable long-term investments, all of which had eliminated and used dollars or euro. We remained focused on sustaining a strong balance sheet and identifying further ways to optimize our debt portfolio.

[Alexey Kornya:]

For the past three years, we have successfully executed on our previous strategy. Over this time, they had built on our market leadership in Russia for the introduction and extension of our mono MTS beta networks. Investment in retail and our firm commitment to build in our brand. In other markets we continue to expand internet penetration most recently in Ukraine, which is a one shop 3G services there, which is EBITDA by standard [ph]. Why we continue to handle the macroeconomic challenges in our markets and directional competitive behavior. We also have had – our future a technological evaluation customer needs and other sectors provide new opportunities [indiscernible]. If anything global, if there is or we are aware of sensing global telecommunications. Infrastructure for example, a key question and our recent launch of our tower rental business is strong. Smaller debt toward monetizing our asset base. For now we are offering over 5,500 towers and maintain a support searches for many regions throughout Russia. But eventually we intend to extend this to include traditionally all our assets. Combined with our infrastructure sharing efforts such as [indiscernible] we are certain a pragmatic approach, we are taking a pragmatic approach realizing greater difference in our operation and capital expenditures, while taking advantage of incremental revenue opportunities. Our [indiscernible] even digital work, and we are ready to size opportunities [indiscernible] networks. Some of this test towards this have not been realized. We continue to work the banks to provide our customers with model payment solutions while the other revaluing e-commerce company hence our online commercial networks. Yet we also see our profits like the Internet of Things and big data, the evaluation is evolving from ideas to inception. The same opportunity is to establish platforms for growth in new digital products in this field. And as a contribution to our revenue growth in Russia, it was RUB2.5 billion from our traditional position. Giving us control over our billing system which will allow us to improve same-store market for the new products and realize benefits of additional flexibility in our IT efforts. It is also another step towards diversifying our business activities to enter new markets in IT and system integration. Later this year, we do more formally introduce our new strategy increasingly digital world. For now, we want to remind the investment community that we are not complacent as the world changes. In fact we are aggressively sizing these opportunities to further grow and develop MTS. With that, I would like to open the call to questions. Thank you.

[Operator:]

[Operator Instructions] We will now take our first question from Alex Kazbegi from Renaissance Capital. Please go ahead.

[Alex Kazbegi:]

So I joined a bit late, so I think you addressed the issue of the margin in Ukraine but if I can still just ask you. So in what sort of say perspective do you expect this margin to come back to sort of say mid-30s, I think that’s what you probably said as far as I understood from this. So anyways just a comment maybe on the evolution of the Ukrainian margin what should we expect, how much was one-off and when do you think and what is kind of the normalized level you could get there? Second question would be still on end vision [ph] just [indiscernible] that I think initially you said that you don't expect significant growth in this integration revenues. Here you’re looking for the new avenues and the customer, so given again that it’s a very nascent acquisition, just to understand also what kind of ballpark numbers you are aiming for for this year in terms of like revenue understand that the guidance might not be sort of say exact from the side, but just to understand what kind of opportunity that represents this year both on EBITDA side revenue contributions. And last just too maybe clarify, the 30 billion we purchase over does that mean you would be buying locals or you’re open to buy whatever you would like to sort of say purchase the ADRs [ph] of the locals?

[Vasyl Latsanych:]

Hi, Alex, this is Vasyl, the question about the Ukraine. So in short we have some negative factors in Ukraine amongst which was the rapid decrease of the international traffic to Ukraine which unfortunately watched away a high-margin interconnect, international interconnect to our business in Ukraine, as well as in general, Ukrainians, travel last and receive less international calls, so this high marginal business was going down in Ukraine. It was partially replaced by internal growth of the voice and data businesses in Ukraine but that was not enough so the margin was, unfortunately affected. The other thing is that this was a set up period for our Vodafone partnership in Ukraine and brands introduction and a lot of things we had to do in the market including the advertising campaign including the shop rebranding and internal rebranding of our business, and that all drew a certain one-off costs that were allocated in the first quarter of 2016. We are working hard and accounts on the improvement of the margin already in the second quarter and we did make some markets wide steps like the tariff reintroduction in Ukraine as well as we have done most of the initial investments needed for the new project of rebranding in Ukraine in the first quarter. So I believe we will see the improvement in ROA [ph] in the second quarter and so on we are determined to improve the performance of this business in the course of 2016.

[Alexey Kornya:]

Just before you go, if I can just qualify that, given that again this loss of the revenues which you mentioned is probably not replicated, so to say, what it would be then the normalized margin you will be looking in the new and probably high 30 is good estimate.

[Vasyl Latsanych:]

Alex let me specify, I think what we are saying is there is some certain impact of one-off marketing initiatives together with a more longstanding factors. However, one-off factors will go away and we will see improvement already in the second quarter and feel that through the year and probably already in the second quarter or at least in the third quarter we’ll see mid-30s as a target level of marginality in Ukraine.

[Andrei Dubovskov:]

Talking about second question the Envision, let me say that the first target, which you have in this series is the [indiscernible]. We are moving to have the full control over all the billing system and all IT services in our business. This is the main question for us to have – to be more flexible to be more aggressive in this area. And at the same time, unfortunately the regional revenue in compared with the previous year, I’m talking about the compare in between 2014 and 2015. Less than in previous periods, and target is the following. They are going to increase absolute OIBDA of this business first of all. And secondly, we need to combine all IT integration services which you have in this asset, with our B2B business in MTS. This is the main target. We have no holistic approach talking about the revenue growth in Envision, it’s not separate business for us. It’s just a part of our core business in our B2B market.

[Vasyl Latsanych:]

And as far as the buyback program concerned we are right now in the process of developing the one and as soon as it will be approved by the board of the directors we’ll share the details at this point of time, we don't have any details to share.

[Alex Kazbegi:]

Okay. Thank you very much all.

[Operator:]

Thank you. We will now take our next question from Roman Arbuzov of UBS. Please go ahead.

[Roman Arbuzov:]

Thank you very much for taking the question the first one is on Russia margin. So just from your presentation for Ukraine, you’re talking about higher cost of international calling together with high volume. I was just wondering do any of these international calling costs, does any of that ends up in Russia and help the Russian profitability. And then more generally on the Russian margin, I appreciated to comment to sort of competitor results, but then your results really stand out in terms of profitability in Russia versus your competitors. Are there any particular factors that you think best explain your strong performance versus competitors on the profitability front? So that’s OIBDA. And then just, and more strategic question on the towers. So the fact that you've set up or offered your towers to third party rent. Does this rule out you participating in a independent tower company set up at some point down the line or not? Thank you very much.

[Vasyl Latsanych:]

Hi, this is Vasyl and I will answer the question on the OIBDA performance relative to the Russian, Ukrainian and international calling. While in fact the decrease of the Ukrainian OIBDA was one of the factors of decrease of the Ukrainian OIBDA was the decrease of the international calling from Russia to Ukraine, which also negatively affects its Russian OIBDA but it was then replaced, this negative effect was replaced by several positive effects in the Russian business which was the overall market development, the more customers acquisition and base increase in Russia as well as much healthier smartphone drive of the data performance - data penetration and data revenue growth in Russia. So in fact we have managed to come with the decrease of the effect of the international calling between Russia and Ukraine and thus this international calling was a smaller factor for Russian business. Meanwhile it was a larger factor for Ukrainian business and even larger one for Armenian business, so these decreases of the Armenian OIBDA were driven partially by decrease of Russian calling to respective countries. So it could not possibly affect the Russian performance. The effects on Russian performance were internal to Russia and were mostly driven by the Russian day-to-day business including voice and data calling.

[Alexey Kornya:]

Well, to add up on Russian OIBDA factors we think that our revenue structure is more help there when we speak about what are the difference, which allows us to demonstrate a better OIBDA growth. Also one should appreciate that there was one more factor in first quarter which is a compensation for the frequencies, which we mentioned, which helped our OIBDA performance. That’s hundreds of millions so that’s not, that much. But the key factor of course we believe has helped the structure of our revenue which is contributing to a positive OIBDA or to the more stable OIBDA development. In second quarter, we’ll see some bit weaker OIBDA performance but still we believe we are well within the guidance for this year.

[Roman Arbuzov:]

Can you just the best revenue structure, what do you mean by that?

[Alexey Kornya:]

I mean, the different structure for the sources of revenue, so low marginal revenues against higher marginality revenues. So data is having historically higher margin and some international calls having a lower margin in other factor which showed us by the way against competitors is license of commissions to multi brand dealers. And I think that is a factors if you look at the first quarter last year. None of the competitors probably had the commissions to be paid to seasonally. While this first quarter, the ---- or that could also impact and this could be also the difference. Let’s see I think generally we see number of factors and you cannot say that there is one factor which is explains the overall performance.

[Andrei Dubovskov:]

Its Andrei, in addition I just want to say that our marginality reflects not our D&A but in our commercial metrics. For example, talking about our churn, you can see that our churn is much better than our competitors. But talking about your question about the towers. I just want to say that we are positioned like towers company as this. I think we are their biggest towers company across the Russia and our is just 5,500 but and this is assure that later or we can offer to the markets or our networks and we can offer much more better terms and condition for all our competitors and all our structures across the Russia. For example, we have all possibilities do not increase their rents, payments for partners. We in all possibilities do not increase in line with inflation rates next year, the payment and we have all possibilities to offer to the markets, that sizable discounts for their rent-based payments.

[Roman Arbuzov:]

Okay. Thank you very much.

[Operator:]

Thank you. We’re going to take our next question from Ivan Kim from VTB Capital. Please go ahead.

[Ivan Kim:]

Hi good afternoon. Questions from my side. Firstly, what is the effect of Envision consolidation on your EBITDA in the first quarter. In other words, what is Russia EBITDA excluding Envision. Then secondly, it’s on the towers, tower portfolio, what benefit on your network 12 million [ph] if you can match there, just as a ballpark number. Thank you.

[Vasyl Latsanych:]

Ivan thinking about from regional OIBDA this is not meaningful, we talk about few hundreds max, less than five definitely. On our OIBDA performance and without Envision we would have about the same level of OIBDA. So it’s not meaningful.

[Roman Arbuzov:]

Sorry, can I have a follow-up here. But these were tried, you were paying for billing system before as your external cost and now it’s your internal cost. I mean I understand that Envision product doesn’t make much of the external OIBDA of course. But for your OIBDA it should have a meaningful effect now.

[Alexey Kornya:]

Well, there are two factors, just partially of course went as a CapEx. The second factor that now you have all operational cost of Envision which used to be with that, which is a headcount and so on so forth. So that is why it doesn’t really, in terms of improvement year-over-year with Envision and without Envision it is non-meaningful.

[Roman Arbuzov:]

Okay. Thank you.

[Operator:]

Thank you. We will now take our next question from Herve Drouet from HSBC.

[Herve Drouet:]

Yes, good afternoon. Two question on my side. Firstly on the CapEx, I know CapEx is kind of seasonal but last year we’ve seen much more linear CapEx. The first quarter CapEx was relatively light. I mean, one of your competitors has reduced its CapEx guidance I was wondering compared with the big of the year what assumption you’ve in terms of for example like [indiscernible] and the ruble to the U.S. dollar. And so you feel if EBITDA potentially under pressure there is room to protect cash flow generation with maybe better conditions on the CapEx, that’s the first question. The second question is on Ukraine and about the use of the Vodafone brand I understand there had been some one-off costs associated with the rebranding and some promotions. I was wondering when you are using the Vodafone brand do you a fee to pay which is based on this revenue.

[Alexey Kornya:]

I’ll take the first one, on the CapEx. Well, we still pursue our policy of having most of our build up on the network in the first half of the year. So that is why we’ll have quite well equally distributed CapEx through the year, we do not expect that there will be hikes in the fourth quarter and then this slide. We see irrelative reduction in CapEx comparatively to last year is a sign that we are generally reducing by 10 billion CapEx this year. If you remember we are guiding 10 billion reduction on CapEx in this year comparatively to the last year and that would be naturally for us to have a low CapEx in the first quarter. We will accelerate in the second quarter and in the third quarter and I think generally overall trends in the CapEx spend will be similar to what we saw last year because our build up policy as I just mentioned is the same. We’re trying to build up as early through the year as possible. So as far as currency impact we have sufficient instruments at hand in order to steer our CapEx spend to the target and what we ever wanted to have. We can move certain projects, we can restructure payments and so on so forth, so there are different tools how we can steer the CapEx that is why we expect that we’ll get to the target this year. We don’t expect that we’ll be looking at lighter CapEx in order to boost our free cash flow. I think the combination of our guidance allows us comfortably to achieve the search free cash flow.

[Herve Drouet:]

Okay.

[Alexey Kornya:]

I will take the second question on the Ukraine and Vodafone relationships. No, we do not pay the revenue sharing’s Vodafone. We pay the brand loyalty to Vodafone it was account for in the costs and accounted for 2016, that does not represent the major part of what's impact will be OIBDA because as I said it was more investments into the beginning of the corporation than they see would pay to Vodafone itself.

[Herve Drouet:]

Is it just a one-off fee you pay or and that’s at all, when you say but royalties is based on, which – it’s just one-off or is it just on some certain financial criteria?

[Andrei Dubovskov:]

It is ongoing normally when you work on the brands and have a mutual operations with by brand but one side you pay the loyalty that brand it’s an ongoing payment on an annual basis.

[Herve Drouet:]

Right. Okay. So I would guess I mean, usually I mean, when people use brands we’re talking about at 1% or 2% of revenue in that range. That I will assume would impact a bit, your margin compared with what it was before when you were not using the brand. Am I correct in that assumption?

[Alexey Kornya:]

You shouldn’t make any inferences based on the performance of the first quarter to come up with the fee that we pay to Vodafone. We are not in a position to disclose that that’s the relationships with Vodafone that are being regulated like this. And we believe we paid fair amount for using the worldwide renowned brand and establishing a more beneficial presence of ourselves and our business in Ukraine.

[Herve Drouet:]

Okay. All right. Thank you.

[Operator:]

Thank you. We will now take our next question from Igor Semenov from Deutsche Bank. Please go ahead.

[Igor Semenov:]

Hi, thank you very much. Can you possibly remind us again about the Envision readiness is it going to stay at this level for the next few quarters or you will phase out third party clients, sometime this year. Second question is on towers, do you have real interest in your towers from any of the competitors? And thirdly on churn you don’t disclose it any more but directionally is it flat, is it declining and how quickly - what kind of dynamic, can you give a bit more color on that. Thank you.

[Vasyl Latsanych:]

Okay. I’ll take the first one for Envision. We will – the level of the structure for revenue in Envision is that about 75% comes from MTS and the figures which we are disclosing this is gross up figures. They’re not net of eliminations, so most of the rating which we see are coming from MTS. But that is why you feel …?

[Igor Semenov:]

Yeah, so and the quarter 75% is MTS’.

[Vasyl Latsanych:]

As I’m saying, I’m rounding with about three-fourths coming from intragroup transactions. That is why we don’t think that third party revenues, will significantly impact Envision revenue and we’ll see pretty much stable level at the level where we see. Of course we are looking at developing the business that third party revenues is becoming an integral part of our B2B revenue stream as it was discussed earlier. But we will not suggest the things that there is any big volatility in Envision revenues in the coming quarters.

[Andrei Dubovskov:]

Talking about the towers, you’re right, well inclusion of the differences between the previous situation and current situation is the program. Before we have the usual practice when we change with our competitors that keep on numbers of towers in each regions in each micro regions. But right now we offer in all our networks and the first step, you know decides without this [indiscernible]. And right now we have no big positive for trend in this area. But we think that much more positive trends it will be later when we open to the market all our networks. And the let me remind you that all our competitors right now, I’m talking about their own towers companies and the real question there is to have choosing what way will be better for all our competitors. At the same time I think when our competitors choose the normal pragmatic ways they will choose our proposal like a trust. And talking about the churn, you know that right now we are not disclosing our churn rate because I think you know that know our approach have change speaking about the current period. Right now we are not disclosing a lot of commercial metrics like unit usage, average price per minute, like ARPU et cetera. And we think that the much more relevant for all investors, and all shareholders will be to disclose the bigger numbers like voice traffic, data traffic, the numbers for our subscriber base, et cetera and you have possibilities to describe this metrics like ARPU, et cetera. We also at this rate that our churn much more less than churn of our competitors less than 40%, but we are not ready to talk about the churn later.

[Igor Semenov:]

Thank you very much.

[Operator:]

We will now take our next question from Sergei Libin from Raiffeisen Bank. Please go ahead.

[Sergei Libin:]

Yes, hello. Thanks. First of all I would like to follow up on the Russian margin section, so last year you were saying that you’ll be working with almost zero margin in handset retail business. But this quarter it looks like that’s, you had quite healthy margin on retail business. So could you explain that, so whether it is one-off or is it some change in your strategy or anything else. And secondly, you had depreciation decline year-over-year in the first quarter and despite the aggressive rollouts of the retail network. So could you also explain this? Thanks.

[Alexey Kornya:]

Okay. On the margin question we never said that on our margin we go to zero, because if you look at and we disclose the figure so far. Our gross margin that’s - what is the markup now handset sales. You see yes, we indeed reduced that from double to single-digit, but still we enjoy a positive gross margin in the handset sales. And with the growth of scale and we quite substantially grew the number and the scale of this business. The loss in marginality is being compensated by the scale. So that is why we have somewhat mitigated, in fact, from our retail strategy where we reduce substantially margins you will not go in zero gross margin, but partially compensate this effect with this scale. As we go forward and as we expanding our network, through the year this all the different part, all this relatively good performance in the margin might be reducing because the scale of the business and the cost associated with the rent cost and headcount cost. We will put higher pressure on our margin. However so far we saw quite a positive development in the sense that expansion of our handset business did not have necessarily a significant negative on our OIBDA.

[Sergei Libin:]

Can I have another follow-up here. Do you think you should see more pressure especially from the second quarter because you always can slashed prices on smartphones and your network. So as I think it's going to have a significant impact.

[Andrei Dubovskov:]

I’m sorry I didn’t quite get the question, what is cash? Can you just repeat?

[Sergei Libin:]

Yeah, so you reduced pricing on some smartphone, some equipments in our network. So …

[Vasyl Latsanych:]

But there was no extraordinary reduction, we all the time reduce some of the prices for the older smartphones or we get promotional offers from the vendors, but there is nothing that we would slash the price and lose a lot of margin. Whereas we were and specifically showing the margin in the disclosure materials as relatively stable positive margin, but the fluctuation due to seasonal or promotional activities.

[Sergei Libin:]

Okay. Got it. And yeah my second question was on depreciation. Why it decreased year-over-year despite your retail network expansion.

[Alexey Kornya:]

Okay. We end up with the sizable portion of amortization its intangible assets in Uzbekistan, so that cuts to overall reduction and depreciation of course.

[Sergei Libin:]

Okay. Thank you.

[Operator:]

Thank you. We will now take our next question from Allan Nichols from Morningstar. Please go ahead.

[Allan Nichols:]

Hi, thanks for taking my question. More of a big picture item with the rebound in the price of oil recently how is that affecting the Russian economy and demand for your services? Thank you.

[Vasyl Latsanych:]

Well we think that the key drivers of the performance is not that much market economical for our business as the industrials which we see and the compensatory for our acquisition in the market. So I think that is pretty much the keys through all telecom companies. So they kept very limited impact. I mean from market economics on the consumption, because there is like utility. There is not to say that there is no impact to call. But this in fact is limit one so the key drivers is usually over. Just once again industrial trends like penetration of smartphones like the options rates, changes and people if we hold people will change their behavior and so on so forth. That is why we don't think that the they should – so market economic will, I feel it have any impact on the developments.

[Andrei Dubovskov:]

And no decline, usage no decline in revenue and rubles no when you they decline I think big decline will follow a profitability. Russian economy separately read us the statement. But of course the main problem its cost into ratio, it’s problem of the elimination. But no more, speaking about the usage, it’s more on demonstration.

[Operator:]

Thank you. There are no further questions in the questions in the queue at this time. I would like to turn the call back to your host.

[Joshua Tulgan:]

Okay everyone. Thank you very much for listening in. We obviously welcome you at any time to contact our investor relations department for further questions. A webcast of this discussion will be available on our website, if you wish to replay the call. In the meantime we appreciate everyone’s interest and wish everyone a pleasure day or evening. Thank you very much.

[Operator:]

Thank you ladies and gentlemen that concludes today’s call. You may all now disconnect.