VEON Ltd (VEON) 2003 Q1 法說會逐字稿

Good day and welcome everyone to the Vimpel Communications first quarter 2003 financial results conference call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. John Dillard (ph) of Eddleman Financial (ph). Please go ahead, sir.

Good morning and welcome to VimpelCom's conference call to discuss the company's first quarter 2003 financial results. Before getting started I'd like to remind everyone that except for historical information statements made on this call may constitute 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 at the Securities & Exchange Commission. If you have not received a copy of the press release, please contact Eddleman Financial at 212-704-8134, and it will be forwarded to you. In addition, both the press release, which includes reconciliations of non-GAAP financial measures presented on this conference call, and in the earnings presentation, can be downloaded from the VimpelCom website at www.vimpelcom.com. At this time I'd like to turn the call over to Jo 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. We also posted a company presentation on our English language website where we give a more detailed summary of our activities for the reported period.

Let me start by introducing our management team that is present on this call. Nikolai N. Prianishnikov our First VP and Commercial Director, Illiana Martova (ph) our CFO and Valery Goldin our VP of International Relations.

On this conference call we will discuss the following topics. 1) Recent market developments and VimpelCom's position in the market. 2) Our financial results for the first quarter of 2003. 3) Operating results for the first quarter of 2003.

We consider our first quarter results as very positive for the company. We reported approximately 70% growth of net revenues and EBITDA on a year-on-year basis, and the EBITDA margin went up to 44%. We added more than one million new subscribers, approximately 800,000 of them are [indiscernible], and as of today our total subscriber base is approximately 6.9m.

During the quarter a very strong organic growth. We are also very pleased to report breakeven point at a net income level in our regional operations. An important remark here is that the profitability in our regional operations in the first quarter have not come at the expense of our growth strategy. Our revenues in the region grew by 64% quarter-on-quarter. Our incremental market share outside Moscow has over the last 12 months grown from 9% to 30%. And we are, as of today, number one in the Moscow and Siberia super-regions, number two in the central and Volga super-regions. We are the fastest growing operator in the south super-region. And our launch in St Petersburg in April of this year was another important milestone in our regional development program. And the growth so far is in line with our expectations.

These results demonstrate VimpelCom's ability to conduct rapid national expansion, keeping costs under strict control. We believe this achievement is to a large extent due to our consistent strategy of a unified approach in our national expansion. It allows us to organize a well managed operation, combining local initiative and centralized control on a territory which currently covers five time zones. The more we expand our business the more we expect to see the effects on economies of scale. We are encouraged without success in the regions because we see that there has been a clear shift from Moscow to the regions as the prime area for both subscriber and revenue growth.

Describing the development in Moscow I would like to underline the following: Moscow remains and will continue to be the largest and most important single market in the country. According to the preliminary results of a national census held in October 2002, the number of people living in Moscow license area is approximately 70m, 2m more than it was thought previously. It means that there may be more mobile subscribers in Moscow than it was originally estimated.

At the same time, we see signs of a growing number of subscribers using more than one operator, increased competition on pricing and product offering, which can result in increased churn and increased MOU and ARPU, particularly in the low end user segment. Regardless of the increased competition in Moscow we will continue to focus on maximizing profitability and cash flows through retention programs, increasing our share of the business segment, and through strict cost control.

In the regions in 2003 we will continue to pursue our strategy of rapid expansion building a unified nationwide network, focusing on efficiency, cost control, economies of scale and utilization of the same solutions across Russia. We have developed this policy in order to allow us to build a profitable high margin business, notwithstanding declining MOU and ARPU.

We are not changing our guidance for 2003 given earlier this year. We are targeting a 2003 annual revenue growth of 45% to 50%. We also expect our 2003 net income to grow in absolute numbers compared to 2002, and we are not changing our guidance on EBITDA margins made during our previous conference call.

We are moving according to plan in our fund raising activities. Last week we successfully completed the placement of 3bn ruble bonds, the equivalent of approximately $97m. The bonds are guaranteed by VimpelCom Region only, not VimpelCom, and the proceeds will be used to finance regional development. In line with our capital expenditure plan we will need to raise approximately $250m more in debt financing during 2003 and 2004.

As many of our shareholders probably know, we will hold our Annual General Meeting of Shareholders on June 27. All shareholder materials were sent by mail on May 13. And in addition the AGM material are available on our website. We've called on our shareholders to actively participate in the AGM and support the proposed decisions which will facilitate further growth of our business and value creation for our shareholders.

Before I give the floor to Illiana to give you more details on the first quarter financial results, let me reconfirm our confidence in the growth potential of the Russian cellular market, and that VimpelCom has the right strategies to take advantage of this potential. Illiana?

Thank you, Jo. Looking at the first quarter financials we see continued revenue growth in the regions and improvement in our consolidated EBITDA, both on a quarter-on-quarter and year-on-year basis. Consolidated net revenue grew by 68% year-on-year and by 7% quarter-on-quarter. Quarter-to-quarter to we have added $13m in service revenue, with a decrease in handset sales of one million. Service revenue growth came from the regional side, mainly from our organic development, but also helped by acquisition of StavTeleSot on January 31 this year.

In Moscow in the first quarter of year 2003 we see a decrease in minutes of use compared to the fourth quarter of year 2002, due to less working days, which together with a certain decrease in average price per minutes results in a revenue decrease.

Direct costs were changing in line with revenue, with some decrease in service margins and increase in the margins on handset sales, keeping total growth margin at approximately the same level as last year, around 80%. Our SG&A decreased as a percentage to revenues, from 38.2% in the fourth quarter of last year, to 34.9% in the first quarter of this year, which is very similar to the year's [unclear] percentage to revenue in the first quarter of year 2002, which was 34.4%.

Our depreciation is increasing in absolute terms relative to revenue terms as we accelerate regional coverage and capacity in a number of regional networks. In the first quarter depreciation and amortization constituted 16% of revenues compared to 13% in the fourth quarter of last year. So stabilized situation in Moscow in terms of margins, and rapid revenue growth in regions with margin improvements resulted in the total operating income growth in the first quarter to $68.9m or 28.2% operating margin, compared to $54.5m or 23.8% operating margin in the fourth quarter of year 2002. EBITDA margin has improved to 44.2% compared to 43.6% a year ago, and 37% in the last quarter of year 2002.

The deviations in Other income expenses came from the increase in our interest expanse, which are increasing due to debt financing of regional expansion. Consolidated net income has increased in absolute terms in the first quarter of year 2003 to 41.4m compared to 39.1m in the fourth quarter of year 2002. In relative terms both quarters show approximately 70% of net income as a percentage of revenue.

Due to improved performance of regional operations, we can see an increase in the net cash provided by our group operating activities, from $46.8m in the fourth quarter of year 2002, to $75.1m in the first quarter of this year. This cash inflow combined with cash on hand and external funds allowed us to finance investments of approximately $137m for purchase of property and equipment, and $38.1m for the acquisition of StavTeleSot.

On the May 20 we issued 3bn ruble bonds, which is an equivalent of approximately US$97m guaranteed by VimpelCom Region. The placement was done in one day with a coupon rate of 8.8%. The proceeds will be used for further financing of regional development, including some refinancing of securities for tenders.

Debt/equity ratio as of March 31 is close to one, and our balance sheet shows that together with current earnings VimpelCom is well positioned to take advantage of further future growth opportunities.

Thank you Illiana. Nikolai will now present our operating results. Nikolai?

Thank you, Jo. Despite increased competition in the Moscow market, VimpelCom maintains leadership position and kept on showing strong operations results and achievements during the first quarter 2003. We expanded our Moscow network by 183 new base stations in order to keep the quota of our [unclear] GSM network on the level to operate to our customers requirements. content provider access partner [indiscernible] for content providers [indiscernible] for [BPlus] were launched during the first quarter of 2003, that's keeping us in line with one of our major strategic objectives, to remain the leaders in the regions.

VimpelCom has been the first company in Russia that has introduced GPRS to the market, and presently is among the leading operators worldwide in terms of GPRS roaming. Our subscribers can currently use GPRS roaming in 23 countries. Various marketing initiatives and campaigns undertaken in the first quarter of 2003, and promotions of our strong brand, led to the growth of the number of subscribers, and brought us to approximately 4.2m subscribers in the Moscow license area as of today.

Our ARPU in Moscow was $15.2 in the first quarter of 2003, mainly affected by decrease in minutes of use per subscriber, which was a result of bigger share of prepaid subscribers, same as always, increase competition, and seasonally low minutes of use in January and February. We managed to keep low subscriber acquisition costs, $29.9 for attracting our Moscow subscribers.

Our regional expansion can undoubtedly be considered rapid, aggressive, effective and compliant with our objectives, to be the leading Russian national cellular operator. We developed our networks and expanded our operations all over Russian. In Siberia for example we built the networks in the most number of regions, Novosibirsk, Kemerovo, Barnaul, Gorno-Altaysk, Tomsk, Omsk, Krasnoyarsk, Nadisk (ph) and became the leaders in the Siberia super-region, where [unclear] and Barnaul showed the most rapid growth.

We continue to introduce nationwide marketing initiatives in order to strengthen our brand and make it national. We improved our regional GSM network. 479 base stations were installed in the first quarter. We launched new [validated] services, fixed to mobile conversions for corporate clients of [indiscernible] in the [Novosibirsk] region, WAP GPRS and Internet GPRS in several regions, and we show bright results. The growth of our regional subscriber base is very mush noticeable. A year ago we had only 285,000 subscribers in the regions, and during just the first quarter of 2003 we added more than 800,000 regional subscribers. That works out to approximately 2.7m subscribers in the regions as of today.

Regional ARPU which was $10.8 in the first quarter of 2003 was also influenced by seasonal low minutes of use in January and February, as well as by some price reductions made during the last two quarters in order to be competitive with our main regional competitors. Subscriber acquisitions costs in the regions was only $11.7. We consider this as good achievement that shows the efficiency of our business model with synergies of unified nationwide operations.

On a consolidated basis our numbers look as follows. Subscriber base approximately 6.9m as of today, ARPU [unclear] in the first quarter, minutes of use per subscriber 81.5 minutes. Subscriber acquisition costs $20.8. We consider the first quarter of 2003 a successful quarter for VimpelCom. We have a very strong intention to continue the growth of the company, strengthening Moscow, winning local and super-regional markets, further improving our operational results and expanding our network and product offerings all over Russia.

Thank you Nikolai. Let me now open the floor for any questions you might have.

Thank you, sir. If you would like to ask a question today please press the star key followed by the digit one on your touchtone phone. In order to keep this organized, please limit yourselves to one question and one follow-up. If you are on a speakerphone please unmute your phone in order for your signal to reach our equipment. Once again if you would like to ask a question please press the star key followed by the digit one, and please limit yourself to one question and one follow-up. We will pause a moment to assembler our question roster.

We go first to Vladimir Bogdomal(ph) with Nicole (ph).

Hello, it's Vladimir Bogdomal from Nicole Investment Bank. One small question. So as we could see ARPU continues to dilute significantly both year-over-year and quarter-over-quarter. So how do you see a bottom line for ARPU for the year, and going forward? Thank you.

First of all let me say again that we believe that we have some seasonal effects on ARPU due to the fact that the January and February is usually a low minutes of use month with a lot of holidays in Russia. February is a short month, and that was influencing ARPU in the second quarter. Secondly we believe that talking about price per minute we've already passed a very serious decrease of prices during the last two years, and right now we believe that price per minute was up on the market is already good price for keeping the markets growing further.

That's why our view on the ARPU is that, talking about Moscow market our guidance is $15 to $16 ARPU in Moscow this year. Talking about regions, $10 to $11 level for regional subscribers.

I would just add also to Nikolai's answer that we still see a very good relationship between subscriber acquisition costs and ARPU. So even though the ARPU is falling - which is of course a concern for the company and we are working on this, we have a lot of focus on this - that we still believe that the subscribers are very profitable for the company, showing a positive net present value. And we still face a very profitable growth even though ARPU decline has fallen in the first quarter.

Okay, so maybe you could disclose some measures in order to prevent further ARPU dilution?

Well first of all one of the key elements of our strategy is introducing new validated services, and selling that to the existing piece. We have research that shows that our subscribers are willing to use the services and are ready for paying more for the services in case of it's really a good, easy convenient service. So that's one of our strategies to introduce easy to use, convenient new innovative validated services, and to increase ARPU from the same subscriber base.

Secondly we are still aiming at increasing market share within this segment. We still have very good opportunities in Moscow. We were the second GSM player and usually all good GSM subscribers are choosing the first GSM player on the market. We managed to have some increase of our market share within this segment, but there is still some room for increasing. And more or less the same we can say in the regions. We started with a relatively small coverage area in all regions of operation. Right now we are expanding that to help to grow minutes of use and will try to attract more [indiscernible] subscribers in the regions.

We take our next question from Dimitri Vinobradav(ph) with UBS.

Hi. First of all congratulations with very good results. I had one question. Your net adds in the first quarter were obviously dominated by the regions. Given the high weight of the regions and also the SAC breakdown you provided, your blended SAC number looks a little high to me, could you comment on that?

First of all we believe that $20.8 is a good number, and if we compare that to our competitors number I think it shows efficiency of our operations. And if you look to the regional operations where most of the growth really is right now coming, I think the ratio is a little better. We are spending only $11.7 to attract new subscribers in the regions and we are getting $11 per subscribers in terms of ARPU.

I think it's worthwhile also mentioning here that subscriber acquisition costs we see in the regions is of course subscriber base growing and investment into growing the base. Some of the subscriber acquisition costs you see in Moscow, which is partly [indiscernible] and partly advertising, is of course also now linked to loyalty programs, retention programs. So part of that cost is also the maintaining and protecting the base that we've been building over the last couple of years. So that's probably why the average -- the question you're asking, why is the average not lower, and why is Moscow higher than maybe expected, that's partly because of some of the advertising and some of the expenses going onto advertising. It's also focusing on loyalty and retention programs for keeping the subscribers longer on the network.

Yes, I guess it would be difficult for you to quantify the cost associated to this retention program - is that right?

Right now it's difficult to break it because it's partly activities integrated with one another. But for the future it should still be possible to try to give some guidance on how much is going into growth and how much is going into maintenance. So that will be something we will be looking into trying to provide going forward.

We take our next question from Kevin Pettifer with Merrill Lynch.

Good afternoon. Could you please comment on where you think regional pricing will be going throughout the year please?

The pricing in the regions is quite complex figures. There is no general answer to the regions, there are different pictures in different markets. Some places there are quite a few competitors, in other markets there are less operators. We believe that the last half of -- or the second half of 2002 we saw quite a lot of pricing initiatives and quite a lot of head on competition because new entrants came in, accessing operators protecting themselves. We have also seen that through the first quarter of this year, so if you analyze also the first quarter you see mainly it's average price per minutes was dragging down the regional ARPU and not the minutes of use. We believe that we have put the strongest price competition in the regions behind us now. We've [unclear] back with increased subscribers, increased volumes that we will still see a price decrease - that's going to be very difficult to avoid. But we don't think we will see the same steps in terms of average price per minutes being reduced in the regions the next three quarters as we've seen in the last three quarters.

This is also the same we saw in Moscow. We saw this in a quite high average price per minute, it was quite dramatically reduced over a couple of years and it's sort of declining but it's showing a flattening trend. We believe also that should be the guidance for how the regional markets will develop. To give an exact percentage for the rest of this year is difficult to give given the complexity and so many different markets and so many different competitors in different markets.

In addition I would say that also we think that validated services will help in the region as well, because right now it's for subscriber they start to see this voice only. And I think the markets with regional subscribers which would show the same trends as we've seen in Moscow. Initially it's voice then it's news services and we can increase ARPU and average price per minute with this help.

Thanks. As a follow-up, are you able to break down the non-voice component of ARPU in Moscow and the regions for us?

Yes, we can say that for our Moscow subscribers 7% of our service revenues are coming right now from validated services. In the region it's just a very small portion, it's a few percent only, and that's where it's opportunities… where we see opportunities.

But just to close this issue, because of course average price per minute is an extremely important [indiscernible] in the whole business case [unclear] case. We think that we have a communicated a number of times, and we consider ourselves in the marketplace a price follower. We have a lot of very strong attributes to our product that makes it possible for VimpelCom to compete without being the price leader. So we have, over the last 15 months, not been driving prices down in Moscow, we have basically been following and having a very slow response to be honest on pricing initiatives in the Moscow market.

In the regional markets we have been forced to adjust our price levels to the competitive picture, but going forward we have no intention of being a price leader and a price driver to increase volumes. We think we will be able to compete on coverage, quality, national operations. Right now we are introducing a concept or a technology call Camel 2 (ph) which makes it possible for national roaming on our prepaid product real time [indiscernible]. So we have a lot of advanced products and attributes that we would like to promote going forward.

We go next to Olga Shilenskia with Renaissance Capital.

Hello and congratulations with the strong financial performance. Actually I have two questions. The first one - can you please mention once again the breakdown of ARPU and subscriber acquisition costs in Moscow and the regions - I'm afraid I missed it? And can you also provide with a breakdown for EBITDA margin in Moscow and the regions?

Well let me start with ARPU and subscriber acquisition costs. So on a consolidated basis ARPU is $13.5 - Moscow $15.2, regions $10.8. Subscriber acquisition costs $20.8 total, $29.9 in Moscow $11.7 in the regions.

When it comes to EBITDA we don't disclose separate EBITDA for Moscow and the regions. We disclose revenue numbers and not after tax numbers. But it's pretty obvious that the EBITDA this quarter is driven by a good performance in Moscow but also very much helped by the positive developments in the regions. We had a breakthrough on that after tax line and we see a very impressive growth in our EBITDA margin, and this sticks to our guidance for the consolidated EBITDA margin that we guided on, on the last call.

Thank you very much. Can you please provide us with some guidance for [indiscernible]?

Yes we are satisfied by the start-ups. As of today we have 30,000 subscribers in St Petersburg. Every day we get new 1,000 subscribers which we believe is a good start. And of course we're very much helped already by the growth of roaming revenues both from international roamers and from our own domestic roamers.

We go next to Yoli Adivosov with Deutsche Bank.

Good evening. I have two questions. First of all do you have any data on marginal or incremental ARPU for Moscow and the regions of your new additions?

We estimate that our new regional subscribers have same ARPU as the average regional subscribers, which is $10 to $11. In Moscow it's approximately $10 subscribers that we were taking during the last months.

Thank you. And the second question, again do you have any idea what is the incremental Capex for your new additional subscribers in the region? Maybe you could assess it or give us some estimate on that?

If you look first to Moscow incremental Capex right now is low because we're no longer building coverage in Moscow, except maybe some [metro] stations etc. We're mainly building capacity and with reduced equipment prices right now the incremental Capex is lower than most of the numbers I think we've seen in the industry* so far. We will build between $100 and $200 per sub in Moscow on incremental basis right now, and we still see a declining trend. In the regions it's a bit different because were in completely different stage of development. We are still building coverage in order to increase ARPU and attract business users and be able to provide a good product to our regional customers as well. And because of that the incremental Capex per sub is a bit higher than Moscow, but also here we clearly see incremental Capex coming down. And we are certainly targeting also for the regions to meet a level below $200 in Capex per sub medium term.

Thank you very much.

We go next to Nick Farns(ph) at Tinsover Capital (ph)

Hi, it's Martin Taylor. My question is also relating to Capex. Do you still stand by the guidance you gave on Capex for 2003 given in your last conference call, given that on an annualized basis the first quarter number was a little bit higher? And was that related to any perhaps fund loading [indiscernible] for instance?

Yes. We don't have an update on the Capex guidance. As of today we stand on our guidance. [indiscernible] is the [indiscernible] subscriber base is going faster than what we anticipated in the beginning of the year. In Moscow it's probably growing a bit slower than we anticipated, so we will have a more [indiscernible] between Moscow and the regions. So I think the [indiscernible] 500 can be achieved. If we will give an update on an increase on that Capex guidance it will certainly come with an update on our revenue guidance. So we will not invest money in that [indiscernible] subscriber bases without also being able to grow our revenue base. So as long as we see a revenue growth of 45% to 50% it is possible to do this with a Capex of 500. If the growth is stronger we should be able to update also the revenue guidance and the Capex guidance. But as of today the way the market [indiscernible] we believe in the guidance we gave in March.

Thank you, can I ask one follow-up question, which is relating to your previous gross disclosure of revenue tax. Could you tell us which cost line that's now being subsumed within?

You know starting January this year there is no revenue tax, and so that's why -- well this brings some difficulties comparing previous year to this year. Because in the previous income statements we showed this revenue tax as decrease in revenue, and right now in the first quarter you just do not see it all because it doesn't exist anymore.

We go next to Tarus Tarmelda (ph) in American Century (ph).

Hi can you please provide a breakdown of ARPU for Moscow, meaning incremental ARPU in the second quarter that you are seeing now, prepaid versus contract, and the same for the regions, or at least an estimate of that?

It's difficult I think as of today to give a forecast of ARPU in the second quarter, that's all we can say. But if you compare the previous years I think we clearly have an experience in the Russian market that there is normally a flat trend from the first to the second quarter when it comes to ARPU. We've seen that in previous years, so I think our guidance on ARPU in the second quarter would be that we believe that trends that we've seeing the past is going to continue also this year when it comes to development of ARPU and minutes of use.

But I will also add that having some numbers for April, we see some growth in minutes of use linked to seasonal effect, because people are coming to the countryside right now and start to talk more.

As a follow-up, can you provide a breakdown of first quarter ARPU for prepaid versus postpaid for Moscow and the regions?

It was $45.6 for postpaid subscribers and $8.1 for prepaid subscribers in the first quarter. And for regional subscriber $10.8 for regional subscriber. And all this data is in our presentation on the website.

We go next to Rusty Johnson with Harding Lovener (ph).

Thank you. My question regards the trend in SAC and apparently this does relate to the level of competition which seems to be rising. Do you feel that this can also come down to a level? You discussed that ARPU seems to be stabilizing, but can you continue to push SAC down at a time when competition may be rising or certainly will in the future? Where do you see trends there? And maybe if you could touch on some of the areas where you are cutting costs, whether it be retention in Moscow or just ad promotion on the service and acquisition site in the regions?

We believe that in Moscow we can foresee some stable level of subscriber [indiscernible]. It will be some more focus not on growth of new subscribers but more on existing, on retention of the existing subscriber and on upselling validated services, which will be a very profitable activity. But we're looking for more or less stable trends of subscriber acquisition costs in Moscow.

As for region we see that as of today subscriber acquisition costs are extremely low, $11.7 in the first quarter. That's partly the result of just low expenses in the regions, the [indiscernible] are low in the regions, marketing expenses are low in the regions. We're getting excellent economies of scale and benefits from having a very strong brand which everybody knows in Russia.

In the longer term perspective it could go up slightly mainly because we will have more sales through their wide distribution network and have just big volumes* through the dealers. But we believe we will be able to have a strict cost control in acquisition and marketing in the regions, that's why it will be still very profitable growth.

Thank you.

We go next to Bill Norber(ph) at Marvin Palmer Associates.

We are shareholders and congratulation on both a great quarter and also the excellent handling of this conference call. My question - over the next quarter, in view of the rapid regional growth, will there likely be some restructuring of the ownership of your regional business in any way that minority shareholders may have some concern? And second of course relates to you, Jo - are you expected a quarter from now to still be in your position or will you have moved on to maybe other interests? Thank you.

Thank you, Bill. Let's talk about the merger first. In general I think we clearly see that the concept of a merger between the VimpelCom and VimpelCom-R in a good thing for all our shareholders, our strategic shareholders and our public shareholders. That's why also if you go back to the disclosed agreements from 2001 you see we have a trigger of a merger built into these agreements. And it's the point for the triggering is when the two subscriber bases in VimpelCom and VimpelCom-R is getting equal. If you looked now at the trends and the growth in Moscow and the regions you will see that most likely this is going to [indiscernible] let's say the first quarter of next year, potentially a little earlier.

And also the basis for evaluation at that point in time should be a one-to-one evaluation between the companies. But all this is subject to a [indiscernible] opinion from a global investment bank. And important in the end it will be the public shareholders have to vote on a merge or not, because both [indiscernible] now follow the interested parties and cannot vote on these transactions.

We are because of all this of course in the process of reviewing the whole situation. We have as of today nothing to report and this is something we will come back to the market with when and if we have a structure and a proposal for the public market to review and finally vote on.

When it comes to my situation I think it's fairly known out there that my contract ends in June of this year. I have -- first of all we have a very strong management team in place in VimpelCom, and I think our result is a result of that. I have a very flexible time schedule, I have no new commitments, so will not leave the company in any difficult position. And you will find that in transition the plan is also as of today for me to serve as the Chairman of the Board the next year. And we will find the right person to serve as the CEO of this company going forward. As of today we don't have something to report, but of course as soon as we have a good solution for the company we will come back and we will report about the changed. But we have no concerns in terms of the day-to-day management of this company, given the fact that I am moving into a different position shortly.

Thank you very much.

We go next to Nageshka Olobeva with [indiscernible]

Good afternoon gentlemen. My question is about regions. Could you tell us how many more regional networks are you planning to launch in the remainder of this year? And second small question - I just wanted to make sure I understand that correct - when you calculate subscriber acquisition costs for regions, taking that gross adds, are those growth adds net of acquisitions or do they include acquisitions? I mean subscribers acquired like through purchase of StavTeleSot - thank you.

Let met do the regional plans this year first, and then Nikolai can explain the question you had on subscriber acquisition costs. We have already launched St Petersburg this year, which was the main target. We have also plans for the Euro super-regions. We will launch three [indiscernible]. We will also launch [indiscernible] regions later this year, so we have full coverage from our [indiscernible] in St Petersburg and to the Finnish border. And that's basically ending the new launches of operations this year. And the rest of the Capex you see will go into existing operations, increasing coverage and capacity. And in our view a lower risk profile of these methods, and [indiscernible] is only a year or 18 months back.

In terms of acquisition costs we have the information in that press release, but a general answer we are calculating all our marketing and sales expenses, and then the dividing it by the total number of net new subscribers growth. But of course when we are applying a new company that's not completed. Then for example the months of March of the growth and expenses of that [indiscernible] is of course complete.

Okay, thank you.

We go next to Nick Farns(ph) with Tinsover Capital.

Hi, it's Martin Taylor again. Just a follow-up question, this time on tax. Could you give us a guidance on your effective tax rate for this year and going forward? Your effective corporate tax rate.

As you can see in the first quarter of this year the effective tax rate was 26%. And if will look on this year 2002 the rate was 28%. We assume that taxes will be in this range in the year 2003, although capital tax rate is 24%. But this is [indiscernible] that not all expenses are tax deductible in accordance to the Russian standards. So expect the tax rate to be a little bit higher.

So you think closer to 28% or closer to the 26.5% in the first quarter?

Well, in between.

Okay, thanks very much.

We go next to Ilsevin Masetov(ph) with Credit Suisse First Boston.

Good afternoon. Churn rates are trending up and I wonder whether you could share your thought about the increasing churns and how this may impact your view of these economics going forward? And any views on subscriber retention costs? And any particular measure you are undertaking to [indiscernible] churn?

First of all I need to mention that in fact these numbers which we show as churn, according to our estimates and researchers 30% is internal migration. Some customers who buy new tariffs and new packages, so we consider it as internal migration. Then I would mention that these numbers of churn which we have, which we believe also is relatively high is also a result of the huge sales in the past, and wide availability of the prepaid products on the market.

Important to mention that we have the system* of our commissions to the dealers, which makes us safe on this churn of subscribers. If the customer did not bring us enough revenues during six months we would throw back dealer commission. And of course the retention and loyalty right now is a top priority for the company. We're implementing a number of actions in the long term and short-term perspectives to decrease churn.

And let me also add that our analysis -- of course churn is of importance, and is a key focus area for the company, and the number in itself is too high. We will work to bring it down, but our analysis of the churn number is that this is not a loyalty problem for the company, it's not a reflection of customers leaving the company because of dissatisfaction. Partly it's internal migration and partly it's a structural problem in terms of how campaigns and products are being sold in the market, making it attractive for customers to jump between operators, and also to migrate inside our own operations. So when we go forward now, and especially Moscow that moves into a new stage of competition, retention programs looking at how we pay our dealers for bringing subscribers, for keeping subscriber. How we promote value added services will be part of the whole work on this issue.

But maybe the most important is what Nikolai said about protection in terms of not having dealers put a lot of money in their pocket if the subscriber churns early. We withheld dealer commissions as a result of that. So financially the churn number is not a big problem. It's an issue but it's not a big problem. And loyalty is not a big problem, it's an issue. But it's average* structurally how we handle the customers and how we sell new products to customers. But I think churn is a concern on the number in itself and we will work on this number over the next year.

Okay. Do I understand you correctly that basically for the next few quarters we can see churn rates roughly at these levels, however the financial impact of these high churn rates will be somewhat limited?

I think unfortunately that's the case, that we will see quite high churn numbers over the next quarter, because it take a little time to change these trends. It not something you do in a week or two by one initiative, it's a set of initiatives that is needed in order to combat this. But we have a quite strong program in place and we hope to be able to achieve results over the next 12 months. But to give a guidance that churn is going to be reduced even two quarters from now I think probably would be incorrect.

We go next to Anna Boson with CAIB.

Hello, gentlemen. Firstly I was very pleased to see that your share of net adds in the regions has being doing very well - aside from obviously the acquisition of StavTeleSot. I just wondered if you could give us some thought -- I mean MTS isn't doing quite so well at the moment on that? And secondly on tariffs, MTS launched a new unified tariff policy - I know the tariffs aren't unified but similar packages across Russia recently. I just wondered what you think will be happening to your tariff packages over the next 6 months? And in Moscow perhaps in particular with Megafon (ph) not performing very well, what you think might happen there?

First of all we already have unified tariffs across Russia. And that's to our advantage to have unified tariffs for regionals and Moscow. And we also have very good terms for inter-network roaming. In addition with our prepaid roaming online right now this unique proposition when the customer is traveling a lot in Russia the best proposal is to choose our service and to have tariffication* online in the best tariffs.

Talking about the trends, we believe that as already said we fought through the CRS (ph) price reduction during the last two years. Right now according to our researchers the market don't need a further strong reduction. That's why it will be of course some decline moving forward, but it will be modest, 10% to 15% on year-on-year basis, both in Moscow and in the regions.

Excellent, thank* you very much.

There are no further questions at this time. I would like to turn the call back over to Mr. Lunder for any additional closing comments.

Thank you all for all the questions and also for joining our call today. As always we will be available if you have any further questions. Feel free to call us. I wish you all a nice day and goodbye. Thank you.

That concludes today's conference call, thank you for your participation, you may now disconnect.