Mobile TeleSystems Public Joint Stock Company
Q2 2015 Earnings Call Transcript

Published:

  • Operator:
    Good day, and welcome to the Mobile TeleSystems’ Second Quarter 2015 Financial and Operating Results Announcement Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Joshua Tulgan. Please go ahead, sir.
  • Joshua Tulgan:
    Thank you very much and everyone welcome to our conference call today to discuss the company’s second quarter 2015 financial and operating results. Before beginning our discussion, I would like to remind everyone that except for historical information, comments made during this call may constitute forward-looking statements which may involve certain risks. These statements may relate to one of the following issues
  • 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 second quarter 2015. Joining me today are Alexey Kornya, Vice President and Chief Financial Officer; and Vasyl Latsanych, Vice President and Chief Marketing Officer. For the periods, we delivered group revenue growth of 3.9% to RUB 102.7 billion. Data adoption continues to drive growth in Russian and other market, while recent changes in our approach to distributions have helped boost handset revenue. Adjusted OIBDA fell year-over-year to RUB 42.7 billion. Our OIBDA margin came in at 41.6%. This reduction from last year due largely to a smaller contribution from our current business and startup costs related to our relaunch in Uzbekistan. Vasyl will now take us through the key markets.
  • Vasyl Latsanych:
    Sorry. Good day, ladies and gentlemen. For the quarter, total revenue in Russia grew to RUB 94.3 billion, or 4.4% year-over-year. Our market share in the mobile business continued its expansion to RUB 72.7 billion, or a 2.8% increase from 2014. Data traffic revenue grew by 23.4%, a smartphone penetration reached nearly 45%. Uptake remains strong for our primary growth product. We continued to outperform the markets in mobile services revenue even though we have to exit from one of our key sales channels, Svyaznoy, which has effectively been taken over by our competitors. It had contributed between 12% and 20% of our subscriber net adds over the years, but we manage to effectively capture Svyaznoy’s falling out sales numbers in our own and local partner’s outlets. I’m very well discuss our rationale from no longer participating in national multibrand chains, as we feel that we can create greater value by focusing more on our proprietary retail to further grow quality of our new customers in strengthen our share of market. The group of success of such strategy can be seen in our numbers, hosting almost a million of net adds in Q2 at 50% increase versus same period of last year, while further decreasing our churn to a record 9.1%. Our new sales approach certainly had additional impact in driving nearly 27% growth in the handset sales year-over-year. We do continue to see significant demand for smartphones, including LTE-enabled ones. Sales of devices under RUB 10,000 continued to be the focus of our efforts, as these are the devices first time data users can afford. We saw a slight increase in fixed line revenue of 0.8% year-over-year. But B2C sales overall increased 2.2%, due to the growth in Moscow market through our GPON product. GPON allowed us to grow residential broadband and Pay TV revenue at MGTS nearly 34% year-over-year. Service enhancements at MGTS, and strong B2B offer in many regions allow us to grow residential ARPU by increasing our share of double and triple play products, migrating customers to our digital TV platform and up-selling our subscribers to tariff plans with higher speeds. In Ukraine, we saw revenue declined year-over-year by 5.8% to UAH 2.4 billion, while organically without Crimea, this implies growth year-over-year. Elsewhere, we see continued strength in our market positions in Turkmenistan and Armenia, despite competitive and macroeconomic pressure. And in Uzbekistan, we see strong growth, as we continued to build our presence. I’ll now hand over to Alexey Kornya, who will discuss the group’s profitability and financial performance in more details.
  • Alexey Kornya:
    Thank you, Vasyl. Adjusted OIBDA for the period declined by 2.1%, or RUB 42.7 billion, although factors we have previously mentioned in the Russia, for example, inflationary cost put on margin. We saw in the second quarter a significantly small contribution to OIBDA from our non-Russian asset. In Russia, OIBDA came in at RUB 41.2 billion, or 2.2% growth above second quarter 2014. Our OIBDA grew 8.1% quarter-on-quarter or twice the price of revenue growth. We adjusted pricing on international calling, which certainly was a factor, but we also saw OIBDA expansion due to a fewer SIM card sales and we implement our new retail strategy. Another factor pressing margin in our – is our increase of handset sales, which translated to a 0.9 percentage point decline in OIBDA margin year-over-year. In Ukraine, the adjusted OIBDA fell significantly as we witness the full effect of the suspicion of business in Crimea, which can be in a strong market for us. Likewise, we rate prices on international termination, which had a negative effect on ongoing traffic from Russia to other countries. Usually, point of strengthening our business our non-Russian assets overall contributed a 1.7 percentage point decline in group OIBDA margin. In Armenia and Turkmenistan, we saw general seasonal trends in profitability, which were boosted slightly by local currency strength versus the ruble. However, our start-up costs in Uzbekistan contributed to a negative OIBDA, although we saw in over 50% reduction in our loss compared to first quarter in the market. Group net income improved during the quarter by 57% to RUB 17.1 billion, and our bottom line was boosted by revenue in OIBDA dynamics, as well as the non-cash RUB 3.6 billion Forex gain on the value for our non-rubles denominated debt. Free cash flow for the first six months reached nearly RUB 19.7 billion, while running less than in 2014, whereas we have stated before this is because we accelerated our CapEx built in the first-half 2016 from second-half 2016. CapEx reached RUB 53.6 billion for the first-half of the year, and this amount is consisted with what we initially planned and guided. As we already announced, we were awarded a license to provide 3G and best services throughout Ukraine. The cost of the license was UAH 2.7 billion. In addition, we have spent an additional UAH 358 million for the reforming costs. Already we have begun building our network in key regions of Ukraine and anticipate the widespread launch of proprietary 3G services in fourth quarter of 2015. The cost of 3G network rollout as well as the related reforming cost should translate to an additional around RUB 7 billion so far, total CapEx estimate for 2015. 3G services are obviously critical development in many mobile markets. And giving our strong balance sheet, we have no issues in meeting this funding need. At MTS, we have long considered dividends to be a key commitment to our shareholders. In August, completed payment of our last installment of fiscal year 2014 dividends, which totaled RUB 53.2 billion. We also announced our recommended interim dividend of RUB 5.6 per share, or roughly RUB 11.6 billion in total. This sum is based on our first-half 2015 results, and will be paid out in November 2015. The key question has been how additional spending in Ukraine may impact our dividend calculation. Our current dividend policy calls for a minimum of 75% of free cash flow. So, obviously, we can devote a great amount of free cash flow towards our dividend. Even though, this policy will expire this year, and we will return to the Board of Directors to approve a new dividend policy next year, we do not expect the Ukraine 3G spending to impact the total dividend. Though it is too early to make a firm commitment, it is likely we will not consider license, of course, as part of our dividend calculation. And we have stated many times that we consider it a strategic priority to provide stable dividends without compromising what has proven to be strong in the resilient balance sheet. By the end of the period, the total debt stood at RUB 312 billion, a 2.9% reduction from first quarter, largely attributable to repayments in the ruble appreciation. Our ratio of net debt to last 12 months OIBDA remained constant at one times multiple, which is in line with previous quarters. Most of our repayments during the year for due in the fourth quarter 2015 when we will make payments predominantly in ruble in the amount of RUB 30.5 billion. This also includes RUB 15 billion put option, which we expect to be exercised on our Series 8 ruble bonds.
  • Andrei Dubovskov:
    Thank you, Alexey. Andrei Dubovskov. Recent changes in the retail landscape in Russia have been of key concern to investors. Let me remind you that for years multibrand retailers like Euroset, Svyaznoy and others dominated the market. In 2009, we began our rollout of preparatory detail to both ensure future growth and protect ourselves against aggressive moves by independent retailers and the sector was positive. Moving to significant reduction in churn and dealer expenses from 2011 to 2014, because we leveraged our own retail to migrate here through revenue-sharing models and reduce growth in the marketplace. We believe that this new model favors both customers and operators. It allows us to devote our services to give customers better services and invest in our product. The new approach also exposed inefficiencies at multibrand retails. We had been in discussions with Syvaznoy about deepening our partnership, but we declined for three reasons. Firstly, a partnership would run contrary to our goals of reducing overall SIM card sales in the market. Secondly, it has fixed growth in the marketplace by discouraging growth in usage and data migration. And thirdly, the loss-making track record of multibrand retail and the fact that Syvaznoy is growing in-depth. Globally the multibrand retail model is outdated as markets mature, particularly as e-commerce becomes a more important channel. In Russia, the mono has been negatively driven SIM card sales, impacting churn and holding back growth in the market. It’s clear from our own experience in Russia data operators retail network is a necessary complement to relate core business This market should be solid by no more than 10,000 stores. Independent retailers alone have varied more than 7,000 stores. And that could be used to finance acquisition of retail and pay down their high level of debt at better to use to our own business. We witnessed this with the initial build-out of our own retail, which resulted in a lower per-store cost compared to our peers, who acquired [indiscernible] And benefits are visible in our numbers to these days, because in days passed [ph] a faster top line growth rate, higher data penetration among its customers, and lower cost and churn than our competitors. This is why instead of actually producing a loss-making business, we decided to devote funds that [indiscernible] enhancing our retail to achieve our ultimate goal of reducing SIM card sales in the market. As we’ve discussed previously, we have lowered prices on Smartphone to entice customers to adopt data plans, reduced commissions on certain payment services to drive traffic to our stores, and adopted a number of other tactics to enhance our retail experience. We are confident this is the best course of action for not only MTS, but the market. We’ve been through this before and we are confident that we can affect the markets in the same way. And these activities in total will not impact our guidance for the year. We still envision at least 2% revenue growth for the group, more than 3% revenue growth in Russia and 40% OIBDA margin for the group. With that, we’d like to open the call to questions.
  • Vasyl Latsanych:
    Operator, we can take questions now.
  • Operator:
    [Operator Instructions] We will now take our first question from Mr. Roman Arbuzov from UBS. Please go ahead, sir.
  • Roman Arbuzov:
    Good evening. Thank you for taking my questions. Actually I had two lots of questions, if I may. The first lot is on distribution, and the second one is on cost. So, regarding distribution and Svyaznoy, you’ve mentioned that Svyaznoy have historically accounted for a large share of the total net adds, 12% to 20%. And you’ve also mentioned that, you’re planning to make up for the lost net adds by local dealers and your own retail. So could you please provide us some color in terms of perhaps some breakdown in terms of how exactly you’re planning to make up for the loss of this significant sales channel. So, perhaps a mix between local dealers and your own retail. And also do you envisage that you will be utilizing perhaps more multibrand retail, I’m not talking about Svyaznoy or Euroset, I’m actually talking about what was recently reported in the press about MTS potentially launching a standalone multibrand called Telefon.Ru. And then do you think you have to make up the gross adds fully, or do you see some potential through churn reduction, as well, and if you could give us the mix there, that would be very useful for us. And then secondly, I just wanted to ask, Alexey, on costs and the ruble depreciation in terms of how to think about the ruble depreciation and the impact on margins. Clearly, the ruble has been strong this quarter, but then, if we assume that the ruble rate stays at the current sort of RUB 65 to the dollar level through the third quarter and, therefore, resulting in a sort of 20% depreciation quarter-on-quarter given that they’re around 15% to 20% of the OpEx is USD based. What does that imply for margins? Does that mean, we should expect quite a large hit in margin? That would be – if you could expand that, that would be great. Thank you very much.
  • Andrei Dubovskov:
    Roman, it’s Andrei Dubovskov. Thank you very much for that question, during the last five minutes, I enjoyed your question. So talking about our deferral [ph] in the distribution, I just want to remind you that you’re really right, the 15% of all of our sales based on Svyaznoy network a during lot of previous years. But right now approximately 60% of all our sales based on our own retail network is, of course, we are going to increase the numbers of monobrand shops growth in Russia. I think that the total number till the end of this year will be approximately 5,000. Speaking about our activities in multibrand network, which you mentioned earlier against Telefon and the ruble. That’s not better year for us, but that’s not a strong way, this is not a silver bullet for this problem. Of course, we are going to pioneer in this – our coverage in this market, but there will no significant, not huge impact on our sales channel. And speak about the gross adds in the second quarter 2015, as you know, we attract approximately 900,000 new subscribers in Russia. Compared with the same period in 2014, it’s 50% more than in previous year. In the second quarter 2014, it was approximately 600,000 new subscribers. That means that the loss of our activities in Svyaznoy does no impact to our business right now or in the near-in future. And second question, let me turn this question to Alexey Kornya.
  • Vasyl Latsanych:
    Maybe I will add a couple of points. This is Vasyl. Just wanted to point out that since we exited Svyaznoy, we are saving quite a significant amount of money that we used to pay to Svyaznoy as the commission. Svyaznoy wasn’t a cheap channel for us, it was relatively good quality. But we believe that by using that money more wisely into –investing into our own retail developments and developments of other channels, some experiments in the footprint area of sales we are conducting right now, we may achieve even better results in terms of quality without closing the volumes that we had discussed more previously.
  • Alexey Kornya:
    And Roman, as far as the second question on the cost side concerns, I think, the effect on marginality is – depends from what perspective you are looking. So if you compare the value effect on a year-on-year basis, clearly, we do see pressure in our margin, because second quarter 2014 we’ve had a much stronger ruble and this effect is marked now, but is in patient. However, if you look at the dynamic quarter-on-quarter, of course, we’ve had some strength in mobile, which held up in the second quarter and that was also reflected in the margin dynamics to give there would be seasonal trends. So what is important also to know that, our margin this year has impacted structurally by the fact that we have with the equity ratios starting up and running initial costs on those operations. And the second structural change is the deconsolidation of Crimea operations from Ukraine, and strong devalue of hryvnia in Ukraine, which moved to much more almost 10 percentage points more margin in Ukraine, if you make a year-on-year comparison. So summing that up, I would say that, our guidance is fairly reflecting all the challenges, which we’re facing. And I would say some within the conservative side, but still we’re committed to meeting the guidance and even looking at potentially all the forming.
  • Roman Arbuzov:
    Okay. Thank you very much.
  • Operator:
    We will now take our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead.
  • Alexander Vengranovich:
    Yes. Hi, two questions from my side. So, first, just a follow-up on retail strategy. Can you please elaborate a little bit more on Telefon.Ru, and what is the rationale behind building an additional multibrand network versus just focusing all your efforts on the existing monobrand retail and expanding it? And the question here is like, I heard that you’re planning also to offer Tele2 to sell their contracts in this telephone network. So what is the rationale here? So why are you planning to help your competitor to sell the contract and they plan that the impact of the policy on the back of this partnership? And the second question is on CapEx in Ukraine. Do you expect that the majority of the CapEx you need to spend on the 3G network in Ukraine will be spend this year, or you also expect it to continue at such, I will say, fast and strong pace also next year? Thank you.
  • Vasyl Latsanych:
    Alexander, this is Vasyl. Regarding your first question, honestly, this is a much overheated subject as there is no chain of Telefon.Ru in the market. We are experimenting with different types of setups in our existing retail network, including we may experiment with the different names for different types of openings. And there is no decision and even no speculation inside on what we should, or should not sell Tele2 or any other competitors, in network if we decided to make it multibrand. So I do believe that this is away ahead of time discussing the subject that there is no distinctive strategy for it so far, and there is no Telefon.Ru retail network in place in Russia.
  • Alexey Kornya:
    And speaking about CapEx in Ukraine, there are two points to say. First, that Ukrainian 3G CapEx is the beginning of a big project on the rolling out 3G network in Ukraine. Ukraine probably is one of the largest European countries, but there is no yet 3G network. So, of course, the plan for and the CapEx spend for 3G network will not be unlimited by this year. However, starting from the next year that will be, of course, an organical part of our guidance, and that will be organical part of development in our CapEx. This year, the exception is related to the fact that we were – we own 3G license already this year and that is why our 3G plans were not included in the guidance of this year, which was giving upon the results of last year. However, another important point to mention in the respect of Ukrainian CapEx that Ukrainian CapEx is fully funded and to be fully funded through Ukrainian sources and from Ukrainian operations. So we are not planning to transfer any fund in Ukraine in order to fund this network rollout. We’ll use either local ranking facilities, which are not yet in plan. Although, we use the accumulated cash there right now. We have more than $100 million U.S. dollars on the accounts, and the free cash flow, which is to be generated by Ukrainian hryvnias.
  • Alexander Vengranovich:
    Thank you. That’s helpful.
  • Operator:
    We’ll now take our next question from Ivan Kim from VTB Capital. Please go ahead.
  • Ivan Kim:
    Yes. Good afternoon. Two questions for me, please. Firstly, on NVision. It was a loss-making business at the time of acquisition, so do you think it can become profitable, and when? And can you probably quantify the merits of this transaction, in terms of like increase for your EBITDA going forward to maybe decrease in CapEx? And then secondly, on Moscow fixed line, so I remember couple of years ago, one of the scenarios was that there will be some decent growth in Moscow because of GPON upgrade and consumers taking more products that you’re gaining shares, et cetera, et cetera. So where we stand now? Do you think that, there is any growth coming in Moscow, or the fixed revenues would be more flattish, so the same? Thank you.
  • Andrei Dubovskov:
    Ivan, let me take the NVision one. So we do not view the acquisition of NVision the view on which we will continue the existent model – business model of the NVision. For us, 90% of the valuation of NVision is the billing platform on which MTS exist. So in with respect, firstly, that was a profit-making business in NVision. Secondly, that is more than just the CapEx saving. This is a strategic different prospect for us to develop our own billing rather than that being developed independently by a separate company, because you have completely different incentives and motivations, if you have – if you are running it as a separate business with the short-term KPIs and P&L targets for one year, or one quarter and next quarter, and you have completely different ambition in NVision, if this is a strategic asset as it is for us. We should set to ground our strategic development being our competitive advantage in the long run. So we clearly have much more strategic approach towards developing the product, so what is developing the billing system and itself. As far as the rest of the business concern, this is really not material part of the transaction itself. We see some side benefit from having integrational experience now B2B sales, which will help us to provide complex solution to our B2B customers. However, comparatively to your strategic advantages, which we’re gaining through developing our own billing platform that is the minor one. And mostly, we’ll see the optimization, or I would say the benefits, of course, coming from on one side leaving you in time to market of our products and flexibility of our products, so our commercial policy. And as far as the cost side or expense side concerned, that will go mostly on CapEx side. But, again, the strategic advantages, which we are gaining on the commercial side is exceeding any cost benefits, which we might get on this transaction.
  • Vasyl Latsanych:
    I will take it from here, Ivan. This is Vasyl. Coming back to your question on the MGTS networks and Moscow fixed line. In fact, through this year since second quarter 2014, we have more than doubled our subscriber base on the GPON network, and that let to 34% increase in the B2C market from broadband and TV products. So we do believe that their growth is very significant, it’s actually growing faster than the markets, and we’re gaining the market share. I believe we’ll be soon able to show the market share dynamics to get the data from the other carriers as well in the researchers. Thank you.
  • Ivan Kim:
    Thank you. Just a quick follow-up on NVision. So, basically, in other words, you’re going just to shutdown all businesses that unrelated to viewing except for a small portion, which is often IT services or something for B2B sales, right?
  • Andrei Dubovskov:
    It will measure – the integrational part of this business will significantly reduce, especially targeted at the external clients. So there will be lot of products, which we will have internal support both of our functions, including support of our dealing in our B2B clients. However, as far as the other purely integrational services being provided to external clients that will probably diminish.
  • Ivan Kim:
    Okay. Thank you.
  • Operator:
    We will now take our next question from Herve Drouet from HSBC. Please go ahead.
  • Herve Drouet:
    Yes. Good afternoon. Two question as well on my side. The first one is on CapEx. I think the previous guidance of RUB 85 billion, I thought included some of the 3G rollout as well in Ukraine, maybe, I’m wrong. So I was wondering this increase of RUB 7 billion for Ukraine. Is there other element that has played for increasing CapEx guidance, I mean, did you change any of your outlook for the currency who may have an impact on the CapEx? Are you planning maybe to accelerate potentially monobrand retail shop that may have as well an impact on the CapEx. I was wondering if all the elements just purely Ukraine that may have pressure to increase this CapEx guidance? And the second question is as well regarding NVision. I was wondering if there is any data you can share with us in term of EBITDA or EBITDA margins, for the business. I understand that half of the revenue of NVision is mostly MTS contract. So I was wondering if it’s what we are talking about this billing is roughly 50% of the business, or is it more than that. And I’m trying to figure out when NVision would be incorporated on MTS, I would expect that in Q3, how the EBITDA of the group will be impacted by that consolidation? Thank you.
  • Andrei Dubovskov:
    Thank you for your questions. On the first part on the CapEx, the increase is purely related to our 3G project in Ukraine. So that is not driven by any other factors. And we’ve been communicating in our previous disclosures that the CapEx guidance, which we are giving – which we were giving did not include 3G rollout network in Ukraine. There was included minor preparational work, which Ukraine was doing in order to get its network ready. However, the rollout CapEx and the rollout plan, of course, were specified only after the license was granted to us. So, as we were indicating that by the second quarter, during our second quarter, disclosure will give an idea what would be a top up in our CapEx because of 3G Ukraine. So this is only 3G Ukraine-related increase.
  • Alexey Kornya:
    And as far as NVision, yes, and as far as NVision consolidation concern, so there are two – the transaction is broken down in two parts. The first part includes billing, and we closed already the first part of this transaction and started already accumulate headcount and preparations related to maintenance of our – developing of our business. And the second part of these preparations to – will be consolidated at the end of fourth quarter. So it will not have any significant impact on our before months. And as we discussed, since we will not develop integrational services, per se, other than those B2B related, we don’t see that it will have any significant impact on our margins in the next year as well. And the people who are involved in the billing development, they are being capitalized. So that will not also help change your perspective for our financial in terms of how we recognize those expenses. So you’ll not see significant impact from consolidation of NVision in terms of our permissions.
  • Herve Drouet:
    All right. Thank you. Thank you very much.
  • Operator:
    We will now take our next question from Alex Balakhnin from Goldman Sachs. Please go ahead.
  • Alexander Balakhnin:
    Yes. Good afternoon. My first question is on the handset margins and overall handset strategy. So you’ve been saying before that you were offering substantial discounts on your handset distributed and also the performance recently on Samsung partnership, whereby you jointly promote devices, which may also have some of impact on the profitability. I was just wondering with this decline in the gross margin on the handsets we’ve seen in the second quarter, is this all the impact we will see, or you will probably introduce some greater fact towards the end of the year? And my second question on the dividends, so you made a comment in the introductory statement that you have a dividend policy. But in the same time you have this guidance of not less than RUB 90 billion paid in 2014 in the future, which you will successfully deliver. So I was just wondering you’ve been staying on fairly stable dividends over the last two years. To what extent this dividend stability is important for your internal understanding of MTS investment case?
  • Andrei Dubovskov:
    Alexander, thank you for your question. This is Andrei Dubovskov. So speaking about handset margin, I just want to say that you’re right, it’s a low profitability in this area for us, lowest than – lower than in the previous year. But, of course, we are not going into subsidy these operations. So I want to remind you that we have revenue from handsets in the second quarter 2015, approximately RUB 7.7 billion. So at the same time, our cost for this operations – it’s lower than RUB 7 billion. It means that we have approximately 5% to 7% marginality in this area. And, again, I just want to remind you that we’re not going to subsidy of smartphones in the Russian market. But, of course, this is a little bit normal impact to our profitability, because we are going to keep our guidance speaking about our OIBDA in absolute terms, it will be approximately 200%, that is 200% during all these years. But speaking about our Samsung partnership, it’s clear for us that all these vendors in the Russian market that not want to have the situation when they will be in this market face-to-face with the custom multibrands retail networks and our competitor. Samsung and other vendors wants to be a part of competitive market in the Russia. And, of course, we are going to support this approaches. And that means that with Samsung, with other vendors, we have really good possibility to keep the lower prices in this market. And especially speaking about the economy situation in Russia, and the problem with GDP and Russian ruble devalue on.
  • Alexey Kornya:
    Alexander, speaking about dividends, stability in dividends is very important for us. As I mentioned in my speech, we view stability in dividends as integral part of our value, and that is why we are committed to delivering stable dividend richer. However, at this point of time, I think that would be pretty much here to commit for any amounts over the next year. However, as we mentioned, we do not think that we’ll see any change in the approach towards our dividend payout.
  • Alexander Balakhnin:
    Okay. Thank you so much.
  • Operator:
    We will now take our next question from Ksenia Mishankina from UBS. Please go ahead.
  • Ksenia Mishankina:
    Hi, thank you for the presentation. You’ve mentioned that you’ve signed US$200 million term loan with China Development Bank Corporation for the credit line, as well as a credit line with Sberbank. Do you plan to draw on Sberbank credit facilities to refinance your shifting [ph] debt? Are you planning any further debt refinancing, or you will be partially using your cash? Thank you.
  • Andrei Dubovskov:
    Thank you for the question. We have not yet drawn on the facilities with the CTB [ph] So we’re looking at – we’re looking that that on one side execution. On the other side, what – when we’ll have a need for additional financing, that’s probably closer to the end of this year. We might consider utilizing this facility. On Sber, we mostly utilized all the facilities, which we signed with them. We have only RUB 5 billion pending probably, and that’s how we view our position in respect of their Sberbank facilities. We are not planning to have any issue of hryvnia bonds. In ruble bonds, the issuance will depend on the market situation, taking with the market situation is right now, the probability is also removed.
  • Ksenia Mishankina:
    Okay. Thank you.
  • Operator:
    We will now take our next question from Dalibor Vavruska from Citi. Please go ahead.
  • Dalibor Vavruska:
    Hello. Can I just ask you just one question on market share? Clearly, when we look at the year-on-year comparisons, it seems that you’ve been doing very well in Russia, relatively to your peers. How important is this for you to sustain this trend? And if I can just ask, when you look at the quarter-to-quarter numbers, just the reported one for the mobile service revenue for this quarter, it seems that the competitors did a little bit better and they also gained a little bit more subscribers. I mean, is this something that, do you think may have to do with seasonalities, or would you attribute part of this to the changes in distribution and you think that the steps that you’re taking now will reverse this, or it equalize this, just to give a flavor how important these things are for you? Thank you.
  • Andrei Dubovskov:
    Dalibor, please clarify the question. Are you talking about the subscriber’s revenue?
  • Dalibor Vavruska:
    Well, I was talking mobile service revenue in Russia, where I think in the second quarter, when you look at the mobile service revenue quarter-to-quarter. The competitors may have done a little bit – may have shown a little bit higher number than they needed. But, of course, there may be some seasonalities or other factors, is this just one quarter. So I was just wondering, if this is something that you would totally disregard, or how important is this for you?
  • Andrei Dubovskov:
    Yes, Dalibor, it’s clear. This is Andrei Dubovskov. Speaking about our market revenue share, that’s clear for us, that’s really faster than our competitors are speaking about the comparison year-over-year. But given our expectations talking about the previous quarter, it’s also important for us – much more important for us that our leadership position in the market in Russia, and at the same time the much more faster development of our revenue. That’s our point.
  • Dalibor Vavruska:
    And do you think there was some reason that can be possibly described seasonal reasons, why you would grow the slower rate in the second quarter versus the first quarter compared to VimpelCom and MegaFon?
  • Alexey Kornya:
    Dalibor, the – I think that the seasonal trends, it’s a little bit tension describing when at a rate of made really the acquisition and really big churn that’s for us. Speaking about the current time much more important for us to see that we had really fastest growth in market revenue share in the subscribers. And let me remind you that, for example, during the last year, we increased our subscriber base by 5 million new subscribers. It’s a really big impact in our business, a much bigger than the seasonal trends et cetera.
  • Dalibor Vavruska:
    Okay. Thank you.
  • Operator:
    We will now take our next question from Allan Nichols from Morningstar. Please go ahead.
  • Allan Nichols:
    Hi, thanks for taking my questions. Two of them please. First, in most of your countries operations you saw year-over-year decline in ARPU, but a sequential increase, is that just a seasonal uptake, or is there something more sustainable going on? And secondly, in Ukraine you talked about problems in Crimea in the East, where you’ve seen any issues with the right-wing militants in the West. Thank you.
  • Vasyl Latsanych:
    Allan, regarding your first question on the ARPU, we don’t see any significant shift in the consumer usage pattern. It’s rather the effect of quite a big addition of the new subscribers during the second quarter of 2015. And we had slight decrease in the ARPU numbers versus the previous year, but we still see our ARPU growing well and projected growth well based on our MOUs, which grew quite nicely throughout the last year. Regarding the Ukraine situation, we don’t see any issues with the right-wing militants in the West. And there is no disruption, no fighting, and no other issues in the West. But on contrary, as I said in my speech, we do see that the country, if we factor the Crimean revenue out of the previous year shows the positive dynamic year-over-year and building up the 3G network this year, we hope to set up a very well push for the next year development of the data services, which is long expected in Ukraine. We’ll finally arrive and deliver the revenue growth and the new trends. Thank you.
  • Allan Nichols:
    Great. Thank you.
  • Operator:
    We will now take our next question from Sergei Libin from Raiffeisen Bank. Please go ahead.
  • Sergei Libin:
    Hello, two questions from me, as well, please. First of all, the proportion of data users, mobile data users actually declined in the second quarter compared to the first quarter, and it’s now even lower than the number of Smartphone users. I was just wondering why did this happen, is it kind of a one-off, or could you just explain this effect? And secondly, there was some articles about your potential participation in the Telekom Serbia privatization. Could you confirm and just approve that, or maybe in more general terms, what’s your attitude towards the international M&A in Telekom’s now? Thank you.
  • Vasyl Latsanych:
    Sergei, hi. This is Vasyl. Regarding your first question on the data users, we did see some abnormal very high growth of the users in the Q4 2014 and Q1 2015, which has affected our short-term results in the second quarter 2015 indeed, looks like a decline. But if you draw a long-term trend since 2014 like the first quarter of 2014, and due to this today’s numbers, you will see a steady trend upward. And actually, if you take a look at our previous results, we did have some splashes of the activities in the past as well. So we are seeing some seasonal high sales of the devices, and Q4 2014 was abnormally high sale. And we do see the first activations increased in Q4 and Q1 2015, which is most likely the short-term usage, the seasonal usage that we have seen, and we have got back on the trend, which is long-term positive for us 2014 and we believe we’ll be continuing in 2015 as well.
  • Sergei Libin:
    Okay, thanks.
  • Andrei Dubovskov:
    And speaking about our interest in M&A area, that our last deal in this area was in 2007 in Armenia, and starting this time we should no real deals in other countries, and just our whole market in Russia and other country, first of all in fixed business, TV satellite [indiscernible]. But speaking about the Telekom Serbia, it can be little bit interesting for us just for elaborate, it will be profitable for us, no, and of course, our interest depends on the real terms and conditions and real money, which we need to spend for these deals.
  • Sergei Libin:
    All right. Thank you.
  • Operator:
    We will now take our next call from Igor Semenov from Deutsche Bank. Please go ahead.
  • Igor Semenov:
    Yes. Hi, good evening. A couple of questions from my side, as well. So, first of all, on Ukrainian CapEx, do you have an idea how much money you will spend over the next couple of years on 3G? And also I just wanted to ask you, I mean, I think you had a very high CapEx in 2013 in Ukraine and Q4 2012. And the reason was that you were preparing the network for us eventual award of the 3G license, you were swapping some equipment. So shouldn’t it reduce your CapEx needs for the next couple of years? So that’s question number one. Second question is, on your guidance, in general, just wanted to reconcile – just on EBITDA margin guidance. I just wanted to reconcile the – what’s kind of on the distribution market on the acquisition of NVision, I mean, there is a material event in my view, and you’re not changing the guidance. I just wanted to see the dynamics how come? Thank you.
  • Alexey Kornya:
    Thank you, Igor. On the Ukrainian CapEx, we – if you look historically, Ukraine over the, like a decade backward, you’ll see that the relative ratio CapEx to sales in the Ukraine was substantially lower to what was the leverage on the group and specifically in Russia. And that was to large extent also linked to the lack of re-modernization of network and 3G network rollout. So that time probably came to payout the check, because network needs modernization and its upgrade for the modern technology. As I mentioned already, it’s probably one of the worst countries, which is not having 3G in Europe. That is not to say that we’ll see an elevated level of CapEx in Ukraine abnormally elevated, that will be on the level, which is normal for introduction of new technology. You can compare that with the similar CapEx ratios, which one could sell in Russia at the time of 3G introduction in the market. So we estimate that the CapEx will be around probably RUB 15 billion over the next – over this next year rubles. As far as the EBITDA margin guidance, I mentioned that we are being probably right on the conservative side. However, right now there is not enough visibility in order to upgrade our guidance only EBITDA able to prefer to be rather on the conservative side with some upside potential, rather than being over bullish, taking the uncertainty in the market and volatility, market economic or volatility another volatilities, which we have normal.
  • Andrei Dubovskov:
    And in time based on our good results in marginality in first-half of this year, I think if you do regarding our approach in this area to the next question from you why we are changing our approaches. And, again, based on our current results, I think it’s normal behavior to keep current level of our guidance and profitability.
  • Igor Semenov:
    Okay. Thank you, guys. Follow-up here on Ukraine Vimpelcom, when they’re presenting the results, they also provided an update on the strategy, and they mentioned the transition to the asset life model. I’m not sure if it would work in Russia. But in Ukraine, for example, would you see it is an opportunity to actually be very active in terms of sharing and maybe building joint 3G and 4G network structure to reduce CapEx?
  • Alexey Kornya:
    On our track records you can judge that we are very open to optimizing in CapEx spend, when we have such opportunities. We have a very positive experience with Vimpelcom in Russia on sharing our cost on LTE network rollout in some of the regions. So, if there is such an opportunity that will be of course exploit it. However, right now, we do not see the practical opportunities on that side.
  • Igor Semenov:
    All right. Thank you very much.
  • Operator:
    We will now take our next question from Igor Goncharov from BCS Financial Group. Please go ahead.
  • Igor Goncharov:
    Yes. Thank you very much for opportunity, I have a follow-up question on the dividend policy as far as you highlighted the dividend payment which is to be approved in September effectively last payment under the current dividend policy. Can you maybe give some indications as to when you plan to approve the new policy and to communicate it to the minority shareholders? Thank you.
  • Andrei Dubovskov:
    Historically, we’re usually coming out in the market with our view on the dividends somewhere in April and May. So, up until this time, we can assure only that stability of dividends as I mentioned earlier is very important for us. And it’s integral part of our value and we’re committed to providing a stable dividend return. However, with the exact parameters of our dividend policy and repayments for the next year, in the next year, for this year will be in the market probably April next year.
  • Igor Goncharov:
    Understood. Thank you very much.
  • Operator:
    We will now take our next question from Alexey Gogolev from JP Morgan. Please go ahead.
  • Alexey Gogolev:
    Hello, everyone. I had a follow-up question on the fixed line business. If you are saying that your subscriber base substantially increased most until this imply that you’re losing subscribers outside of Moscow in the regions. If that is correct, are you seeing a lot of competitions from Rostelecom and ER-Telecom. And also what is your future strategy going to be with regard to new services video on demand broadband expansion. Could you elaborate on that, please? Thank you.
  • Vasyl Latsanych:
    Thank you, Alexey. This is Vasyl. We are seeing the shrinkage of the base, which has been for a longtime the story with us. As we are converting people from analog TV to the digital TV, as well as our current accounting has a numeric effect, because as we were using every single service to account as a customer. Now we are moving to customers from single play to double and triple play sometimes. We accumulate these customers under one ID. And that becomes one customer with a number of services. Unlike before, it used to be a separate customer for TV service and separate customer from a broadband service. And this, if you take a look at our decrease of the customer number throughout the whole country that corresponds to at least half of that decrease, when we are aggregating the services under one Id. The other half is really the migration of the relatively three and non efficient for us analog services to the new digital services on the new platform. And that comes to the second part of your question what we are doing. We are deploying probably the best and state-of-the-art Erickson’s platform, which is the hybrid platform allowing us to work on literally all of our transports to deliver the TV signal including IPTV cable and even satellite. And we will be delivering not just the normal line TV but Catch Up TV, PostTV and video on demand through this platform through literally everyone of our customers non-regarding to the technology the signal deliver it on. So, we do see a very bright future developing the TV offerings back up by the ARPU growth that we have enjoyed throughout the last year in the fixed business in Russia.
  • Alexey Gogolev:
    Thank you, Vasyl. And could you also elaborate on competition on broadband, are you seeing much pressure from other players what is your focus right now is it on ARPU, or is it on subscriber market share?
  • Vasyl Latsanych:
    Well, our focus is as I said on the technological upgrades going through the digitalization and changing to the hybrid platform, this will be a cornerstone for the future development, as we will be technologically advanced over our competitors in most of the markets. About the big competitors like AR Telecom and Rostelecom, we see different dynamics, Rostelecom is literally saving the base, as they bleed heavily on the, as we see in the reports, they bleed heavily on the voice business. So, they have to replace by whatever it takes even sometimes prices slashing in the broadband market and sometimes TV market. AR Telecom on contrary tries to build the market and deliver its relatively high quality service at a relatively premium price. So, we are in between different competitors out there. We are at the moment, very price competitive and we do see a good potential for the price increase and value increase in the market for the next one to three years.
  • Alexey Gogolev:
    Thank you very much.
  • Operator:
    We will now take our final question from Alex Kazbegi from Renaissance Capital. Please go ahead.
  • Alexander Kazbegi:
    Yes, hi. Two questions if I may also, first one, maybe it’s a bit early to discuss, but if I look back so to say a couple of year actually quite a lot of years back, the CapEx sales ratio has been somewhere between like 22%, 23% and the same will be not probably, but given again your guidance in 2016. So, if you look for the next so to say two, three years, how do you see this ratio so to say developing, understand you might not be ready to discuss so to say quantitative numbers but collectively and where do you see possibly reductions or actual increases and again that you’ve done the GPON, you’ve done let’s say most of the 3G behind do in Russia, okay, there is Ukraine. But could you just give us some sort to say overall vision if you wish for the next one or two years? And second one is a small one probably on Uzbekistan, I just noticed again that the growth range of the market shares being quite slow sort to say 2%, 3%. And as a result again the EBITDA margin and the EBITDA is negative. So, I was just wondering again at what level of the market share or whatever the metrics could be when do you feel and see that the EBITDA margin can actually turn positive there. And do you think that in order to achieve that would you need some investments, which potentially has a risk of taking money again from Russia and still investing into Uzbekistan or that’s basically of the cards, irrespective of how the market develops there? Thank you.
  • Alexey Kornya:
    All right. Thank you for your question. Speaking about our CapEx to sales multiple. You are absolutely correct; historically during last some years it was 22%, 23%. And our approach is based on our understanding that every next year, we will decrease our capital expenditure approximately by RUB 5 billion. But let me remind you that for example in 2015, it was the time when we have the highest level of capital expenditure approximately RUB 92 billion. And our approaching for this year was to reduce this numbers to RUB 85 billion. But about our Ukraine story and we have no possibility to avoid our evolving introducing market, speaking about the competitor situation in Ukraine, our commitments, our licenses, et cetera. But, of course, we’re going to reduce our capital expenditure during the next 10 years, at least, for RUB 5 billion, because – yes, we are going to finalize our GPON product in Moscow till the end of this year. At the same time, we’re not going to spend money to 2G network, and speaking about our 3G network, that’s really a good competitive level. And the next area for investment, this is LTE. But that LTE penetration had some penetration in the Russian markets, right now, approximately 7%, maybe 10% to 12% in Moscow, that means that our current level talking about numbers of LTE base station, that’s enough for our current market trends. And, of course, if – in 2016, 2017 this level, we will be much more higher than in current level. It means that we need to spend a little more capital expenditure. But our commitment is the following. We’re going to decrease our capital expenditure during the next 10 years, at least, by RUB 5 billion every year.
  • Alexander Kazbegi:
    Thank you.
  • Operator:
    There are no further questions in the phone queue at this time. I would like to turn the call back…
  • Joshua Tulgan:
    One moment operator, we have – operator, one moment we have to follow-up on that question.
  • Operator:
    No problem. I beg your pardon.
  • Andrei Dubovskov:
    Okay. Speaking about Uzbekistan. So far we are moving above our plans, which we had during the – discuss during the decision to reenter the market. So we’re exceeding our plans and then, with respect both on top line and OIBDA and this respect we don’t feel that we are underperforming in terms of market share gain or whatsoever. And speaking about investments as part of our settlement deal, we had agreement with local financial institutions. We should providing financing in the initial stage of our reentrants in Uzbekistan. So we do not need any external financing from outside of Uzbekistan and we are not planning any.
  • Joshua Tulgan:
    Okay. Thank you very much ladies and gentlemen for your questions. We welcome you at any time to contact our Investor Relations Department for further questions. The webcast of this discussion will be available on our website, if you wish to replay the call in the meantime, we wish everyone a pleasant day and evening. Thank you very much.
  • Operator:
    That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.