VEON Ltd (VEON) 2004 Q1 法說會逐字稿

Good day, and welcome, everyone, to the VimpelCom first quarter 2004 financial and operating results conference call. Today’s call is being recorded. At this time, I would like to turn the call over to John Dillierd of Edelmann Financial. Please go ahead, sir.

Good morning, and welcome to VimpelCom’s conference call, to discuss the company’s first quarter 2004 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, one, the company’s development plans, such as national expansion. Two, to the confirmation of the merger between VimpelCom and each of the VimpelCom-Region and KB Impuls. Three, the expected growth in regional revenues or EBITDA, and net income, and four, the company’s ability to resolve issues raised by Telecommunications authorities regarding the company’s Moscow operations.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements, including those risks detailed in the company’s press release, announcing first quarter 2004 financial and operating results. The company’s earnings presentation, entitled, “A Presentation of First Quarter 2004 Financial and Operating Results,” and in the company’s annual report on Form 20F for the year ended December 31, 2003, each of which are posted on the company’s website, at www.vimpelcom.com.

In addition, the company’s first quarter 2004 financial and operating results press release and Form 20F are posted on the Securities 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 call, or to make corrections to reflect future events or developments.

If you did not receive a copy of the company’s first quarter 2004 financial and operating results press release, please contact Edelmann Financial at 212-704-8134 and it will be forwarded to you. In addition, the company’s 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. Go ahead, sir.

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

Today, we’re going to cover three key topics - the tariffs of the Wireless market in Russia and its growth prospects, our first quarter financial and operating results, the status of our major corporate initiatives, and outstanding business issues.

As one of the major players in the Russian cellular industry, we are very happy to see that the growth in the cellular business continues unabated. Last year, Russia was the fastest growing market, and second only to China in terms of absolute number of net additions. This year, so far, we have added twice as many new subscribers as in the same period of last year, and our total penetration rate has passed the 30% mark.

Several factors actually account for this positive development. First, the continuing improvement of economic conditions in Russia. Second, adequate investments in network and infrastructure development, and forceful marketing strategy of major mobile operators. Third, change in public attitude, which transformed cellular from a luxury to a must-have product. Thus, the picture looks very encouraging, and we are optimistic as to the prospects of further growth.

Where do we see the limits? We believe that this market will add another 25 million to 30 million subscribers during the next 12 to 18 months before the penetration growth will slow down.

Let us now move to the financial results of the first quarter of 2004. When compared to the first quarter of 2003, consolidated numbers show great progress with a revenue growth of 71%, OIBDA growth of 87%, and net income growth of 84%. OIBDA margin reached 48.4%, its highest level since the company went public in 1996.

Our strong financial performance was the result of a number of factors – rapid subscriber growth, strict costs 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 the revenue.

The progress in the Regions continues with growing revenues and OIBDA margin around 40%. The longer we operate in the Regions, the more we are convinced that we can build a healthy, profitable business in the Regions with low ARPU but comfortable margins. As we continue to expand, we expect further growth in revenues generated in the Regions as well as a corresponding increase in OIBDA and net income.

The company has been successfully implementing its growth focus strategy, and as a result today, we have 14.9 million subscribers in Russia. This year, we have already launched five new networks and we plan to launch more this year to cover all key [indiscernible] within our License portfolio. This should significantly strengthen our position in the areas where we came later than our competitors.

Among other notable achievements, I would like to mention our progress in promoting Value Added Services, which generated 15% of our service revenues in the first quarter of 2004. On the financial control side, we launched an Oracle financial system in order to reinforce our internal control procedures.

Analyzing subscriber growth, we see that it is slowing down in Moscow, and on the other hand, accelerating in the Regions. This is natural because the penetration rate in Moscow is already more than 75%, while in the Regions outside Moscow, it is around 25%, with total national cellular penetration approaching 31%. We consider our position in Moscow as sound and stable. It is already a sufficiently saturated market, and our focus, therefore, is shifting towards loyalty retention, yield and profitability.

At the same time, growth potential in the Regions remains very strong, and we are concentrating our efforts on capturing this opportunity. Our market share in the Regions is steadily growing, reaching 25% from 17% just a year ago. This strong growth allowed us to improve our overall national market share, which has now reached 32%.

It is good to know that strong growth comes from all of our regions. We are the leader in Central, Volga and Siberia super-regions. We also lead in net additions in these areas, as well as in the south super-regions. We are also doing well in the North West market, where we came much later than our competitors. We have reached a milestone of 500,000 subscribers in St Petersburg, after one year of operations and we continue to expand elsewhere in the North West super region. In fact, today we launched our network in the Volga region.

In the Urals, we launched operations in December 2003, and signed up almost 100,000 subscribers after three months of operations. In April, we launched operations in the [indiscernible] region which became our fourth operational region in the Urals. One of our objectives is still to gain access to operations in the Far East. We continue working on this issue, and we will report to you as soon as we make substantial progress in this area. Profitable growth in the Regions will remain one of the major objectives for VimpelCom in 2004.

We already discussed subscriber growth, and now let me talk about churn. We recorded some reduction in churn in the first quarter of 2004, but we still need to do much more. We continue to develop understanding of churn drivers. We clearly see that it is not a loyalty issue, as only one third of our churn subscribers go to the competitors. A major part of the remaining churn comes from the widespread practice of changing tariff plans by buying new SIM cards.

In March, we introduced a new structure of dual commissions, which we hope will enable us to reduce churn. In dealing with real churn, we will continue working to improve quality of our services, promote our brands, and communicate with our subscribers using CRM techniques. Recently, we made fine-tuning of our entire Moscow network, which resulted in substantial improvement of our network quality.

Another growth related issue is the numbering capacity. This problem is common to all major mobile operators. Each so-called DEF code, which we receive from the government, pursuant to the National Numbering Plan, gives us the ability to create 9 million federal telephone numbers. We have two such codes – 903 and 905, which gave us 18 million federal numbers altogether. We need one more code – 906, and we submitted appropriate applications. We are actually working with the Ministry of Communications on this issue, and we hope that it will be resolved during the summer.

Meanwhile, in dealing with the numbering capacity issue, we have temporarily tightened our disconnect policy in order to release some additional telephone numbers. Consequently, you might see some increase in churn in the second quarter of 2004.

Let me now ask Elena to present our first quarter financial results in more detail.

Thank you, Alexander. As was already said, our growth continues to be very rapid. If we compare year-on-year growth rates for the first quarter, we will see that in the year 2004, the revenue growth rate was 71%, while in 2003 it was 68%. So we are not slowing down. The picture for the net income development is even more impressive. The net income year-on-year growth rate in the year 2004 was 84%, while in the year 2003 it was only 48%.

This is of course the effect of the total market growth and very favorable economic conditions, connected with stable and high oil prices, but also, I think, it can be attributed to our efforts in improving quality and availability of our services throughout Russia. The regional expansion and business growth allowed us to utilize our unified business model more efficiently, which resulted in margin improvement.

Our CAPEX, as usual, was modest in the first quarter, but the forthcoming summer season, we hope, will allow us to accelerate our field works and network roll-out so that we are able to serve our growing customer base. Our depreciation expenses, even with the reduction of useful lifetime for telecom equipment from 9.5 years to 7 years, looks a bit better as a percentage of revenue than a year ago. We are moving from the initial stage of network development to high utilization indicators, and a more efficient use of our network.

In the reported quarter, we had a decrease in ARPU compared to the previous quarter, which is a standard picture for every first quarter of the year. Our blended ARPU decreased nearly by 20%, year-on-year, and mainly, that was caused by the regional contribution. As a stand-alone factor, it can be seen negatively, but if we look on it in the context of other operating indicators such as subscriber acquisition costs and compare ARPU with SAC, we see that they are still very close, and regional ARPU is close to 70% of SAC which makes regional financials rather healthy.

This fact, together with lower than in Moscow prices for all overheads, enabled us to record strong financial figures for our regional subsidiary, VimpelCom-Region.

Our balance sheet is strong, and leverage ratios demonstrate positive dynamics, which gives us a solid platform for further development. Our debt/OIBDA, calculated on the last 12 months’ basis, is already below 1%, and OIBDA interest is 10.7%. So, being cautious in our financial management, we think that we made good progress in terms of liability of our company, which resulted in the upgrade to our credit rating. We received BB- with positive outlook from Standard & Poor’s and BA2 from Moodys. These ratings are among the best of all Russian corporates.

Such leverage indicators and ratings allow us to look for good conditions on external funding for our network development, which will further improve our financial results.

As a result of previously mentioned factors, the difference between capital invested and cash generated is shrinking. Going forward, we will continue, on the one hand, to follow our strict internal rules in managing our balance sheet, but on the other hand, to look for all attractive investment opportunities for which we can use our own funds as well as attractive external financing.

Thank you, Elena. Let me now move to our corporate issues. There are currently two main events – the merger with VimpelCom-Region and the merger with KB Impuls. The merger of VimpelCom-Region into VimpelCom was approved at the joint AGM of both companies on April 16. It was a formality required by the Russian law to approve changes in the charter connected with the merger.

Following this approval, we have reapplied for the transfer of licenses and frequencies from VimpelCom-Region to VimpelCom. As you probably know, the process of formation of the new government has been completed, and the old Ministry of Communications and Informatization has been reinstated in its previous form, at least as far as it’s major features are concerned, and has been renamed the Ministry of Information Technology and Communications.

Therefore, we hope that the Ministry has now the necessary capacity and authority to complete the process promptly, as required by the law on communications. Still, the government restructuring is not finished, and this is causing some delays.

Moving to the situation in Moscow, I am happy to say that the decision to merge KBI into VimpelCom was approved by the votes of more than 50% of all registered disinterested shareholders, exactly as required by the Russian law. Having taken this hurdle, we will now proceed with other formalities, including the transfer of licenses, frequencies and all other permits from KB Impuls to VimpelCom. This merger actually has two positive effects. On the one side, it will allow us to streamline the corporate structure, and on the other side, will help to remove the grounds for our dispute with the regulator.

As many of you know, since the beginning of this year, we have had a dispute with the Telecommunications authorities over the operational arrangements between VimpelCom and its wholly owned subsidiary, KB Impuls. We have been generally successful so far in protecting ourselves through legal actions, but this process may be long and protracted.

However, on a number of occasions, Mr. Raymond, and other high-ranking officials in the Ministry of Communications, stated that the reassignment of licenses and frequencies to VimpelCom would totally resolve the issue. So, we hope that the merger will help us to remove the issue altogether.

I would like to use this opportunity and thank all of our minority shareholders for active voting at the AGM, which has opened the way to a possible permanent satisfactory solution to the regulatory disputes in Moscow. Considering numerous steps, some of which must be sequential that we need to take to implement the merger, we hope to finish the process by the end of 2004.

So, completing our presentation, I would like to say that the company is successfully implementing its plans for 2004. We are the leading subscriber net additions in Russia, and our incremental market share in April was 37%, according to an independent source. It means that our national market share, which has reached 32%, continues to grow. We plan to further expand our operations in Russia in order to capture the growth opportunities, which we believe will remain in Russia for the next several years.

Our financial position is strong, and getting stronger. We are gradually approaching the position of being free cash-flow positive, and we are currently working on our dividend policy, which we plan to announce later this year. Thank you for your attention, and let me open the floor for questions now.

Thank you, the question and answer session will be conducted electronically. [Operator Instructions]. We will take our first question from Isban Manatov (ph) with CSFB. Go ahead, please.

Good evening, this is Isban Manatov from CSFB. Could you please elaborate a little bit on what your experience has been with the pricing environment and the competitive dynamics in the regions during the first quarter, and during April and May?

Yes, of course. So during the first quarter, it was some further expansion of the national players to some more regions, so that was the tendency. There are other small players in each region which are constantly decreasing their market share, and still there is some parts of the market kept by these small local players that’s also a good opportunity for VimpelCom. We’re very glad to say that VimpelCom was leading in net additions in Russia during the last month, which was actually proving our strategy of this unified regional expansion and growth.

Okay. Do you see then, a certain downside to the current erosion we saw in the revenue per minute quarter-on-quarter, there was a big decline. Do you think there is a certain downside to it going forward?

First of all, I need to say that if we took dynamics, quarter-on-quarter we need to understand that there is a bigger share of regional subscribers in the total base. That’s also bringing us to some decline in ARPUs, and minutes of use, because in the regions we’ve got lower tariffs, but at the same time, lower expenses. To service subscribers requires subscribers [indiscernible]. That’s also proving to be a healthy business to attract low ARPU subscribers although there is a high margin.

But in terms of dynamics, and competitive pressure, I would say that competitive pressure is in all the market. It’s relatively tough competition, but during these dates we see more mature behavior of all players. So all national players understand the importance of keeping, not decreasing prices, and there is actually a limited number of very aggressive campaigns in the Regions. There are some temporary actions. As an example, [Lenka], onea national player comes to new regions, it’s something for action. But after it finishes, we believe that there is opportunity for each operator to increase tariffs after this temporary election.

Thank you very much.

And we will take our next question from Jean-Charles Lemardele (ph) with JP Morgan. Go ahead please.

Yes, good morning. I just wanted to go back to the ARPU question. You had a big drop this quarter and I understand there is a significant seasonality. Can you give us a sense of – in your estimate of that seasonal effect how much of a drop, typically, we see from the existing subscribers from Q4 to Q1 in ordinary magnitude?

I would maybe answer the overall ARPU question in a broader scale. So there are actually four reasons for ARPU decline. Firstly, it’s seasonality, as you mentioned, because it’s low minutes of use, the lowest quarter in terms of minutes of use. Actually, we’ve got a very slow January and February in Russia, and that’s actually considered in our results.

We believe that the tendency which VimpelCom and other operators in the Russian market have seen during the last years would be more or less this year. We will have these tendencies going forward. We will have good summer traffic, when people go outside and have more traffic in general, and also have summer traffic on their country houses, and then we will have smaller winter traffic.

But also important factors which were influencing ARPU were, as I mentioned, a bigger share of regional subscribers in the total base, and then competitive pressure and price decreases. But also when we look to pricing, I need to mention that we have growth of proportion of intra-network traffic in our network. We are just on the one hand herding our price per minute and ARPU, but on the other hand, intra-network traffic is without intra-connection. Taking this into consideration, that’s a very healthy marginal traffic and marginal development for our business.

So how much of a rebound can we expect for the second quarter in your regional ARPU and overall [indiscernible]?

Well, if we look to -– of course, we would not prefer to give exact numbers, but in terms of trends, we believe that in the second quarter, moving to the third quarter, we will have an increase in the minutes of use. Both in Moscow and in the Regions we will have some further price decline, but we don’t foresee some dramatic change here, and we will foresee some growth in Value Added Services. As we mentioned, we’ll reach 15%, and that’s a pretty good development. We had 12% of the revenues only in the fourth quarter, and right now we receive 15%. So we want to continue promoting Value Added Services and that will help ARPUs going up.

Okay, thank you.

Thank you. We will take our next question from Alex Kazbegi (ph) with Renaissance Capital. Go ahead.

I wanted to ask a question about the EBITDA margin and the dynamics going forward. On the one hand we saw clearly in the Regions the stabilization of the margin and quite a high growth of the service costs, which were up, I think, 37%, quarter-on-quarter. So one question will be what is the dynamic going forward in the Regions?

The second part of the same question is that in Moscow on the other hand, we’ve seen the market going up to 54% which is a very good number. So the question is, how sustainable that number would be already again going forward? Thank you.

Thank you for the questions. So, talking about EBITDA in the Regions, yes, we’re seeing that going forward, it will continue to improve, due to the factors that we have already identified, but the overall picture on the Group level, we think still that the EBITDA will be in the high forties, and this will be driven by two factors. On the one hand, as has Nikolai already said, we will face the deterioration of prices going forward, but on the other hand, the growth of volumes will allow us to have some economy of scale, and we think that EBITDA margin will be somewhere in the mid 40% or high 40%.

I would add that if we look at our business model, I think we have a very healthy position right now. We’ve got the Moscow operation which is moving in the right direction. We’re having very good profitability. If we look to the overall Regional situation, yes, there is some stability but we also need to take into consideration that we’re still in the launch phase, and we launched five new networks during the beginning of the year, and right now, we will launch some more networks. If we look on a region by region basis, all our branches are growing their EBITDA and EBITDA margin, which means that after we finish this launch phase, and we’ve got this more and more, this critical mass in the Regions, we will have a healthy business model.

And our next question comes from Sergei Arsenhez (ph) with Goldman Sachs. Go ahead, please.

Good afternoon. If I may, can I follow up, please, on the yield question? If my numbers are correct the yield erosion in the first quarter was about -9%. Could you tell us, could you specify, how much this average revenue per minute erosion was due to the move to intra-network traffic, and how much of this was due to the genuine pricing pressures and tariff erosion? Is it possible to do?

Maybe I will just comment on the growth of intra-network traffic, and then, of course, we can make some conclusions. So, if you look at intra-network traffic, it’s naturally growing in all segments in our business. In Moscow, it’s a more or less saturated market, and we have a very big subscriber base with a growing small percentage during the first quarter. That’s why the change was not that significant, but still, it’s growing, and in the first quarter it was approximately 55% of the total traffic being intra-network.

In the Regions there is a really serious growth of this traffic, and actually, it’s starting from the 20% in some regions, when we just launched and a smaller subscriber base, to actually moving to the same 50% but at a different stage. So naturally during the nearest quarter we will still have this effect, which will have some decreasing trends on our PPM but as I said, without intra-connections, with good margin and also improving loyalty of the total base. It’s like a snowball effect, so we believe that there are a lot of positive elements here.

Thank you, and as a follow-up, could you split the ARPU between Moscow and the Regions, and possibly contract and pre-paid, if you can?

In the first quarter, we had $14.1 in Moscow, and $8.6 in the Regions. In Moscow, contract subscribers had $60.5 ARPU and pre-paid $8.2.

Thank you.

Thank you and we will take our next question from Alexei Yackarvitsky (ph) with UFG. Go ahead, please.

Yes, hi, I’ve got a question on your new depreciation policy. Can you provide the rationale for the change? What has shortened the useful life for the equipment? Thank you.

Yes, the decision was based on the periodic internal studies for useful economic lives of the company’s property and equipment, and taking into account our statistics and our history, we assume that this change will be more profit for our business.

This is basically based on your historical experience, right?

Yes, absolutely, and how we see it develops in other companies, and we also took some statistics from other companies, looking at how they are using this depreciation rate, and silicon lifetime, and we assume that on average in the Telecom business, it’s quite a normal situation when Telecom equipment is depreciated over seven years.

Okay, and can I ask you a related question? Your CAPEX in the first quarter was light compared to your full year guidance. Do you still maintain your $900m guidance for the full year?

Yes, actually, we’re still sticking to it, and the reason for delays in CAPEX was mainly on the vendor side.

Okay, I see.

I experienced some problems supplying it.

On the customer side?

The customers as well, but also, they had on their production.

Okay, thank you.

Thank you, and our next question comes from Kerry Schimelda (ph) with American Century. Go ahead, please.

Hi, I would like to return to the question on tariffs. It appears that most operators, or pretty much all operators on the Russian market are saying that there is no need to get in a price war, and everybody understands the tariffs, that no-one should get overly aggressive. At the same time, there appears to be a rather steady decline in tariffs. Can you talk a little bit about how much pressure on per minute tariffs is there, and how much more pressure you expect to see? Also, which operator in the market is the price leader at this point? Thank you.

We believe that the pricing pressure is on the market, and we believe that that’s a result of actually, four players, more or less in each market, actively working. We believe that there are some good tendencies that the local operator, which I’m calling the fourth, losing position, and therefore then it’s more and more difficult to be competitive moving forwards. They don’t have good roaming conditions in Russia. They don’t have good brands, etc. That’s why, in our estimations, we are less and less taking them in general to consideration. That’s why we believe that this tariff pressure on that side is having some positive development.

Talking about three national players, we believe that there is more mature behavior of publicly traded operators, and there is more aggressive behavior on the last operator. Also, an important factor that I have to mention is that still, right now, we are in the phase where a lot of operators are launching their networks to the new tariff areas.

If we look some time from now, let’s say, at the end of this year, we believe that more or less, there is some preference in all tariffs areas of Russia, and that of course would have a positive effect for the pricing development, because if when you launch your networks, you always get some temporarily low tariff proposal on the market. But when the time has passed, and when everybody is on all tariff areas, we believe that it will be less pricing pressure.

I just wanted to add a little bit to this question, because I think it’s on everybody’s mind. It’s [inaudible] which defines the penetration driven growth. It’s actually coming to an interesting phase where a goalpost is almost in sight, and we are saying that this growth will be going on for another 18 to 24 months maximum, right? And therefore, everybody, of course, tries to run as fast as possible. If until recently we’ve been developing an un-intersecting passage, so to speak, right now, we are entering, for example, in virtually every region. We are coming now, with the network, and we’re being number three.

Before, we were exercising more aggressive entering pricing, and then like in St Petersburg after we reached critical mass with gradually increasing our prices, with respect to our competitors, they didn’t make any drastic moves to match our initial offering, and we see, actually, the same behavior on our side in Moscow. In Moscow we didn’t change our pricing per se, but what we see is that it’s more of a consumer driven, or consumer-industry driven behavior, when we offer more promotions and sort of special minutes, and so on, which drives kind of per minute pricing, but not necessarily through the pricing as such.

And yes, the market has to reach that, I guess, equilibrium, around that type of behavior, which is driven by aggressive entry, and then we are looking for additional tools and understanding price sensitivities to increase traffic by offering free minutes and things like that, if it helps.

Thank you, our next question comes from Olga Zillensjer (ph) with Renaissance Capital. Go ahead, please.

Good evening, I wanted to give you a follow-up question on margins. What were the measures which you undertook to control costs in Moscow, as the EBITDA margin has improved by 5% in the first quarter? My second question is, what was incremental and existing subscriber ARPU and what were the roaming revenues in Moscow and in the Regions? Thank you.

Let me start with the last one, roaming revenues. We had 15% of the total revenues of the source revenues in Moscow coming from roaming in the first quarter, and we had 12% revenues in the Regions from roaming. In Moscow, it was more or less equally split between incoming guests and outgoing our subscribers. In the Regions it was more a share of guests.

And talking about margins in Moscow, we should also take into consideration the fact that seasonally, the first quarter has less sales activity, and thus we have a certain decrease in sales and marketing expenses as a total. So this helped the improvement of the margin on the one hand, and on the other hand, also comparing to the fourth quarter, we should keep in mind that the fourth quarter normally has, well, some year-end expense which we do not see in the first quarter.

And in terms of incremental ARPUs we believe we are bringing $8 to $9 ARPU subscribers in the Regions, and $12 to $13 ARPU in Moscow. That’s incremental ARPU for our new subscribers.

Thank you, and our next question comes from Vladimir Postalovsky (ph) with Brunswick UBS. Go ahead, please.

Good afternoon, ladies and gentlemen, and congratulations on great margins. The question I have, and I’m sorry if you addressed it in your presentation, is, how many months do you think you have before you hit the wall with the numbering capacity you have? I assume that you do not get the additional [inaudible].

[Inaudible], so with all the typing of our insurance policies, we expect that we can hold with the current growth rate through July, and August will probably be the critical month.

Hello?

One moment, please. We will take our next question from Vladimir [indiscernible]. Please go ahead, please.

Good evening. What’s your current incremental ARPU for the Regions? Thank you.

As we’ve said, we believe it’s $8 to $9.

Okay, thank you.

And our next question comes from Karina Lyes with Morgan Stanley. Go ahead, please.

Yes, hi, can you hear me? Yes, it’s Steve Frank here of Morgan Stanley. I’d like to ask some questions about your current bank [lives] and you recently, in light of the difficulties in the Russian corporate market, pulled a [indiscernible] deal. Can you tell us – you burned about $10m or so in the first quarter. You’ve got about $130m of cash on the balance sheet, and you’ve got some pretty substantial short-term debt. Can you tell us – my question is – how do your bank lives, how much extra capacity do you have on the bank lives, and what is your plan, essentially, if the Russian corporate bond market does not open up again over the next year or so? Thank you.

So, if we look on our cash-flow for the first quarter, you will see that the cash-flow is quite healthy, so we are practically showing very close numbers of cash generated by our own alterations and cash spent for capital investment. Also, if you seen our press release, we have signed the loan agreements with [indiscernible] Bank and thus we have access for a credit line of $130m. In this sense, we’re seeing that we will not face any restrictions in our future development.

Thank you, and our next question comes from Nick Burns with Thames River Capital. Go ahead, please.

Yes, hi, it’s Nick Burns at Thames River. I’ve got a question on your SG&A costs, which were down about 7%, Q-over-Q, Q4 to Q1 and also were down year-over-year, as regards to your revenues. Can you tell us what have been the big driving factors there?

Yes, we have already discussed a little bit, so the main driver was collected with a little bit lower sales than in the fourth quarter, but also some difference in the start-up expenses connected with the regional launches, because in the fourth quarter and in the previous quarters of the year 2003, we had more and more and larger launches of our branches in the Regions. So, the first quarter was quite modest in this sense. We opened only three branches compared to [indiscernible] nine which was in the fourth quarter, and so in this sense, yes, we have this better result as well as we’re seeing that, going further, we haven’t placed quite as good control procedures and I think that we can maintain a good correlation between revenue growth and SG&A growth.

Thank you, and our next question comes from Herve Drueth (ph) with HSBC. Go ahead, please.

Yes, good afternoon. I have two questions, starting with the first one, on tax, it looks like your effective tax is relatively higher compared with the country tax. Is there any thought that in the next three quarters we may see effective tax rates going down?

No, actually, our effective tax rate is pretty stable, around 29.7%, and compared to 24%, the statutory tax rate is always high, and the difference is connected with the effects of permanent distance between tax accounting in US GAAP and in [indiscernible] and particularly as recognition of certain non-current assets and [4X] and some non-deductible expenses.

So from that position, you don’t think we are going to see a decline in the effective tax rate?

No, I don’t think so.

Okay. The second question is regarding what was previously stated. To which extent are you going to use the free minutes unbundling in your package in order to reduce churn, and do you have any statistics on the number of free minutes you intend to offer to subscribers at the moment, and where do you see that evolving over time?

First of all, we will say that our loyalty programs to combat churn consist of different measures. One of the first issues is the continuous improving of all quality aspects in our service, because we believe that one of the key issues is when a subscriber is not satisfied with some issues in our service. We are continuing to tune our networks to improve quality. Right now, we are best in customer care, but we still want to improve that, and as we’ve mentioned, we’re launching CRM, special CRM solutions, so we believe that this will be a serious effect.

Secondly, we want to continue leading in product development, and we want to launch and promote these new services for our existing subscriber base. We believe in also adding loyalty to the subscribers. On top of that of course, good conditions for the subscribers in terms of tariffs, free minutes and special loyalty actions. As maybe you’ve heard, we launched a special program for all prepaid subscribers, which assimilates traffic, our special [indiscernible] program. But as I said, that will be only one angle of this loyalty activity, and we don’t want to use this pricing very hard.

Thank you, and our next question comes from Anna Basson with CAIB. Go ahead, please.

Yes, hello, I just firstly wanted to ask about the loans from [Spare] Bank, if you could give me the interest rate that is attached to that loan? My second question was further to the previous question, the nature of the promotions when you’re going into new markets. Are you using, for example, the one send a minute type promotion in St Petersburg, or has it changed into something a bit different, just for these new launches?

So, interest rates, the Spare Bank loan is 8.5%.

That’s US dollar?

Yes.

Thank you.

As for promotions, first of all, it’s different scenarios in different markets, because when we’re entering into each new region, we analyze carefully their market observation. We analyze what actions we need to do to get the targeted market share, and what’s very important is that all these actions are temporary. As a general rule, more or less in all launches, half a year we have some special temporary promotions.

Out of that, we’re increasing our tariffs. Actually, the same happens in St Petersburg, after we had some success with one [of them]. We stopped using these tariffs on the market, and for the new subscribers, we have used the new tariffs for the new subscribers with the higher tariffs.

Thank you, and our next question comes from William North with Marvin & Palmer Associates. Go ahead, please.

Yes, we are shareholders, and I too wish to congratulate you on both a fine operating quarter and also on how you are handling these questions on this interview! I note that the number of shares, common, outstanding is up roughly 6% year-over-year, and I’m wondering if that’s where it’s going to stay, pretty much for the rest of this year? I also note that your minority interest charge is roughly equal to 10% of the pre-tax earnings, or 14% of the after-tax. Are those ratios likely to be pretty much the way it will be for the remaining three quarters of this year?

Talking about the shares outstanding, we have some Treasury shares which were then issued to the market, but this is a very immaterial amount. Talking about the minority interest, we should say that the major portion of it is associated with VimpelCom-Region, and after our merger, which we hope will happen this year, this portion of minority interest from outsource and loss statements will go away. There will be still some connected with our other subsidiaries but they are much smaller than our subsidiary, VimpelCom-Region.

And in regard to the change in the number of shares outstanding, it was the result of conversion of convertible bonds in December of last year, and we had approximately 2 million plus common shares, underlying convertible bonds we had about 3 million, 2.8 million exactly of [indiscernible] so this was one-time thing which was of course approved several years ago, when we issued convertible bonds.

Thank you, and our next question comes from Jean-Charles Lemardele with JP Morgan, as a follow-up. Go ahead, please.

I just wanted to follow up again. You mentioned this incremental ARPU at $8 to $9 in the Regions. Looking at your numbers, this should suggest that the seasonal drop from your existing base would be 12% to 15%. Can you confirm that? Is that the magnitude of seasonality we’re seeing?

Could you repeat the question please?

Yes, if you factor $8 to $9 incremental ARPU in the Regions, and you look at the change in your service revenues from fourth quarter to first quarter, it would suggest that the existing base, the base that you had in place at the end of the fourth quarter, its usage dropped by 12% to 15% which strikes me as a very high number. My question is [indiscernible], how confident are you in your assessment of an incremental ARPU of $8 to $9? How can you measure that, really?

The second point is, then is the seasonality really in the double digits from the fourth to the first quarter?

I will try to answer and put our arguments here. First of all, we need to understand that we are in a growth stage, and right now, especially if we look to the Regions, there is a very serious growth each quarter, and if we look to this particular quarter, we have actually 2 million new subscribers across additions, just in the Regions. When you have this very serious growth of the subscribers which we are getting, not during the whole quarter but some customers we’re getting in March, of course it’s influenced overall the mathematics.

Secondly, the seasonality is really very important. That’s changing the whole picture because half of January, half of people are not working, they are going outside of Russia, etc. That’s also a very important factor. And how are we getting to this $8 or $9 ARPU in the Regions? That’s our service, and that’s our calculations of the kind of growth of each market, region by region. Of course, it’s a bit different if we look to different regions. Of course it’s different when we only launched them, the networks, because in the initial stage, with these temporary campaigns as we discussed, is a bit lower of course, but in general, that’s the trends which we see in our market.

Thank you, and our next question comes from Andre Baganov (ph) with Alpha Bank. Go ahead, please.

Oh yes, I have a question about your regional business. The net income from the Regions dropped quarter-on-quarter by 25%, if I see the numbers correctly. Could you please explain why it happened, and what do you expect in the future? Thank you.

Well, net income was associated with high depreciation rates, so if you will compare, line by line, you will see that this is the major factor.

Thank you, and due to time constraints, we will take one final question, and our last question will come from Adam Karshop (ph) with Discovery Capital. Go ahead, please.

Hi, my question relates to your activities in the Regions. In your opinion, how would you assess the relative benefits of you offering customers in the Regions better infrastructure nationwide than the ability to roam nationwide, relative to the intra-connect charges that you have to pay to the incumbent operators? To give you one example, this is in the Urals – you know, incumbent operators that have their own Wireless networks?

Yes, first of all, we believe in the intra-connect regime, it should be the same for all operators on the market. This is in their law of communications, and if there was some exception in the past, we believe looking forward, that shouldn’t be any exception, and that’s the reason in the law, so we believe that that will be the future of our market.

Secondly, we believe that we really have advantages against these operators. Roaming is important because if you look to Russia, all people from the regions are coming to Moscow, for example, so it’s always one or two or three visits per year for any person in Russia to the capital.

Thirdly, there is a lot of migration in Russia right now. There are not staying in one region, their children are moving to another for work, etc, so people get this connection, they want to have their service and their discounts for other national bases. That’s why that will definitely work in our favor.

Lastly, brand is also important, because when you have the national brand, and very soon we will have our advantage with this unified approach across Russia, and we can advertise this unified product and packages for the whole Russian territory. That’s a strong advantage.

Thank you, and that concludes our question and answer session. At this time I’ll turn it back to the speakers for additional or closing remarks.

Well, thank you all for your questions, and for joining us today at this conference call. Those of you who only listen but not view the presentation, you can visit our site and go through the entire webcast. If you have any follow-up questions or any other follow-up questions, please contact us. Have a nice day, and goodbye.

Thank you, and that does conclude today’s conference. We appreciate your participation. You may now disconnect.