U.S. Markets open in 4 hrs 2 mins

Edited Transcript of MTSS.MZ earnings conference call or presentation 20-Aug-19 3:00pm GMT

Q2 2019 Mobil'nye Telesistemy PAO Earnings Call

Moscow Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Mobil'nye Telesistemy PAO earnings conference call or presentation Tuesday, August 20, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alexey Valerievich Kornya

Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director

* Andrey M. Kamensky

Mobile TeleSystems Public Joint Stock Company - VP of Finance, Investments, Mergers & Acquisitions, Member of Management Board and CFO

* Inessa V. Galaktionova

Mobile TeleSystems Public Joint Stock Company - First VP for Telecommunications & Member of Management Board

* Polina Ugryumova

Mobile TeleSystems Public Joint Stock Company - Director of IR

* Vyacheslav K. Nikolaev

Mobile TeleSystems Public Joint Stock Company - First VP for Customer Experience & Marketing and Member of Management Board

================================================================================

Conference Call Participants

================================================================================

* Alexander Vengranovich

Renaissance Capital, Research Division - Analyst

* Herve Drouet

HSBC, Research Division - Head of EEMEA Telecoms, Media and Technologies Equity Research

* Ondrej Cabejšek

UBS Investment Bank, Research Division - Director

* Svetlana Sukhanova

Sberbank CIB Investment Research - Senior Analyst

* Vyacheslav Degtyarev

Goldman Sachs Group Inc., Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to MTS Second Quarter 2019 Financial and Operating Results Conference Call.

I will now hand you over to your host, Ms. Polina Ugryumova, IR Director. Madam, the floor is yours.

--------------------------------------------------------------------------------

Polina Ugryumova, Mobile TeleSystems Public Joint Stock Company - Director of IR [2]

--------------------------------------------------------------------------------

Welcome everybody to today's event to discuss MTS second quarter 2019 financial and operating results.

As usual, I must remind everyone that except for historical information, any comments made during this call may constitute forward-looking statements. Important factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements. These, in turn, imply certain risks, a more thorough discussion of which are available in our annual report and Form 20-F or the materials we have distributed today. MTS disavows any obligation to update any previously made forward-looking statements spoken on this conference call or make any adjustments to previously made statements to reflect changes in risks. You can find copies of the presentations and materials used and referenced in this conference call which are available on our company website.

Today's presenters are Alexey Kornya, President and Chief Executive Officer; Slava Nikolaev, First Vice President for Customer Experience and Marketing; Inessa Galaktionova, First Vice President for Telecommunications; and Andrey Kamensky, First Vice President for Finance.

Now I will hand it over to Alexey to kick us off.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, everyone, for joining us today. I am happy to note we have delivered another set of solid results in second quarter and we are now moving further into the second half of the year from a position of strength.

In second quarter, total group revenue was up 9.4% year-over-year, reaching RUB 125.1 billion. We are -- also saw solid OIBDA performance with all our geographic markets contributing positively. Overall, group OIBDA was up 4.1% year-over-year to RUB 56 billion. Excluding the effect of MTS Bank, on a like-for-like basis, revenue was up 4.5% and OIBDA up 1.2% year-over-year.

Before we go deeper into the results, I wanted to take a moment to talk about how we are realigning our organization to accelerate our digital transformation. First, we are setting up 4 distinct business verticals: telecommunications, FinTech, cloud and B2B digital and media and cv. Given the importance of connectivity, we have created the new First Vice President position to head this core business. Since joining MTS at the beginning of the year, Inessa has quickly proven herself a capable leader with a fresh perspective and a lot of sharp focus on operational rigor. I am confident she is the right fit for this critical role.

Second, we are strengthening our horizontal capabilities to tie the existing together and empower our product teams. This includes areas like marketing and IT as well as our proven Big Data expertise in growing AI competencies. Looking forward, the horizontals will serve centers of expertise to enable business execution in the verticals. In many cases and place, we'll be directly embedded with an agile mission-based product teams. In addition, the horizontals will help nurture our digital startups, for example, in cybersports, education and other new directions. To provide additional flexibility and agility, they will operate outside the verticals in the early phases with the potential to be integrated into the core as they grow and mature.

We also plan to strengthen partnership in certain areas, for example, in media content production. As we diversify our ecosystem, it is critical to maintain the unified 360-degree view of our customer and their total lifetime value. To that end, Slava Nikolaev's role has been elevated to First Vice President for Customer Experience and Marketing. He will now oversee how we track and engage customers across the existing, working in close coordination with Inessa and the other vertical leaders. Overall, this is a fundamental realignment of the way we run our company. We are transitioning away from a rigid hierarchy and forward into more a flexible, agile matrix organization. This change -- these changes are aimed at empowering our teams to a more rapid development, launch and scale the new products and will fill out our digital ecosystem. I'm confident this is the right framework and the right team to execute and deliver on our long-term growth strategy.

With that, let me turn it to Slava Nikolaev.

--------------------------------------------------------------------------------

Vyacheslav K. Nikolaev, Mobile TeleSystems Public Joint Stock Company - First VP for Customer Experience & Marketing and Member of Management Board [4]

--------------------------------------------------------------------------------

Thank you, Alexey. Hello, everyone. Let me briefly highlight just a few of the latest developments as we move beyond connectivity. In cloud, we saw a sevenfold year-over-year increase in data processing and storage volumes in Q2. In Big Data, we are leveraging analytics to smartly allocate network capacity in real-time. We also continue to improve credit scoring for MTS Bank.

In eSports, we have already reached over 40,000 daily viewers less than 6 months after launching our WASD. TV streaming platform. And in artificial intelligence and FinTech, we are integrating new capabilities into our MyMTS mobile app. MyMTS is our central digital platform for customer care. We have solid ratings on both the Google Play and Apple App Stores. In Q2, we saw adoption accelerate and reached over 17 million active users, more than 1/3 of our subscribers on smart devices. The app now features an AI-based chat bot that successful resolves over 80% of customer inquiries without the involvement of a human operator. We are also integrating our MTS Bank products into the app as well as fixed-line and TV account management.

As part of our sharper focus on customer loyalty, we are proactively shifting away from an opt-out value-added services toward opt-in services with a clear and simple value proposition. For example, in June, we launched a new service to block scam callers by detecting suspicious activity on our network in real-time using Big Data. For RUB 1 a day, subscribers can block scam calls before their phone even rings. This is a good illustration of how we're moving the needle on the customer care and loyalty.

According to our estimates, we have now taken a strong NPS lead among the big 3 telcos in Russia. Looking ahead, that provides us a firm foundation to sell new services beyond connectivity to an audience that already knows and trusts the MTS brand.

On a related note, in June, we unveiled the biggest revamp of the MTS brand in over a decade. The new branding features a simpler, cleaner graphical style that better integrates in to reach marketing imagery and digital displays. We purposefully designed it to be adaptable and extendable across our expanding ecosystem. Going forward, it will serve as an umbrella for our growing portfolio of digital products and services. We also updated our slogan to, "be better every day", reflecting current consumer sentiment as well as our own commitment to continuous improvement. According to our own market research, the new style has been well received with an increase in audience favorability, in our first video ad campaign. This summer, we were thrilled that MTS was recognized as Russia's most valuable TMT Brand by Brand Finance. We are confident the recent refresh builds on that strong legacy and positions us for the future.

Now I will hand over to Inessa for our telecom business update.

--------------------------------------------------------------------------------

Inessa V. Galaktionova, Mobile TeleSystems Public Joint Stock Company - First VP for Telecommunications & Member of Management Board [5]

--------------------------------------------------------------------------------

Thank you, Slava. Russia continued to be our main top line growth driver despite continuing regulatory headwinds and moderating retail sales. Country revenue in Q2 grew 8.4% year-over-year to RUB 115.3 billion driven by mobile connectivity, software sales, integration services and the consolidation of MTS Bank. OIBDA in Russia grew 2.3% year-over-year to RUB 52.3 billion with margin decreasing to 45.3% as our revenue mix shifted. From our point of view, the Russian mobile service market remains stable with healthy competitive dynamics. We expect growth to continue and potentially slightly accelerate in the second half of the year on easy comps.

Looking beyond mobile connectivity, we also see significant long-term opportunities without entering new markets. In B2G, we welcome the recent efforts by the Ministry of Digitalization Development Communication and Mass Media to stimulate competition in public tenders. With the right regulatory conditions now in place, we are happy to participate. In early this month, we were awarded a RUB 3.9 billion contract to bring online over 5,000 public facilities in 9 Russian regions. This is a good example of how our core telecom strategy is evolving to capture additional revenue, support the digitalization of the economy and improve people's lives.

Turning now to retail. As you recall, last quarter, we forecasted slowdown in handset sales after years of rapid growth, what saw MTS consistently outperforming the market. As expected, we saw sales of handsets and accessories decelerate in Q2 with the revenue roughly flat year-over-year. We're seeing clear signals that retail market dynamics are shifting and we have begun adjusting our strategy accordingly.

In June, we launched a partnership with Russia's largest multi-brand retailer, Svyaznoy. Under the agreement, MTS SIM cards are being made available on the shelf of 5,000 additional stores nationwide. This new channel is supplementary and we don't expect it to represent a substantial share of SIM sales. At the same time, by diversifying our SIM distribution, we are aiming to open a window to optimize our retail footprint. In the short term, we are targeting to close 200 to 300 storefronts by the end of this year. We will closely monitor the situation and depending on how the competitive environment evolves, we are prepared to further resize our footprints over time. The overall market mood seems to be shifting in this direction as we see significant upside for optimization to drive value creation over the next several years.

Turning to our international markets. Ukraine also saw solid performance with both revenue and OIBDA up by double digits year-over-year. OIBDA increased 13.8% from the year-ago quarter with somewhat large top line growth of 20.7%, reflecting our active marketing efforts and retail expansion. In Armenia, revenue was down 3.5% year-over-year in the market facing tough competition and regulatory changes. At the same time, we saw OIBDA increase 6% driven by office optimization. Finally, in Belarus, which is not consolidated, we continued to enjoy double-digit growth in both revenue and OIBDA.

Now I will pass it to Andrey.

--------------------------------------------------------------------------------

Andrey M. Kamensky, Mobile TeleSystems Public Joint Stock Company - VP of Finance, Investments, Mergers & Acquisitions, Member of Management Board and CFO [6]

--------------------------------------------------------------------------------

Thank you, Inessa. In the second quarter, we saw solid 4.1% year-over-year growth in the group OIBDA to reach RUB 56.1 billion. Broadly speaking, this was a steady continuation of the positive underlying trend we saw in the first quarter.

Moreover, we successfully overcame regulatory headwinds with OIBDA growing in all of our markets, Russia, Ukraine and Armenia, including contribution from MTS Bank. And we continue to take steps to digitalize our process that are aimed at improving our long-term operational efficiency.

Group net profit came in at RUB 12.7 billion, down 11% year-over-year partially driven by higher interest costs related to increased debt. At the same time, a significant impact came from the high base effect due to IFRS reporting requirements with respect to improved loan terms in second quarter of the previous year.

Capital spending for the first half of the year was RUB 39.3 billion driven by continuing investments to improve network coverage and quality. The ratio CapEx to revenue stood at a healthy 16.2%. Excluding the SEC/DOJ payment, underlying free cash flow in the first half of the year was RUB 22.7 billion. Free cash flow was supported by OIBDA growth, while negatively impacted by investments in software upgrades, the consolidation of MTS Bank and high-income tax payments in the second quarter. An additional impact was seen from the high base effect due to a spike in interest received from maturing deposits in the first half of the previous year. We expect the majority of these factors will be equaled out in the second half with minor impact on full year free cash flow.

Taking a closer look at the Bank, we continue to see solid performance and rapid expansion in line with our FinTech strategy. In the second quarter, net interest income rose 11% year-over-year to RUB 2.7 billion. Total portfolio increased 53.3% year-over-year to RUB 96.4 billion. As Slava mentioned, we are also making a steady progress on integrating the bank into our ecosystem. In June, we launched a new flagship credit card product under our MTS Cashback loyalty brand. Cardholders earn points through spending, which can be redeemed for mobile services or purchases at MTS retail stores.

Turning to our balance sheet. We continue to optimize our debt portfolio. In the reporting period, we issued 2 series of exchange-traded books -- bonds on MOEX totaling RUB 12.5 billion. We also made the full early repayment of a 10-year USD credit facility backed by Sweden Export Credit Agency EKN, with an outstanding balance of RUB 163.9 million. This step demonstrates our continuing efforts to seek timely opportunities to refinance our debt while mitigating risks such as currency exposure. Total group debt at the end of the quarter stood at RUB 377.2 billion with the weighted average interest rate holding steady at 8.1%. Overall, our ratio of net debt to last 12 months adjusted to OIBDA remains at a comfortable level of 1.6.

Now I will turn it back to Alexey for his closing remarks.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [7]

--------------------------------------------------------------------------------

Thank you. I am encouraged by our year-to-date performance and proud of the entire MTS team with what we have achieved so far in 2019. Given our strong first half results and increased visibility in second half, I feel confident in raising our full year guidance to 6 to -- 4% to 6% growth in revenue and low single-digit growth in OIBDA.

I also wanted to give a brief update on where we stand with our equity capital market strategy review. We have now completed the open consultation period with the market and are in the process to digesting the results internally. There are a number of options still being considered, including preserving the current listing structure with no change. We will keep the market updated as we make a final recommendation, which we expect to be in the next few months. I would like to thank you our shareholders for their patience and input into the process. We greatly appreciate your active engagement and we'll share more as soon as we can.

Last but certainly not least, I also wanted to highlight that we recently completed our full year 2018 dividend payment and the Board has recommended our first half dividend amount for the shareholder approval. Together, this account to RUB 28.66 per ordinary share for the calendar year, which is above our dividend policy target and represents more than a 10% increase over dividend paid in 2018.

So to sum up, we are sustaining our momentum in 2019, we continue to generate significant returns to our shareholders and we are making steady progress in better positioning our business for the future.

Thank you, and let's open the line for questions.

--------------------------------------------------------------------------------

Polina Ugryumova, Mobile TeleSystems Public Joint Stock Company - Director of IR [8]

--------------------------------------------------------------------------------

Operator, we are ready to take questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Herve Drouet, HSBC.

--------------------------------------------------------------------------------

Herve Drouet, HSBC, Research Division - Head of EEMEA Telecoms, Media and Technologies Equity Research [2]

--------------------------------------------------------------------------------

This is Herve Drouet from HSBC. Couple of questions from my side. So first one, could you give us a bit, maybe, more color on the competitive landscape in Russia. I mean you mentioned in your press release that you think it's kind of stable competition at the moment in Russia, which makes you believe, I mean, there is room to increase your guidance. What specifically do you think has changed in Russia to make it more stable? I mean do you see some of your competitors changing the tariff in that sense?

And at the same time, it looks like the number of point of sales continue to increase. I wouldn't have thought that in a more stable competitive environment there will start to be a decrease of your number of point of sales. So I would like to see, if, from your perspective, there is any reason to why we still see those point of sales increasing. And my second question is around the interest and interest cost. I was wondering have you done recently some refinancing that may explain some of the increase of the financing cost, especially in other expenses.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [3]

--------------------------------------------------------------------------------

Okay. Its Alexey, I'll take the first one. As far as competitive situation is concerned, we feel that it is stable in the pricing field with even some slight increase in pricing and growing consumption of that which contributes to certain ARPU growth. And what is more, importantly, we see positive trends in distribution side and the cost-competitive, which we just mentioned that we think the market is open for certain optimization in the retail side. And on our side, we are planning to close from 200 to 300 stores until the year -- until the end of this year. And we think that other players are also open for a more rational cost distribution approach. So all this together makes us feel quite comfortable in terms of overall competitive environment in the market.

--------------------------------------------------------------------------------

Andrey M. Kamensky, Mobile TeleSystems Public Joint Stock Company - VP of Finance, Investments, Mergers & Acquisitions, Member of Management Board and CFO [4]

--------------------------------------------------------------------------------

And just to going to answer your second question, which is related to the interest expense or the finance cost. If you look at our P&L, you'll see the effect, first quarter of around RUB 3 billion. There are 2 major components of this effect. One is coming from the 2018 with a high base effect due to IFRS requirements, where actually what we did is -- was that, that notification gain that we received last year and because of that, we had a higher base in 2018. That was the first effect, which was quite significant. Then the second effect that was the higher interest cost related to increased debt. So that's the answer to your finance -- to the question. But overall, we see that our growing business will compensate this negative effect coming from the higher debt.

--------------------------------------------------------------------------------

Herve Drouet, HSBC, Research Division - Head of EEMEA Telecoms, Media and Technologies Equity Research [5]

--------------------------------------------------------------------------------

Maybe just a follow up, maybe, back on the competitive landscape. I mean have you seen any change on Tele2, Russia in term of the way they act within some part of the market? And also coming back to your comments, very positive on how potentially the distribution channel may gradually reduce the number of shops. I mean, are you saying that you are ready to take the first move on your side to decrease, now, your number of stores? Which is something we haven't seen yet. When we looked at quarter-on-quarter, your point of sales are continuing to increase Q2 versus Q1. Now are you saying that you expect that numbers now for the end of the year to decline quite significantly to 200, 300 stores? Just wanted to confirm that.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [6]

--------------------------------------------------------------------------------

Well, on the pricing side with -- which concerns to Tele2, they retain their discount policy. But in this sense, it doesn't change the overall situation in the market. And in this sense, we feel that the market is stable. No one takes more aggressive steps, and we don't see activity in terms of aggressive steps in price -- on the price side. So yes, Tele2 is a challenger for this market. They are a discounter player. They are slowly gaining little bit of market share. But at the same time, we don't see that it has changed some activity -- their activity, their steps get changed relative to what we saw a year ago or 2 years ago. And as for the retail situation, yes, with our return to Svyaznoy, we feel that our number of touchpoints with the customer is sufficient enough in order to take the first steps in reducing our distribution.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question is from Alexander Vengranovich of Renaissance Capital.

--------------------------------------------------------------------------------

Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [8]

--------------------------------------------------------------------------------

Two questions from my side. First one is on MyMTS app usage. So looking at your numbers, quarterly numbers, there was some significant acceleration, the number of the users quarter-over-quarter. So like, typically you're adding around 1 million of monthly active users over the quarter. This quarter, it was like 2 million. So I'm just like wondering whether you had any specific promotion of the app in the quarter or should we consider this growth as organic throughout 2019? So that's the first question.

And the second question is about rebranding. Do you have any estimates of the costs of the rebranding across the whole organization this year and whether this cost will be significant for the company?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [9]

--------------------------------------------------------------------------------

Thank you. I will take both those questions. MyMTS, we didn't have any -- we haven't done any specific promotion in the second quarter. On the other hand, we've introduced quite a few interesting features into MyMTS. So I cannot promise you, of course, that the growth will really continue.

But I think that in the third quarter, we are going to see additional acceleration because we did promote some new features of MyMTS on ATL, so it's going to grow definitely in the third quarter. But I see this as a very healthy growth of MyMTS in the second quarter based not on money spent on marketing but on features.

Regarding the second question, we were not planning any significant budget for rebranding because we've done that definitely on digital side immediately, but we are not planning to replace all the costly equipment with brand right away. It's going to be in the normal way of changing the old sites to new sites.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question is from Slava Degtyarev, Goldman Sachs.

--------------------------------------------------------------------------------

Vyacheslav Degtyarev, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

--------------------------------------------------------------------------------

There were certain press speculations over potential sale of the Ukrainian business, although those rumors have been rejected quite quickly. Still, can you describe your approach towards international iterations? Are those quite strategic for the group? And can you opportunistically consider some divestments?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [12]

--------------------------------------------------------------------------------

We consider those geographies where we are present is our strategic footprint. At the same time, we are not looking at active expansion beyond our current geographic footprint because we think that the markets are quite mature already, and there are no clear cross-border synergies through whatever expansion is possible.

As far as divestment opportunities, opportunistically depending on the specific situation, we are open for considering such an opportunities.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question is from Svetlana Sukhanova, Sberbank.

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [14]

--------------------------------------------------------------------------------

Your number of subscribers in Russia has started to grow in the second quarter after several consequent quarter of decline in mobile subscriber base. May I ask what happened? Is it kind of real growth of real subscribers? Or is it primarily driven by the growth of IoT subscribers, which are so complimentary about in the following page of the press release.

And my second question here would be, out of that kind of mobile subscribers in Russia, how much IoT subscribers do you have?

--------------------------------------------------------------------------------

Inessa V. Galaktionova, Mobile TeleSystems Public Joint Stock Company - First VP for Telecommunications & Member of Management Board [15]

--------------------------------------------------------------------------------

Okay. Regarding your question on our growth, so first of all, this is the flat growth year-on-year. Most probably, you mentioned that growth second quarter...

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [16]

--------------------------------------------------------------------------------

Quarter-on-quarter because, yes, you had several consequent quarters of decline quarter-on-quarter of subscriber base.

--------------------------------------------------------------------------------

Inessa V. Galaktionova, Mobile TeleSystems Public Joint Stock Company - First VP for Telecommunications & Member of Management Board [17]

--------------------------------------------------------------------------------

Yes. So first of all, we are happy with the quality of our sales. So I was sure, that it was very healthy.

And secondly, we are doing some right things in the distributional channels, not just by growing the quantity, but working on the quality side. The product itself and also the healthy distribution gives us these drivers for the subscriber growth second quarter over first quarter.

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [18]

--------------------------------------------------------------------------------

But can you answer my question, please? What's the number of IoT subscribers overall? And out of the incremental growth, how much of that is coming from IoT subscribers and from the real subscribers?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [19]

--------------------------------------------------------------------------------

We are not disclosing the exact number of our IoT subscribers. Still we believe that we are -- clearly, there is in this direction as an overall in the market. Firstly because we have the biggest network and that includes, in the IT network, where we take a lead and we were the first one to launch this network. And we have the biggest footprint currently with 60 regions footprint for narrowband Internet of Things network. So we estimate strong leadership of us in this market. Did you get the answer?

--------------------------------------------------------------------------------

Svetlana Sukhanova, Sberbank CIB Investment Research - Senior Analyst [20]

--------------------------------------------------------------------------------

Yes. This is a good answer about overall number, but if I may ask about the incremental growth. So out your answer, do I -- if you'd drive that kind of incremental growth quarter-on-quarter in the number of subscribers was contributed, both by IoT subscribers and both by the real subscribers because you redistributed the channels, et cetera, et cetera.

--------------------------------------------------------------------------------

Vyacheslav K. Nikolaev, Mobile TeleSystems Public Joint Stock Company - First VP for Customer Experience & Marketing and Member of Management Board [21]

--------------------------------------------------------------------------------

Okay. Svetlana, we got the question. I can assure you that it's not the number of IoT subscribers that has driven the growth in the second quarter. We have a healthy growth of general subscribers too.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question is from Ondrej Cabejšek, UBS.

--------------------------------------------------------------------------------

Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [23]

--------------------------------------------------------------------------------

Two questions from me, please. So first one is on content production. So you've been talking about producing your own content recently more and more. If you could just speak about what sort of capital incentives you are planning in this venture? And then it's very conceptually whether you see this more as a defensive initiative, given the growing importance of convergence in Russia or whether you think this can actually become a digital growth driver for you?

And second question on 5G, please. Last time you mentioned that you don't expect any significant 5G CapEx before 2021. But what we've seen in the meantime is some press reports on the fact that the 3 gigahertz bands may not even be freed up for the telecoms industry. So if you could talk a bit about how this changes your assumptions in terms of timing and CapEx and whether potentially this changes your view on how you would go about rolling out the network in conjunction with, like, the rest of the sector in Russia or not?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [24]

--------------------------------------------------------------------------------

On the cost of content production, I think it's -- firstly, the approach will be quite waited. We are not planning major investments into this area short term. So we'll start moving and building our media verticals still being quite conservative and cautious on that side. Although, on the other side, it's too early to give the exact indications of what would be our strategy in investments. So we'll be better positioned as we build -- finalize build-up of our major vertical and improve the strategy for this direction, which we expect to have by the end of the year. And as far as 5G is concerned, we don't see any changes towards our estimates, which have no material impact on our CapEx in 2019 and 2020.

--------------------------------------------------------------------------------

Ondrej Cabejšek, UBS Investment Bank, Research Division - Director [25]

--------------------------------------------------------------------------------

So then can I just follow-up on the second question. Do you expect this what I just mentioned to happen and materialize, i.e., no 3 gigahertz spectrum being given to this sector? And if so what impacts would you see on yourselves in terms of timing and then potential CapEx for further technology overall?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [26]

--------------------------------------------------------------------------------

Well, it doesn't say that -- we still expect that certain clarity on the frequency will be achieved, and we'll see what, together with regulator, we're discussing and will see certain path towards what is the approach and what is -- how regulator sees the development into this field. And we might see certain decisions sooner than the period which we indicated. So in some future. However, it doesn't mean even if there are certain allocation of frequencies and even if there are more clarity on frequencies, it doesn't mean there will be immediate CapEx start irrespective of what are those decisions and how they are to be implemented. We just don't feel that there is right now a demand. We expect that the first 5G sensors to appear only by the end of this year. So there is no strong need on building up aggressively 5G, at least with the current -- at the current stage, with the current iteration of 5G smartphones, which is effectively 0 for today, it will not be sufficient -- it will be nothing meaningless in the next year. So in this sense, at this stage, this is more of a PR than in a real consumer experience and economic rationale.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Our next question is from Alexander Vengranovich.

--------------------------------------------------------------------------------

Alexander Vengranovich, Renaissance Capital, Research Division - Analyst [28]

--------------------------------------------------------------------------------

One follow-up question from my side on MTS Bank. So we've seen quite significant increase in the loan portfolio of the bank. So my question relates to the future outlook for the bank's profitability. So typically when you have the correct expansion of the loan portfolio, that could create a risk for some more prudent provisioning of that portfolio and ultimately have some negative impact on the profitability. So I'm just wondering whether you see the current level of the profitability as organic and should we expect any further volatility from that level this year and probably over the coming couple of quarters? So that's my question.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [29]

--------------------------------------------------------------------------------

Okay. Thank you for the question. Firstly, I would like to stress that the growth in our portfolio is a good indication of synergetic effects, which we demonstrate through consolidating MTS Bank within the group in deriving ecosystematics, if you want to say that, effects based on our Big Data and other elements of our ecosystem on the portfolio of MTS Bank. First of all, we are succeeding, specifically, in B2C segment where we feel quite confident, where we have priority now strategy and where we are able to successfully generate synergetic effects from our Big Data knowledge of our customer base and more efficient scoring and better service being provided. That includes, by the way, our distribution side where we also feel strong and where we also through our distribution sales of handsets on credit is also generating a healthy return for our credit portfolio.

Saying that it is also important to stress that the growth in our portfolio goes along with a stable cost of risk and at a quite healthy level. So right now, we see that by market standard, we're quite conservative on the side of cost of risk and in this sense we don't expect that we are taking any excessive risk and we don't expect any additional provisions. Moreover, we expect solid growth of our net income this year versus last year, so if last year, we had about RUB 600 million of net income, I think this year we are expecting somewhere within RUB 1 billion range of net income, which is a good addition in terms of year-on-year.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) We have a follow-up question from Herve Drouet, HSBC.

--------------------------------------------------------------------------------

Herve Drouet, HSBC, Research Division - Head of EEMEA Telecoms, Media and Technologies Equity Research [31]

--------------------------------------------------------------------------------

This is Herve Drouet from HSBC. Just a follow-up question again on MTS Bank. And about the net interest income you are posting, how do you book those net interest income? I would've expected while your retailer launch portfolio grow, you will have a significant pickup in the net interest income you are booking on your P&L. And it looks like also it's growing, it's more flattish, it doesn't follow at all the growth of the retail loans. I was wondering is there some specificity that explains that you don't have the same growth trajectory on your net interest income versus your retail loans gross.

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [32]

--------------------------------------------------------------------------------

So net interest income goes into OIBDA, the contribution into OIBDA, which we have in our factor analysis is an indication of this healthy growth, which we have from net interest -- interest income, iterating interest income, which we have from MTS Bank. As net income goes, of course, into consolidated group net income and we see good -- pretty stable dynamics first half year-on-year in terms of net income, but the healthy growth in net operating income and we are guiding -- what I'm guiding the overall growth in net income, along with net operating income full year results. So what we'll see? We'll see good growth from all parameters year-on-year.

--------------------------------------------------------------------------------

Herve Drouet, HSBC, Research Division - Head of EEMEA Telecoms, Media and Technologies Equity Research [33]

--------------------------------------------------------------------------------

All right. And what I was trying to find out is the -- as your retail launch increase and maybe you have different type of margins you are doing on those retail loans, I was wondering in terms of the quality of the loans, I mean, is there a change in the type of loans you are gradually taking, which may explain the fact that maybe what you are booking on the net interest margins income is maybe not growing as fast as the volume of retail launch you are taking on?

--------------------------------------------------------------------------------

Alexey Valerievich Kornya, Mobile TeleSystems Public Joint Stock Company - Chairman of the Management Board, President, CEO & Director [34]

--------------------------------------------------------------------------------

You can see our NPL is now cost of risk. They are pretty stable in year-on-year terms, they're even decreasing. So in this sense, we are very comfortable. The growth of portfolio doesn't go at the expense of risk. You can see it from the indicators -- the figures, which we're providing.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

(Operator Instructions) We have no other question at this moment. Dear, speakers, back to you for the conclusion remarks.

--------------------------------------------------------------------------------

Polina Ugryumova, Mobile TeleSystems Public Joint Stock Company - Director of IR [36]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you very much for listening. If you have any further questions, we welcome you to contact MTS Investor Relations team at any time. A webcast of this discussion will be available soon on our website if you wish to replay the call. In the meantime, we appreciate your interest and wish everybody a pleasant day.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

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