Bankers Presentation (with Q2 Highlights)

Transcription

1 Bankers Presentation (with Q2 Highlights) September 16,

2 US$ Data Based on Convenience Translation Until December 31, 2006, the Company used the US dollar as its reporting currency. Effective January 1, 2007, the Company changed its reporting currency from the US dollar to the Ruble, since this is the primary currency of the economic activities in which substantially all operations of the Company are conducted. But we continue to show numbers in US dollars throughout this presentation to facilitate comparison with our Peers. All US dollar financial information were generated by convenience translation methodology. Specifically, all Ruble financial data have been translated using the official exchange rate determined by the Central Bank of Russian Federation as of the end of each financial period; viz., the last day of each quarter in 07-08, regardless of the actual date(s) or period(s) covered by the Ruble data. 2

3 Disclaimer OJSC MegaFon ( MegaFon ) has obtained the information in this presentation from sources it believes to be reliable. Although MegaFon has taken all reasonable care to ensure that the information herein is accurate and correct, MegaFon makes no representation or warranty, express or implied, as to the accuracy, correctness or completeness of such information. Furthermore, MegaFon makes no representation or warranty, express or implied, that its future operating, financial or other results will be consistent with results implied, directly or indirectly, by such information or with MegaFon s past operating, financial or other results. Any information herein is as of the date of this presentation and may change without notice. MegaFon undertakes no obligation to update the information in this presentation. In addition, information in this presentation may be condensed or incomplete, and this presentation may not contain all material information in respect of MegaFon. This presentation also contains forward-looking statements that relate to, among other things, MegaFon s plans, objectives, goals, strategies, future operations and performance. Such forward-looking statements may be characterized by words such as anticipates, estimates, expects, projects, believes, intends, plans, may, will and should and similar expressions but are not the exclusive means of identifying such statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause MegaFon s operating, financial or other results to be materially different from the operating, financial or other results expressed or implied by such statements. Although MegaFon believes the basis for such forward-looking statements to be fair and reasonable, MegaFon makes no representation or warranty, express or implied, as to the fairness or reasonableness of such forward-looking statements. Furthermore, MegaFon makes no representation or warranty, express or implied, that the operating, financial or other results anticipated by such forward-looking statements will be achieved. Such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario. MegaFon undertakes no obligation to update the forward-looking statements in this presentation. 3

4 Highlights General Highlights Over 40 million total subscribers today First and only operator to cover entire Russia Developing 3G Increasing subscriber share and continuing to improve revenue share Strong credit metrics (stronger than Peers), and continuing to improve Q2 and H1 08 Operational and Financial Highlights $1.8 billion Q2 08 revenue, 36.3% increase over Q2 07 by convenience USD translation (23.8% increase in ruble terms) $0.9 billion Q2 08 EBITDA, 26.0% increase over Q2 07 (13.6% in rubles) $0.4 billion Q2 08 Net Income, 34.3% increase over Q2 07 (22.1% in rubles) $3.4 billion H1 08 revenue, a 38.8% increase over H1 07 (26.1% in rubles) $1.7 billion H1 08 EBITDA, 34.0% increase over H1 07 (21.8% increase in rubles) $0.8 billion H1 08 Net Income, 47.9% increase over H1 07 (34.4% in rubles) Significant Developments Resolution of shareholders dispute Signed 2-year iphone contract Introduced FMC convergent offering including Home- and Office Zone Alexander Volkov, former General Director of Northwest Branch, became COO Lubov Strelkina, former Volga Chief Accountant, became our Chief Accountant Set up MegaFon International headed by Alexey Nichiporenko, 1 st Deputy CEO 4

5 Russian Mobile Industry 5

6 Russian Mobile Market Still Growing At Relatively Good Pace Actual Penetration of Active Subs about 70% In 2008, Forecasting mln new Mobile Adds 220 Market subs, mln. Cell. Penetration (SIM) 119% 125% 126% % 102% 106% 86% % 51% % 46% 20 13% % 6% E -14% 6

7 Russian Mobile Operators Face Such Major Challenges As: Slowdown in Russian market growth Industry analysts anticipate slowdown in growth of the Russian mobile market (current penetration 121%). However, industry will still grow faster than GDP: forecast growth of 20% to size of $23-24 Billion) Price per minute in Russia averages ¼ of prices in the Europe Russian mobile ARPU of $13 is significantly lower than European average. Considering that our level of Capex is similar to Capex of European operators (same prices for equipment of leading vendors), the task of improving efficiency of business in Russia becomes more challenging Churn is higher in Russia Because schemes to link subscribers to the operator (e.g., post paid/contract plans with phone subsidies) are not widely used in Russia, subscribers easily switch between competitors networks. As a result, Russian churn rate can reach 50% vs the significantly lower European average churn rate of ~ 25%. Regulation in Russia becoming more severe Due to high margins and the increasing sensitivity of public opinion towards mobile communications in Russia, there is increasingly risk that the regulator may seek to strengthen its control over prices and competition including the possible introduction of MNP and MVNO. 7

8 Other Regulatory Challenges We Face Includes: Calling Party Pay (CPP) In June 2006, the Calling Party Pays (CPP) was introduced in Russia. Russian mobile subscribers are no longer charged for incoming calls. Fixed line operator also began to pay for terminating traffic to mobile networks. As a result, ARPU grew from interconnect revenue (now 13-14% of total) and from the increase in usage of voice services General decline in gross margin and EBITDA margin because of higher interconnect costs 3G Licenses In April 2007, the tender was held for issuing Third Generation licenses. All the Big Three operators were awarded the licenses. We were the first in Russia to launch 3G commercial operations in the North-West. Rollout of 3G in Moscow is impeded by the need to clear frequency spectrum, which are generally owned by defense and security agencies. Control over registration of telecom networks in Russia becomes more severe Since mid- 2008, the regulator has tightened its control, increasing the difficulty to secure permits for use telecommunications-related devices or assets including frequency permits, authorization for use of telecom installations, registration of radio-and-electronic devices, etc. Currently, securing such registrations or permits takes much longer than what s needed for the fast growing network infrastructure of the Russian telecom operators. Stronger control over efficient use of radio frequency spectrum in Russia In early July 2008, President Medvedev supported the initiative of the RF Ministry for Communications and Mass Media to introduce payment for use of frequency spectrum with the purpose of increasing the efficiency of spectrum utilization. Industry experts believe that such step may also allow the operators to rollout 3G network in Moscow. 8

9 Russian Mobile Market is Evolving Along Such Major Trends As: Developing New Technology Growth of 3G technologies. Boosting the demand for value-added services (high speed data transmission, consumption of «heavy» content, etc). Growth of revenue from value-added services. Development of new wireless technologies, primarily Wireless Broad Band (Wi-Fi, WiMax), IP-technologies, Smartphone. Mobile and Fixed Convergence Networks, services convergence, strategic partnership of mobile and fixed operators, content and internet providers, platform manufacturers, including use of end-to-end brands. Shifting Competitive Focus Shift in focus from acquiring new additions to retention of customers, marketing, channels of customer care, control of distribution, improving brand values, etc. Strengthening Business Internally Improving business efficiency and profitability. Diversification, costs optimization 9

10 The Company and Development Strategy 10

11 Milestones of Company s Evolution Establishment of North-West GSM Leading position in North-West of Russia Merger of 9 regional operators into all-russian operator MegaFon About 30 mln. subscribers ~ 20% of RF market, leader in new adds number Leader in revenue from Russian operations Launch of commercial operation Launch of commercial operation in Moscow First Eurobond issue ($375 mln., 5 years) 100% license coverage, rollout of 3G network Leadership in the best segments, 3G development 11

12 We Began To Offer Some Fixed-Mobile Convergence Initiatives Mass Market Growth Initiatives Home Zones: Prices competitive with fixed line within users specific zone to promote fixed-to-mobile substitution. This service is intended to stimulate users to use their mobile in lieu of fixed line. Long-Distance Offering: Currently, consumers perceive that long-distance calls on mobile networks cost more than fixed-line communication. Our service aims to debunk this stereotype, with the goal capture a higher share of long-distance traffic. Voice service over Internet (soft-phone) Targeted to progressive users, this service gives them free calls to other computers, and cheap calls to phones. Corporate Market Growth Initiatives Office Zones: Fixed-to-mobile substitution. Voice and Data Services: For regional SMEs (small and medium enterprises) using WiMax Fixed-mobile convergence: Voice and data solutions for corporate customers Mobile data solution, including WiFi hotspots 12

13 We Intend to Succeed in the Fixed- Mobile Convergence Space Success Factors for Implementation of Above Initiatives Convergence of fixed and mobile services Near-term steps aimed at maintaining market position Improve efficiency of existing assets and upgrade tested technologies Medium-term steps to gain competitive market advantage Introduce new technology solutions; adapt to changing competitive environment Key Success Factors: Prompt decision-making Implement new technologies Introduce centralized and integrated system for launching new services and products Develop forecasting system to better identify needs and demand for new products and services Fast adaptation to changing market place and needs Organizational learning and renewal 13

14 Company Priorities Change As Market Develops Market Stage of Development Fast Growth Late Growth Mature Market Actual Penetration Annual growth of subscribers 0-40% 40-80% Более over 80% 25% % Up to 10% What is important for financial markets Strategic priorities Organizational priorities/ Culture Subscribers number, revenue Acquiring subscribers Entrepreneurial Increasing market share + + Revenue, strategic position Maintaining share and ARPU Focused on customer + + Profit, strategic position Maintaining and Leveraging market share Profit, Efficiency Corporate 14

15 We Are Getting Bigger in Revenue Share, Converging to Our Peers MTS 50% 46% 41% 36% 35% 35,5% Vimpelcom MegaFon 31% 19% 32% 33% 26% 22% 35% 29% 34% 32,9% 31,7% 31% mth 08 15

16 We re Among Russia s Largest and Continuing to Move Up AK&M agency s rating of «Leading Enterprises of RUSSIA» by size, social and economic contribution,efficiency, etc: 16 th Place from 21 st Gazprom 1 1 Lukoil 2 2 Russian Rail 3 3 MTS VimpelCom MegaFon EXPERT magazine s largest Russian businesses by revenue: 28 th Place from 36 th Sistema VimpelCom MegaFon Forbes ranking of 200 largest Russian private companies - 7 th Place from 8 th MegaFon Finance magazine rating of 500 largest Russian companies: 27 th position from 35 th VimpelCom Sistema MegaFon

17 Operational and Financial Highlights 17

18 Solid Ruble Performance; Even Better in US$ Terms 18

19 Increasing Subscriber Market Share with the Highest ARPU Russian Subscribers ( 000) Q1'08 Q2'08 '08/10/08 % market share 100% 75% 50% 25% 0% Evolution of ARPU Russian Subscribers Market Share 13,0% 10,9% 12,5% 15,1% 16,4% 32,0% 34,8% 34,3% 31,7% 29,9% 37,0% 35,9% 35,2% 33,7% 33,2% 17,4% 17,6% 25,1% 24,6% 35,7% 35,5% 18,0% 18,4% 18,1% 19,5% 20,5% 21,9% 22,4% Q1'04 Q4'04 Q4'05 Q4'06 Q4'07 Q1'08 Q2'08 MegaFon MTS VimpelCom Other $17 $15 $13 $11 $9 $7 14,1 13,1 MegaFon MTS Vimpelcom VIP (active) 11,6 11,2 10,8 15,8 15,1 14,7 14,3 13,5 13,2 12,9 11,0 10,9 11,1 11,0 10,1 10,0 8,7 8,9 8,5 7,4 7,0 VIP started to distinguish between ARPU of active subs vs registered subs. Specifically, VIP defines active subs as the sub count based on 3-month cutoff as in MegaFon. $5 Q1'04 Q4'04 Q4'05 Q4'06 Q4'07 Q1'08 Q2'08 Source: Companies reports 19

20 Continuing to Improve Revenue and EBITDA Share Among Peers Majors Russian Revenue Share % Majors Russian EBITDA Share % 100% 100% 75% 30,9% 31,9% 34,2% 34,4% 34,0% 33,0% 32,7% 75% 30,3% 33,6% 34,8% 34,6% 32,6% 36,3% 33,7% 50% 48,5% 44,2% 37,9% 35,8% 34,5% 35,4% 35,5% 50% 53,6% 46,1% 36,8% 37,1% 34,6% 33,2% 36,0% 6,5 25% 0% 20,6% 23,9% 27,9% 29,9% 31,5% 31,6% 31,7% Q1'04 Q4'04 Q4'05 Q4'06 Q4'07 Q1'08 Q2'08 MegaFon MTS VimpelCom 25% 0% 16,0% 20,3% 28,4% 28,3% 32,8% 30,4% 30,4% Q1'04 Q4'04 Q4'05 Q4'06 Q4'07 Q1'08 Q2'08 MegaFon MTS VimpelCom VIP last 2 quarters of EBITDA share numbers influenced by stock compensation plan accruals of $118.7M in Q4 07 and subsequent reversed of $42.7M in Q1 08 due to volatile stock prices Source: Companies reports 20

21 Positive Operational Dynamics: About 2 Months SAC Payback MOU ARPU $20 $15 $17,0 $15,0 $12,7 $11,0 $11,8 $14,1 $14,3 $15, $ $5 0 $ Q1'08 Q2' Q1'08 Q2'08 Churn All-in SAC (1) /Payback $40 2,5 60% $35 $33,5 50% 40% 30% 22% 36% 36% 45% 46% 42% 41% 40% $30 $25 $20 $15 $25,0 $25,9 1,5 1,7 1,8 $23,4 1,8 $20,0 2,0 $21,5 1,9 $27,0 $28,5 2,0 2,1 2,0 1,5 20% $10 1,0 10% $5 0% Q1'08 Q2'08 $ Q1'08 Q2'08 SAC Payback 0,5 21 Note: (1) Includes commercial expenses ex payroll

22 Solid H1 08 Financial Results Year Ending 31 December (US$ million) H1 07 H1 08 Revenues ,480 2,388 3,733 5,720 2,464 3,419 % YoY Growth 103.9% 102.9% 81.7% 61.4% 56.3% 53.2% 58.7% 38.8% EBITDA ,113 1,849 2,916 1,252 1,678 % Margin 34.5% 44.5% 42.0% 46.6% 49.5% 51.0% 50.8% 49.1% Operating Income , ,108 % Margin 10.9% 26.6% 24.6% 27.1% 31.4% 33.8% 32.7% 32.4% Net Income , Cash Flow Operations from ,404 1,042 1,498 Cash Capex* (1) (230) (365) (653) (1,001) (1,218) (1,453) (524) (748) Cash Flow from Investing Activities (2) (222) (439) (605) (990) (1,211) (1,455) (523) (747) Cash Flow from /(to) Financing (3) (302) (191) 5 (182) * vs Accrual Capex (308) (523) (970) (1,232) (1,255) (1,571) (550) (787) Note: (1) Reflects actual cash outlay for capital expenditure. Excludes capex funded through vendor/eca financings, equipment under capital leases, and change in accounts payable to equipment suppliers. (2) Excludes short term investment with (3) Excludes vendor/eca financing and capital lease obligations, as prescribed under US GAAP 22

23 Continued Revenue Growth and Improving Profitability Revenue ($mn) EBITDA ($mn) $ % $6 000 $5 000 $4 000 $3 000 $2 000 $1 000 $0 17x $5 720 $3 733 $2 388 $1 480 $1 607 $1 808 $815 $ Q1'08 Q2'08 $3 000 $2 500 $2 000 $1 500 $1 000 $500 $0 24x $ ,0% 49,5% 50,0% 50% $ ,3% 46,6% 44,5% $ ,0% $803 $873 40% $621 $362 $138 34,5% 30% Q1'08 Q2'08 EBITDA EBITDA margin% $1 350 $1 200 $1 050 $900 Net Income ($mn) 63x $1 384 $813 $750 $600 $450 $394 $394 $430 $300 $172 $150 $99 $26 $ Q1'08 Q2'08 * Q3 05, Q4 05, Q1 06, Q2 06 net income include $39M, $12M, $13M, and $15M C-loan expense. C-loan is treated as derivative instrument under US GAAP accounting. C-Loan was paid off in July

24 Capex(1) Scalable and Funded From Operations Capex (1) overview $3 000 ($Mn) 268% $ $ % % $ $ % % % $500 31% % $ Q1'08 Q2'08 284% 252% 221% 189% 158% 126% 95% 63% 32% 0% Capex covered from internal cash flow from operations since H2 06 Capex is committed on a region by region basis and largely modular In unfavorable market conditions capex can be scaled back or postponed Capex distribution / trends: 2008: Estimated 3G capex $ M. Total capex up to $2.0B depending on incremental MOU and subscribers Cash Flow from Operations Accrual Capex Cash Flow/Capex Note: (1) Accrual capital expenditure for the period (includes actual cash outlay for capex and capex financed through vendor/eca financing, equipment received under capital leases, and change in accounts payable to equipment suppliers). 24

25 Strong and Improving Debt to EBITDA Total Debt (1) ($mn) Net Debt (ex sub debt) (2) / EBITDA $1,766 $2 000 $1 750 $1 500 $1 250 $1 000 $750 $500 $250 $0 $1,797 $1,732 $1,814 $1,705 $1,710 $138 $1,652 $112 $123 $135 2,0x $141 $1,226 1,5x $108 2,0x $552 1,5x $277 $99 0,6x $45 0,6x 0,9x 0,5x Q1'08 Q2'08 Debt shareholders loans Total Debt/EBITDA 2,8 2,4 2,0 1,6 1,2 0,8 0,4 $1 500 $1 250 $1 000 $750 $500 $250 $0 -$250 1,9x $1 340 $ ,2x 1,3x 1,2x $802 0,7x $557 $435 $261 0,2x $79 0,0x Q4'07 Q1'08 Q2'08 -$161 Net Debt Net Debt/ EBITDA 1,9 1,7 1,5 1,3 1,1 0,9 0,7 0,5 0,3 0,1-0,1 Vs Debt Covenant 2.75x Note : (1) Total Debt includes short- and long-term debt, capital lease obligations and shareholders loans but excludes derivative instruments for all period except Q2 06. Also includes A/P to equipment suppliers. (2) Net Debt is total debt less cash and short term investments and subordinated shareholders loan of original principal $92.6M. (3) Quarterly Total Debt/ EBITDA and Net Debt/EBITDA figures are based on trailing quarter financials. 25

26 Strong Interest Cover; and All Debt Unsecured EBITDA /Gross Interest Expense (1) EBITDA /Net Interest Expense (2) $160 $140 $120 $100 $80 $60 $40 $20 $0 $18 7,7x $76 $40 9,1x 8,2x $123 9,1x $135 13,7x $134 21,8x 23,6x $32 25,7x $ Q4'07 Q1'08 Q2'08 16% 26,0x 24,0x 22,0x 20,0x 18,0x 16,0x 14,0x 12,0x 10,0x 8,0x 6,0x Secured vs. Unsecured Debt 28% $100 $80 $60 $40 $20 $0 -$20 12,3x $11 $24 $49 $86 14,9x 12,9x 12,7x $92 20,1x $56 52,1x 87,1x Q1'08 Q2'08 Vs Debt Covenant 4-5x $0 -$11 110,0x 90,0x 70,0x 50,0x 30,0x 10,0x -10,0x 56% 84% 72% 89% 100% 100% 100% 100% 44% 11% 0% 0% 11% Q1'08 Q2'08 Secured Note : (1) Gross Interest Expense is reported interest expense plus capitalized interest on a rolling four quarter basis. (2) Net Interest Expense is reported interest expense less interest income for rolling four quarters. Unsecured 26

27 Current Focus Increase customer loyalty and decrease churn Stabilize average price per minute and improve ARPU Continue efforts to centralize functions and internal processes. Expand coverage, improve service quality and introduce new value added services Develop 3G particularly to take advantage of growing market for internet access from mobile phones Leverage sale of iphone to stimulate data and VAS usage Continue to manage finances prudently Explore profitable external growth opportunities Explore profitable new business opportunities 27

28 Successful Partnership 28

29 Backup Slides 29

30 Strong Credit Metrics Even With Conservative Methodology Key Credit Metrics Q1 08 Q2 08 (1) (3) (2) (5) (4) (5) (3)(4) (4) (5) (5) Note : (1) Total Debt includes short- and long-term debt, capital lease obligations, shareholders loans and A/P to equipment suppliers, but excludes derivative instruments in all periods except for Q2 06. (2) Net Debt is total debt less cash and short term investments. (3) Net Debt less subordinated shareholders loans with original principal amount of $92.6M. Adjustment made beginning yearend 2004 since clear subordination occurred only late 2004 and early (4) Quarterly Total Debt/ EBITDA and Net Debt/EBITDA are for rolling 4 quarters ending on March 31 st, June 30 th, Sept 30 th for calendar years 2005, 2006, 2007, and (5) Gross Interest Expense is reported interest expense plus capitalized interest on a rolling four quarter basis. Net Interest Expense is reported interest expense less interest income. 30