Mobile TeleSystems Public Joint Stock Company
Q4 2012 Earnings Call Transcript

Published: 19 Mar 2013

[Operator:]

Good day, and welcome to the Mobile TeleSystems Fourth Quarter and Full Year 2012 Financial and Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Joshua Tulgan. Please go ahead, sir.

[Joshua B. Tulgan:]

Thank you very much. Welcome to MTS' conference call to discuss the company's fourth quarter and full year 2012 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 relate -- may relate to any one of the following issues

[Andrei A. Dubovskov:]

Ladies and gentlemen, thank you for joining us on today's conference call to discuss the company's financial and operating results of the fourth quarter and full year 2012. Joining me today are

[Alexey V. Kornya:]

Thank you, Andrei. In 2012, group adjusted OIBDA increased by 3% to USD 5.3 billion. Through the year, we showed faster adjusted OIBDA growth relative to revenues despite the suspension of our business in Uzbekistan, which had historically demonstrated a higher OIBDA margin than elsewhere. On the margin basis, the group's adjusted OIBDA margin came in above our guidance for 2012 at 44 -- 42.6%. For the quarter, group adjusted OIBDA increased by 1 percentage point year-over-year despite ongoing costs in Uzbekistan and strategic decision made by the company to increase our retail network and increase in sales of handsets. In Russia, OIBDA rose by 11% to RUB 148 billion. Sustained improvements in the OIBDA through the year reflected ongoing efforts by the company to manage costs, while we realized benefits from reduced competitive activity. In particular, by switching commissions to revenue sharing scheme, we were successful indicating our payout for dealer commissions by more than 20% for the year. For the quarter, we did see significant decrease in the OIBDA margin compared to fourth quarter 2011. These reasons, which we have discussed previously, include higher dealer commissions due to catch-up through revenue sharing in second half of the year, increased advertising during the holiday period. The expansion of our retail network continued impacting inflation adjusted costs, including rent and utility costs; rising maintenance costs due to expansion of our network; and increasing sales and social contributions on the back of expansion of MTS retail chain, the upward revision of the compensations of retail stores employees and increase in personnel costs at MGTS that related to roll-out of GPON networks. OIBDA trends in our CIS markets were largely in line with the top line performance and competitive factors. In Ukraine, OIBDA reached RUB 4.9 billion in 2012. For the year, the OIBDA margin came in at 40.8%, an increase of 2.8 percentage points compared to the previous year. In Armenia, our OIBDA margin improved in 2012 to RUB 44.4 billion. In our fourth quarter 2012, the management delivered strong growth and profitability, increasing the OIBDA margin from 50.5% to 53.4%, due largely to their successful implementation of new tariffs and commercial policies. And in Turkmenistan, we see strong profitability with the resumption of operations in fall 2012. In fourth quarter, net income reached USD 547 million. Expenses below OIBDA were largely in line with previous quarters, though we did benefit with the USD 28 million ForEx gain and appreciation and depreciation improvements. For the year, overall net income decreased by 30% to roughly USD 1 billion due to the write-offs related to suspension of our operations in Uzbekistan. Without the write-offs, however, we would have realized an adjusted net income of nearly $2 billion, a 38% increase from 2011. Supporting this profitability is the 10% increase in operating cash flow compared to 2011 despite relative ruble weakness. In fourth quarter 2012, our total debt increased slightly quarter-over-quarter to USD 7.6 billion. We have no principal repayments during the quarter, but drawing or missing financing on the back of CapEx spend and currency fluctuations, mainly the weakening of the ruble year-over-year, translated into a slight increase in our net debt to OIBDA ratio at 1.3 multiple. We were also successful in reducing the average cost of debt by 70 basis points to 7.17%. Our debt level remained quite manageable and we have no principal repayments in 2013 and 2014. However, we believe capital markets both in Russia and abroad continue to favor MTS, and we may consider opportunities to refinance portions of our portfolio to lower our overall costs. We also are engaged with our lenders and the equipment suppliers to consider various financing schemes for our ongoing network improvements. Overall, the business continues to generate high amount of cash. Operating cash flow increased in 2012 by 10% despite ruble weakness to over USD 4.2 billion. Despite sustained level of capital expenditures, free cash flow for the year reached USD 1.3 billion, an increase of 25% compared to 2011. CapEx for the year came in in line with our guidance at USD 2.9 billion or roughly 23% of sales. In 2012, we continue the build-out of our 3G networks, which should reach 28,000 base stations, with over 90% sites connected via IP channels. We invested in backbone and backhaul roll-out in the regions, as well as in our GPON projects in Moscow, bringing the total length of our fiber-optic networks up to 142,000 kilometers. Significant investments were also channeled towards upgrading our IT infrastructure.

[Andrei A. Dubovskov:]

Thank you, Alexey. With the near completion of our aggressive rollout of 3G in 2012, we foresee a decrease in 3G-related CapEx in 2013. Also, we are current down investments in 3G network. We aim to begin the roll-out of LTE networks in Moscow and Russia's largest cities in 2013. We need to direct sufficient funds towards LTE network build-out to ensure we are able to offer our customers cutting edge solution and size commercial opportunities, which LTE provides. Coupled with the year-over-year weakening of the ruble versus the U.S. dollar, we expect to spend 20% of sales on capital investments. For the period 2013 through 2015, we expect cumulative CapEx sales ratio in the range of 18%, 19%. At this point, we consider our network competitive with any in the market. Our 2G base network remains unrealized [ph] at 41,700 base stations. By the end of the year, we could also boost 28,000 3G base stations, in which 90% are connected via our IP protocol. Over 90% of 3G base stations are HSPA+-enabled. While we have up to 50% of our base stations in larger cities already future dual cell HSPA, a technology that greatly increases performance on 3G phones and the key performance standard to ensure customers get the most out of virtuality and handset currently sold in the Russian markets. We are also now focusing on our build-out of LTE to meet license requirements and ensure that our customers can take advantage of this new technology. Our LTE TDD network in Moscow was launched in September, and we have already seen tens of thousands of customers try our networks. By summer, we will have LTE commercial launched in regions acquired by our licenses and expand into cities with large populations and communities and the services by high-quality fixed-line broadband Internet. We will start network build-out in 2 ranges

[Operator:]

[Operator Instructions] We can now take our first question. Cesar Tiron from Morgan Stanley.

[Cesar Tiron:]

Two questions from my side, please. On your 2013 EBITDA guidance, it looks a little bit conservative in light in what you've accomplished in 2012. Is that guidance mainly the reflection of a change in the revenue mix, or do you expect to see some slight pressure on your core Russian business margin? And if yes, can you say why? The second question would be on the CapEx. I noticed that there were some increase in your CapEx to sales ratio guidance for 2014 and '15. Can you please explain what has changed over the past 6 months, so you felt you had to increase this longer term CapEx guidance and explain if this is mainly due to the fixed or the mobile networks?

[Alexey V. Kornya:]

Thank you. This is Alexey Kornya. On OIBDA, we do indeed lower slightly from this year our guidance for the next year, but this mainly due to a change in the structure of our revenue. We do think that we'll have a higher share of retail business in our portfolio next year, which is a low margin. Also, we'll see some impact from our network expansion, which we undertook over the previous years. So these are 2 main factors. And the third big factor is a catch-up from dealer commissions, which we'll see in the next year comparatively to this year due to transition to revenue-sharing schemes. So these are 3 main factors which will basically contribute to slightly lower margin as we expect it, or stable slightly lower margin than we saw this year. As for CapEx guidance, we do slight upgrade our guidance on CapEx because we believe that LTE technology will come to the market faster than we previously expected as we see it from other markets because people are adopting these technologies quick -- adoption of customers of this technology is quicker than with the 3G case, so we see that will have probably accelerate our LTE development, and that's slightly reflected in our guidance summary -- or that's reflected in our slide guidance summary.

[Andrei A. Dubovskov:]

This is Andrei Dubovskov. Speaking about your question about CapEx to fixed or mobile area, of course, it's mobile area, of course it's 3G, first of all, and LTE network.

[Operator:]

We can now take our next question, Ivan Kim from VTB Capital.

[Ivan Kim:]

Two questions, please. One on the distribution side. So as you are staying in Euroset now and you have the strongest mono-brand retail network, what kind of implications you see for the markets in 2013? Previously, you said that change in distribution is one of the key facts for you, but now it seems that have actually probably the strongest footprint. And the second one, on the margin again for 2013, what kind of upside risks do you see for your margin guidance?

[Vasyl I. Latsanych:]

I will start responding. It's Vasyl Latsanych, CMO, on Euroset and retail sales. We were early enough prepared for any changes in the retail landscape in Russia, thus built up the strongest and the biggest network of retail stores across the country. At the moment, we're reporting 4,462 stores around Russia, with roughly 1,500 of franchise stores and nearly 3,000 owned stores. We believe with this -- leveraging this, we will be well positioned against any possible changes in our competitor's situation on the retail, sharing some networks, buying, selling, cooperating on other networks as long as the number of stores of our competitors stores does not increase dramatically. We also made some strategic preliminary alliances with other Russian national networks and also made ourselves very strongly positioned in the local networks. So we believe that all the preemptive moves which we actually started long before there was any kind of agreement reached by our competitors. On Euroset, we have at least a 0 base scenario because we don't lose anything on the sales. But I also think that we are even better positioned to gain something out of more higher-quality sales in the channels, but there will be less competition between the operators. As in our channels, we will clearly dominate even in those channels that are not our own or we don't control 100%.

[Ivan Kim:]

Sorry, but that's why I'm saying, so on top of what you named, you also are staying in Euroset as far as I understand, yes? So you have at least compared to VimpelCom, you have much stronger distribution footprints for 2013. I mean, how these...

[Vasyl I. Latsanych:]

I think I understood your question. We are not seeing it as a long-term situation. We are in negotiations with every network and every possible partner, including Euroset. The conditions are under negotiation. The fact that we are there is a legacy. It may change. We are not counting on it for the long term, so we are building an independent from Euroset situation for our retail network. The fact that we are there is a plus, but it might not last long. We understand that. We are realistically thinking about it.

[Alexey V. Kornya:]

And as for the second question, this is Alexey Kornya, we think in respect of the risks which might impact our margin guidance, these are competition and competitive -- overall competitive environment, if it gets tense. And second is overall inflationary environment in the market. If we'll see high inflation in the market, then specifically on those costs which are being driven by inflation for us.

[Ivan Kim:]

I actually meant upside risks to the margin guidance.

[Alexey V. Kornya:]

Well, upside risk is also the one related to competition. So if competition gets better or weaker, we'll definitely benefit from this. And second factor is higher consumption of data products, which by essence is high-marginal products. So if we grow faster than we expect, and than we saw in previous years, then we'll realize it in the margin.

[Operator:]

We can now take our next question. Alexander Vengranovich from OTKRITIE.

[Alexander Vengranovich:]

I actually have a question regarding the data revenues and the smartphone penetration network. We've seen that you've done a substantial progress in penetration of smartphones in 2012. At the same time, the percentage of the share of data revenues increased from around 8% in 2011 to 10% in 2012. What sort of a smartphone penetration in your network do you expect by the end of 2013? And also what sort of data revenue percentage do you estimate in your revenue growth and EBITDA margin guidance for next year? And probably, if you can elaborate going further, what is the saturation point in your minds for both, so for the share of data revenues in the future and for the penetration of the smartphones in the network?

[Vasyl I. Latsanych:]

This is Vasyl Latsanych, and I will try to answer that question. First of all, the smartphone penetration this month as we reported is around 23%. That very much depends on what you define a smartphone as in different markets, there is different methodologies. But we are, across Russia, counting it the same way and that is almost doubled since the end of the previous year. We believe that this approximately a 1 percentage point per month is the minimum growth rates for 2012 and may very well accelerate up to 1.5% in the year 2013, unless some other macroeconomical factors influence. At the same time, it very much depends on lower-priced handsets, smartphone handsets developing in the markets and appearing in great masses, like our smartphone last year that cost less than $100 on retail shelves was really booming, while we see other big manufacturers producing predominantly high-end very expensive devices, which is slowing down the growth in volumes -- in numbers of the smartphones, while showing very good results in terms of the smartphone sales revenues, which we are not so much concerned about. In terms of revenue of the data services, as you pointed out, we have grown last year. We believe that this will be just the beginning because we have been extensively building 3G network and have just started the 4G network build-up in 2012. So in 2013, I expect that growth to be significantly higher, but that would be really a forward-looking statement to say by how much. I would expect -- and we make every effort, including tariff plans, smartphone sales, data promotion to make sure that the data gets very well penetrated in the base. And at this moment, according to our knowledge, the penetration of the data is the highest in Russia in MTS base. But that is still away, unfortunately, from European standard limit, so we want to reach up to 40% or even 50% of smartphone penetration in the coming years, as we see it's very much possible in the European markets.

[Operator:]

We can now take our next question. Anna Kurbatova from BCS Financial Group.

[Anna Kurbatova:]

My first question is about one line in your P&L statement. Could you elaborate the USD 82 million amount referring to provision for claims in Uzbekistan? And also, my second question is about your mobile voice and messaging revenue trends in Moscow. You're saying, now we see very good numbers for messaging revenue, you have double-digit growth year-on-year. But maybe you could elaborate what trends you see, let's say, in traditional mobile revenue in such a well penetrated with smartphones market as Moscow. So whether you have -- you already see some pressure from OTT options or not?

[Alexey V. Kornya:]

Let me take the first one. It's Alexey Kornya. We did not change and there is no change in provision for Uzbekistan. Basically, there was only a change and so there is no change in impact on now being from Uzbekistan for which we reflected in our second quarter financials. We only change the split between impairment of our video and provision for claims which we reflected in our second quarter financials. So previously, there was a low amount for impairment. So in this -- in the final end-year results, we increased impairment value, and we decreased the provision for claims. However, overall, the total amount has not changed, and it equals to total book value of our assets in Uzbekistan. So whatever the development in Uzbekistan, it will be neutral. Negative development in Uzbekistan, it will be neutral for our financial statements.

[Vasyl I. Latsanych:]

As of the second part of the question, this is Vasyl Latsanych. Actually, we don't show the granularity of region by region in this report, and I don't have these numbers at my hands. But so it's more about how we see the situation generally. OTT was really always stronger in Moscow, as well as Wi-Fi was stronger in Moscow than in other regions. We have adopted our tariff plans and our behavior pretty long ago by selling big bundled plans, including our very popular MTS Maxi plan, which includes both messaging and data and, thus, guards us from the cannibalization of OTT players and OTT services in most populated places and most advanced and smartphone-penetrated cities like Moscow, Saint Petersburg, Yekaterinburg, Novosibirsk and others.

[Operator:]

We can now take our next question, Vyacheslav Shylin from Deutsche Bank.

[Vyacheslav Shylin:]

I guess I have only one question. Just wanted to ask you to clarify the comments that you made when talking about Slide #9, debt profile. You said something similar to -- that you are thinking of proactively managing your future -- well, the cost of funding by potentially reducing it by refinancing some debt with longer maturities. Is it -- is my understanding correct? And if yes, then what does it mean? Are you thinking of refinancing, exchanging your ruble and dollar loans that you have? Or are you actually thinking of doing something with the dollar bond as well?

[Alexey V. Kornya:]

Well, thank you for your question. We consider different options how we can optimize our debt portfolio. In particular, we are targeting at extending maturity of our debt portfolio since the -- it slightly decreased over the last 2 years through -- because it just comes naturally, maturity of our debt. And we are considering, as I said, different options. We still are giving preferences to ruble-denominated facilities. However, different options are possible.

[Vyacheslav Shylin:]

So just to get to narrow down the question, so it is mostly concerning the debt due '14, '15, '16, '17 at present and not the Eurobond, which is due in 2020, or including the Eurobond as well?

[Alexey V. Kornya:]

Well, it mostly relates to the debt 2015, '16, '17. We are not really considering anything related to 2020.

[Operator:]

We can now take our next question, Olga Bystrova from Crédit Suisse.

[Olga Bystrova:]

I just wanted to check your dividend policy. You have elaborated a little bit on the third quarter results about potential increase over the next 3 years. So I was wondering how your -- any of your thinking has changed on that. So that's one thing. And second thing, it looks like, if I calculated correctly, your voice revenues in Russia in the fourth quarter improved in terms of growth rates. I was just wondering what might have changed since the first 3 quarters of the year and how we should think about voice revenues in Russia going forward in terms of growth rates. And finally, if you could talk a little bit about, what are you seeing in the first quarter in terms of consumer behavior, how economy is affecting it, if at all, and whether subscriber trends in the first quarter for MTS and for the market have changed relative to last year.

[Alexey V. Kornya:]

Let me take the first one. We did not change our plans for dividends, so we confirm our intention to bring, for the consideration of the board, change in dividend policy, which will imply increased -- minimum increase of our dividend payout over the next 3 years by 25%. I say this is just the minimum. And this policy has to be considered together with the decision over the dividends for 2012 to be paid in 2013 until the end of February.

[Vasyl I. Latsanych:]

This is Vasyl Latsanych speaking about the voice revenues in Russia. Yes, we did see voice revenues improved, but that's mostly to the recomposition of the tariff plans. We generally see voice revenues being pretty flattening across the markets. And our most revenue growth comes from additional services, including bundling services like messaging, as I said before, and data and content services. In Q1, I don't really see any specific trends that I would be speaking about at this moment. No, definitely negative trends; generally, seasonal regular trends, showing us that we are within the guidance on most of the numbers and indicators.

[Olga Bystrova:]

Okay. And that also relates to subscriber trends for you relative to the market overall, right?

[Vasyl I. Latsanych:]

Excuse me, there was difficulty hearing you. Could you please repeat that?

[Olga Bystrova:]

Also, the question on the 1Q trends was related to subscriber growth for you relative to the market, let's say. Has any -- have any trends have changed from last year?

[Vasyl I. Latsanych:]

Oh, well, the trends on the subscriber growth numbers. First, the biggest trend on the subscriber growth numbers in our base is because of the decrease of the churn. So we have less customers churning. And with -- in a lower sales, we have growth in the base. We are very happily seeing the customers being more sticking our base, using more services. The ARPU is going down. The MOU is going down -- going up, sorry. The ARPU is going up. The MOU is going up. And at the same time, the churn is going down. So these are very healthy trends. At the same time, we see our competitors making some higher sales sometimes, but this is very seasonal, and we will not comment really on some activities. There is no seasonal increase or decrease of overall sales numbers. We only know that, at this moment, we are growing healthily, and our churn is very, very low, and we are happy with that.

[Operator:]

We can now take our next question, Ilya Rachenkov from Investcafe.

[Ilya Rachenkov:]

I would like to ask a question about your dividend policy. Previously, you told that you wanted to peg your dividends payments to cash flows. Can you give us some updates on this question? And the second question is can you possibly give us some approximate breakdown of CapEx for 2013?

[Alexey V. Kornya:]

As far as the dividend policy is concerned, there was the -- we do not plan to have any direct coloration or any direct pegging. Our understanding that overall level of dividends will be defined, taking into consideration a few factors, those including our cash flow and our leverage positions. More details will be upon our approval of our dividend policy in April. And as for CapEx, as far as breakdown for CapEx 2013 are concerned, the big chunk of the investment, which is about 40%, will go into 3G in our existent infrastructure. Then we have a significant portion coming through fixed business, which is about the same share of the overall CapEx, and the rest coming into transport network with more backhaul, some IP and LTE projects.

[Operator:]

We can now take our next question, J.P. Davids from Barclays.

[John-Paul Davids:]

Two questions, please. The first question is on your LTE rollout. You mentioned during the presentation high network costs impacting margins looking out. How do you think the LTE rollout or the acceleration of LTE will impact that, particularly as we look out to sort of 2016 and beyond, do you start seeing margins improve there as the network is more efficient to run? And then the second question is on your Moscow fixed service. You mentioned in the presentation converged offerings being launched in 2013. Is this converged with mobile? And if so, will the converged offerings be marketing-led or pricing-led?

[Aleksander V. Popovskiy:]

This is Aleksander Popovskiy. I will answer on the rollout and the consequences for margins. So mostly, we don't expect big influence for our margins from LTE rollout, especially in the first years, when the most of LTE sites will be co-located with 3G, so there is not a big growth in landlord -- in rental expenses towards landlords. And the same is for transport because, mostly, we have our own transport, and we've just undertaken -- undertook a big modernization of transport system, both intercity and the inner city. So there's no reasons for big impact on margins, at least in the next couple of years, from this side. Long term, it is difficult to say because, of course, long-term LTE will mostly evolve as a small cell concept. And with a small cell, it can be -- potentially doing some savings on rental because it's, anyhow, a different scheme so less harm towards real estate and the other things. So it is difficult to predict at the moment what will be the influence in 3 to 5 years from LTE. On converged offerings in Moscow, so maybe I can transfer this to Vasyl.

[Vasyl I. Latsanych:]

This is Vasyl. I will answer the convergent offers. At this moment, we are selling convergent offers of broadband and television because -- sorry, broadband, television and fixed telephony. The mobile telephony is not included at this moment because of regulation around MGTS. At the same time, we are considering some of the cross-promotions from both sides, which have to be legally very, very accurately constructed. That will most likely happen end of this year, next year, as we go further with both legal and bore -- more network expansion. In terms of the leading pricing, by leading, would we mean the most expensive ones? Yes, if it's regards to the high-end technology, GPON high speeds. But we have to understand that the market is very highly penetrated. And even with the superior GPON technology, we have to be competitive in those places, where there are already a couple of players battling for subscribers. So we will be on par or slightly above the market, but that's after the initial entry phase.

[Operator:]

We can now take our next question, Igor Semenov from Deutsche Bank.

[Igor Semenov:]

I have a few follow-ups. On the smartphones, can you split out the Androids and Apple's iOS from the rest of the smartphones? So in your total base of 22%, 23% penetration, what is the Android and iOS? Also, I just wanted to understand better the message on the CapEx increase. I mean, previously -- you're now saying that part of it is related to LTE developing faster than expected. Could you explain a little bit better why is this happening? And does it mean that in the future years, you would expect CapEx to drop off more quickly? And also, a follow-up on the gross sales and churn. I mean, quite frankly, I don't think 11% churn per quarter is small. I mean, it's still very high. I mean, it's decreasing, but it's still very high relative to other markets. So can you talk a little bit about the -- your expectations for this year? Do you think there will be a further reduction in churn? Are you seeing this 11% per quarter is sort of sustainable? And finally, on Uzbekistan, there were still some costs involved in Q4. Do you expect further costs in Uzbekistan in 2013, or this is it?

[Vasyl I. Latsanych:]

Thank you for the questions. I will take 2, the first and the third one. So the first one was in the smartphone. The split in Android and iOS is very simple, it's pretty much following the worldwide tendencies, except for the United States. As we all can see, Apple is not doing a good job in Russia, and their share in Russia is not growing substantially. They are angling somewhere in between 12% and 14% in our base, which we see below what it should be if the job was done properly, while Android is very rapidly increasing its share by more than 2% per month, leading to about 40% in total. The rest is composed of Symbian, Windows and other small systems. We must admit that there is the highest churn from Symbian-based phones, even the late Nokia Symbians to Android. But recently, we see some uplift in Windows, especially with the new Windows 8 platform, Windows-based phones. The question about churn, just -- the question about churn is very simple one. You have to compare apples-to-apples. Comparing our numbers to Russian market, you see that they are outstandingly and substantially and consistently low. We can say that in Ukraine, our churn is much lower than in Russia, but the market composition in Ukraine is completely different. So market-wise, this churn we consider to be very good and still unchallenged --

[Andrei A. Dubovskov:]

It's Andrei Dubovskov. I just want to remind you that in 2012, we've had the lowest historical churn, speaking about last 5, 6 years, 42.7%.

[Aleksander V. Popovskiy:]

On the LTE rollout, Aleksander Popovskiy, I will answer. Actually, I could have really -- I was shortly told, so there, we expect that the catch-up of LTE technology would be much faster than that of 3G and the UMTS because most of our customers are already used to data, so they know modems, they know touch screen, they have tablets and other things. So it is not something that have had to be invented as it was with the coming of UMTS. And we took 3 to 5 years to learn all the things, to really enable all the advantages of this technology. So with LTE, we don't have this problem. Our customers are really urged, hungry for data. And we see examples from other markets like LTE champions, for example, like Korea, where they really have a decline of 3G traffic towards 4G. So we see that LTE terminals are introduced into market much faster than what we expected earlier. So we already in the Russian markets have around 10 different models at the moment, which most of them are high end, but the number will grow significantly. You should understand that our networks will be commercially available mostly at the end of this year and beginning of the next year, when terminals will already come at a pretty affordable price, as we expect. So in terms of CapEx influence, this -- we don't expect a huge impact on CapEx because, of course, we will build less 3G-based stations, first of all, and this will give us some opportunity to rollout 4G more. This technology is more capacity-effective. And what is very important is, in particular, for Russian market then, that for LTE, we also have 800 band available here, which gives us much higher coverage than that of 3G, where we only have in most regions, except maybe a couple of them -- except a couple of regions, we have only 2.1, which presumes more base stations for the same coverage. So with the LTE, we have more efficient technology in terms of capacity and more efficient frequency band in terms of coverage. So LTE wouldn't be that expensive like 3G, and LTE will also -- as I already told, will be based on the same backbone, which we build for 3G.

[Alexey V. Kornya:]

And on the fourth question as far as costs for Uzbekistan is concerned, in the second half of 2012, we ran approximately about $10 million -- $5 million to $10 million per quarter costs mostly related to rolling down our duration of paying people salaries and conserving our networks. However, end of this -- end of last year, beginning of this year, most of the people were dismissed -- conservation of network was completed. So - and basically, we run out of our cash in Uzbekistan. So that we will not see any cessation costs related to Uzbekistan in 2013 further on, other than the legal costs.

[Igor Semenov:]

Okay. But can I go back to CapEx in LTE? I mean, the previous messages were that the transition to LTE does not increase CapEx because radio equipment comes LTE-enabled, so you just need minor software upgrades and that's it. But now you're saying that there is an increased CapEx because of LTE. So why is that? Is it because you need more sites to provide proper coverage or -- and does it mean that as you build out, you bring forward CapEx? Does it mean that it'll drop off faster after 2015?

[Alexey V. Kornya:]

Yes, I think that the message was not exactly the one which you referred. We were not -- we were never saying that LTE CapEx is basically nonexistent because of single around [ph] and so on and so forth. We were saying that it is -- as per a base station expense, it is lower than what we saw because of backbone and so on and so forth. However, still, there will be quite a CapEx related even for base stations. Even though it is lower than in 3G and 2G, it will be there. So -- and what affects our CapEx is our mission on how quickly we do rollout of our LTE. And we are just still upgrading our CapEx from what we previously indicated.

[Operator:]

[Operator Instructions] We can now take our next question, Evgeny Golosnoy from METROPOL.

[Evgeny Golosnoy:]

I have a question regarding your dividends, future dividends. You mentioned that they might be rising 24%, 25% on a somewhat, say, 3- or 5-year basis. How is it going to work? Are you going to make a onetime increase on the index -- dividend annually, or it's going to be sort of 5-percentage-points increase in dividends every year?

[Alexey V. Kornya:]

Well, the exact split over the next 3 years of dividends payout will depend on free cash flow and leverage ratio. We do expect some increase already this year. However, overall, our policy, as we stated -- or our proposition to the board is that over the next 3 years, we will pay at least 25% more than we paid before. The exact composition will be decided each year by the Board of Directors.

[Evgeny Golosnoy:]

Yes, but that's why I'm asking. I mean, I was under an impression that, originally, you meant that the 24% increase or 20-something percent increase would apply to this year's dividend. But now you are sort of referring to a 5-year period or whatever. So it's going to be some percentage increase, like 10%, 15%, whatever every year, or it's just onetime?

[Alexey V. Kornya:]

Well, we cannot -- I mean, our expectation that it will be a certain amount per share which we indicated at least minimum. However, we are not yet have visibility to tell you what will be the level of dividends 3 years away from this -- from today. So sorry, but we cannot give you that level of granularity.

[Operator:]

And we'll take a follow-up question from Anna Kurbatova, BCS Financial Group.

[Anna Kurbatova:]

I actually wanted to ask about -- again, about your EBITDA margin guidance for 2013 and the implementation of -- implication of the introduction of MNP in Russia. So as you -- taking into account that the principle should be introduced in Russia from December 1, what should we expect in terms of additional pressure on your EBITDA quarter-by-quarter? So would you expect this additional cost to fall into one certain quarter, let's say, third this year, or there'll be additional costs spread more or less equally?

[Alexey V. Kornya:]

As for impact of MNP over our EBITDA margin, we do not foresee any impact for this year. As you correctly pointed, the introduction of MNP will be effective very late this year or early next year. Thus, there will be no impact for us on the margin. There will be minor impact in our CapEx. However, this is not of the size to affect our guidance and overall outlook for CapEx.

[Aleksander V. Popovskiy:]

If just looking a little bit on MNP, so maybe, there is some capital expense this year. In terms of operational expense for technology as such, there was no big expenses. As far as I understand, it is planned to finance MNP database from government funds, like from Universal Service Fund and other funds. So we will not pay directly for this database management. And there can be some effects probably from the marketing side. But as we mentioned earlier many times, we don't expect big impact from MNP on the market. So we don't expect that more than 5% of people will use it in the near future.

[Anna Kurbatova:]

Okay, then it means that to be 100% prepared for MNP implementation by December 1, your additional costs will be mainly on the CapEx side, and that's it, yes, this year?

[Aleksander V. Popovskiy:]

Yes, 100% on the CapEx side. No operational expense for MNP introduction. We don't have even an idea how it [indiscernible].

[Operator:]

We can take a follow-up question from Olga Bystrova from Crédit Suisse.

[Olga Bystrova:]

Can you talk a little bit about spectrum -- a discussion in the press and within the government about spectrum frequency tenders and licenses that has been going on, as well as a potential discussion on payments for technicality. Just where that discussion stands, what could be the implications for the licensing costs or spectrum costs in Russia, if any? The second sort of -- a sort of a follow-up, you haven't really talked much about the financial services that you obviously launched with the acquisition of MTS Bank. What is currently the percentage of revenues that you generate from financial services, if you're ready to operate on that? And finally, just a small question on how are you expecting to price LTE data given that you started talking a bit more about LTE -- a bit more aggressive about LTE deployment now?

[Aleksander V. Popovskiy:]

Okay, about the spectrum regulation in Russia. So yes, we expect some changes in the regulation. The most things -- the things that we mostly expect is spectrum sharing, of course, because we really consider using this opportunity when it will come to the market. Our means of communication says that it could be introduced this summer. So we see this as not very likely, but, okay, they are very -- they're really sure, so maybe we can trust them. And the other thing that they want to introduce is spectrum auctions, but it is very speculative to say how -- what will be the starting price and how it can potentially influence because there are 2 problems here. First of all, there is not much spectrum available for those auctions. And it is really difficult to understand how, without fully chameleon spectrum for military use, for example, you can introduce the spectrum for an auction. So it is not likely. But there will be some pilot auctions maybe this year for some minor bands of spectrum for 2G. And then we will see how it works and what is the price level. Frankly speaking, we don't expect this to be very high because of the limited number of spectrum and because most of the spectrum that is available for mobile communications in Russia is available on the principle of secondary usage. So you basically have no guarantee that in each particular place, this will -- the spectrum will be clean from government authorities. This is -- so your question was very broad, so we can actually talk for long on this. If you somehow focus it, then we can answer. In terms of bank services, I'll transfer you to Vasyl.

[Vasyl I. Latsanych:]

This is Vasyl again. The point is that we do not consolidate, anyhow, the bank revenues. And we are not, at this moment, in a position to comment what the revenues of specific services of the bank are. At the same time, we are looking forward to have our share of profits of the business that we have together. The profits were not yet achieved, so we only comment on the general numbers, on customer numbers that we have. And at this moment, we don't have the visibility to further details on this project.

[Andrei A. Dubovskov:]

Speaking about this question, it's Andrei Dubovskov. I just want to say that, in my opinion, I think they all agree, if really you establish different price between LTE and 3G technology in the market, we believe that our clients need to have equivalent pricing for all technologies, and it does not depend on technologies issue in Russia. So it will be -- really, market price, it will be approximately the same price like in 3G network. And so I hope it will be a success in this market. Thank you.

[Operator:]

We can now take our final question, Yana Kuznetsova from Sberbank.

[Yana Kuznetsova:]

I have just a small question on your SG&A line. Could you please tell us what stays behind the 21% increase in administrative and general expenses?

[Alexey V. Kornya:]

Well, that mostly relates to increase in selling and compensation on the back of growth of our EPL network and change in taxation for social taxes.

[Operator:]

We have no further questions.

[Joshua B. Tulgan:]

Thank you, operator. Ladies and gentlemen, thank you very much. We welcome you at any time to contact our Investor Relations department for any further questions. A webcast of this discussion will be available on our website, if you wish to replay the call. In the meantime, we appreciate your interest and wish everyone a pleasant day.

[Operator:]

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.