VEON Ltd (VEON) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the VimpelCom fourth quarter and annual 2003 financial and operating results conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. John Dillard. Please go ahead, sir.

Good morning and welcome to VimpelCom's conference call, to discuss the company's fourth quarter and full year 2003 financial and operating results.

Before getting started, I'd like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to the company's development plans, such as national expansion, and to the confirmation of the merger between VimpelCom and each of the VimpelCom-Region and KB Impuls. Certain factors may cause actual results to differ materially from those contained in the forward looking statements, including those risks detailed on the company's press release announcing fourth quarter and full year 2003 financial and operating results, the company's earnings presentation entitled "A Presentation of 4Q and Annual 2003 Financial and Operating Results", and in the company's annual report on Form 20-F for the year ended December 31 2002, each of which are posted on the company's website at www.vimpelcom.com.

In addition, the company's fourth quarter and full year 2003 financial and operating results press release and Form 20-F are posted on the Security and Exchange Commission's website at www.sec.gov.

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 fourth quarter and full year 2003 financial and operating results press release, please contact Edelman Financial at 212-704-8134 and it will be forwarded to you.

In addition the press release, which includes reconciliations of non-GAAP financial measures presented on this conference call, and the earnings presentation, can each be downloaded from the VimpelCom website.

At this time, I'd like to turn the call over to Alexander Izosimov, Chief Executive Officer of Vimpel Communications.

Good morning, everyone, and thank you for joining our conference call today. Let me now introduce the team participating on this call. Here with me are Nikolai Pryanishnikov, our first Vice President and Commercial Director, Elena Shmatova, our Chief Financial Officer, and Valery Goldin, our Vice President of International Relations.

At today's conference call, we will discuss three topics. First our fourth quarter and annual 2003 financial and operating results. Second, the status of our major corporate initiatives, including the proposed merger of KB Impuls and VimpelCom, which we announced today. Third, the development of our relations with the regulator.

Starting with the business development in 2003, I would like to say that we are very pleased with the progress of the Russian cellular market in general, and VimpelCom's performance in particular. As far as market growth is concerned, we see two major reasons for this positive development. First, the continuing improvement of economic conditions in Russia, and second, the growing financial strength and adequate marketing strategy of mobile operators.

In 2003, the Russian cellular market grew by 102%, from 18 million to 36.4 million, becoming one of the fastest growing markets in the world. At the same time, our subscriber base increased by 122%, from 5.1 million to 11.4 million. We retained our leadership position in Moscow and made great progress in the regions, where we recorded a four-fold increase of our subscriber base, which resulted, of course, in a strong market share gain.

Let us now move to the financial results of 2003. Consolidated numbers show great progress, with the revenue exceeding $1.3b, a growth of 74%. OIBDA increased by more than 90% and OIBDA margin for 2003 reached 45.9%. Net income grew by 81% and reached $231m.

Our strong financial performance was the result of a number of factors, among them rapid subscriber growth, strict cost control, use of state-of-the-art billing and CRM solutions, increasing utilization of economies of scale. The company's growing efficiency was reflected in the fact that OIBDA and net income grew faster than revenue, in spite of many [start-up] operations launched in 2003.

The progress in the regions was so rapid, that year-on-year comparisons would show growth in thousands of percentage points, which is not very meaningful. Therefore, the current dynamics of regional development is better seen if we compare our fourth quarter and third quarter results. The most remarkable is the more than 100% improvement in net income, which follows, actually, the doubling of net income in the previous third quarter of 2003. OIBDA margin exceeded 40% in the fourth quarter, signifying a new and more mature stage in our regional development.

Now we are looking at the operating highlights. The company has been successful in implementing its growth forecast strategy. As a result today we have 13.2 million subscribers in Russia. We had the leading net additions in all super-regions, where we have well-established operational platforms.

We are doing well in the Northwest market, where we came much later than our competitors. Currently, we operate in four out of ten Northwestern regions, with the city of St Petersburg and the surrounding Leningrad region, where actually our customer base exceeded 400,000. The Kaliningrad region and Novgorod region are the other two, and we are already fighting for leadership in net additions in the Northwest region.

Our position will be even stronger later this year, when we launch more new networks in the Northwest and develop further our operations in the Urals, which we started in December 2003.

Analyzing subscriber growth, we see that it is slowing down in Moscow and accelerating in the regions. This is natural, because the penetration rate in Moscow is already more than 70%, while in the regions outside Moscow it is around 22%, with a total national cellular penetration approaching 28%.

We are quite pleased with our current position in Moscow, where we keep a comfortable lead with 49% market share. Our market share in the regions is steadily growing, reaching 23% from 13% just a year ago. This strong growth allowed us to improve our overall national market share, which has exceeded 31%.

It is important to note that all our regions show strong growth. It is also important to note that we are leaders in net additions in the Central, Volga, South and Siberia super-regions. This year, we plan to extend our operations, including the launching of new networks in our youngest Northwest and the Ural super-regions. This should significantly strengthen our position in these areas, where we came later than our competitors and where in aggregate, we currently operate in seven regions out of some 20 regions, which comprise these two super-regions. Profitable growth in the regions will be one of the major objections for VimpelCom in 2004.

Now, let's have a look at the subscriber statistics. We already described subscriber growth and now let me talk about churn, which has been and remains higher than the industry average. We see there's a problem, although it has not seriously affected our financial performance. The reason for this limited impact is that we do not make any handset subsidies, which results in one of the lowest subscriber acquisition costs in the world. However, we see the following major factors that contribute to churn.

First, competitive pressure accounts for approximately one-third of lost subscribers. This factor is being addressed through improvements in quality of our services, promotion of our brand, and various CRM focused activities.

Secondly, other factors which are more Russian-specific, primarily seasonal churn of low-end subscribers, who use mobile phones mostly in the countryside in the summer period.

The last factor is internal migration, which is apparently the biggest contributor to churn. It is caused by a number of factors, one of which is the structural dealer commissions, which set a one-time payment for new subscribers or for each new sold SIM card. We are now in the delicate process of changing the structure of dealer commissions, in order to motivate the dealers to encourage our subscribers to keep their SIM cards and stay in the network while changing their tariff plans.

Now, let me ask Elena to present our fourth quarter financial results in more detail.

Thank you, Alexander. As we know, the fourth quarter revenue normally suffers from a substantial decrease in roaming. However, in the fourth quarter last year, our revenue demonstrated growth of 7.6% from the third quarter, while in the year 2002, quarter-on-quarter growth was just 3.6%, which we see as a positive sign showing that our subscriber base is becoming large enough to make seasonal effects connected with roaming and decreasing usage less pronounced.

Our gross margin was fairly stable within the year. On a year-on-year basis, gross margins showed approximately a 1.5% improvement, due to a slight decrease in low margin handset sales in total sales volumes. In the year 2002, revenue from handset sales was 6.4% revenue, and this year it is 4.9%.

In the third quarter of this year, SG&A as a percentage of revenue constituted 33.5%. In the fourth quarter it grew to 36.5%, due to the intensive New Year sales campaign and expenses connected with the launch of new regional branches. If we look one year back, SG&A in the fourth quarter of the year 2002 was 39.2%. The main drivers of this year-on-year improvement are an increase in volume of operations and improvements in profitability of regional operations.

So, opening practically the same number of new branches in the fourth quarter of the year 2003 as in the same quarter a year ago, can, I guess, deliver. It made much less negative impact on margins.

As a result of these factors, the OIBDA margin in the fourth quarter was lower than in the third quarter but much stronger than a year ago, 46% compared to 37% in the fourth quarter of the year 2002.

Net income in the fourth quarter, as a percentage of the revenue was 16.6%, approximately 1% lower than the average for the year, 17.5%. This was mainly as a result of growth in minority interests in net earnings of subsidiaries, from approximately $7.5m reported in the third quarter of the year 2003 to approximately $16.7m reported in the fourth quarter of the year 2003. This was caused by the growing profitability of regional operations, as well as the increase in the minority stake from approximately 35% to 45% in VimpelCom-Region after the completion of the third tranche of investments by Alfa Group in August 2003.

If we look at such operational indicators as ARPU and minutes of use per subscriber, their variation illustrates some of the trends that were discussed before. ARPU decreased in the fourth quarter by 13.2% compared to the previous quarter, due to seasonal effects. Again, this effect applied to a larger base made less impact than a year ago, when we saw a decrease in ARPU on a quarter-on-quarter basis of 19.1%.

The same related to minutes of use per subscriber. Blended minutes of use per subscriber decreased this year on a quarter-on-quarter basis by 3.7%. Last year, it was an 8.1% decrease.

Subscriber acquisition cost continues to show good development, as regional operations are showing faster than Moscow, and subscriber acquisition cost in the regions is lower.

Our leverage and return on investments are constantly improving for the last years. Our total debt has decreased by $44m in the year 2003 compared to the year 2002, although previously we always increased our debt in order to finance our tremendous growth.

Net debt during 2003 increased only by $62m compared to $219m increase in capital investments. Other issues showing our ability to service debt, such as Debt/OIBDA and OIBDA/Interest, are improving substantially, providing much more confidence to our creditors, which improves our borrowing ability.

Talking about the operating cash flow, we can see that we are rapidly decreasing the difference between our cash generated and capital invested. Even in the year 2002, 57% of our capital investments should be funded externally in the year 2003. This mix constituted only 30% of capital needs.

What is important to mention is that our regional subsidiary generated in the year 2003 $146.5m of operating cash, while only a year ago in the year 2002, we needed to spend $10m to support its current operations.

Thank you, Elena, and now let me move to our corporate issues.

As you remember October 24 last year, the Extraordinary General Meeting of VimpelCom shareholders approved the terms of the merger between VimpelCom and VimpelCom-Region. We actually believe that the results of the fourth quarter of 2003 and current trends confirm the underlying assumptions and rationale for the merger. However, in order to complete the merger, we need to meet a number of conditions precedent.

One of them, according to Russian law, is the approval of the merger at the joint EGM of VimpelCom and VimpelCom-R shareholders. The decision at the JEGM is taken by 75% of votes of shareholders participating at the meeting. As voting is open to all shareholders, we do not foresee any problems with the approval of that decision at the JEGM. Still, we have called on our ADR holders to actively participate in the vote and again support the merger.

The new law in communications states that in case of merger, the license should be transferred to the successor within 30 days. We have submitted all necessary documents to the telecommunications authorities to complete the transfer of licenses and frequencies, and to secure continuous operations during the 30-day transitional period.

We have some concerns as to the schedule of the merger process, as a result of the reorganization of the Russian government. In order to restructure the various ministries, including the creation of the Ministry of Transport and Communications, many pieces of legislation are required to establish the right duties and reporting structure of various ministries, services and agencies, including those regulating the telecom industry. Until these pieces are put into place, we may encounter delays with the merger and other activities. In fact, yesterday we received a letter from the former Ministry of Communications, which returned our application for the transfer of license and frequencies from VimpelCom-R to VimpelCom. The stated reason for this move was that responsibilities had not been assigned within the new government structure.

Let us now move to the situation in Moscow, where a few months ago the telecommunication authorities changed their previous position, and claimed that the operational arrangements between VimpelCom and its wholly owned subsidiary, KB Impuls, contradict the law. We took legal actions to protect the company and its shareholders, and we have won all our cases that have been decided. The Moscow Arbitration Court invalidated the notice made by the Telecommunications Authority, and confirmed the legality of our operational arrangements in Moscow. We also won the case on the appeal, where our subscribers, supported by the Ministry of Communications, challenged the legitimacy of our Moscow operations.

We are very pleased that we have won our cases in court, but they are subject to further appeals and may continue for some time, distracting (unfortunately) our resources to non-productive purposes. In order to streamline the VimpelCom/KBI relations and eliminate the grounds for the issue altogether, we propose to our shareholders to approve the merger between VimpelCom and KB Impuls at our AGM on May 26.

It has been our desire to make this merger ever since the Ministry of Communications abandoned this policy of issuing only one operating license to a legal entity in a given license territory. We have not done it before because of the risks associated with transfer of licenses and frequencies, and as the old law on communications didn't contain any safeguards against losing the license in the merger process.

We hope that the new Ministry of Transport and Communications will facilitate the transfer of licenses, frequencies and permissions from KBI to VimpelCom in a timely manner, so that we can continue uninterrupted provisioning of services.

In case of merger between VimpelCom and KBI, there are no real interested parties, as KBI is VimpelCom's 100% owned subsidiary. However, Russian law technically considers this as an interested party transaction. Consequently, neither Alfa nor Telenor can vote on the KBI merger issue, and we will again need more than 50% of votes of all ADR holders to approve the merger. It is going to be a real challenge to collect so many votes, and we have called on all of our ADR holders to actively participate in the vote and secure the decision that will be beneficial to all shareholders. It is an extremely important issue for all of us, so we will be contacting you later on concerning the KPI merger approval at the forthcoming AGM. If you have any questions or problems with voting, please contact Valery Goldin, our Investor Relationship Officer.

Summarizing the call, I would like to say the following.

The company has entered 2004 with excellent financial results. We enjoy a growing, rapid subscriber growth, and strong market share position, achieved predominantly through green field operations. In 2003, we opened operations in 50 additional Russian regions and installed almost 3,500 base stations, as many as in all previous periods. We also added approximately 6.3 million new subscribers. We intensified our network build-out in the fourth quarter of 2003, when we installed 930 new base stations and launched eight new regional networks. We increased our capital expenditure beyond our original plans, in order to match an unprecedented subscriber growth. We expect this growth to continue in 2004, and we plan to spend approximately $920m this year, for purchase of property and equipment.

In making our capital expenditures, we see that we can meet the constraints we set earlier. The constraints are that the CAPEX for new subscribers should be no more than $150, return on capital employed should be no less than 25%, and debt to equity ratio should not exceed the comfort level of 1% unless, of course, we have a major corporate transaction.

Adhering to these principles, we will continue to pursue the strategy of profitable growth, which has been so successful in the past few years. The indicator of this success is the steady improvement in our financial performance, particularly growth in generated cash, which brings us closer to a free cash flow positive area.

Thank you for your attention, and let me now open the floor for questions.

Thank you. We'll go first to Alex Calstagie with Renaissance Capital.

It's Alex Calstagie for Renaissance. Well, since I am limited to one, can I ask - it looks like your regional implied yield has reduced by about 14% in the last quarter. I was wondering if you think that this kind of a case of tariff erosion is going to continue throughout 2004, and what is the level of the incremental output currently in the regions?

We estimate that our incremental ARPU in the regions is approximately $9. That's kind of, we believe, relatively stable figures. Of course, we need to say that there is some seasonal effect on ARPUs, so in the fourth and first quarter we will have less roaming revenues compared to the second and third quarters. Also, there is slightly less traffic. It's more seasonal summer traffic during the second and third quarters.

So you don't see much pressure on the tariff side?

We've been through some serious tariff decreases in the past, but right now we see more mature behavior from all players. Also, we had very good help from the tax decreases from the beginning of the year. We had a decrease in VAT and we had the elimination of the sales tax. This is another argument for all operators not to decrease tariffs.

Okay, thank you.

We will go next to Vladimir Kostolovsky with Brunswick UBS.

Good afternoon, ladies and gentlemen. Congratulations on excellent results, first of all.

My question is going to be with regards to the VimpelCom-R merger. Could you tell us exactly when you are going to complete this merger, or at least what your plans are, as it is quite important to the estimates for next year, given how significant minority interests from VimpelCom-R seems to be at this point in time.

A related question is, could you spend a bit more time again talking about potential logistical problems with the completion of the merger you mentioned earlier? Thanks.

Thank you, Vladimir. As we mentioned in the presentation, in order to complete the merger we need to hold a shareholders' meeting, transfer the license and frequencies from VimpelCom-Region to VimpelCom, and meet some other conditional precedents.

It requires the participation and approval of certain government bodies. We plan to close the merger with VimpelCom-Region in the second quarter. We hope that the change in government structure and reassessing the responsibilities within the government agencies will not endanger this plan.

Talking about the logistics, I'm sorry, I was not quite clear about the exact question, but as far as I understand you were asking whether we...

You said that you received the letter from the Ministry saying that because of the change of the Ministry, they cannot approve the transfer of the license. Are you expecting anything similar, and is it going to be difficult to deal with this particular issue?

No. We hope to resubmit all the documents and we think that it will be resolved in a normal and good practice.

So we can assume that they will be consolidated from Q3, right?

Actually, we think that we have all the chances right now, still to make it in the second quarter as we planned for.

Right, so mid-way through the quarter, or towards the end of the quarter?

No, it's a very precise question. It again depends on very many factors. As we said, we hope on good work, us together with the Ministry's officials in this sense.

Thanks very much. I'm sorry for taking so much time. Thank you.

Next we will move to Tom Furdo with Citigroup Smith Barney.

Good afternoon. I just had a question. You've given a more specific CAPEX estimate for 2004, $920m. What kind of market penetration are you assuming the market reaches by the end of 2004?

We are looking to forecast of all analysts, and our judgment is that it will be close to 60 million total subscribers in Russia by the end of this year.

Thank you.

Next we will move to [Estovan Ratotov] with CS First Boston.

Good afternoon. Could you please elaborate on what kind of options you see for the extending of [indiscernible] in the regions you currently failed to get a license, like the Far East?

I would also like you to come back to Alexander's question on the average revenue per minute. I didn't quite understand. The decrease in the average revenue per minute in the regions in the fourth quarter, was it mainly due to pricing pressure, or was it mainly due to the shortfall in roaming revenues?

I will start with the second question. During the fourth quarter, we had some seasonal effects on the ARPUs, both in Moscow and in the regions. So we have slightly less traffic, because there is no more summer traffic and less roaming revenues. On top of that, I need to mention that in the fourth quarter we had a very strong Christmas promotion, where we were giving as a present 30 minutes to our subscribers. To the regional part it was a very huge sale, it was actually 1 million subscribers who connected to us through this promotion.

That's kind of increased slightly our minutes of use, without really affecting ARPUs and revenues. That was some kind of one-time event, as a promotion, and we don't foresee this changing our future plans.

I understand.

We'll take our next question from Nick Barnes at Thames River Capital.

Yes, hi, it's Nick Barnes here. I had two questions.

The first one was - could you possibly just give us a bit of a reconciliation on your CAPEX number? In the presentation, you said that your CAPEX last year was $730m, and in the cash flow statement I think the total CAPEX including investments comes up to about $600m. So you could talk us a bit of color on that? Thanks.

Yes, of course. We recognize our capital investments as long as we get them and install them, while in the cash flow the reflection of what we have actually paid for this. So of course we have some deferral in terms of paying the invoices and here comes the difference.

Okay, great, thanks. The second question is that I was wondering if you could just tell us how many employees you have on a consolidated basis, and also what the total remuneration, what your total employee costs across VimpelCom and VimpelCom-R would be, combined, including all social costs?

We have, in terms of number of employees, we have slightly more than 7,000 employees currently. In terms of all ratios of subscribers to number of employees and revenues, for this number we have a very good tendency of improvements besides the fact that we are opening a lot of branches at this stage.

But could you give us an idea of what the total wage bill is for VimpelCom or the average per capita wage including, as I say, social taxes?

We usually don't give this information, but you can derive this from an assumption that our wage level and in general payments are slightly higher than average in the country. Therefore, taking general statistics, you can derive that.

Thank you.

Next we'll take a question from Olga Geleskia with Renaissance Capital.

Hello, this is Olga Geleskia from Renaissance Capital. I have one question. What is your OIBDA margin expectation in the regions for 2004, and what were the roaming and value-added services revenues in Q3 and Q4? Thank you very much.

I will start with roaming and value-added services. We had total revenues from value-added services, 12.4% of the total service revenues in Q4. Actually we see a very good trend, both in regions and in Moscow, in terms of growth of that type of service.

As an example, in Moscow, we have a growth from 11% to 13% through the year, and in the regions from 4% to 9%, actually doubling there our revenues from value-added services, which we can see there as a very positive result. Roaming revenues, we have 15% of the total revenues coming from roaming from Moscow and 12% in the regions.

Next we will have Stephen Pettifer from Merrill Lynch.

Yes, thank you. I wonder if you could please, looking at the CAPEX, reconcile your growth expectations in the year compared to the $920m forecast? It appears to me that you are either being very conservative on your subscriber growth this year, given the run-rate to date, or you've managed to negotiate some fantastic new deals on equipment.

Could be a bit of both. We try to [inaudible] a different philosophy of trying to anticipate exactly the number forecasting the growth. Last year was a good lesson when virtually everybody - analysts, vendors and operators - used this number. We paid dearly at the year-end by trying to ramp up aggressively [indiscernible] to catch up with the growth. So, what we are now trying to do is to be actually quite flexible, and trying to secure opportunities for us to invest as we grow.

I just want to repeat that our guidance in general which we take is $150 per incremental [sub], we take as the upper boundary of our investments and we'll try of course to bring it further down, this number. The lower boundary you can take and say that $120, which we see in the year 2003, we're probably [institutioned]. Therefore we deployed virtually all of the reserves, all of the profits that we had on our networks. So we will continue to invest with this speed and if we see that our growth is growing faster, we might come back and indicate that we'll increase this guidance.

In general, what we're trying now to do is to say what is the end game. Within the next two years, we see that we need to build a network that will be able to support anywhere between 22 million and 25 million subscribers. Therefore, the question only becomes how fast we build this network. Is it within this year, or within two years, and so on. That's exactly how we're handling the CAPEX issue nowadays.

Just to follow up on that, if you're comfortable with the 60 million market size for this year, doesn't that imply that there's a pretty good chance you're going to raise your CAPEX numbers again?

You see that also depends on the capability of the organization to digest, because this is a significant jump already, in terms of the size of the CAPEX. I think that if we see some change in the CAPEX later on in the year, it wouldn't be significant compared to this number.

Thank you.

We'll move next to Andrei Bogdanov with Alpha Bank.

Good evening gentlemen. I have two questions, if I may.

The first one is regarding this December decision by the Minister of Telecommunications, which did not give you some licenses that you applied for. Do you plan this year with the new Ministry to reapply for these licenses? If you do, when do you expect any success from this?

Secondly, I'm sorry if I didn't hear the question before, but do you think the new guideline for the OIBDA margin for next year, given that the number seems to be much stronger than people think.

Then the very last question, if I may, do you plan looking at any acquisitions, both in Russia and [indiscernible] for the foreseeable future? Thank you.

Thank you for your question. It is good when you have many questions. It gives the opportunity to pick.

So, starting with the first question, regarding the licenses for which we've applied last year. This predominantly, I understand, we are talking about the Far East license, which we've been denied. Of course we will continue to explore all of the opportunities to get this license. This is the last gap in our license portfolio, the 15 regions in Far East and Eastern Siberia. We are absolutely determined to get into that region and therefore applying again with the new Ministry for these license solutions would be one step.

The other step would be, of course, to explore opportunities to acquire existing operators in the region and create through that a foothold in the region. So that's with regard to licenses.

There is also one more resource that we've been denied, that is the EGSM frequencies. That also we intend to try to reopen this discussion with the new Ministry, because it's an important resource. As you know, Russian operators chronically suffer from the lack of bandwidth in the country. Therefore, it is an important element in our further development.

With regard to acquisitions outside of Russia, we take more of an opportunistic view on that one. We said it before and we do reiterate, that our primary focus is Russia, and there is quite a bit of investment to be made in Russia and quite a bit of growth to be captured in this country. Nevertheless, we're very careful in monitoring opportunities, which arise now and then in the countries like Kazakhstan, Belorussia. If we see that we can enter those markets without jeopardizing our resources and our positions in Russia, we certainly will do that. Again, I repeat that has more of an opportunistic nature than a strategic nature.

Thank you.

Next we'll move to [Nadia Golevov] with Atan. Nadia, your line is open. Getting no response, we'll now take a follow up question from Alex Calstagie with Renaissance Capital.

I just wanted to go back a little bit to Nick Barnes's question also on the CAPEX regulation for 2003. This was almost a $200m difference there. So am I right that you're going to be rolling [forward] this and recognizing something in 2004? Given that $920m CAPEX guidance for 2004, is that again the number you are going to report at the end of the year, again given that nothing's going to change? Or is it again the number just for the guidance, in terms of how much you're going to spend but not necessarily report all of it, accruing some of it in the future?

One more from the same topic is that your depreciation charge for the fourth quarter was hardly any different from the third one. Given that you invested about $250m in just that quarter, that did sound a bit strange. If you could clarify maybe that as well. Thank you.

Yes, Alex. I just want to clarify that. Again, as far as I understand, you are asking about the difference between cash spent for capital investment and real recognition of capital investment ratio. So, in this sense of course, next year we will report on the $920m, if we will do that investment as capital investment. Of course, the cash flow connected to the capital investment will be different. I'm not projecting right now which it will be, but they can never match.

Talking about the depreciation, we should say that yes, and you recognize that in the fourth quarter we have a very substantial capital investment. Of course, they start depreciating in the next month after we put them on our balance sheet. So in this sense you will not see an immediate jump in depreciation. Also, I should mention that our capital investment includes equipment in the process of installation, while depreciation starts when we start using this equipment for commercial purposes. This also gives rise between the amount you see as capital investment and immediate effect on depreciation.

Which essentially means you recognize all $250m virtually the last day of December, and didn't charge any depreciation for the fourth quarter from that one? That's how I understand.

Yes, so what you get in December will start depreciating in January.

Thank you.

We'll now go back to [Nadia Golevov] with Atan.

Good afternoon. Could you please tell us how much you think you need to spend as CAPEX in Moscow this year and probably next year?

Also, does it lead to the expansion of your network, or is it some sort of maintenance CAPEX? Is there any need for maintenance CAPEX in Moscow, for example, given that this network is not a brand new one? Thank you.

Yes, we will be spending at the maintenance level. We've basically been already this year at this level. So spending in Moscow is more related to maintaining and some minor upgrades of the equipment. The capacity of the network itself in Moscow is actually sufficient. All the hardware installed is sufficient. It requires constant optimization of our radio parts. Particularly when we had to switch on and switch off following the recommendation from Gossvyaznadzor, different base stations and different segments and so on, so it just complicated our life.

In general, we conceded that at least on the 2G or 2.5G evolution of the Moscow network has been completed.

I will add that actually our network in Moscow and in general Russia is pretty young. We're investing during the last few years and that's our serious advantage against our competition. We can implement new technologies very quickly. All our elements of the network are enabled with the new services and new opportunities.

Given that, according to what you are saying, that most of the Moscow CAPEX is maintenance CAPEX here, does it mean that this number will be sustained going forward for Moscow? I mean in terms of CAPEX, I think decreases in levels in three or four years.

It's definitely going to be sustained. Again, we're talking about 2.5G network. This number doesn't include third generation, where Moscow would be the primary recipient of this technology.

Thank you very much.

Next from Anna Vasonn, with CAIB.

I've got three questions, if I can.

The first one is minutes of use in Moscow, and your contract customers jumped between the third and the fourth quarter, from 284 minutes to 303 minutes. Were there any special offers there or anything? Obviously the special offers in the regions wouldn't have affected that.

My second question is the Urals. You're going to be one of four operators in the Urals when you expand there this year. Are you really going to have any special marketing exercises like free minutes or anything like that to kick off there? What can we expect?

My third question is very quick. Megafon. Do you think they might get some more frequencies this year?

First about minutes of use. Yes, that's some increase in minutes of use in the fourth quarter. We believe that that's the result of our activities in the business segment in Moscow, in our opportunity to attract more heavy users. We have special programs for the attraction of the heavy corporate users, and also some wealthy individuals, mainly in Moscow. That resulted in growing minutes of use. Of course we're giving very good deals for them in terms of tariffs et cetera. That's why we don't have a very big effect in terms of ARPU but in terms of minutes, and those revenues are growing.

In terms of the Urals, yes, that's a region with active competition. We are coming there right now. We believe we have a very good chance. Actually, one of the key advantages that we will have is this unified business model across Russia, and a very strong brand. It's interesting to mention that in a lot of Ural regions the leader of the market is using the local brand. So when you are answering with the strong Bee Line brand, which is already very well known in Russia, and with very attractive commercial offers, we have some success. We're glad to say that right now we see a good growth in the Urals on a daily basis.

In terms of Megafon, we believe they got some frequencies already, so I think they solved their issues in Russia. In terms of Moscow they also have some frequencies. I think the biggest issue for them is that they don't have enough financial resources. That's their challenge.

Thank you, that's very interesting. So you think once they got some more financing they might actually be able to grow a little bit more aggressively later this year then? It's not a question of they kept running out of frequency capacity as such?

I think the main restriction will be financial. We tend to invest more, because if we are talking about the Moscow market, this requires a lot of CAPEX. We have more than 2,000 base stations covering all Moscow and its suburbs, so they will require a lot of investment for the Moscow market.

Next we'll take a follow up from Vladimir at Brunswick UBS.

Good evening again. I have three questions, if I may.

The first one is just coming back on (because I don't think you've answered) margin guidance going forward. Obviously you've been very conservative over the last couple of years. How do you see margins developing going forward?

The other two are just small detailed ones. Bad debt, as a percentage of revenue this year, because of the tax credit in Q4, was very low. Do you think that this level of 0.7% as a percentage of revenues is sustainable going forward or was Q4 a bit of a one-off?

Finally, the effective tax rate in Q4 was about 31%. Was there anything special? Would you suggest that we use 29% for the year as a guideline going forward as well? Thank you.

I will start with bad debt. If we look to that yearly number of bad debt, we believe that's more or less the same level of bad debts we can forecast going forward. That's the result of our majority of the subscribers are on the prepaid, where we have real opportunities not to lose any money on bad debts. Effectively, with our credit subscribers we improved significantly all our credit control and collection procedures. That's resulted in these good numbers.

Talking about effective tax rate, yes, it's a one-time effect. At the last quarter of the year we changed the depreciation time for some of our fixed assets for tax purpose calculation. This gives the right to a one-time recalculation of deferred tax.

We should assume a bit less then, 29% for the whole year?

Going forward it will be approximately the same as average for this year.

Thank you.

The last thing, which came as the second time and we need to answer that one, is margins going forward. We never give exact guidelines on the numbers. We can only discuss the trends here. We believe that margins will remain in the mid-forties and we will see two trends. In Moscow, margins will probably be going down, because the base of the subscribers in Moscow is shifting. In regions, as our businesses mature and more subscribers are coming on our network, we'll see improvement in margins. So we hope that these two factors will balance each other, with maybe slight pressure downwards.

We'll take a follow up now from Olga at Renaissance Capital.

My questions have already been answered. Thank you.

A follow up from Estovan of CS First Boston.

You mentioned that you are in the delicate process of changing the dealer incentivization. Do you think that there is a chance that [with the threat] of lower churn you will have to pay effectively higher dealer commissions going forward?

Right now we're in the process of changing our dealer commission scheme, mainly starting from Moscow. That will result in approximately the same level of dealer commission, but we will not pay it up front, we will pay this depending on the quality of the subscriber. Actually, we started this process right now. It was accepted by the dealers and by the market. That's why we believe in the end the dealers will get more for the very good quality subscriber and they will get less if the subscriber churns quickly. That will be the trend.

We don't foresee any serious changes that will affect the serious growth of dealer commission.

Thank you very much.

That does conclude our Q&A session. Mr. Izosimov, I'll turn the conference back over to you.

Thank you very much. Thank you all for your questions and for joining us today at this conference call. Those of you who only listened but did not view the presentation, you can find this presentation posted on our website. We strongly encourage you to visit it and look through it. If you have any follow up questions, please don't hesitate to contact us.

So that will be it. Have a nice day and good-bye.

That does conclude today's conference. Again, thank you for your participation.