Mobile TeleSystems Public Joint Stock Company
Q1 2015 Earnings Call Transcript

Published: 20 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Mobile TeleSystems’ First Quarter 2015 Financial and Operating Results Announcement. For your information, today’s conference is being recorded. At this time, I’d like to turn the call over to your host Mr. Joshua Tulgan. Please go ahead, sir.

[Joshua Tulgan:]

Thank you very much and welcome everyone to today's conference call to discuss the Company's first quarter 2015 financial and operating results. Before beginning our discussion today, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks. These statements may relate to one of the following issues

[Andrey Dubovskov:]

Thank you, Josh. 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 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer; Vasyl Latsanych, President and Chief Marketing Officer; and Andrey Smelkov, Vice President International Subsidiaries. We are pleased to share with you another set of solid result. For the period, MTS again demonstrated strong operational trends in our core markets. Revenue for the Group grew 2.7% year-over-year to RUB100.2 billion. Growth was primarily driven by increase in voice usage and data adoption. Despite the volatile and generally negative macroeconomic environment, we maintained the strong profitability with the Group Adjusted [OIBDA] margin coming in at 41.2%. In Russia, we continue to benefit growth -- from growing smartphone penetration and increased data usage in all customer segments while overall demand for our services remains resilient. Our sensible commercial strategies, the speed and quality of our networks, our commitment to customer service and the biggest chain of proprietary retail stores have allowed us to continue to outperform the market. Vasyl will now discuss the performance of our various business units.

[Vasyl Latsanych:]

Ladies and gentlemen, Q1 revenue and our business in Russian grew 3.6% year-over-year to RUB90.4 billion. The most significant growth was seen in our mobile business, which increased 3.9% year-over-year to RUB70.5 billion. This was mainly attributable to the higher uptake of data plans as smartphone penetration reached 43.5% among our active subscribers, contributing to a 26% increase in data traffic revenue year-over-year. We also generated significant addition of subscriber to the period, year-over-year we increased our subscriber base by 4.5 million customers. Sales of SIM cards continued to be both consistent and sustainable while churn remains stable at the lowest level in the market. Sales of handsets increased by 1.2% year-over-year. We continue to see significant demand for smartphones including LTE enabled smartphones; however, we do see demand shifting towards more affordable devices. Following our rubble volatility in Q4, in anticipate of such shift we adjusted the product portfolio in our stores to showcase more affordable devices, 53% of smartphones sold in our shops in Q1 2015 were priced under RUB5,000. Whereas the share of devices priced over RUB10,000 continued to decline. We saw a slight increase in fixed line revenues of 0.9% year-over-year. We continue to grow residential ARPU by increasing our share of double and triple play products by migrating customers to our digital TV platform and by up-selling our customers to tariff plans with higher speed. In Moscow, we're nearing the final stages of our GPON roll-out. By the end of the quarter, we had passed 3.7 million households with GPON and provided over 650,000 subscribers with internet pay TV access; however, our success in increasing B2C customer value in Moscow and the regions was mitigated by weakness in the B2C segments as ongoing projects reached their conclusion. In Ukraine our revenues grew nine percentage points year-over-year to 2.6 billion hryvnia in spite of the operational challenges in the East and the exit from Crimea, MTS-Ukraine's operations show remarkable resilience. In addition, revenues were boosted during the quarter by an increase in termination rates as well as by the hryvnia devaluation against the US dollar, as interconnect rates are fixed in hard currency. We also saw an increase in validated services and data traffic revenues to the reallocation of the revenues from subscription services from Q4 2014. In Armenia revenues felt by 1.3% year-over-year to 16.9 billion manats. Weak microeconomic trends continue to impact our performance there through the decline in the volume of international course but remained dominant -- we remained the dominant operator in the markets. In Turkmenistan we increased revenues by 9.4% year-over-year to 71.9 million manats. Operating trends remained stable and we’ve been successful in monetizing subscribers by growing data and content usage. I’ll hand it now over to Alexey Kornya, who will discuss the group’s profitability and financial performance in more details.

[Alexey Kornya:]

Thank you, Vasyl. Adjusted EBITDA for the period decline by 2% to RUB41.3 billion, our group adjusted EBITDA dynamics were impacted by a lower share attributed to international roaming in our Russian revenues alongside decreased roaming profitability due the rubles depreciation. We also saw losses related to the launch of our operations in Uzbekistan and the decline in the contribution to EBITDA of our business in Ukraine. Despite these factors, this translated to respective adjusted group EBITDA margin of 41.2% for the period. In Russia EBITDA increased by 0.9% year-over-year to RUB38.2 billion, EBITDA was positively impacted by growing share of high margin data revenues. At the same time weaker roaming revenues increased roaming expense, depress the margin; which came at 42.2 and sequentially our EBITDA felt by 7.7 in line with revenue. In Ukraine we delivered stable adjusted EBITDA of 1.2 billion hryvnia with an EBITDA margin of 47%, EBITDA was adjusted for reserves booked due to the insolvency of [indiscernible], platinum bunk and delta bunk, where MCS Ukraine helped 640 million hryvnia in cash and deposits. On the quarterly basis we saw a strong increase in EBITDA due to growth in interconnect revenues. Our termination rate fixed in U.S. dollars also benefited from the considerable depreciation of hryvnia during the quarter. In Armenia EBITDA grew by 4.4% year-over-year to 8.1 billion drams. Profitability was boosted by an increase in termination rates for international calling introduced in third quarter of 2014. Our [indiscernible] unit remains strongly profitable and we anticipate stable margins going forward. In Turkmenistan our EBITDA declined by 14.8% or 25.9 million manat at the margin of 36%. The decline was primarily driven by the impact of U.S. dollar appreciation versus the manat on U.S. dollar denominated cost items and the customer increase in payroll cost in January 2015. Group net income for the period declined 13.8% to RUB11 billion. The dynamics behind this reflects the decline in EBITDA before the close RUB3.5 billion in first quarter based on the value of MTS foreign currency denominated debt due to ruble depreciation and volatility through the period. The result related to cash balance is held in Sberbank in Ukraine in the amount of RUB1.7 billion. Free cash flow for the first three months felt by 56% to RUB15 billion, free cash flow was largely impacted by higher than normal CapEx for the period this included both brought ahead of construction cycle for 2015 and settlement of invoices billed at the end of 2014. At MTS we have long considered dividends to be key commitment to our shareholders. This is what the reflection of the strong market in which we operate in the prudent management of our business. We’re pleased that the result of 2014 will allow us play our largest dividend in the history. For the fiscal year 2014 MTS will have paid out RUB53.2 billion most importantly the sum is derived from our free cash flow which does not require us to result outside finding to finance this payment. Our view is that dividend story is best resolved by paying one. And in that respect in April the board recommended to the Annual General Meeting to be held on June 25th to improve annual dividends of RUB19.56 through ordinary MTS share or a total of RUB40.4 billion based on the full year 2014 financial results. The board recommended that the shareholder meeting set the record date for the shareholders and ADR holders entitled to receive dividends for 2014 fiscal year for July 7, 2015. Payout of the dividends will be within 25 days after the record date. By the end of the period the total debt stood at RUB330 billion, an increase of 13.7% from fourth quarter. During the quarter we drew RUB25 billion from a credit line signed with [Sberbank] and $283 million from a credit Citibank and [indiscernible]. The revelation of the foreign currency denominated portion of our debt portfolio also contributed to increase in the amount of total debt. However our net debt to last 12 months EBITDA ratio remains constant at multiple one, which is in line with the previous quarters. Most of our repayments during the year or for due in fourth quarter 2015 where we will make repayments predominantly in ruble in the amounts approximately RUB30 billion. This also includes the RUB15 billion option which we expect to be exercised on our Series 8 ruble bonds. After the end of the period, we signed U.S. $200 million equivalent in term loan facility agreement with China development and construction which features both U.S. dollars denominated in RMB, denominated transfers, funds drawn under the facility agreement will be used for procurement of network equipment and related services from Huawei. This transaction represents the first experience of attracting financing in renminbi and as such showcases our success ensure that they will [suffice] our sources of credit. On an operational note I would like to remind you that in accordance with the recent Russian regulations we are now reporting our financial and operational results on the IFRS rather than U.S. GAAP. We have provided restated financial results from first quarter 2014 to provide comparisons and in our disclosure material you will find more information on comparative results and other key principles adopted in line with IFRS requirements. If you have any specific questions about this please contact our Investor Relations department who will be glad to assist.

[Andrey Dubovskov:]

Thank you, Alexey. As we previously announced MTS has launched its operations in Uzbekistan and I will now invite Andrey Smelkov, Vice President of Foreign Subsidiaries to discuss this in more detail. Please Andrei.

[Andrey Smelkov:]

Thank you, Andrei. As has been related previously on this call in July 2014 we concluded the global settlement agreement with the government of Uzbekistan on outstanding claims and litigation of our legacy and subsidiary in Uzbekistan [indiscernible]. As part of this agreement, we have created a new firm Universal Mobile Services or UMS of which 50.01% is owned by MTS while the balance is held by an Uzbekistan government entity. Assets, equipment and infrastructure which were previously owned by [indiscernible] has been transferred to UMS. Prior to the transfer of the stake in UMS to MTS, UMS has been granted 2G, 3G and LTE licenses and transferred -- and receive frequencies numbering capacity and other permits required for the launch of the operations. UMS has also received guarantees covering the protection and return of investment in accordance with the laws of The Republic of Uzbekistan. On December 1, 2014, we launched our operations in Uzbekistan. By the end of the year after just one month we could boast 200,000 subscribers and in Q1 we have doubled our base to 400,000. We realized 19.3 billion [soms] contribution from Uzbekistan in Q1 and we anticipate realizing over 189 billion [soms] in revenue for the year as a whole. We anticipate that our performance will be hold up negative in 2015 a fact we have already factored into our group guidance before turning OIBDA positive at some point in 2015. We believe that in time Uzbekistan with over 31 million people and then economy expanding to roughly 7% or 8% per annum can provide a significant contribution to the group results.

[Andrey Dubovskov:]

Thank you, Andrei. As you’ve seen from the results of [indiscernible] in the sector even in conditions of greater macroeconomic uncertainty the Russian telecom sector continues to present growth opportunities, but only operators use the right business model we will be able to realize them. Our leadership of the sector position us to benefit over our competitors. For example from the continue to increase in data usage and strong unit sales in lower value handsets. So before closing I would like to highlight three key points that clear demonstrate the success of our strategy. Firstly, we saw revenue growth in our two core markets Russia and Ukraine. In Ukraine, results are naturally more volatile but our growth in Russian seemed to be unique in the market. The key factor of interest is handset revenues which grew slightly year-over-year. Customers are still buying handsets and judging from the fact that more handsets are being sold for the less than RUB5,000. We're seeing more customers integrate to data despite the unexpected [indiscernible] sales during Q4 last year. This has long been our key growing driver and smartphone penetration continues to grow. Secondly our ability to better monetize our customers with data plans also led us to show the strongest data revenue and test the gross rate in the market. We also showed the highest data traffic penetration among our base. The smartphone penetration reached [33.5%]. This is not only shows that customers started to immigrating but it also provide an opportunity to show the monetized usage growth of increase in customers. And thirdly, while adjusted OIBDA for the Group decreased year-over-year, we saw OIBDA increase in Russia by over RUB300 million, such a strong performance naturally helps right situations about our margin guidance for the year, but for now to maintain our guidance on the expectation that for the volatility and the rate of inflation may impact the stability. We do of course address our guidance after our media results but for now we're confident of our markets and have faith in our continued outperformance. With that, we'd like to open the call to questions.

[Operator:]

Thank you very much, sir. [Operator Instructions] Today's first call comes from Mr. JP Davids of Barclays. Please go ahead. Sir, your line is open.

[JP Davids:]

Two questions from my side, the first one relates to Russia and specifically can you provide a little bit more color around the business-to-government and business-to-business revenues and specifically how those two markets have reacted to the economic crisis, so are they proving more immune or less inelastic to the macro-pressures we see? And then a separate question on Ukraine, I picked your comments on the ARPU growth and what drove that in the first quarter, would you say a lot of what happened in the first quarter as one-off nature or do you expect this ARPU level of about 43 to be maintained for the rest of the year? Thank you.

[Vasyl Latsanych:]

Hello, this is Vasyl. I wanted to clarify the first question, the question regarding the B2B and B2G performance, what is regarding the fixed business which we have mentioned in the disclosure or it was about the general business?

[JP Davids:]

Actually, the general business, so both fixed and mobile if you don't mind? Thank you.

[Vasyl Latsanych:]

Okay so on the fixed line, what we have disclosed in the statement was that, there was a clear one-off strong project -- strong batch of project we have executed during 2014 which strongly contributed to our top line in MGTS performance and some of other fixed line parts of our business, that contract -- those contracts were finished and they are not anymore present in Q1, so we have returned to more less normal business as usual and it effects B2B environment. Meanwhile we'd like to highlight that our B2C operation in business is growing and we believe that we have passed the turnaround point when we have gone through the network, cleaning network, remolding and finally have customers paying at higher ARPU and consuming more services in the B2C market of fixed business. Now regarding the overall business, at the moment we do not see any adverse effect in the B2B or B2G areas of our business. In Russia, we did see some weakness in the Ukraine but that's mostly weakness of the overall market. In the B2B area in Russia and B2G, we're expecting tenders, we're expecting more scrutiny from the customers side, but it is not reflected in the top line as of today more than it was usually very competitive environment where we had to fight for every customer. The second question was about the Ukraine and the ARPU and the general volatility of the situation, as Andrei mentioned before, Ukraine results are volatile, plus 9% year-over-year is a stunning result but you're right it incorporates certain effect that can be taken as one-offs. We have increased the dollar price for international termination and as well as the local currency has weakened so that the local currency results look better because of this exchange rates change. That is for sure partially a one-off result. But looking into more details into our Ukrainian business, we have seen that apart from these one-offs, the overall business looks to be healthy and is growing in spite of very harsh condition it operates in.

[Operator:]

Thank you, Mr. David. Now go to Mr. Roman Arbuzov of UBS. Please go ahead sir. Your line is open.

[Roman Arbuzov:]

Thank you for taking the question. I have two please, the first one is on CapEx guidance, so just looking at the CapEx spent in the first quarter, that was very high and also putting that in context to the full year guidance of RUB85 billion for 2015 which is actually below your 2014 spending. Of course all of this comes within a year where ruble has depreciated a lot and as you’ve mentioned in your release you had to take on some CapEx spending and pay for it, some CapEx spending from last year from ’14. So bearing all of that in mind I’m just trying to gauge your comfort around the 2015 CapEx guidance and also related to CapEx -- I mean should we expect some extraordinary and quarterly trend this year as well for example in the first quarter should we still expect a very big CapEx spend over the usual seasonality of perhaps you can offload some of your 4Q CapEx on to 2016 for example. And also could you comment on whether you’ve prepaid any of the capital expenditures as well for the rest of the year?

[Alexey Kornya:]

Thank you, its Alexey Kornya for the question. We confirm our guidance for the full year however we would like to stress that this guidance does not include our 3G project in Ukraine. We’re finalizing the tender for 3G in Ukraine and we’ll probably be ready during our next disclosure to give more details and more light on our plans for 3G and how they impact the guidance on CapEx for this year and later further on. However, as far as [organically] CapEx is concerned we indeed move construction cycle in 2015 a bit ahead, that means that we will see an elevated CapEx level in the first half of the year however that means that we’ll put earlier through the year our network into use and we will fast and sooner generate revenues and benefits from the construction already starting from the summer of this year but that leads to some redistribution of the CapEx through the year and we’ll see lower level of CapEx in the second half of the year where we planned to end up at the level which we guided, 85 billion for the group.

[Roman Arbuzov:]

Okay. Thank you. So you essentially prepaid some of the CapEx?

[Alexey Kornya:]

Sorry, just to stress, it’s not that we prepaid, we move the construction cycle ahead. It’s usual and tradition construction cycle in telecoms was that you starting construction in the first quarter and new construction through the year and most of the new construction finalizing by the end of the year in the fourth quarter, where the highest CapEx spend comes from. Now we move the construction cycle so that most of infrastructure will be put in use by the summer so we’re actually pushing that right now, so that we will already benefit from our network build up through the summer and during the year and that leads sequentially to the redistribution of CapEx spend through the year where you are willing to spend more CapEx at the beginning of the year for the construction at the beginning of the year and less CapEx for the second half of the year. So that’s not prepaid and this is the change in the construction cycle.

[Roman Arbuzov:]

Okay. Thank you very much, very clear. And can I ask my second question on the handset found in Russia please for [indiscernible]. I was just wondering it’s interesting that handset sales were actually up where as they will down for your competitors, so I was just wondering if you’ve been particularly active or doing anything out of the ordinary this quarter to promote your handsets for example have you been subsidizing in your handset this quarter?

[Alexey Kornya:]

Yes, thank you for the question. You’ve noted us right we have been increasing our activity in the sales and the handset sales as well. In fact we believe that we have been catching the wave correctly by moving to the lower priced handsets more aggressively than our competitors who were more hooked up to the high end smartphones having direct contacts with Apple for example which we do not, so we don’t have that burden to execute on the obligations to sell more high end handsets. Meanwhile we can concentrate on something we believe is more applicable to the current state of the markets to selling more handsets under $100 price which will inevitably deliver the more data ARPU yields from our customer base because they’re switching from feature phone to a smartphone definitely deliveries more revenue increase than the switching from a smartphone to a higher end smartphone that’s go into our calculations. Regarding the subsidies, no we were not playing subsidies, we are not and we do not intend to pay and subsidies in this market.

[Operator:]

We’ll now go to Mr. Ivan Kim of VTB Capital. Please go ahead sir your line is open.

[Ivan Kim:]

Thank you. Two questions from my side please, firstly on the mobile data pricing in Russia which seems to have become more aggressive lately with the growing data allowance by [indiscernible] within the offered tariffs -- bundled tariffs. Do you think it shall continue and how can you mitigate the reduction in this implied price per megabyte? That’s the first question. The second question is on Ukraine, so why did you decide to increase this termination rate, is it partly for funding your 3G CapEx or something else because for -- CapEx is probably not as material. And if it’s possible probably also can you say growth in Ukraine excluding the effect of this termination rate increase? Thank you.

[Alexey Kornya:]

Thank you, Ivan. I will answer the questions maybe I will start from the second one it’s actually an easier one. We have increased it to the market level. The whole market shifted from around $0.14 and $0.15 to around $0.18 and $0.19. So that was probably not right to stay down there and collect less money when all the market -- all our colleagues and competitors have moved up. We are now on the market as well on par with our competitors in the area that is totally justified by the market levels. There was no one-off from our side, this was the market’s move. The first question on the mobile data pricing, it little bit triggers the question what do you consider to be more aggressive and reduction of the ABPNB. In fact what we have seen in the last couple of months in Russian market was relative strengthening of the ABPNB pricing with reduction or elimination of unlimited offers, elimination of extra generous 80 gigabytes offers for the dongles as well as we see all the carriers getting more or less on par for the smartphone volumes and the prices. So we do not consider that to be an aggressive reduction, in contrary we think that the market is more or less stable for the last couple of months or even quarters. We do count on more stability and less aggression for the ABPNB per megabyte pricing in future. In fact when we compare our ABPNB pricing versus our voice pricing and our SMS pricing with most of the leading markets and developing markets in the world we have seen ourselves pretty much on par with most of the competitor markets throughout Europe and the world.

[Ivan Kim:]

Thank you. Just if I may a quick follow up, but if we’re talking purely about smartphones the year it still looks like the bundled offers, the smart offers and then the offers by your competitors have increased data allowance over the past six months let’s say. Do you see that not really impacting your ARPU just because the usage growth is so fast, that people just keep upgrading and take out more data and where you see basically that trend going?

[Alexey Kornya:]

Well, you maybe also confusing little bit the aggression in increasing the bundles on the upper side and lowering the entry barrier on the lower side. What we did completed in the last half of the year we have introduced the lower tire voice and data bundle prices and that was done throughout the market with many of our competitors because we have seen more people ready to sign up to the bundled offers but the pricing level was relatively restrictive for massive connections so we have moved down in terms if we had offer to the markets a lower priced smaller bundle massively which was there in place to substitute the previously very popular prepaid, only prepaid offers. So our move towards the voice and data bundles is by selling it to more people even if it takes lowering the entry level entry barrier for those people. In terms of increasing the bundle sizes, there was this moment in the market about a year ago, but I think it’s slowed down recently and we did not see any major moves from any competitors in the market.

[Operator:]

We’ll now go to Mr. Herve Drouet of HSBC. Please go ahead.

[Herve Drouet:]

Good afternoon, two questions as well on my side, the first one is on your fixed line business as you mentioned there has been some declining on the revenue in Russia in the B2B segment. Do you think it is likely to continue during the rest of the year or you think there will be more growth to come in the future? And I would like to see as well how that’s going to impact your overall CapEx allocation especially through the GPON network if you consider the overall fixed group revenue, it’s barely growing now, almost flat slightly positive even if we include the B2C. And I was wondering can that impact your plan in investment in the GPON network? That's first question. The second question is maybe on the handset as well in terms of sustainability of having still positive handset revenue growth, I mean, do you think that’s feasible in your view and do you believe as well that -- it looks like there has been some talk of potentially new operating system -- Russian operating system to be gradually being developed, do you think that may come and potentially be imposed by the regulator to be on the new generation of handset in the future? Thank you.

[Vasyl Latsanych:]

Thank you, Herve, this is Vasyl. You've asked some very creative questions we'll have to find some creative answers for those, well, this first one is relative straightforward, as I mentioned before there was no decline in the fixed line B2B revenue. There used to be couple of projects that which we completed throughout 2014 which were extraordinary projects and they contributed to the some extra growth. If you look back to our reporting couple of quarters backward, you would notice that we had some extraordinary growth in B2B revenue which is at that time we did not manage to separate B2B from B2C in our disclosures, so we did not give you full transparency on where the revenue is coming from while we noted that the revenue is coming from some extra projects made on the B2B and B2G side specifically by MGTS. So these projects are over, we have returned to normal growth levels where B2C growth is present and we believe that this growth will continue and even enhance. And we do not foresee any adverse revenue decline or adverse effect from B2B or B2G side while the big projects were over, the normal businesses as usual is continuing. The other question was about the GPON, GPON is an infrastructure project which we are finishing this year. We'll be happily finishing it. We don't see any threat in the present market that would force us to change these plans and honestly speaking when we have completed absolute majority of these projects, I don't see it's feasible to be changing in the last moment. So we'll be completing as planned and we believe that this will be a very good platform for further development in the most lucrative Moscow market of the high-end broadband and TV services. Regarding the handsets, the handset revenue that we have shown in Q1, we believe that, that is sustainable. We hope we can sustain that level or even the growth throughout 2015 because as I said before, we believe that we have found the right place in the market, the right pricing, right promotion and the right handsets to be pushed to the market at this time. Meanwhile your question on the Russian OS of handsets -- probably we'll have to leave without a comment as we'd not participate in that development and we do not have a lot of information about it probably not more than you do. Meanwhile on the handsets overall, we do move quite aggressively pushing the handsets to the market because as you know we have built tremendous network of LTE in 2014 and beginning of 2015, and we have finished the major construction of 3G network and now our commercial task is to fill this network with profitable traffic with as much as possible. And as I mentioned before, the customer is migrating from feature phones to smartphones immediately use the data in most of the cases and increased the ARPU. So we believe that this is the major drive for us to utilize the newly built network and to increase the ARPU of existing customers and even mainly to attract new customers by giving them the smartphones even though if the smartphones are of the low end. Thank you.

[Operator:]

[Operator Instructions] We'll now go to Mr. Alex Balakhnin of Goldman Sachs. Please go ahead.

[Alex Balakhnin:]

Quick question on dividends, in your press release you made quite a strong emphasis at the progress with your dividends and highlighted this time that the dividends are higher ever. I was wondering if whilst as long as you are so part of the dividend, should we probably expect next year you will repeat a success and post even higher dividends i.e., is your statement on the dividends is a sort of a manifest of commitment to a growing dividend policy? I mean, is that what you're saying? So your thought here will be very helpful. Thank you.

[Vasyl Latsanych:]

Thank you, Alex. I think that would be slightly preemptive to consider our statement on dividends before ones this year treat as the commitment for dividend increase -- growing dividend for the next year. As you probably know we have a three-year dividend policy which comes to the end in the next year and early first half of the next year we will have to discuss with our Board the new dividend policy which will be probably also based on our free cash flow and as you know our current dividend policy is based on free cash flow and we are paying our dividends from our free cash flow. So let’s wait but however we would like to stress that we definitely see dividend is important and integral part of our value and whatever comes out will be with understanding of that -- of the role of these in our value.

[Alex Balakhnin:]

And then I just quickly ask a follow up here, while given the financial indicators of the company performance maybe quite volatile and net income can fluctuate and by given cash flow maybe volatile as you may book some CapEx sooner or later in the year, when you internally think about the shareholder [indiscernible], what is the sort of the main starting point? Is this just a performance of on free cash flow or net income in a particular time or you just still think of some positive dynamics of the dividends, considering maybe some slight increase over the dividends every year. So how do you approach to shareholder [indiscernible] when it comes to the internal discussions, so you can share that?

[Vasyl Latsanych:]

I think we view our value creation capabilities in the profitable growth or cash flow generating growth concept. We believe that we can grow and we can grow with the generating healthy cash flow which will be in its turn distributed in the form of dividends. So that is why we believe that integral part of our value creation idea consist of two points, first is the return in the form of dividends and secondly profitable growth.

[Operator:]

Thank you, sir. [Operator Instructions] We’ll now go to Anna Lepetukhina of Sberbank. Thank you very much. One moment please.

[Anna Lepetukhina:]

Hello. I have two questions, I have a follow up question on CapEx I’m just trying to understand what was the rationale behind moving the construction cycle through the first half of the year and also out of this [25 billion] CapEx that you spend in first quarter how much is related to the equipment that was installed last year because in the press release you mentioned that you’re being invested deal at the end of the 2014. So I’m just trying to understand actual CapEx how much you could have spent last year, not in terms of cash CapEx and how much you plan to spend this year on equipment that you will install this year. And also on Ukraine I noticed an increase in CapEx as well but at the same time you said that you’re still finalizing plans for 3G investments. So what was this increase due to if possible? And my second question is about MGTS you mentioned that by the end of third quarter you’ve passed 2.7 million households, but how many households actually are now connected to GPON and what is their uptake rate and what do you see in terms of competition? Thank you.

[Vasyl Latsanych:]

Anna, thank you for the question. As far as the duration for the CapEx growth forwards, we would like to stress that rationale is to put the infrastructure faster in place because during the traditional construction cycles you have most of the infrastructure being put on air, in the first quarter or in the third and fourth quarter and in this period of time it starts generating revenue. So our view and our idea was to put as soon as possible so that we’ll put most of our infrastructure already in the first half of the year. So its start generating revenues for us and gaining benefits earlier through the year, so that was the main idea. As far as the share whether there was some portion of deals from [2000 Oak] construction of 2014 paid in 2015, yes, this is a normal situation when you have some deals related to the end of the previous year in accordance with the previous construction cycle, most of the construction comes at the end of the period. So you’re just paying on those bills and we paid some amounts related to the construction 2014 that was normal share depending on the volume of the constructions. For the fourth quarter 2014, I would say out of the total spend that would be probably around 10%-15%. As for Ukrainian CapEx, there was nothing specific I think the increase which you could note was rather linked with the low base effect because as you could see last year we have very low CapEx spend in Ukraine and that was also reflected in the first quarter. So, there is not yet CapEx which accumulates 3G construction and we’ll clearly see the higher CapEx spend in Ukraine. And one more point to stress that probably looking at the Ukraine CapEx figures you see also acquisition of our licenses which came as a CapEx spend. However, we’re splitting that separately in our figures.

[Alexey Kornya:]

And regarding your question on MGTS household pass and real customers, as we’ve indicated we have 3.7 million customer and 1 million households pass that’s nearing the 4.4 million target out of those we have 1.2 million of the paid [telephony] subscribers which is extremely high penetration and about 700,000 of broadband and Pay TV customers. The number actually doubled during 2014 and continues to grow. Thank you.

[Operator:]

Thank you. We’ll now go to Mr. Allan Nichols of Morningstar. Please go ahead.

[Allan Nichols:]

Just on Uzbekistan, your outlook is only for 1.15 million subscribers by the end of the year, you would had 9 million customers before you were lost your license, I thought you have little bit faster come back in that. Is there just no loyalty there or what’s the reason that you expect such slow recovery? Thank you.

[Andrey Smelkov:]

Thank you for that question, about Uzbekistan here is Andrey Smelkov, yes indeed we had 9 million customers before operations got closed in Uzbekistan. But we had as I mentioned in my speech we had created the new company joint venture between the government and us and we started to attract customers from new page and we definitely have new strategy of customer attractions. We have strategy now is premium quality network, we have network which had capacity for 9 million customers with much better quality of voice and data for the capacity and for customers who count on our network. And we decided to slow down customer intake to provide better quality and in fact we see ARPU almost two times higher than the ARPU of our competitors on the market. So this is our strategy and we are totally in line with our plans. As we forecasted we are going to intake 1.1 million customers till the end of this year and we’ll continue growth next year.

[Operator:]

[Operator Instructions] We’ll now go to Mr. Igor Semenov of Deutsche Bank. Please go ahead your line is open.

[Igor Semenov:]

Thanks very much. My questions have actually been answered. Thank you.

[Operator:]

We’ll now go to Mr. Igor Goncharov of BCS. Please go ahead.

[Igor Goncharov:]

Just a quick follow up on the dividends. Do you plan to pay interim dividend for 2015 as you have been doing over the last years? Thank you.

[Andrey Smelkov:]

Could you repeat your question?

[Igor Goncharov:]

Yes, this is regards to interim dividend for 2015, over last year you have been paying not only final dividend but also interim dividend during the years. Do you plan to so during 2015?

[Andrey Smelkov:]

Yes, definitely we’ll be this is part of our dividend policy we’re also with the new dividend policy we also introduced two periods of paying dividends and we also indicated that we say that total payment for 2015 including the share of 2014 and the interim dividend will be approximately the size roughly the same size as we had in 2014.

[Operator:]

Thank you, sir. As we have no further question at this -- just one sec. We have Mr. Roman Arbuzov calling form UBS. Please go ahead.

[Roman Arbuzov:]

Just a follow up on the dividends, your dividend policies for 2013 and 2015 could you just perhaps remind us why it was that specific time periods as opposed to indefinitely and then what makes this time period extraordinary from your perspective for example why couldn’t you commit to 75% equity free cash flow payout for the indefinite future? Thank you.

[Andrey Smelkov:]

I think this is just a legacy of how we looked at midterm perspective, we usually take a three-year view period and historically we prove our dividend policy with the Board at least last three times when we had that set, we were setting that for three years for three-year period. And there is nothing, no specific reason for that, it’s just midterm view which we tend to take.

[Operator:]

As we have no further questions, so I'd like to turn the call over to Mr. Joshua Tulgan and the other speakers for any additional or closing remarks. Thank you.

[Joshua Tulgan:]

Thank you very much and thank you, ladies and gentlemen, for listening today. We welcome you at any time to contact our IR Department for any further questions. The webcast of this discussion -- [Call ends abruptly]