VEON Ltd (VEON) 2003 Q2 法說會逐字稿

Good day everyone, welcome to the VimpelCom's second quarter financial results conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to Mr. Christopher Mittendorf (ph) of Edelman Financial. Please go ahead, sir.

Good morning and welcome to VimpelCom's conference call to discuss the Company's second quarter and six month 2003 financial and operating results, and the planned merger of VimpelCom and Vimpel-Region.

Before getting started, I would like to remind everyone that except for historical information statements made on this conference call may constitute forward-looking statements that involve certain risk and uncertainties. Certain factors may cause actual results to differ materially from those contained in forward-looking statements, including those risks detailed from time to time in the Company's reports on file at the Securities and Exchange Commission. VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call, or to make corrections to reflect future events or developments.

If you have not received a copy of the Company's second quarter press release, or the press release announcing the planned merger, please contact Edelman Financial at 212-704-8134 and it will be forwarded to you. In addition the press releases, which include reconciliations of non-GAAP financial measures presented on this conference call, an earnings presentation, and a presentation on the planned merger, can each be downloaded from the VimpelCom web site at www.vimpelcom.com.

At this time, I would 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. With me here in Moscow are Nikolai Prianishnikov, our First VP and Commercial Director, Elena Shamtova, our Chief Financial Officer, and Valery Goldin our VP of International Relations.

Earlier today, we published three press releases which we think are significant. First of all, our second quarter earnings release that demonstrates our continued strong financial performance. Secondly, we are very excited to announce that today the Board of Directors is recommending to its shareholders to approve the merger of VimpelCom and VimpelCom-Region. Third, our Board of Directors today gave consent for our [indiscernible] to proceed with the acquisition of 25.1% stake in Megafon.

Against this background, we will on this conference concentrate on the following topics. 1) The merger between VimpelCom and VimpelCom-Region. 2) Our financial results for the second quarter of 2003. 3) Our operating results for the second quarter of 2003.

Let me start with some highlights from the second quarter results, which we consider a very positive quarter for the company. We are pleased to report on a year-to-year basis approximately 76% growth in net revenues, 95% in EBITDA. The EBITDA margin went up to 46%. In our regional operations we reported a net income of $9m, and the EBITDA margin in VimpelCom-Region was 46%. We added more than 1.2m new subscribers, and as of today our total subscriber base is approximately 8.5m of which over 40% are now in the regions.

We have taken back the lead in terms of incremental market share in Moscow, and as of today we are the biggest operator in Moscow and in Siberia. These results demonstrate the advantages of our unified national expansion [treasury], which becomes more obvious with the growth of our business and the scale of our operations. Only a year ago, we had negative EBITDA and a substantial net loss in the regions. In the second quarter this year we had a substantial contribution from the regions in our consolidated numbers, both in EBITDA and net income. We expect these trends to continue so that in 2004 you will see VimpelCom's regional subscriber base exceed that of Moscow.

During 2005, we expect to see VimpelCom's regional revenue base exceed that of Moscow. And during 2005, we expect to see VimpelCom's regional EBITDA equal to that of Moscow. Our Moscow operations and our regional operations are now two equally important parts of our overall business, and this is the background for the proposed merger.

As you know, this merger was contemplated in the shareholder agreement signed back in May 2001 by VimpelCom, Telenor and Alfa Group, which allows us to commit $337m of investments into VimpelCom-Region. The agreements envisioned that a merger would automatically be triggered by December 2007 if certain operating parameters and other conditions were met. In view of the very strong growth in VimpelCom-Region over the past two years, there's continued confidence in the medium-term outlook for the regions.

We believe that there are significant benefits in accelerating the merger of the two companies now, including the opportunity to 1) complete the merger on terms that we believe are an advantage to minority shareholders, particularly when compared to a potential merger at a later date. 2) Capture 100% of the growth in the regions instead of only 55%. 3) Significantly lower overall cost of financing by eliminating the need for future equity financing by VimpelCom-R, and by leveraging VimpelCom's strong balance sheet. 4) Gain greater efficiencies and unlock synergies from operating as one single company.

We believe at this point that the proposed merger presents a balanced solution, which takes into account both the [indiscernible] of today and the future development of this business, as we can foresee it. Alfa Group and Telenor have agreed to swap their significant minority stages of almost 45% in VimpelCom-Region in exchange for additional new shares of VimpelCom. Specifically we will issue an aggregate of 10,948,821 new common shares, the equivalent of 14,598,428 ADSs in exchange for the 44.7% that Alfa and Telenor own in VimpelCom-Region.

The proposed exchange of shares reflects the valuation ratio of 0.91 : 1 between VimpelCom-Region and the rest of VimpelCom's business, which is predominantly the Moscow GSM business. It implies that 33.6% or approximately one-third of VimpelCom's market cap is attributable to its 55% stake in VimpelCom-Region. On a fully diluted basis the transaction represents a 21.4% economic dilution for VimpelCom shareholders.

However, our overall business model shows that it is earnings per share accretive already in 2005. The company has obtained a fairness opinion from UBS, our financial adviser regarding the terms of the proposed merger.

After the merger our shareholder structure will look as follows. In terms of economic ownership Telenor will hold approximately 29.9%, and Alfa 24.5%. In terms of voting shares Telenor will own 26.6% and Alfa 32.8% of voting shares. The balance of course remains predominantly free float. The fine details of the transaction can be found on our English web site, and will be distributed with all the EGM materials to all shareholders.

The Board of Directors has called for Extraordinary Shareholders Meeting on October 24, recommending that minority shareholders approve the merger. In accordance with Russian law, both Alfa and Telenor are interested parties in the transaction, and will not vote. So it will be the minority shareholders who will decide on the merger issue.

In this respect, we call on all our minority shareholders to actively participate in the EGM and support the proposed decisions. A positive decision will clear the way for further rapid progress of our company, and continued value creation for our shareholders. In addition, let me also point out that the transaction will be subject to various Russian regulatory approvals and other conditions pertinent.

Today, we also announced that our Board of Directors gave its consent to the Alfa Group's purchase of a blocking 25.1% stake in Megafon. The consent contemplate that the parties will explore a possible business combination between Megafon and VimpelCom in the future, which we believe might be beneficial for shareholders in both companies.

A few words about our previous announcements, the appointment of a new CEO. As you may know, as of October 1 I will become Chairman of VimpelCom, and Mr. Alexander Izosimov will become our new Chief Executive Officer. Alexander Izosimov has a solid and proven track record as a successful international executive, and he has valuable experience in Russia and the CIS in the consumer goods industry. He will become a tremendous strength for the Company in the next period of rapid growth. I am fully satisfied with the quality and the results of our entire management team during the last years. Under Alexander's leadership, I believe VimpelCom's management team will continue to deliver strong results.

Leaving the CEO position does not mean my disengagement from VimpelCom's affairs. As Chairman, I will closely work with Alexander and I will be actively involved in the development of the company, including the proposed merger and other strategic issues.

Before I give the floor to Elena, a couple of words about our guidance concerning the Company's financial performance.

We are now experiencing higher growth in the Russian cellular market than we foresaw in the beginning of the year. As a result of this we are revising our guidance for 2003 given earlier this year. We are now targeting more than 10m subscribers by year-end. We are targeting a 2003 annual revenue growth of 60% to 65%, up from 45% to 50% in our previous guidance. We expect our consolidated 2003 EBITDA margin at a higher level that that of 2002, due to stronger regional performance. And with more subscribers and revenues we are also increasing our Capex for the year, which is now expected to approach $650m for the year 2003.

Now, Elena will give you some more details on our second quarter financial results. Elena?

Thank you, Jo. I would like to start by commenting on the second quarter results with net revenue line, which shows impressive growth compared to previous periods. 75.6% as compared with the second quarter a year ago, and 24.5% compared with the previous quarter. It is necessary to mention analyzing the second quarter results that this growth, of course connected partly with a season affect, but partly it is connected with the rapid regional growth and better subscriber quality. This time we see a 15% increase in minutes of use per subscriber compared to the previous quarter, while in year 2002 the second quarter was better than the first quarter by 8%.

Our costs and expenses are changing in line with revenues with certain improvement in general and administrative expense as a percentage to revenue, and depreciation expense increased. It has grown 9% in the second quarter compared to the first quarter, and nearly twice compared to the second quarter of last year. It very well correlates with a potential increase in the amount of the equipment and operations during the last 12 months. Thus, with the growth in the coverage and capacity of our network.

Net book value of our fixed assets at the end of the second quarter was US$1.2b, while a year ago it was $673m. So operating income has grown in the second quarter to $97.3m, or 31.9% operating margin, compared to $49.9m or 28.8% operating margin in the second quarter last year.

Main items in other income and expense line are interest expenses, which are growing as the amount of debt is increasing. Talking about debt position, I want to say that although our total debt has increased during the last six months by approximately $100m, our leverage ratios are stable or even improving, as long as our earnings are growing. So debt/equity ratio was equal to one end of last year and stays the same today. Also, debt to EBITDA ratio for the last 12 months, at the end of the second quarter was 1.7, while at the end of the last year this ration was 2.

Income tax increased along with our taxable income growth. Consolidated net income has shown good progress, increasing both in absolute terms and growth of the revenue. Net income as a percentage of revenue has increased approximately by 5 percentage points within a year, from 12.7% in the second quarter of year 2002, to 17.3% this year. We continue to see the trends which were indicated commenting our first quarter results.

Our cash from operations increases. Due to improved performance in regional operations we can stick those in 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 year 2003, and to $133.3m in the second quarter of this year. This cash inflow and external funding are being invested into our network developments. In the second quarter of this year, capital investment was $174.4m into property and equipment, which is $37.5m higher than in the first quarter. And our investment plans in the second half of the year are even higher, as we see very attractive opportunities in our regional business.

Thank you, Elena. Nikolai will now present our operating results. Nikolai?

Thank you, Jo. Let me start by saying that the second quarter of 2003 was another successful quarter of VimpelCom's operations in both Moscow and the regions. We significantly improved our core product, the GSM network. During the second quarter, we have expanded the network by more than 1,000 base stations all over Russia. We have greatest capacity in Moscow and its suburbs, and substantially increased our coverage areas in all our regions where we operate.

We continue to lead in innovations in Russia. We became the first in Russia, and one of the first companies in the world to introduce online roaming using CAMEL 2 protocol. This service allows our customers to travel across Russia from the Black Sea coast in the south to Merinsk (ph) in the north with online charging and real cost control.

We continue to develop products on the backbone of GPRS. Our subscribers can now use GPRS roaming and multimedia messaging service in the regions, and GPRS roaming in 27 countries around the world. We introduced new advertising content and brand building campaign. That was well perceived by the markets. Launched [indiscernible] package. Only after two months of introduction, 1.5m subscribers started to use it. Our activities in the second quarter improved the positive perception of our strong brands by the subscribers all over Russia, and led to excellent commercial results.

In Moscow, we strengthened our leadership position. We increase number of net additions, regained leadership in growth in the Moscow market, reached 4.8m subscribers. We became the leader in the Siberia super-region during the second quarter. In the central region our subscriber base has exceeded 1m subscribers, a remarkable milestone in less than two years of operation. We are the fastest growing operator approaching one million subscribers in the Volga super-region. Our operations in the south demonstrate strong growth supported by good development of our biggest acquisition Stav Telesot Company.

In all these regions, we have developed a more than quality GSM network, with coverage in all key cities delivering strong subscriber revenue and EBITDA growth. We started operations in St. Petersburg on April 16 this year. Besides lucrative revenues from roaming in the city, we have already attracted more than 120,000 local subscribers, and considering the start it's very promising.

We delivered a very strong subscriber growth during the second quarter, especially in the regions. We started our regional expansion less than two years ago. A year ago we had less than 0.5m subscribers, and now we've reached 3.7m subscribers in the regions. MOU and ARPU grew in the second quarter compared to the first quarter, 15.1% and 5.8% respectively. We believe it was driven by the seasonally good summer months, improved quality of our subscriber base, and expanded coverage.

Subscriber acquisition costs were stable and low, $21.1 only. We see great opportunities of the market growth, in Moscow and especially the regions. We will take all possible steps to keep pour success stable, and to exploit the opportunities for further business development for the benefit of our shareholders.

Thank you Nikolai. We've given you a lot of information today and we understand that you will need some to analyze it and make a judgment. We plan also to [receipt] some of our shareholders to present the merger proposals over the next week. But, of course, we are more than ready to open the floor for questions that you might have right now.

We will take our first question today from [Tom Purdno] with Citigroup.

Good afternoon .I have a question just on the last slide of your presentation where you present the relative valuation and the forecast for subscribers net revenues and EBITDA out to 2005. I was wondering if you could also give us the Capex that you estimate will be required to achieve those numbers both for the Moscow segment and the regions?

Yes. First of all, just to recap that slide for those who are not looking at it, we expect the regional subscriber base to be bigger than the one in Moscow in 2004. We expect the revenues to outgrow Moscow in 2005, and we expect the EBITDA to be more or less equal in 2005. The guidance we have given on capex so far is $650m for this year. We believe we're going to invest approximately $600m in 2004. And we expect in 2005 going forward that there will be mainly capacity in existing operations where we will invest. We hope to drive Capex down to the levels that you see in Moscow today, which is less then $150m. For some, it's even closer to $100m right now on marginal capex, and that will be then the guidance for 2005.

Then the split between Moscow and regions will be accordingly based on the growth of subscribers. Because the traffic in the regional subscriber base and the minutes of use of the regional subscribers are more or less equal to Moscow. So it's quite easy to reflect on the Capex distribution to the subscriber growth.

Thanks. And also if the merger does go ahead, do you still plan to provide the segmented information Moscow and the regions on a separate P&L?

Our policy will be to give as much information as the market needs in order to put the right valuation on the company. And of course, we will also report in segments after the merger, intra-sector subscribers and other key indicators that is necessary for shareholders to analyze the numbers and our business.

Thank you very much.

We'll go to next to [Tirosha Veldo] with American Century Investments.

Hi, good evening. Congratulations on the strong quarter. With respect to Alfa's intentions with Megafon, do you have any concerns, or do you see any opportunities further out, maybe two or three years from now with respect to Alfa being a shareholder in both organizations?

First of all, just to put a bit more [indiscernible] in our shareholders agreement. In order for Alfa to be allowed to buy 25% of Megafon, they need consent from VimpelCom. We have been discussing this issue now the last weeks, and in the Board of Directors meeting today, the Board of Directors gave Alfa consent to go ahead and acquire 25% of Megafon. We are also saying that the consent is contemplating that the parties will explore a possible business combination between Megafon and VimpelCom in the future.

Our judgment is that to give this consent is definitely in the best interests of VimpelCom's shareholders. We see more opportunities than we see risk factors linked to this, and we believe it's more beneficial to VimpelCom shareholders that Alfa is holding this position than potentially someone else. I mean the stake is at play, and that is better for VimpelCom that Alfa takes it than someone else takes it. So this is the background for our judgment and our consent given today.

May I ask a follow-up?

Please.

Can you give us some idea of what the incremental ARPU in the regions was in the second quarter, and what it has been so far in the third quarter?

Approximately incremental ARPU of the regional subscribers is approximately $10.

Second quarter or third?

In the second quarter, which we announced, and more or less we have stable situation going forward.

Thank you.

We will go next to [Alex Calstagie] with Renaissance Capital.

Hi. I just wanted to clarify the $650m in capital expenditure, is it purely network capex that probably does not include the possible acquisitions if there will be any? And obviously the question associated with that is, does that also require additional debt raising, and in what amount do you feel?

Yes, Alex, this is correct. In the 650 number, there are no acquisitions included. This is for our Greenfield operations and network development. In general, we think our balance sheet is a bit of a leverage, and if you look at pro forma balance sheets for the merged entity our debt to equity will be 0.5. We believe it's in shareholders interests to raise more debt and to increase return on equity as a result of that.

So for that reason, we are planning to be in the debt market over the next six to nine months, and we are basically looking at all possible sources. If you look at the bond market, it was very attractive earlier this year, maybe less attractive right now. We have had syndicated bank loans coming up as an option. We see still vendors being willing to come up with solutions, and we also have other institutions that are willing to look at Russia right now.

So yes, we are planning to do something, and we are exploring different opportunities. We will come back with the information when we have made a decision.

Okay, if I may also go with a follow-up. You mentioned about the synergies between VimpelCom and VimpelCom-R. I was generally under the impression that these companies have been fairly well integrated to begin with. So what kind of synergies are you looking at, and if you can expand on details of that?

The main synergies that we will have here is a link to the company's tax position, because you don't have the principle of consolidating in Russia before you pay tax. We also clearly see that as a consolidated entity we will save money on interest expense, because the consolidated company will borrow at lower rates than the [indiscernible] are on a standalone basis. And we also have savings definitely on.

Even though we operate today under one management under my command, we also have of course general administrative expenses that will be saved as a result of only one company instead of two companies. So it's basically these three elements, tax, interest expense and G&A that are going to help us doing that.

By the way, when we did the relative valuation between the Moscow business and regional business we did not calculate any synergies in there. There is no payment up from for synergies. We left all the synergies out. And then if you add the synergies in after you've done the relative valuations we also see that we have an EPS accretive deal here in 2005.

Okay. Thank you very much, Jo.

We will go next to Nick Barnes with [Introver Capital].

Hi there. I noticed in the second quarter your SG&A expense in the regions sales was actually lower than that in Moscow. Is that something you expect going forward, and as subscriber penetration growth slows down in 2004 and 2005, is that something that you expect to see falling significantly?

If we talk about subscriber acquisition cost, then it's really lower in the regions. It was only $12.3 in the regions while in Moscow it was $29.7 in the second quarter. And we believe that also dealer commissions are lower in the regions, marketing expenses are lower in the regions, that's why it's possible to grow the subscriber base in the regions with lower expenses.

Okay. Thanks. And as a follow-up, can I ask what your ARPU currently is in St Petersburg?

In St. Petersburg, as I mentioned we started in April, and during the second quarter our ARPU was $18.

Okay, thanks.

We will go next to [Jean Salamani] with JP Morgan.

Hi this is Jean Salamani from JP Morgan. Can you remind us what VimpelCom-Region's debt position is, both third party debt, intra-company debt and then cash position?

VimpelCom at the end of the second quarter has --

VimpelCom-Region, VIP-R.

Yes, I am talking about VimpelCom-Region. So the debt position was around $200m. So talking about external debt, and around $70 of which was intra-company debt.

Okay, what about the cash?

The cash was $28m at the end of the second quarter, now it's approximately on the same level.

But bear in mind, that we also accelerated in the [indiscernible] yesterday, and received $58.5m from Alfa Group as part of the deal. So you can add that now to the cash position.

Sure. How much more capex this year in VimpelCom-Region? So the second half, what's the capex of VimpelCom-Region?

Around $100m. From out of $174m, more than $100m went to VimpelCom-Region. And, of course, the second half of the year will majorly go to VimpelCom-Region and so it will be more than $100m per quarter.

Okay. Thank you very much.

We will go next to [Herve Jeret] with HSBC.

Good afternoon. My first question is on tax benefits that you may get by merging VimpelCom and VimpelCom-Region. I just wanted to check. Can you offset at VimpelCom holdings, or the new entity, your tax with accumulated loss at VimpelCom-Region?

Yes, the merged company can carry forward these losses, and that has tax benefits. That's why we are saying that potentially there is a benefit. Also we can talk about the benefits we will get in our cash position as well in terms of the merger, because VimpelCom-Region has quite huge VAT receivables from the same budget due to our capital investment. And normally, when you bring in the equipment, you pay VAT on the customs, and then you have to claim it back. So it's very difficult to really get cash back.

Normally, the company should offset the liabilities against assets in VAT, and so merging these two companies we can do it quite quickly, while VimpelCom-Region on a standalone basis should wait for a long time for this offset.

Let me also add one comment there on tax savings. We saw in the new telecommunication law that we will have a universal service fee introduced for the cellular operators. We don't know the size of the that fee yet, but it's crystal clear that that fee also will be paid per company, and it's going to be percentage of your revenue line. Which means that all inter-company revenue between VimpelCom/VimpelCom-R will also here be saved in the merged legal entity as a result of not having to pay these fees twice. And those kind of revenues will also in the future grow because there will be a lot of traffic within Moscow and the regions. So there is also a tax saving linked to this, but it's difficult to put a number on it today because we don't know exactly the size of the fee.

Do you have kind of a rough estimation of all the savings, synergies you were talking about in terms of quantifying numbers? Is there something you worked through and you can communicate?

We have built different assumptions into our models. And to be honest if we are aggressive on these assumptions, and for example put in a high fee on universal services, we can even accelerate EPS accretive earlier than 2005. If we are really sticking a bit conservative, it looks like it's going to be accretive in 2005. So because we don't know exactly the size of the fees it's also very difficult to put an exact number on the table.

But what we've done when we say that it's accretive in 2005 is to put realistic numbers on the table and assume this. And as I said, if savings are higher, or for example, the fee for universal services becomes higher, it comes even come earlier than that. But to put an exact number in synergy savings on the table today we believe is wrong since there are different assumptions linked to different models.

Okay. Thank you.

We will go next to Bill Norde, Marvin Palmer Associates.

Congratulations, not only on a great quarter operations wise, but also on the timing of this merger. My first question would be, with respect to the new CEO, Alexander, and I didn't get his last name, could you give a little more detail as to how long he's been with you in the mobile business, and his international experience?

Absolutely. Thank you for your nice comment on the results. Alexander Izosimov, he is Russian, but he has worked abroad for the last 12 or 15 years. He spent the first part of his career with McKinzie, and his last seven years he's spent with Mars Inc. consumer goods, chocolate Mars. He has been on the Executive Board of Mars. He has been having responsibility for the snack food arm globally. He's been having a geographical responsibility for CIS, Russia, Central Europe, Nordic countries.

He doesn't have specific telecom background, but he has an excellent track record, and we regard him a professional Executive. And we believe that VimpelCom has all the necessary telecom experience that is necessary to play the game from that respect. We think Alexander will fit perfectly with his international experience and knowledge to the market, and general experience from a company coming from the consumer industry.

It implies that you're going to have to work very careful with him for a period of time as the Chairman. Is that a correct implication on my part?

Absolutely, and for that reason, I don't have any new commitments after the first October. I haven't made up my mind exactly what I am going to do. I have all my time available for being Chairman in VimpelCom, and we will make sure that we have a good transition between Alexander and me, and he will have time to learn the industry before I move on.

Thank you. My second follow up would be in the area of effective tax rate. It looks to me like it was 29% in the second quarter versus 30% a year ago in the second quarter. With a change in the Russian tax codes and with what's going on in your firm, all the dynamics, what would be a reasonable rate to use for this year as the effective income tax rate?

First of all, I would like to comment why we have 29% this quarter. When we calculated taxes, in addition to what we really pay of course we have the deferred taxes. And we calculate deferred taxes basing on the full year projection for the taxable income. In the second quarter we anticipated much better results coming from our regional operations than we forecasted in the beginning of the year.

Actually we thought that VimpelCom-Region will not be in a tax paying position for a little bit longer period that it is actually now. So we recognize earnings, so will start paying income tax on VimpelCom-Region. We have to change our forecast for the taxable income and income tax for the full year, and the second quarter is kind of a wrap up of all these implications.

As for the projections for the year. We normally think that it should be somewhere in line as it was in year 2002, maybe with some increase. Again connected with the theme that VimpelCom-Region is now profitable and should pay tax.

We will go next to Stephen Pettiffer with Merrill Lynch.

Hi. I wonder if I could just turn to pricing, looking at your prepaid numbers you gave out in Moscow, about a 13% effective decline sequentially on your yield. I just wondered if you could talk us through what's going on there. How much of that is down to pricing changes and how you see that going forward? Thanks.

We believe that in Moscow and in Russian regions that today's pricing level is already good for the market growth, and there is no need for further price reduction. Especially talking about regional average pricing there is relatively low. But still we believe that competitive situation could make different players to keep launching new tariff packages with a bit lower prices, especially in Moscow or Moscow market, which is right now we believe a tougher competitive environment.

At the same time VimpelCom will not be the market leader in tariffs reduction. We consider ourselves as market follower. And we will try also to work actively in promoting new [indiscernible] which could potentially increase ARPUs and increase their total revenues from our big subscriber base.

I think also just to add a comment there, you are absolutely right. If you analyze right now the price competition in the regions it's not so aggressive, it's fairly stable. You can see it in ARPUs, you can see it in average price per minute, and you also see that the minutes of use is more or less equal to Moscow. While in Moscow we do have a situation with one of the players that needs to grow, and for that reason comes into the market with price aggressive proposals. And I think that is also reflecting the average price per minute in Moscow and putting a pressure on VimpelCom. And for that reason you also see more pressure there than in the rest of the markets that we're operating in right now.

Okay, thanks.

We will go next to Russ Johnson with [indiscernible].

Hi, could you expand a little bit more on the pricing issue in regards to the churn is really my question? And to what degree is churn sort of internal churn, and what degree is it a competitive issue that would reflect back on pricing? I can't imagine you're satisfied with these numbers, but what is the outlook for that in a competitive situation?

First of all, it's important to say that approximately one third of these churn numbers which we announced is internal migration, according to our survey. That means the customer is not leaving us. Secondly we believe that these high churn numbers which right now for I think both we and our competitors, are linked to the huge sales in the past and wide availability of the prepaid products on the market.

The good think that we have the dealer commission structure in place, which allows us to withdraw that commission from the dealer in case the customer left us. So economically we're more or less safe here, and we don't pay commissions in case of the customer leaving us. But saying that we can see the loyalty and retention of our subscribers is a key priority right now. Right now, we are implementing special measures and programs for our existing subscriber base.

Okay, if I could follow up. I heard some discussion about the ease which customers at the low end can source third party black market handsets which SIM cards are interchangeable, which makes pricing almost the key driver at the lower end of the prepaid market. Could you shed some more light on that, and whether it's really a game of price, or whether network quality -- whether that issue's being overstated and whether it's going to be a key driving feature at the low end of your prepaid market growth and take a lot of the growth out?

We believe that we have a good control over the distribution network right now. And that every week we have special committee who looks [indiscernible] on all dealers fraud issues, and other things, etc. So we have special system of penalties, etc. So we have the dealers network under control, and that's why of course something can happen with one dealer, but we have control and minimize our expenses here.

Talking about the segments of the customer who potentially is migrating between different operators because of price. Yes, that type of segment exists on our market, especially it's linked to students use segments, part of youth segment of the market. But we believe that this segment is not that big, that's why it's not so serious a threat for the Company.

Thank you very much.

We will go next to Michael [indiscernible]

Hi. First, congratulations on your strong results. And my question is, could you please comment on the change quarter-on-quarter in subscriber acquisition costs in the regions, and give any expectations of further changes?

During the second quarter, subscriber acquisition costs was $12.3, and that's pretty close to the previous quarter. For example, the first quarter of this year it was $11.7, so also approximately $12. And we believe that's a good level for us to try to keep of course.

Right now, we've been held by the big volume of the sales in the regions going through our own shops. For example, it's relatively small city and big part of the sales going through one of our direct shops, and we save dealer commissions. Where in the future when the market will be growing it will be more sales through the distribution network. That's why we could lose some growth, but we will try to minimize the whole expenses and I believe we are able to control marketing and dealers expenses in the regions.

Okay, thank you.

We will go next to Charlie Illingsbridge with Natexis.

Hi, good afternoon. I'm just trying to understand what the dynamics are that are driving increased ARPU on a quarter-on-quarter basis. I can see that there's a significant increase in moments of use, but perhaps you could talk to us about what the dynamics are that are driving ARPU?

We believe it's three factors which are driving growth of the ARPUs. First it's seasonally good summer months. Usually we have most of the Muscovites and different Russian people who during summer time go to their country houses and spend some time on the roads and on in these country houses. And that's why minutes of use with this seasonal effect are growing.

Secondly, we've expanded the coverage, we have excellent coverage right now in Moscow. In Moscow suburbs, we've got one of the biggest networks in the world right now. We have 2,100 base stations, which means that all suburbs and even far suburbs of Moscow regions are fully covered. And that's helps, that means customer growth to the Moscow region, and we have full coverage everywhere.

The same happens in the regions, as well we've developed our networks, traffic increased, and right now we have good coverage in the roads in different Russian places, that also helps. And thirdly we believe it's linked to the better quality of our subscriber base, because both in Moscow and in the regions we were the second or third GSM player. And so initially, we were starting with a mass market, low end subscribers. And as soon as our quality was there our product is improving, and as a result you attract better and better subscribers. And right now, we have even more targets for business segments of the market where we can grow the ARPUs and minutes of use.

Thank you. And just as a follow-up question, particularly given that seasonality issue, could you talk about how you expect ARPU to evolve over the course of this year? And in particular what you're seeing in the current quarter?

First of all, we believe that this season effect is more or less equal for the second and third quarters. And it's less minutes of use during the first and fourth quarter. So you can have this assumption. In terms of dynamics, we believe that today's levels of ARPU is more or less sustainable for this year, and we will have some positive and negative effects going forward.

On the positive side, we can - as we discussed - we will have some more attention to the business segment of the market, and opportunity with growing value added services. That's still big opportunity right now. We have 10% of revenues in Moscow, and only 5% in the regions. That's why promoting new value added services we can keep increasing ARPU. At the same time, pressure on pricing will still be there, especially as discussed in Moscow, that's why there will be pressure on pricing and ARPUs.

Thank you very much indeed.

We will go next to Olga Volenski with Renaissance Capital

Hello and congratulations. My first question is do you expect at the present you showing more attention to subscriber retention?

In the long-term, yes. But in the nearest months and quarters is will be more or less on this level.

Okay, thank you. And the second question is, can you specify the revenue from guest and own roaming?

The revenues from roaming were approximately 15% of the revenues in Moscow, and approximately 13% in the regions. In Moscow, this was more or less half of them came from the guest and half of them from our roamers in other networks.

And what about the regions?

In the regions slightly more revenues from the guests roaming, guests in the regions, mostly linked to the fact that when we were launching the networks initially we were taking guests. But to take local subscribers travel to other regions or countries will take some time.

Thank you.

We will take our final question today from [Olga Bashrova] with CS First Boston.

Hi, congratulations on the good results. My first question is regarding dynamics of SAC for the next two quarts. Just like you said in terms of ARPU?

We believe that during the last few quarters we've demonstrated this level of subscriber acquisition costs which we're doing is low. And our target is to keep growing with more or less these levels of subscriber acquisitions costs. As I said, the only potential change which could be [indiscernible] of is growing share of dealers sales in the regions, which we will be growing subscriber acquisition costs in the region. At the same time, dealer commissions in the regions are very low, it's only $10 which we pay to regional dealers. That's why it will be not significant effect.

Okay, thank you. And the second question regarding merger. Can anything happen to also preferred shares following the merger?

Alfa will keep their preferred shares, and no change in their holdings on the preferred. And that is the difference between their economic and their voting stake in VimpelCom.

Okay, Thank you.

You do have one additional question from [Alexei Yakovinski] with United Financial Group.

Good evening. I have a question on the last slide of the presentation. What sort of ARPU level do you see for let's say 2005 in the regions to get to the revenue figure that you present here in the chart?

We have projections of $14 to $15 in Moscow ARPUs, and $9 to $10 in the regions.

Okay. Thank you.

At this time we have no further questions. Mr. Lunder, I will turn the call back over to you for any additional or closing comments.

Thank you very much, ladies and gentlemen. We are wrapping up now. We are very please with our second quarter results. We are also happy to announce that the Board recommends the merger to its shareholders. We are convinced that we will have to merge these two companies. We don't think it's 'if,' we think it's a question of 'when', and we believe the time is now.

We believe that the longer we wait, the more complicated it is going to get. We appreciate your taking the time to listen to us today. We have given you a lot of information and you may need some time to analyze this. We are ready and we will soon visit our shareholders to present the merger proposal and answer more of your questions. So I wish you all a nice day and goodbye for now.

This does conclude today's conference call. We thank everyone for joining us today. You may now disconnect.