VEON Ltd (VEON) 2002 Q3 法說會逐字稿

Welcome to the Vimpel Communications Conference Call. I'll turn the call over to John Dillard of Edelman Financial.

Welcome to the 3rd Quarter Conference Call. Except for historical information, statements made may student forward-looking statements that involve certain risks and uncertainties. Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including those risks detailed from time to time in the company's reports on file with the Securities and Exchange Commission. If you have not received a copy of the press release today, contact Edelman Financial at 212-704-8134 and it will be forwarded to you immediately. At this time I'd like to turn the call over to Joe Lunder, Chief Executive Officer of Vimpel Communications.

Good morning everyone. Thank you for joining our conference call today. I trust you all received our press release this morning. Let me start by introducing our management team present on this call. Nikolay [Premisnicko], our first Vice President and [INAUDIBLE] Director, Morris [Vorsvo], our Chief Financial Officer, Valery Goldin, our Vice President of International Relations, and Yuli Masmatova, our treasurer.

On this conference call, we'll discuss three topics. VimpelCom's position in the markets and our development plans. Our financial result for the 3rd quarter of 2002 and our general markets and operating results in Moscow and nationwide.

Let me first express my satisfaction with the company's operating performance in the 3rd quarter of 2002. It was one of the most impressive quarter to quarter improvements in our results for many years.

I would like to note the growth of EBITDA of 42.9% compared with the 2nd quarter of 2002. Revenue and net income also demonstrated strong growth.

What is important.

These improvements were made along with the acceleration in our regional expansion. As of today, we have 34 operational networks in the regions of Russia compared with 20 at the time of our previous conference call about three months ago. The number of BeeLine subscribers in the region today is approximately 1 million. At the same time we maintain our leadership provision in Moscow with more than 52% market share. We believe these results show that our strategies rise and our analysis of the market is correct.

Let me briefly remind you the basic principals of our strategy. A continued focus of proximal growth in Moscow, the largest and most profitable market in the country, the roll-out of a nationwide GSM network with a unified business model, selective acquisitions if they are supported by our business model environments, strict cost controls, and careful financial analysis and monitoring to ensure that the investments create additional value for shareholders. As [cellular] business penetrates the regions, we see that the potential of the Russian [cellular] market is much higher than people originally thought.

The encouraging sign is although the regional subscriber base grew by 68% during the quarter, we saw more erosions in regional [INAUDIBLE]. We believe that our balanced approach to regional expansion with extensive use of synergies and cost control enable us to build a profitable business in the regions.

As you know, recent by we received a GSM license for the Northwest region, which includes St. Petersburg. It was given as a single band 1800 megahertz license and we are now working to extend it to the 900 megahertz bound. Although the license came late, we believe it is important and we intend to proceed with vigor in implementing this license.

We plan to build a network in St. Petersburg and immediate surroundings as well as along the road from Moscow through St. Petersburg up to the Finnish border. Our objectives are to provide our BeeOnline subscribers from other regions with good roaming quality, second, we will take share of guest roaming in Saint Petersburg, and then third, start taking local customers and gradually become a significant player in the local markets.

We plan to launch our network no later than in the 2nd quarter of 2003, and at this stage, we will invest approximately $50 million. This is part of our long standing strategy for becoming a national cellular operator in Russia.

So far this year, we closed two acquisitions. Both of which will -- both of which are well managed companies with healthy financial performance. We are also considering making some more acquisitions provided that they are supported by our business requirement and fits in our recent -- of creating a nationwide GSM operation.

Reviewing our performance in the second half of 2002, I'd like to note that the 1st quarter financial numbers were favorably affected by some seasonal factors. This resulted in a significant growth in roaming revenues. From $26 million to $39 million, and some increase in MRU and RPU, compared with the 2nd quarter of this year. In the 4th quarter, the seasonal is expected to work, but in a different direction, particularly traditional Christmas and new year promotions leads to increased sales and marketing expenses, and roaming revenues is expected to decrease. In the same way, we'll see continued growth in operating expenses in the region which now also includes the northwest.

Nevertheless, the continued strengthening of our position in Moscow and improving performance in the regions may make it possible to upgrade our guidance for our income margins. We believe that the consolidated EBITDA margin from 2002 will be in the range of 40 to 42%. As an indicator of our progress in the region, I'm happy to report that in the 3rd quarter of this year, our regional operations grew EBITDA positive. We will work hard to maintain this trend going forward in spite of continuing buildouts in the regions.

Finalizing the review of 2002. It's confirmed that we expect to meet our 2002 cap ex guidance of approximately $500 million given to you on the last conference call.

Looking at 2003, the market situation is very favorable. We see no significant slow down in the subscriber growth in the Moscow area, while subscriber growth in the regions is expected to accelerate. As capital expenditures are directly linked to the number of subscribers we need to serve in our network, it means capital expenditures will have to correspondingly increase.

In 2003 and 2004 we plan to invest about $900 million. We will fund this by cash on hand of approximately $300 million. We plan to raise approximately $300 million of external debt from banks and vendors and the balance will come from operating cash flow and the loss equity crunch. We consider the company well funded and we will become very well sufficient to continue its healthy growth both in Moscow and in the regions.

Let me turn the floor over to Morris, who will give you more details on our third quarter financial results.

Our 3rd quarter, 2002 financial results showed continued strong financial performance with net after tax of 40.5 million at a margin of 18.3 while EBITDA grew to 102.6 million with a margin of 46.4. These improvements relate to a number of factors.

Revenue growth, which in the 3rd quarter -- which in the 3rd quarter was 47 million in addition to compared to the 2nd quarter while the growth margin remained constant at 80.2% Operating expenses, SG&A expenses as a ratio to net revenue, decreased from 30.8% in the 2nd quarter to 30.9% in the 3rd quarter. This decrease related primarily to a decrease in subscriber acquisition costs from $31 per subscriber in the 2nd quarter to $25 in the 3rd quarter. In absolute terms, subscriber acquisitions situation costs improved from 14.6% of net revenue in the 2nd quarter to 11% in the 3rd quarter, with sales and marketing expenses flat quarter to quarter.

All other expenses showed improvement quarter to quarter as the ratios in net revenue. The provision for [Delpha] accounts as a ratio to net revenue compared to the same period last year improved from 3.3% to 2.8%. Depreciation as a ratio to net revenue showed an improvement from 12.6% to 12%, reflecting the phased roll-out of our regional network.

Overall, Vimpel-Communications regional operating expenses improved from 2nd quarter. Other income and expense decreased from 10.6% as a ratio to net revenue in the 2nd quarter to 4.8 in the third. This decrease related to a currency gain of 2.2 million in the quarter compared to 9.5 million loss in the 2nd quarter.

Profit tax increased to 25.1 million in the 3rd quarter from 9.5 million in the 2nd quarter reflecting our increased net income and improved near end projections. Profit taxes are recalculated each quarter based upon a projected year-end profit with the adjustments made in that court.

In terms of cap ex, we invested approximately 136.2 million in the 3rd quarter to bring year to date capital expenditures for the first nine months to 329.2 million. 73.9 million of the 136.2 million in the quarter related to regional development.

Cash reserves are adequate at 293.3 million. Total operating revenues excluding intercompany transactions for most Moscow stand alone and VimpelCom Region in the 3rd quarter of 2002 were 202.4 and 21.7 million respectively.

Net income from Moscow stand alone in the 3rd quarter of 2002 was 43.5 million and VimpelCom's region's loss was 3.2 million.

Thank you. Nikolay will present our operating results in Moscow and nationwide.

Thank you. During the 3rd quarter of 2002, VimpelCom continued to show strong operational results and achievements. Let me first address Moscow, where we maintain our strong leadership position.

The Moscow network expanded by 165 new stations, mainly increased capacity to support our very strong growth in the Moscow region. We kept our leadership position in product in the region. Among new services I would mention mail to SMS service, in addition to our mobile e-mail service, SMS traffic jam service, SMS banking with [INAUDIBLE] Bank, and launch of the first stage of wireless [PBX]. Strong growth in Moscow brought up approximately 3.5 million customers as of today.

We've shown a significant growth of revenue from [INAUDIBLE] here in 2002. Percentage of service revenues from [validated services] rose from 4.7% in the 3rd quarter of 2001 to more than 8% in the 3rd quarter of 2002. And we're well positioned to reach our yearly target, 10%. Our RPU in Moscow remains stable, and even slightly increased in the 3rd quarter. $21 compared to 19.6 in the 2nd quarter. We've managed to reduce and keep subscriber [condition] costs at a very low level, only $29 in Moscow in the 3rd quarter.

Now turning to the region, the 3rd quarter was instrumental in terms of expanding our national-wide footprint. We increased our building in [INAUDIBLE] for most of the regions, 318 new bay stations were installed.

Since the last conference call, we commercially launched 14 regions, and currently we provide commercial operations in 34 regions of Russia besides Moscow. As we announced earlier, our strategy is to use a unified industrial approach. We will use one building and prepaid solution, centralized call center, and a full integrated network across Russia. We believe this will give us an advantage to maximize economies of scale and ensure the most efficient and manageable operation.

We consider our grant as our strong advantage in powerful instruments or expanding our presence in the region. Each time opening a new branch, we get a convincing proof of this confidence because big crowds of people are waiting for the line to come to their city. As we show strong growth from the very first day of operations. Moreover, this year, our brands [INAUDIBLE] received an award as the Best Brand of the Year in Russia, within the competition's brand of the year.

We believe this is recognition of the popularity of our brand and efficiency of our marketing communications.

Strong growth for our regional operations during the 3rd quarter continues day after day. Our region you will subscribers is approximately 1 million as of November 21st. RPU volume lightly increased, 13.3 in the 3rd quarter compared to 12.9 in the 2nd quarter. We can consider our operations of acquiring subscribers in the region as very efficient. Average subscribers additional cost was only $12.4 in the 3rd quarter.

On a consolidated basis our numbers look at follows, RPU, $19.8, MOU, 97.2 minutes, subscriber's additional cost $24.6, and number of subscribers approximately 4 ,520,000 subscribers.

We have an increased churn rate in the 3rd quarter, 8.5% against 6.9% in the previous quarter. It came because of high proportional of low end [INAUDIBLE] users in the network and increased competition. However, It's mitigated by the following factors.

First of all, because of approximately 30% of churn represents internal migration, according to our estimates. Secondly, because of low subscriber position costs, and third, because of arrangements with dealers that we withhold part of dealer commission that compensate our losses if they occur in the first six months of subscription.

We believe that we had another successful quarter and the trend in the Russian market are [INAUDIBLE]. The market continues to grow very fast. It has a huge potential in Moscow and especially in the region. Our strategy is to use this great opportunity for the benefits of our shareholders.

Thank you. Let me now open the floor for questions.

Thank you. If you would like to ask a question, please do so by pressing the star followed by 1 on your touch-tone phone. We will proceed in the order that you signal us and take as many questions as time permits. We ask that you limit yourself to one question and one follow-up during this session. Once again, if you have a question, please press star 1. We'll take our first question from Alex Caseggi with Renaissance Capital.

Hi. First of all, congratulations with great results. If I look at your fourth quarter, you have about 150 million in cap ex still to undertake. Also you have about 120 million in short-term debt. That takes care of the 300 million in cash. If we look at the next two years, we have this -- where does this 900 million come from? Am I missing something here? Could you clarify the position?

I had difficulty hearing the first part of your question, but I heard that you addressed how we will spend the $900 million in 2003 and 2004?

Given the fact that you have 150 million still to do this year and about 120 million in vendor financing which is due sometime soon.

Okay, I understand. Let me deal with that at the end and we'll take the 900 first.

The 900 will be financed by partly cash that we're sitting on today. We plan to raise about 300 million dollars of external debts in the next two years, 2003 and 2004. Partly from vendors and partly from international and Russian banks which we think is very feasible, and the remaining part will come from operating cash flows and also from the last equity crunch that we've seen in November 2003.

Part of that debt will be rolled forward and it's difficult to read the balance sheet the way you do it, so it's not that much -- like the debt that is due in the 4th quarter.

And the 60 million in cap ex in the 4th quarter, is that fully funded by --

Repeat?

The 150 million which is still due in the 4th quarter this year?

As Jo said, first of all, part of this is approximately 50% will be extended, and that's why we will not be saying it back in the 4th quarter.

Right. 150 million you have still to finance in the 4th quarter in the cap ex.

But half of that is being rolled forward and remember also that the [INAUDIBLE] has 117 equity in external equity contributions in addition to what we've contributed [adds to] 175 million in Oslo.

Okay.

Next question is from [Herve Druay] HSBC.

Good afternoon. Congratulations for the very strong results. My question is about if you consider to do any acquisitions of - I mean we've seen you, you own quite a sort of [INAUDIBLE], recently it was quite new in your strategies, so far we've seen you growing organically. Are you expecting to change your strategy and now maybe growing by acquisition rather than organically?

I think we'll stick to our strategies to build a unified business model for [INAUDIBLE] means we believe in huge economies of scales and synergies in having one integrated network, one billing system, regional call centers, keep the traffic inside our own effort, and one brand and one set of products. I think that is the basic strategy that we will follow for the years to come.

We clearly see that there are interesting local players that we would like to acquire, and we'll only acquire them if we can effectively integrate them into the BeeLine concepts with respect to these things I mentioned earlier and we are looking at a couple of them these days, but we don't have anything to report right now in terms of names and actual projects, but I think our basic strategy is a unified approach with selective acquisitions if it makes sense to do so with respect to these requirements I mentioned.

Thank you.

Next question, [Valdimir Poslivoski] with City Group.

Good afternoon. Congratulations on excellent results. A couple of questions if I may. This first one, have your strategy changed from expansion out side of Russian, in particular, do you foresee maybe a merger with [Heathva] in the near future, given what you have already, and if yes, do you exclude a possibility of merger with the VimpelCom directly as opposed to -with VimpelCom R. And secondly, on your acquisitions, could you give us a rough idea of the financial performance by these companies, I'm looking at quarterly ratings, EBITDA and net income roughly at this point in time.

We think we have a lot of potential in the regions of Russia and right now we don't spend time and resources to look at countries outside of Russia. Of course, I understand that it is a logical idea to think given the shareholder structure and given the shareholder structure in the VimpelCom. In the long run, it's difficult to exclude a process like that to start, but right now, there's no such process planned or ongoing.

And in terms of the financial key selected data for the company we purchased, if we look at BeeLine [Zumara], quarterly revenue is approximately 40 million net income, 700,000 with an EBITDA margin of approximately 40%. [Hauron][INAUDIBLE] has quarterly revenues of just over $2 million, net income of approximately 600,000 with an EBITDA margin in excess of 50%. And [Sotovaya] Company in [Nova Sophia] had quarterly revenues of 1.5, with a net income of approximately 200,000 and EBITDA margin of high 50's.

Thank you very much.

Next, Nick Barns with Tims River Capital.

This is Nick Barns from Tims River. Can you give us some indication of the split of your RPU in Moscow between pre-pay customers and contract customers.

Contract customers RPU was $56.5 and pre-paid 10.4. In both segments we have increase in RPUs during the third quarter.

Okay, that's great, thanks.

Next, Anna Bauton with CAIB.

I just wanted to ask you about the launch of the MCS new prepaid product and to get your assessment of how you see yourselves versus that product and perhaps impact on your share going forward.

Yes, our competition launched a new product called [Jinks] on the market recently. In reality, it's not real prepaid product. You can call it quasi prepaid. It's without subscription fee, but relies on it's billing solutions but not pre-pay platform. It has a serious disadvantage compared to our prepaid which is real cost control and on-line certification.

That's why of course I foresee that this will be some difficulties with this product, but naturally with a heavy promotion and with the kind of new products on the markets, that could have some success in this low-end segment. That's why competition is increasing, but still we're -- we think we will have the strongest position on this segment of the market.

Thank you.

Next, Nadia Golupibay with Eton.

Good afternoon. Could you possibly repeat your RPU for MOE as well as subscriber position? We were disconnected and we missed that.

You mean on consolidated basis?

No, Moscow as its RPU, MOU, and [INAUDIBLE]

RPU for Moscow $281, MOU, 99.1 minutes subscriber additional costs 29. That's for Moscow.

My real question, it's regarding your launching of contract of plan outside Moscow. You're going to launch contracts products to outside Moscow you in September. What's your plans?

Yes, we have that first proposal to corporate clients in the market during this autumn, and our subscriber based within the segment is growing. Although in terms of total numbers, it's still modest numbers.

The majority of their subscribers is of course pre-paid users, but together with increasing the coverage in all regions, we'll approach more aggressively that corporate segment of the market.

Okay and let's say that the growth rates of your contract subscribers are higher than that of pre-paid, or do you know?

No, still the majority of the growth in the regions is of course pre-paid.

Okay.

Next, Steven Pettifer with Merrill Lynch.

Good afternoon. I wonder if you could comment please on the net impact of your new pricing plans in terms of price per minute as you go forward into the 4th quarter.

Our new plans were introduced with a new unique proposal on the market, but on the same tariff level as previous. That's why it will not seriously influence the average price per minute.

Let me also comment on pricing, because as Nikolay said, that launch was more or less in line with the price level on the market, and I think also if you analyze MCS's launch of Jinks,at is in line with the current level in the market, let's use this opportunity to address the fact that Megaphone has now launched tariffs in the Moscow market which is substantially lower, and this will gradually lead to increased competition in Moscow.

We don't have any plans right now to respond to their price initiative because we believe our product, our network, is so much better than theirs and for that reason, there should be a premium to be on the BeeLine network, and most likely MCS is [INAUDIBLE] But this is also to address that there is a pre-pay market now, coverage of Megaphone is growing and there are some more aggressively initiatives come from them both from dealer commissions and tariffs right now.

Thanks. Follow-up, are you able to give us MOU for contract and prepaid in Moscow?

Yes. MOU for contract was 233 minutes, for the prepaid, 58.9 minutes.

Thanks.

Next question, Dmitri [Kaken] with Cabelli and Company.

Good morning. Did you specify how much you paid for the acquisitions during the quarter for the three properties that you acquired, and going forward out of the $900 million in capital expenditures that you plan to spend over the next couple of years, do you include any type of M and A activities in that number?

Let me taken the last part of the question first. Both $900 million is marked for actually building networks, and acquisitions might come on top of that number. And then to -- to different acquisition project?

In the 3rd quarter, we purchased [INAUDIBLE], and the total price for the company was 18 million, and tomorrow we purchase only 1% in addition to what we had already because we own 50% of the company. We paid 500,000.

And that is not really reflecting the value of that company, but that is premium to get control.

Okay, so in terms of your funded needs going forward, what is your sense of how much you would potentially spend at least next year or maybe year after in terms of acquisitions on top of that $900 million since it's not in the number?

That depends of course on opportunities and there are different ways of course to finance something like this. We have tremendous leverage on this balance sheet if you really want to use that, but that might be $100 million used for potential regional acquisitions over the next couple of years.

One more question. I know I go over the limits. With the competitive environment getting a little more intense, where do you think your I guess margins on a steady state basis might end up?

You mean for this year?

No, longer term. You had a little over 40%, from to 42%. Do you think that these type of margins can be sustained on a long-term basis or is that something that once you reach a certain penetration level, margins will start coming down?

No, our judgment in the years to come, in 2003, with absolutely target to maintain the position we have this year, and we believe next year, the EBITDA margin will come about 40%, that is a target given how we see the market right now, how we see the competitive environment, how we see the growth coming in the region if you build in there the plans we have for the regions and if the market develops as we expect it to develop, we absolutely believe this is sustainable level that can be reached now even with some increased competition.

Next, Alexi [Yakovitski] with UFG.

Good evening. Congratulations on this. What was the stand alone EBITDA for the VimpelCom R In the quarter? Thank you.

We don't give [separate] EBITDA margins for VimpelCom Moscow/VimpelCom Regions for accounting purposes. It was a small positive EBITDA number in the 3rd quarter. We broke through in the top floor in the middle of the 3rd quarter so we carried dome losses in the beginning of the quarter and then it became stronger in the 2nd quarter, so it was a couple million dollars positive, so not on the levels of course that Moscow delivers, but it's growing and shows good progress into the 4th quarter.

Was a single digit double digit margin?

Single digit.

Next, Nateo Ponceleon with JP Morgan.

My questions have been answered. I have one follow-up. Looking at your credit stats, they're simply amazing. They're very strong. The question I have, have you any idea whether or not you're subject to an upgrade, have you been talking to the rating agencies and can you give us some color?

We have contacts with rating agencies and we have very soon a meeting with Moody's.

It's really difficult to make a judgment here on behalf of the rating agencies. We believe in ourselves, at the end of this month and we'll make another presentation for them and explain why we deserve better than what we have.

Thank you.

Abigail Brown with EMC.

Hi. I think today is the end of the free trial period for VimpelCom's MMS service, and I wanted to know when you plan to launch commercial MMS in Moscow, also if you could comment on GPRS and how many subscribers you think GPRS and how popular the service is in Moscow. Thank you.

With MMS, customers in Moscow can use it. At the moment, the service is very limited by the amounts and prices, that's why it's a niche market.

We plan to launch the service commercially next year, we're still finalizing exact dates and of course we're waiting for vendors to support more hand sets enabling MMS and reduce prices because we believe that will be the main factor increasing the growth.

Talking about GPRS, at the moment we have more than 20,000 subscribers. That revenue from GPRS is growing. We took a serious niche of the market, but of course this niche service is a [INAUDIBLE] not MMS.

Let me take this opportunity of addressing value added services. Remember on the conference call late last year, we said that we were targeting 10% of service revenue from value added services at the end end of 2002 and we see improvements quarter on quarter. Right now, we have 8% and we believe that we are on a good result, and looks like MMS is of course on our roadmap for new launches in 2003, it's going to be interesting to see how it's developing. This is really the first test on generation of products and we have hopes for MMS with some limitations right now, but a very interesting part of the development.

Next, Tom Edshed with Troika.

Good evening. My question was have you been talking to the Ministry about the new law on communications and proposed universal service tax and do you have any sense how that will impact you going forward?

[INAUDIBLE] new law on communications is a project, and the minister's communications, this is the first drop since it was [INAUDIBLE]. There are some amendments, some rivals, problems, so it is very difficult for -- to comment because there is no such document. We believe and we hope that this document will give us more advanced law on communications which would encourage further developments of in our case, telecommunications and in general telecommunications in Russia.

But no one has told you how much revenue you're going to have to give up to this fund?

It is only mentioned that the ministry's proposing to create such a fund. To compensate for so-called important social projects, but there is no figure mentioned there, so it's not clear what it meant, and of course there is an opposition among the deputies as I read in the press, that it's nothing like general legislation. This is a subject for discussion.

Thanks.

Next question, Kay Hope with Credit Suisse First Boston.

We talked a little about the Moscow expectations for next year and what you're planning to do in St. Petersburg, but can you comment about our regions you see as being key next year in terms of regions you might have launched in very recently or those you expect to launch in next year.

In general I would say we have good plans for all of the regions. We have our most mature operation in the central regions around Moscow because we launched there first. We have strong control on Volga right now, we will keep working on Volga. Also you are seeing the acquisition of the [INAUDIBLE] as a further breach into that region. And we have good hopes on that region with some very interesting cities that we will target next year.

We are of course looking at the south which is a bit different given the fact that the [Cobangi SM] is commanding the market down there right now. We have some growth in [INAUDIBLE] and we are also looking at ways to get a stronger position in that area. Of course, if we can recap at Siberia, as the last region that we are currently operating in, is also a good area for the company. A bit later in the development, because we started there than some of these other regions, but also showing good progress, so it's difficult to pinpoint one single region that is more important than others.

There are very interesting markets in all these regions, and also next year, Saint Petersburg is gradually going to go in the market and we will have to come up with a way of attacking that market, being the third player and coming in later than the others, and we have a national, a high national presence for that reason. Part of our plans is also to find access in the two in the [INAUDIBLE] and the Forest.

Great. One sort of follow on to that and that is do you expect that lot of regions where you'll be operating next year, either where you maybe have to start over or you will be launching operations, will you be the sort of second or third of the three big players in that area?

That is a combination. In some of these areas we are the first and our incremental market share is very high. In our regions, we are later, and of course coming in at number three or four is different than coming in at number one, but we also try to limit our resources, we don't roll out networks for the sake of rolling out networks, we do it because they're a value for our shareholders and for that reason invest more in the areas where we see a potential for higher and less where the potential is lower.

Thank you.

Next question, Bill Nord with Marvin and Palmer.

Yes, I'll join those congratulating you on a tremendous performance here, and we are shareholders, so we're very happy for that. The bottom of the net income line was after a rather high effective income tax rate of 38%. It's 33% for the nine months, and I'm just wondering what kind of a projected rate would you have for the entire year?

For the entire year is probably around about 35%. The reason that the effective rate is higher than the statutory rate is that when we strike the net before tax line using GAAP methodologies, we then have to add back many incentives which are not allowed as a deduction in the Russian tax code. So therefore if we look at a number, then we have a higher number and then we apply the statutory rate to the higher number and we end up with a higher income tax rate. But we anticipate it will be approximately 35% at year-end.

As a follow-up on a preliminary year-end basis as you look to 2003, would that be a reasonable projection for 2003, 35, or would it be lower?

I don't think so there will be any substantial change in the operating profile, so I would say that's a reasonable assumption.

Okay. Thank you very much.

Thank you.

Next, [Uli Maravoso] with Deutsch bank.

Good evening. I have two questions. One is when do you plan to start St. Petersburg operations, and second, what target market share you have for St. Petersburg if you have one for the end of 2003.

The target to launch is no later than the 2nd quarter of 2003. That's our target.

There are different risk factors in a project like this, but they are working aggressively and focused right now to launch the network as early as possible, but we communicated earlier and also today that the target is no later than the 2nd quarter of 2003.

With respect to market share, first of all in this project, we see three important segments that you're addressing. First of all, St. Petersburg is important for roaming purposes for BeeLine subscribers, and it's also important to secure the Moscow base because we're building our coverage from Moscow to Saint Petersburg to the Finnish border and there is a lot of traveling between Saint Petersburg and Moscow so this is also a protection on the [INAUDIBLE] base. And if we give the roaming proposal fro BeeLine subscribers living throughout the Russian territory. The second one, there is also guest roaming markets up there because there are a lot of visitors to the city, and the third group is the local subscribers.

We think it's absolutely possible to pick up 10% of the market in St. Petersburg within first two or three years of operations, but of course we need to balance our efforts given the competitive environment and it's difficult to give projections on the market share before we even have started commercial operations.

Thank you.

Next question, Vladimir [Bodemof] with Nick Boil.

Congratulations on your excellent results. Could you please provide us with a regional breakdown of your regional subscribers by microdivision?

Yes. We can do that. For today, our approximately 1 million subscriber is from center,410,000 subscribers, Volga subscriber base, 330, Siberia, approximately 200,00,South, approximately 60,000.

Thank you.

Next question, Vladimir Poslivoski with City Group.

A couple of follow-up questions. On St. Petersburg, any progress of 900 frequencies there, do you believe that you'll be able to secure them eventually, and the second one, could you give us minutes of use in the regions? I think this is missing. And finally, the churn rates in 4th quarter prior to launch of [Jinse] and [TS], were they higher other lower in Q3.

We see it's important to build an effective network after -- to have access to 900 frequencies, and we are of course working on that. We don't have anything to report at this point in time, and we will come back to you as soon as we have something to report.

Minutes of use in the region, in the 3rd quarter, 85 minutes per user. And the last one was churn in the 4th quarter compared to the third.

In the long-term, we of course targeting serious reduction of this churn levels, and that debts would be company priority, special loyalty program and redemption program will be launched, and of course especially talking about Moscow, coming up to more mature market depth, a number one priority of the company, so long-term is reduction.

At the same time, in the nearest quarters, we forecast more or less the same level mainly because of very aggressive sales in the past and very big availability of our products in the market. I will remind once again 30% of these numbers is our internal migration.

Thank you.

A follow-up from Steven Pettifer with Merrill Lynch.

Thanks. Two if I may. Just wanted to go back to your comments on Megaphone pricing in Moscow. I wondered what your thoughts were for if you saw that Megaphone was taking market share on the back of those discounted pricing. On the second question, if you could please give us the -- in your 34 regions outside Moscow, what the population coverage is there and how do you see that progressing? Thanks.

On the Megaphone, it is recently launched, and it's a bit difficult to see the effect yet. But of course when you go into market, you see [INAUDIBLE], you will see an increase in their sales. This is -- can potentially affect both of the players.

We haven't seen any real effect right now, but it might be that Christmas sales this year is the better sales season for Megaphone than last year, but still remember that the total number of subscribers in Moscow are still extremely high and it's going to be real difficult to start moving market share numbers substantially around with efficiency like this, but some increase and some progress are expected.

So far, end of the 3rd quarter, meg phones had only 4% market share.

And the second question?

Just I wonder if you could give us the population coverage you have in those 34 areas where you have the networks launched.

It's -- here it's different between actually how many people living there and how many people our radio signals actually reach, but if you look at the population, living in this area, it's about 73 million people living in these 34 launched networks, but of course our radio signals are not -- not -- that includes Moscow by the way, but our radio signals are not of course covering all of these 73 million people. I think about 50, 60% of that population is covered by our network. But then again, people travel in and out and move around of course.

And of course, to mention, we're starting operations in the main center of the regions, but then we're expanding to -- to the our part of the region gradually and then kind of that population coverage increases significantly.

Thanks.

Our final question today from Dmitri [Kaken] with Cabelli and Company.

Kind of an off the wall question. I'm not totally familiar with the market, but looking for example in U.S., you have carriers like Nextel that is offering a direct connect capabilities very successfully to construction and blue-collar workers and just business community, and I don't know, I know in Europe they are offering similar products called Tetra that are using Motorola, direct connect hand sets. Is there a carrier or service like that in Russia, and do you think that's something that Vimpel might be looking at as an add-on service maybe sometime in the future?

Right now we don't have that and that technology is not actively being used in Russia. We see a great focus on GSM and we are a bit late in the life cycle compared to Europe, but our next opportunity of these kind of local networks and technologies growing upside by side with the GSM and some of these technologies could be used for GSM operators to integrate as part of a GSM network to launch against corporate segments and others, but as of today there's no such initiatives of significance in the Russian market.

And what about services like Y-Fi and other broadband capabilities as an act to the mobile services that you provide already?

Yeah, we of course -- I mean, this is a part of the development in the market, and right now, a part of the product roadmap is to look at the products like wireless, LANs, and others, but of course these are also thing that is a bit difficult to share before we actually launch them.

Thank you.

This does conclude the question and answer session. I'd like to the call back over to Jo Lunder or any closing comments.

Thank you all for your questions, and also for joining us today on this conference call. If you have any follow-up questions, we are here available and I wish you all a nice day and good-bye for now. Thanks.