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Edited Transcript of MFON.MZ earnings conference call or presentation 16-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 & FY 2016 MegaFon PAO Earnings Call

Moscow Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of MegaFon PAO earnings conference call or presentation Thursday, March 16, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dmitry Kononov

MegaFon PAO - Director for IR & M&A

* Sergey Soldatenkov

MegaFon PAO - CEO

* Anna Serebryanikova

MegaFon PAO - COO

* Vlad Wolfson

MegaFon PAO - Chief Commercial Officer

* Gevork Vermishyan

MegaFon PAO - CFO

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Conference Call Participants

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* Alex Kazbegi

Renaissance Capital - Analyst

* Roman Arbuzov

UBS - Analyst

* Herve Drouet

HSBC - Analyst

* Ivan Kim

VTB Capital - Analyst

* Sergey Libin

Raiffeisen BANK - Analyst

* Igor Goncharov

BCS - Analyst

* Olga Bystrova

Credit Suisse - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the MegaFon FY 2016 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Dmitry Kononov, Director of Investor Relations and M&A. Please go ahead.

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Dmitry Kononov, MegaFon PAO - Director for IR & M&A [2]

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Ladies and gentlemen, on behalf of our Board of Directors and management, welcome to MegaFon's investors and analyst call dedicated to financial results for the fourth quarter and 12 months of 2016. With that, please allow me to introduce participants on our side; our CEO, Sergey Soldatenkov; our CFO, Gevork Vermishyan; our COO, Anna Serebryanikova, Chief Commercial Officer, Vlad Wolfson, Director of Accounting and Reporting, Gagik Grigoryan and myself as Director of IR and M&A.

Before beginning our discussion, I must remind you that some statements made on this call relating to future events, conditions or circumstances may be considered forward-looking statements. By their very nature, forward-looking statements may involve uncertainties that could cause the outcome of matters covered by such forward-looking statements to be different from the outcomes expressed or implied by such forward-looking statements. We give no assurance that the outcomes anticipated by such forward-looking statements will occur and expressly disclaim any obligations to update such forward-looking statements. We allocated one hour for this call to present four agenda items and to answer any of your questions. Key highlights for 2016 will be presented by our CEO, Mr. Soldatenkov. Network infrastructure development, shared services developments, update on first our Company, network and connectivity improvements, and 4G developments will be presented by our COO. Commercial developments will be presented by our Chief Commercial Officer, Vlad Wolfson; financial results, liquidity, balance sheet, and outlook for 2017 will be presented by our CFO, Gevork Vermishyan. With that, I'm turning over to Mr. Soldatenkov.

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Sergey Soldatenkov, MegaFon PAO - CEO [3]

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(interpreted) Good afternoon, ladies and gentlemen. I'm very happy to welcome you on our call to present MegaFon's results for 2016. I will now discuss the year's key highlights as well as our key initiatives and projects and my colleagues will then follow with a detailed discussion of our operating and financial results.

I'm happy to report that despite a highly competitive environment in the Russian market, MegaFon was able to deliver on its three key targets of 2016, that is revenue, OIBDA, and CapEx. The growing pressure from tough competition -- during the year, we had to reduce prices for services while increasing spending on both subscriber acquisition and retention and network development. Thus MegaFon's financial performance for the fourth quarter and full-year 2016 closely reflect the market situation. Our consolidated net revenue remained broadly flat year-on-year at RUB316 billion. The growth in data revenue slowed down and our OIBDA margin declined to 38.3%. In this uncertain environment, we took a number of initiatives aimed at strengthening our current market position and which we hope will have a positive effect on our financial performance going forward.

We shifted our focus away from continuing to aggressively build our subscriber base and made it our priority to ensure existing customer loyalty by improving the customer care quality and delivering customer value. We believe at present, the prices for certain mobile services are at their lowest economically viable levels that substantially limits their monetization potential. That is why at the end of December [2016], we made a decision to introduce limits in those of our plans that had previously been unlimited and to revamp our bundled offerings. Last year, we continued implementing a number of important projects aimed at improving our operating efficiency such as the unified billing that we have mentioned already, the Shared Services Center; an update on these will be presented by my colleagues in particular by Anna Serebryanikova.

Our signature event for the period was the acquisition of a controlling voting stake in Mail. Ru Group. The transaction was closed in early February this year, receiving an overwhelming support from our shareholders. This step will enable us to transform our business and evolve from a mobile operator into an integrated digital communications company. The acquisition will also enable us to jointly with Mail. Ru develop brand new products and services for our customers, which will combine mobile data and digital technology capabilities. We hope that these services will open a new chapter in the history of both MegaFon and hopefully the entire telecom market in Russia.

In 2016, we remained committed to ensuring regular distributions to our shareholders. In December 2016, the EGM approved the dividends in the amount of RUB15 billion. Thus, total dividend for 2016 amounted to RUB50 billion, which is in line with the 2015 amount. I'm also pleased to report that in March this year, MegaFon was chosen as an official provider of telecom infrastructure and additional services at all locations for the events of the FIFA 2017 Confederations Cup and FIFA 2018 World Football Cup. MegaFon will carry out construction, preparation, and operation of all engineering and telecom infrastructure at all locations for the international sports events. MegaFon will build test 5G zones and will offer guests and teams super-high speed mobile Internet and high quality network coverage.

I would also like to mention that we are in the final stages of creating a new development strategy for the next three to five years including a review of how we approach our distribution network. We hope to be able to present the updated strategy at a dedicated event at the end of May. That is it from my side and with this, I'm turning over to Anna Serebryanikova, our COO.

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Anna Serebryanikova, MegaFon PAO - COO [4]

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Thank you, Sergey. Good morning, ladies and gentlemen. I will start with a short update on the key projects which allow us to increase our operating efficiency. In 2016, we continued to implement our unified billing system project, which will, upon completion, replace legacy billing systems which we have currently in all our branches. Unified billing project will allow us to decrease the time to market and to make targeted offers to our customers in an efficient way. The unified technical solution is based on an open architecture with capacity to further scale up and expand the system going forward. In 2016, we achieved significant progress in rolling this system. We are start sales of our B2C mobile customers and B2B sales in more than 200 our retail stores across the country. Improvements of implementation process have already resulted in [shorter terms] of launch and rollout of new products.

Turning to the next slide, it's another project we are proud of. In July 2016, we launched our Shared Services Center, which is aimed at optimization and unification of our back office functions including accounting, financial control, treasury, procurement planning, logistics, HR, and some others. This will in turn enhance our business scalability. We have opened a fully controlled Shared Services Center in Samara and we are currently in the process of transferring all branch offices and all our subsidiaries to this center and intend to finish this process by the end of 2017. As of now, three of eight our branches and six subsidiaries are already working from the Shared Services Center. Upon completion in 2018, we intend to start providing services to third parties, our B2B clients, which will generate additional revenue for our Company.

Turning to the next slide, as you remember, in September 2016, the Extraordinary General Meeting of shareholders approved the spin-off of MegaFon's towers into a standalone company, First Tower Company. MegaFon plans to transfer more than 15,000, almost 16,000 this year towers to the tower company. Through this, we will create a market player with the best tower portfolio in Russia, simultaneously MegaFon will improve its operating efficiency via focused management of this tower portfolio. We expect to achieve a better return on CapEx and incremental gains from active involvement in a tower leasing market. You can see the key project implementation stages on this slide. The first stage is the actual spin-off of the tower infrastructure and related assets to the tower company, which is expected to be completed in summer 2017. According to our current plans, the First Tower Company will be ready for sale in 2019.

On the next slide, I'd like to share our results in the network infrastructure development. We remain focused on improving the coverage and quality of our mobile telecommunications network, further network rollout and modernization. We also strengthened our fiber optic infrastructure, which supports further rollout of our mobile network. Our fiber optic infrastructure is the largest network among Russian mobile operators. During the year, the total number of base stations of all types increased by 9% year-on-year and exceeded 143,000 base stations. Also, the number of 3G and 4G stations grew by 16% to almost 76,000. Through organic construction and modernization of our network, we increased the total length of our fiber optic network by 5% to more than 190,000 kilometers and increased the percentage of base stations connected via fiber to 65%. We also entered into long-term leases on fiber optic lines in order to provide our customers in hard-to-reach regions in the Far East with high-quality services.

On the next slide, you see the improving of the results of our activities on improvement of quality of connections and provided services for our clients. This is our key focus. During the year, we identified the needs of our subscribers in terms of network quality throughout the number of user satisfaction surveys and analysis of customer requests to contact centers. As a result, we introduced a key quality indicator system. We implemented serious solution additions to our GNOC facilities. In particular, we upgraded management and monitoring systems used at our GNOC and also adopted the performance management system which is aimed at registering usage and quality metrics of provided services.

During the year, we continued to introduce solutions adding new functionality to our radio access network and optimized the parameters of backhaul network sections to improve the end-to-end quality metrics of our services. In 2016, we introduced the RAN Quality of Service technology, which enables a better distribution of 3G and 4G network resources among subscribers and services depending on the type of service. We implemented LTE 1800 as an additional layer and also continued to develop other layers depending on our customers' needs and regional situation. I'm also proud to say that MegaFon was the first operator in Russia who launched the full-fledged commercial voice over LTE network. It enables us to provide our subscribers so far in Moscow with high quality of voice services and faster call setup, reduced [cost] of Internet sessions when making a call via the LTE network and we plan to continue this rollout in 2017. All the efforts undertaken in 2016 allowed us to improve key connectivity quality metrics, seriously reduce the dropped call rates and increase the call setup success rate.

A few words on the 4G network developments of the fourth quarter. In the fourth quarter, we remained focused on the development of our 4G network infrastructure to maintain high-quality and high-speed of mobile Internet connections. As of the end of the year, the 4G network included more than 30,000 base stations. Our 4G services are available now in 82 regions of Russia while services of high-speed Internet LTE-Advanced are available in 27 cities and regions. The amount of 4G traffic generated in the fourth quarter increased by 60% year-on-year and accounted to 46% of the total mobile data traffic. The increase in traffic was achieved due to our attractive offerings, active marketing promotions, and growth in the number of 4G devices registered in our network through more than 10 million units at the end of 2016. With this, I'm turning it over to Vlad Wolfson, our Commercial Director, who will talk about further development of the product. Thank you.

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Vlad Wolfson, MegaFon PAO - Chief Commercial Officer [5]

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(interpreted) Thank you, Anna. Good afternoon, ladies and gentlemen. Let me update you on the performance of our digital services that are becoming increasingly popular as well as B2X segments in 2016. I will start with MegaFon TV. Over the year, MegaFon TV's audience more than doubled to 1.6 million users at the end of December. More than 70% of active MegaFon TV users also use one of our all-included bundles. These are our core tariff plans and approximately 80% of active MegaFon TV users use their smartphones or tablets to consume the content. MegaFon TV offers our subscribers access to over 130 TV channels and a vast HD content library from largest Russian copyright holders and content providers. For example in 2016, MegaFon TV users had the unique opportunity to access the premier content of CTC or SCS entertainment channel before it was available to the free-to-air viewers. We intend to continue this practice in 2017 as well. I'm happy to report also that in 2016, MegaFon had approximately 9% of paid OTT content market across the nation.

On the next page, I would like to give you more color on our new MegaFon card in 2016. The card is currently available for our users across Russia. In the three months of operating at a federal level, over 400,000 cards were issued and [approximately quarter of] cardholders used the card actively for regular transactions. This is our key customer base. Total turnover at the end of 2016, that is essentially in the four last months of the year was approximately RUB2 billion. This testifies that MegaFon cardholders actively use the card for payments including for MegaFon services. As of today, total turnover is already in excess of RUB4 billion, which means that we were able in January, February 2017 to double the turnover. At the year-end, average monthly turnover per card was RUB11,000. We have launched the product only recently and our advertising campaign is currently ramping up, but we are satisfied with the initial result.

Another new product of ours is in IoT. From December 2016, Russian consumer electronics retail stores and MegaFon's branded retail stores in Moscow, St. Petersburg, and [near Catherineberg, current devices] under the new Life Control brand. Life Control is a unique ecosystem of devices in several product ranges: Smart Home, Fitness, and Geo-tracking. The system is developed by our subsidiary MegaLabs and includes a wide range of sensors that can be combined for individual solutions. MegaFon offers an affordable starter kit of devices that can be supplemented by other Life Control devices and later by devices from other vendors as well. All sensors are plug-and-play. The system is controlled through a mobile app available for iOS and Android smartphones. I'm confident that in a few years time the Life Control gadgets will become a household essential much as smartphones are today for modern people.

In the next page, we will discuss the B2X segment development in 2016. The B2X segment continued to demonstrate strong operating and financial performance. Total B2X customers grew by 7% year-on-year and reached almost 300,000 legal entities while the number of B2X mobile users grew by a record 20% and exceeded 10 million. Total B2X segment revenue was up by 8% while B2X mobile revenue was up by 6%, higher than the mobile revenue growth rate across the Group. According to TMT Consulting, in 2016, MegaFon ranked second in B2X mobile revenue with a market share of 33.3%. Going forward, MegaFon is looking to move from competing on price to competing on quality of services. Over 2016, we completed and initiated several large and important projects in [B2C] and B2G segments. We signed a contract with GLONASS satellite navigation system to act as a full-MVNO partner. We started a project together with Rosseti national power grid company to install in 300,000 power stations intrusion monitoring and telemetry systems.

In 2016, MegaFon provided comprehensive telecommunications and engineering support services for two major events, the Russia-ASEAN forum in Sochi in May and at the Confederation Cup Russia Draw Procedure, part of the preparation for the 2018 Football World Cup. I'm also pleased to report that MegaFon won the tender and signed a contract with Russian Federal Treasury to ensure broadband and mobile communications services. One of our focuses in 2016 continued to be M2M and as a result, our M2M subscribers were some 3.9 million SIM cards, which made MegaFon take some 40% of the market. We implemented the unique functionality of geo-tracking and new HR and car fleet monitoring technology. We also were the first in Russia to pilot test the narrowband IoT. With that, I'm turning it over to our CFO, Gevork. Thank you.

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Gevork Vermishyan, MegaFon PAO - CFO [6]

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I will start with traditional overview of our earnings trends in fourth quarter and full-year 2016. Our total consolidated revenue for fourth quarter totaling RUB81 billion, decreased by 0.8% year-over-year. Revenue was impacted by 3.8% decline in wireless revenue as a result of decrease of traditional voice services. However, we continue to see strong growth in revenue from sales and equipment which increased more than 28% and we also saw stabilization of growth rates in wireline revenue in fourth quarter where revenue was up by 1% though it is important to highlight that fixed revenue in B2X demonstrated on a yearly basis [solely double-digit performance]. On an annual basis, our consolidated revenue was up 0.9%, which is completely in line with the guidance. OIBDA wise, in fourth quarter, our OIBDA declined by 1.6% year-over-year to RUB29 billion. Our OIBDA for the full-year 2016 totaled RUB121 billion which was also above our full-year guidance.

I would like to stress out that we reported adjusted OIBDA, which is presented net of non-cash impairment charge in the amount of RUB3.4 billion relating to the goodwill allocated to the broadband Internet CGU which is NetByNet. Our adjusted OIBDA margin in Q4 was down by [0.3%] year-over-year, it came down to 35.7% while full-year OIBDA margin achieved 38.3%. Our net income decreased by 42.3% in the quarter and it was largely because of this RUB3.4 million non-cash impairment that I mentioned before and elevated D&A. Important to say that the adjusted net income for this NetByNet impairment shows over 20% increase on a quarterly basis.

Next slide, the fourth quarter is traditionally a quarter with [higher CapEx] numbers as you know, this year was not an exception. In Q4 2016, we spent [approximately third] of our annual CapEx budget and as a result, succeeded in delivering on our full-year targets as well. Our actual CapEx 2016 came to RUB65.6 billion, which is [RUB2.4 billion] below the upper range of the full-year guidance. It's important to say that despite this decrease in CapEx, we've completed all natural KPIs in our technical plan of development and strong ruble helped us to deliver lower CapEx. Meantime, our unlevered free cash flow on a quarterly basis was up 2.1%.

On the next slide, I will speak about revenue components. Q4 2016 wireless revenue was down 3.8% mainly as a result of continued contraction in voice. Due to growing popularity of bundled tariffs, which were revised in spring last year in response to the market competitive pressures and increasing number of subscribers using mobile Internet and shifting to digital technologies as a result of growing popularity of messages and OTT services. Our mobile data continued to be one of the largest contributors to total revenue with a share of more than 26%. The growth rates in mobile data stabilized and were standing at 1.9% in Q4 2016. We saw a continuing upward trend in data user base, which increased 5.8% to 31 million customers.

Fixed line segment continued to perform well, but stabilized in fourth quarter at 1%, but as I said, one of the reason was -- I will say that one of the reason was equalization of comparable base. In 2015, there was an non-organic portion of GARS revenue. And it's important to say that on the annual basis, the fixed revenue is showing good results. Sales of handsets and accessories continued to show strong growth rates, increased 28%. The revenue in this segment benefited from higher demand from more expensive and high-end devices, which were marketed along with attractive bundled offerings. The average price of data-enabled devices sold in our MegaFon retail stores has increased by 85%.

Few words about the customer base on the second slide. As said, previously it has increased by 1%, reached 75.6 million users. At the same time, our data user base continued to increase at a healthy rate of 5.8% on the back of higher adoption of data mobile devices coupled with our data offerings within bundled tariffs. Our data user base now accounts for almost 41% overall subscriber base compared to 39% a year ago.

Now, I would like to give you an update on our KPIs. The expansion of data user base, higher data allowances increased sales of data-enabled devices and further development of our network allowed us to increase data usage per customer to more than five gigs per month in Q4 2016, which is increasingly high, 39% higher than the year ago. Despite higher data usage, our data ARPU decreased 4.2% year-on-year due to lower price per megabyte, an increasing share of users choosing bundled tariffs with higher data allowances. Profitability wise, which is on the next slide, adjusted OIBDA, net of non-cash impairment charge has decreased by 1.6% year-on-year. The key reason was the decline in gross profit by 3.3% as a result of the increased cost of services mainly attributable to higher sales of equipment and accessories, which posted strong growth rates and accounted for 10% of the total revenue versus 8% year ago. The increase in cost of services was partially offset by lower SG&A costs.

Sales and marketing expenses have been under control, they decreased this quarter 5.4% due to lower advertising spend and smarter dealership spend. G&A costs were down 5.2% due to lower employee benefits and social charges, they went down 11.5% and decreased radio frequency fees by 25.7%. As a result of change of Roskomnadzor methodology relating to frequency charge calculation, which was introduced in late 2015. Few words about our balance sheet. At the end of the quarter, our leverage stood at 1.63 times [net debt-to-EBITDA] mainly as a result of the increase in long-term portion of total debt and lower OIBDA 2016. We believe our leverage remains at the upper-end of acceptable range. Over one quarter, we continue to increase the portion of cash held in USD in order to mitigate the risks associated with the execution of our foreign exchange denominated liabilities. So this portion grew from [83%] to 92% sequentially. Here, I'm glad to say that our debt structure and leverage led to an upgrade of the outlook on Russian sovereign rating by Moody's from negative to stable. On next slide, you see our debt portfolio structure as well as of the year-end. As you may see, over one year, we have managed to significantly redesign the structure of our debt portfolio to mitigate risks associated with this refinancing and repayment.

Now, over 90% of our debt portfolio is denominated in rubles, matching our revenue mix, significantly extended average portfolio life, now approximately half of our debt becomes due payable in five years or later, which is a comfortable situation. In early 2017, we continued to optimize our debt. In February, we signed an agreement with Sberbank, a total amount of RUB35 billion with a maturity in 2024. The funds and the proceeds were used to finance the purchase of economic interest in Mail. Ru. With this agreement, we also modified terms under three existing facilities, [jumbo] facility totaling RUB97 billion including lower interest rates and revised early repayment terms. Following that, in March this year 2017, we executed a partial refinancing of the existing ruble debt facility with Alfa-Bank and UniCredit, a total amount of RUB15 billion and also managed to significantly reduce interest rates and extend maturity.

The conclusive slide in my presentation speaks about guidance traditionally. We expect our revenue to be flat or low-single digit growth rate in 2017. We also anticipate our adjusted OIBDA to be in the range of RUB112 billion to RUB118 billion and the decline in OIBDA will be offset by a reduced CapEx guidance, which now stands in the range of RUB55 billion to RUB60 billion as opposed to RUB65.6 billion demonstrated in 2016.

It is important to refresh here that this forecast represent standalone numbers, they don't include financial results of Mail. Ru and financial forecasts, but based on Mail. Ru guidance, they expect a standalone revenue in 2017 to grow 16% to 19%, between RUB49.6 billion and RUB50.9 billion and they expect their OIBDA margin to be around 42%. Our guidance is intentionally conservative on OIBDA reflecting the uncertainties in the current environment and does not take into account synergies from Mail. Ru transaction nor any potential recovery in the market conditions. Thank you very much. With this, let's open Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Alex Kazbegi, Renaissance Capital.

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Alex Kazbegi, Renaissance Capital - Analyst [2]

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I have three questions and all of them about the guidance please. The first one is about your revenue guidance, I think I just saw the interview, which Mr. Soldatenkov gave and he said 3.5% service revenue growth. So if you could confirm that this revenue guidance which you are giving of course includes the handsets as well and it's indeed 3.5% service, is that what you are expecting and I guess that is meaning that reduction on the equipment sales.

Number two is vis-a-vis your CapEx, if you could give us a bit of color on how much of that is driven by FX again and how much of that, so to say, real reduction in the CapEx, if I may qualify so to say, real reduction in the CapEx and what is the main, so to say, purpose of this CapEx in any case, is it mostly coverage, is it mostly transport, where does it go?

And lastly, on your [EBITDA] again, mostly recurring again to interview of Mr. Soldatenkov where he suggested that the Euroset could be split between yourself and VimpelCom possibly even within a month and I think as you mentioned, this [EBITDA] doesn't include any external, so to say, factors, but if you would consider for instance indeed the split of Euroset happening, how would that change your guidance for instance, could you give us a bit of color on that? Thank you very much.

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Sergey Soldatenkov, MegaFon PAO - CEO [3]

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(interpreted) Alex, thank you for your question. Let me start with question number three about the potential split of Euroset, this question is handled by Sergey Soldatenkov. We wouldn't want to comment on this. So when we are prepared to make a statement, we will let you know, we will update the market.

As for your other questions, indeed, yes, earlier today, there was a press conference and I was given an interview and it wasn't 3.5%, but it was rather 3% to 5% that we are seeing for next year, not for 2017. 2017, we believe to be a year of stabilization when the focus on the development of our base will help us overcome the switching over of subscribers from our older tariff plans to the newer ones. So, next year is where we expect to see growth.

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Gevork Vermishyan, MegaFon PAO - CFO [4]

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Second question, with respect to the CapEx guidance here, straight answer to your question would be that the FX rate as we have in the business plan, which is the basis for building up the guidance on CapEx has zero impact on the difference numbers. So a fixed noise is absolutely omitted here. In reality, the structure of the CapEx easily it will be changing year-on-year in 2017 versus 2016, not dramatically, but still it is being changed. First and foremost, our investment governance prescribes that capital allocation are getting only those projects, which bear higher ROIC and we focus on that. So it is easy for us having set a monitory target for investments in next year to prioritize the investment projects, which will be put into gear.

Secondly, when the standard technology is developing and on the back of heavy LTE investments over the past years, we feel base case as part of the investment budget shall not bear that much of 2G coverage kind of CapEx than it used to have in previous years. So basically, these are explanations why we believe that RUB5 billion to RUB10 billion decrease is acceptable and not risky and of course, that anticipates that should forex misbehave and ruble pop up [to 100], then obviously we would have a problem and we would come to the market explain and revise.

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Alex Kazbegi, Renaissance Capital - Analyst [5]

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Okay understood, can I go back to this [EBITDA] guidance question, I understand it's all speculative about whether the split happens or not, but just to say it would happen, would that warrant revision of the guidance or not really.

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Gevork Vermishyan, MegaFon PAO - CFO [6]

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One of the disclaimers given in the guidance traditionally is that when we are making the guidance, we put into it the information, the management has at the point of giving this guidance. That's why now non-organic M&A, you don't see a Mail. Ru numbers in here nor you see any potential impacts of M&A transactions.

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Operator [7]

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Roman Arbuzov, UBS.

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Roman Arbuzov, UBS - Analyst [8]

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Thank you very much for taking the question. My first was actually a follow up on Alex's question around the [EBITDA] guidance, it feels somewhat more conservative and as he opened, say it is conservative, but I was just wondering is there anything, you made clear Euroset is not there, but is there anything else that maybe making it more conservative potentially, so things like Tajikistan, we saw some one-offs last year, we also saw historically some volatility with expenses coming from the long-term incentive program. So maybe there are a few things that are on your mind that can pop up in 2017. So if you could please just give us maybe a little bit more color, that will be very helpful.

And then my second question is just on the dividends and so, obviously, it's a Board decision and you are limited in what you can say, but maybe you can comment on the dividends from the perspective of what you think the company can actually afford as opposed to what actually happens in terms of your ability to pay, you've mentioned that you are now probably towards the higher-end of the leverage range in terms of where you want to be.

And also, you're talking about your [EBITDA] being down mid-single digits or potentially even worse in 2017. So with that in mind, do you think we're still in the times of when MegaFon can afford to pay out more in dividends than the cash flow that it makes as you have been doing for the last two years or do you think we should really be thinking as 100% of cash flow is sort of the top-end of where you should realistically be in terms of the dividend or potentially even lower to maybe have some deleveraging. I appreciate you are limited in terms of what you can say precisely here, but just some discussion on your ability to pay dividends, that will be helpful, thank you very much

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Gevork Vermishyan, MegaFon PAO - CFO [9]

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Yes, you're right Roman, we are indeed limited in discussing the dividends. I think the only points that I can mention here is that, we of course talk freely to the sell side, we of course talk to buy side and we understand what are the areas of concern of the existing dividend policy, which was introduced prior to IPO back in 2012 on different market conditions and different times. So we understand that we need to add more transparency to this dividend policy and more predictability to the dividend policy.

This is absolutely certain and this is work-in-progress today. Sometime later during this year, presumably in April, you will hear the Board's recommendation, so it's not long to wait and also we need to say that we promised to you that the strategy session will be held in format of Capital Market Day at the end of May and this Capital Market Day and strategy discussion obviously would have to be followed by an announcement of the concept of new dividend policy that this strategy can deliver. That's all I can say on the dividends.

With respect to the first question, let's put it this way, so you see our revenue guidance, which is flat to single-digit growth rate, you also understand the inflationary pressures that the direct costs and the operational costs have in the P&L. You also hopefully recall that we are really striving and making cost management exercises on a daily basis and the good testament for that is fourth quarter OIBDA which came in absolute terms more or less flattish, but in reality, the guidance message that I'm trying to send to the market is that the market environment is still uncertain, the OIBDA guidance extrapolates the trend we previously saw with half rate dynamics. So I mean, we decelerate the decline trend in OIBDA, which is already something good achievement and any potential shortfall of OIBDA between the years is covered by and offset by CapEx to stabilize cash flows.

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Operator [10]

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Herve Drouet, HSBC.

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Herve Drouet, HSBC - Analyst [11]

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Yes, good afternoon. Thank you again as well for taking my questions. First question is trying to get your view on the data services, data ARPU which you know have been down. Do you see any room to start to improve those data ARPU looking forward, I mean, is it more matter of how the competition is going to do in certain regions or I mean do you feel that there is more to be monetized especially considering the [cheap] data pricing you got. So, I just wanted to get a bit of your view on what you think how promotions will evolve especially this year and where do you see competitions moving in terms of tariff and packages. And the second thing is again back to Euroset, can you tell us so far what prevented it to split Euroset between you and VimpelCom, what are the main hurdle that prevents you to do it and not to have already done it. Thank you.

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Sergey Soldatenkov, MegaFon PAO - CEO [12]

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(interpreted) Vlad Wolfson, [will answer] your question.

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Vlad Wolfson, MegaFon PAO - Chief Commercial Officer [13]

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(interpreted) Thank you. I will tackle your question regarding tariffs and tariff plans. You can see in our documents, the numbers that we announced and published demonstrating the data usage is significantly growing and it's over 5 GB per user in the fourth quarter. So that's approximately 40% growth and we can see that data ARPU is going down. So responding to your question whether there is any reason to believe that this could be changed, we do believe that this situation should start to turnaround in 2017. MegaFon has discontinued unlimited tariff plans for our users in our new sales. We believe this will help us to more accurately offer our services to our users and to monetize the traffic that we can see growing in our network. Thank you. And Sergey Soldatenkov is handling your question on Euroset.

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Sergey Soldatenkov, MegaFon PAO - CEO [14]

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(interpreted) I would like to say once again to remind you that we are not commenting this today about any challenges of the splits. Please give us more time, we will get back to you when we are prepared to tell you about the potential split of Euroset. Thank you.

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Operator [15]

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Ivan Kim, VTB Capital

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Ivan Kim, VTB Capital - Analyst [16]

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Good evening, two questions please. Firstly, can you update us on the data storage law. What are the latest developments, what are your latest expectations or what's the timeline -- any color you can give us on that would be very helpful and secondly, Gevork, if we understood you correctly, you said the leverage is now indeed at the upper-end of the acceptable range. So, is it so? Did you get it right, first and second, if it is so, that probably it means that the dividends will have to come down even though I understand that the dividend push is something to consider later on, but there are just some general guidelines here, which means that if you are at the upper-end of your comfortable leverage level than you have to [cap] the dividends. Any thoughts on this will be very helpful, thank you.

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Anna Serebryanikova, MegaFon PAO - COO [17]

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Thank you, Ivan, this is Anna, I will take the first question on data storage. In terms of moving the timeline, which is now in the law, we don't see such indications currently, but what we see is that -- now you know the issue is within the government and we hope that the government has realized the potential negative impact to the industry of the full scale implementation of the law. So I think that there may be some positive developments in terms of duration of the storage and the pre-filtering systems. That's all I can say. Thank you.

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Ivan Kim, VTB Capital - Analyst [18]

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(inaudible - microphone inaccessible).

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Anna Serebryanikova, MegaFon PAO - COO [19]

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I think that in order to be able to implement the law, we need at least 10 to 12 months. So we don't have more time than summer. So I think that the government also understands that.

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Gevork Vermishyan, MegaFon PAO - CFO [20]

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Ivan, yes, Gevork here again. On the leverage, we demonstrate 1.6 times leverage as of year-end. Post announcement events or post-subsequent events as you appreciate and know was a Mail. Ru transaction which obviously took the leverage up -- standalone MegaFon leverage up to two times. Of course, optically starting from first quarter this year going further would really show very nice leverage metrics as we consolidate Mail. Ru operations and sites, but understanding that this is an Internet company and our economic strategy is [15%] there, we think we have to be not sort of giving ourselves a free ride as a result of Mail. Ru consolidation into any discussions about leverage and dividend policy.

And I know that I probably don't speak very pronounced on sending an pronounced messages on exact dividend policy but I urge you to wait a little bit until we give the privilege of dividend policy adoption to our Board of Directors. What I'm trying to say is that on a standalone basis, leverage metrics are a little bit elevated to my opinion and does not on one hand create any problems with respect to fundamental stability and financial stability of the Company since our corporate finance activities and fund raising activities and ability to manage that is at very high level. So we borrow cheap and we borrow long and we have very nice and comfortable amortization profile, but the carrying cost of debt has an impact on our free cash flow and the more you sort of see our standalone leverage, the more leverage that you have is declining. So we need to find a nice balance between fundamental value of the Company, capital allocation through dividends and prudent credit metrics, which we will do and communicate to the market sometime very soon.

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Operator [21]

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(inaudible) Goldman Sachs.

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Unidentified Participant [22]

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(interpreted) Thank you for the presentation. I have a couple of questions, do you have more understanding about your interaction with Mail. Ru and can you perhaps share something about this even now, when can we expect any joint projects.

And my second question is whether you see any potential for CapEx reduction in absolute terms in 2017 or will CapEx not go down in mid-term to long-term. Thank you.

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Sergey Soldatenkov, MegaFon PAO - CEO [23]

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(interpreted) So, since you're asking in Russian, I will be happy to answer in the Russian as well. In terms of interaction with Mail. Ru, certainly for us this is a very good transaction in terms of our differentiation, our digital strategy differentiation. As colleagues have mentioned, we'll be telling you more about this when we announce our strategy later this year, but even today, we can see two areas that are currently quite obvious for us and these are big data exchange that we will be launching very soon and the VKmobile project.

We will also be presenting them separately. We have other sources of synergy we will be telling you about it later because it's hard to be telling you about something that we have thought about, but not yet implemented and good work continues in terms of our CapEx guidance, we can only limit ourselves to the yearly guidance, but the main reason why this annual guidance is going down and hopefully not just for us, but across the industry. So we believe that you can use it with good probability, but according our rules, we only guide for one year. Thank you.

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Operator [24]

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Igor Goncharov, BCS.

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Igor Goncharov, BCS - Analyst [25]

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Yes, thank you very much and I'm not sure which language is more appropriate. I will ask in English. In terms of further integration of [the quantum] after the acquisition of Mail. Ru, are you comfortable to expand your integration in content, in particular, if we take a look on your presentation, you highlighted you have provided premium access to your subscribers of MegaFon TV to the product of CTC Media, is there any chances that you might be looking at providing a stake in the company or in a related company?

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Anna Serebryanikova, MegaFon PAO - COO [26]

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I can also take this question. First, we do not -- we never speak about potential M&A deals. Second, we do not think that the only way to make a successful partnership is by acquisition. We think that -- and we are now learning quite successfully that we can do partnerships not only by acquisition. Thank you.

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Operator [27]

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Sergey Libin, Raiffeisen BANK.

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Sergey Libin, Raiffeisen BANK - Analyst [28]

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Hello, thank you. So my question is whether you could share your estimates on cost savings from moving to Shared Services Center and also new headquarters in Moscow and if it's in anyway reflected in your guidance?

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Gevork Vermishyan, MegaFon PAO - CFO [29]

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Yes, Sergey, this is Gevork. So without telling you the split year-on-year, I think this [SCS project carries as much as RUB470 million] savings overall and there explained as an arbitrage between the salaries in a low-cost and high-cost environment as well as in lease expenses. So the Shared Service Center effect is inside the business plan and therefore is within the guidance. The other question was with respect to the savings from HQ office right?

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Sergey Libin, Raiffeisen BANK - Analyst [30]

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Yes.

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Gevork Vermishyan, MegaFon PAO - CFO [31]

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Okay. Well in reality, year-on-year or sequential comparison does not show and should not show any savings as a result of consolidation of offices. The case that we provided when we acquired a 50% stake or 49.9% stake in the company, owner of this real estate was the legally binding obligation to see which was signed in 2011-2012 to see at very high rates and very expensive walk away fee. Instead, we negotiated better deals in ruble terms, no FX, long-term, and less space and here we are. So the difference is a little bit, I mean there is savings, but between it's like a delta case between forecast and reality. So it's not factored into the guidance, it cannot be factored. We're going to move premises in two, three months and so up until that time, we will carry the double lease rents, but we're going to be still in the money for that particular investment.

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Sergey Libin, Raiffeisen BANK - Analyst [32]

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Okay, but you assume that you stop paying rent for the old offices starting from say second half this year and you also included in the guidance, right?

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Gevork Vermishyan, MegaFon PAO - CFO [33]

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Yes, if the question was about that, yes you're right, we're stopping paying rent here. We start paying rent there, but again, you need to understand that we're consolidating like five offices including low cost lease offices of NetByNet, MegaFon Retail, Stolichny branch and more probably more expensive headquarter MegaFon and we're moving to a RUB27,000 per square meter per annum. So there's not much of a saving as a result of that.

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Operator [34]

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Olga Bystrova, Credit Suisse.

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Olga Bystrova, Credit Suisse - Analyst [35]

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Yes, good evening. Thank you very much for the question. The first one is on your own distribution chain, you've said several times that you have plans to reduce the number of your own stores, if I'm not mistaken by about 30% per annum. So I just wanted to see if there's any progress on that and maybe you can share with us number of stores you currently have in your own distribution network.

And the second question on pricing, you mentioned that you have amended prices for the new subscribers at the end of December. Do you see any opportunity for you or in Russia in general to change pricing for the existing subscribers one way or the other and if you do, how do you think that will develop and when? Thank you very much.

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Sergey Soldatenkov, MegaFon PAO - CEO [36]

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(interpreted) Olga, thank you for your question. It's handled by Vlad Wolfsan.

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Vlad Wolfson, MegaFon PAO - Chief Commercial Officer [37]

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(interpreted) In terms of our changes in our distribution strategy, they do exist indeed. We have a program to reduce our own retail stores MegaFon Retail, but we do not disclose the numbers about what we've done so far and we'll decide whether we want to disclose it at the end of the first quarter this year. So whether we want to disclose it reporting on our first quarter results in terms of prices, I think the question consists of two parts, the price changes that we implemented in December and that you're referring to is our business as usual, this is ongoing work. We have looked into different markets studies and then also we take customer service to really see how much they're willing to pay and what they want to see in the tariff plans. So that's an ongoing regular work. In terms of the pricing for the existing subscribers, I think that's not possible in a direct manner, but we are constantly working on promoting new services to the existing customer base and often due to the new product, we are capable of increasing the average sales per user.

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Operator [38]

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It appears there are no further questions. I would like to turn the call back to Dmitry Kononov for any additional or closing remarks.

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Dmitry Kononov, MegaFon PAO - Director for IR & M&A [39]

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Folks, we're about out of time. I thank you very much for participating with us on this call. As always, we're happy to take your questions either through direct calls or your emails and we look forward to hear from you when we discuss results for the first quarter of 2017. Thank you very much.

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Operator [40]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation, you may now disconnect.

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Editor [41]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.