VEON Ltd (VEON) 2004 Q2 法說會逐字稿

Good day, and welcome everyone to the VimpelCom second 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 with Edelmann Financial. Please go ahead, sir

Good morning, and welcome to VimpelCom's conference call, to discuss the company's second quarter and six months 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, the confirmation of the merger between VimpelCom and each of the VimpelCom-Region and KB Impuls. Three, expected growth and regional revenues, OIBDA, and net income. Four, the Company's ability to resolve issues raised by telecommunications authorities regarding the Company's Moscow operations. And, five, the confirmation of the acquisition of KaR-Tel.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements, including those risks detailed in, one, the Company's press release, announcing second quarter and six months 2004 financial and operating results. Two, the Company's earnings presentation, entitled, 'Presentation of 2Q 2004 Financial and Operating Results'. Three, the Company's annual report on Form 20F for the year ended December 31, 2003. And, four, other public filings made by the Company with the United States Securities and Exchange Commission, each of which are posted on the Company's website, at www.vimpelcom.com.

In addition, the Company's second quarter and six months 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 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 and six months 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 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, good morning everyone. Thank you for joining our conference call today and let me introduce the team participating on this call. Here with me are Nikolai Pryanishnikov and Jere Calmes, our Executive Vice Presidents who are in charge of regional and Moscow operations respectively; Elena Shmatova, our Chief Financial Officer; and Valery Goldin, our Vice President of International Relations.

So today we will cover the following issues. First, the status of the wireless market and VimpelCom's development strategy. Our second quarter financial and operating results. And lastly, our corporate activities and outstanding business issues.

I hope you have seen the two press releases we published earlier today. They clearly show how dynamic our development actually is. On the one hand, the Russian cellular market is growing with fantastic speed, and it remains to be our number one priority. On the other hand, we have decided to start looking for future areas of growth. As a first step in this direction we chose Kazakhstan which probably is the most promising market in our proximity.

Kazakhstan is a country with large oil and gas deposits, with a stable and market-orientated government, and an investment grade credit rating. It is a country with which Russia has always had excellent relations on governmental, business and human levels. Our plans in Kazakhstan are to close the deal shortly; to establish our presence in the Kazakh environment with the help of a Kazakh partner; and to position KaR-Tel for future growth.

As cellular penetration in Kazakhstan is only 13%, the growth potential is very high, and the competition has only started. We intend to drive the overall growth of the market with the introduction of the Bee Line brand, and by providing all of our unified products and services as we provide today all across Russia.

And coming back to Russia, I would like to say that we are quite satisfied with our second quarter performance and overall business development in 2004. It hasn't been an easy year for the Company so far, with significant time spent on unnecessary, non-business matters. All the more, it is rewarding that we were able to achieve the highest rate of growth in Russia; establish our footprint in the Far East; and further improve our financial performance, setting record margins.

Our second quarter 2004 consolidated numbers, as compared with the second quarter of 2003, show great progress with the revenue growth above 61%, OIBDA growth of almost 75%, and net income growth of almost 73%. OIBDA margin reached 49.8%, setting another Company record.

The regions continued to develop at an incredible pace, demonstrating both high growth and solid financial improvements. Original OIBDA margin in the second quarter was 42%. A very healthy number attained on the background of launches of new networks, significant start-up expenses, and various incentives introduced at the initial phases of subscriber acquisition.

As of today, VimpelCom has the widest presence across Russia, operating commercially in 70 regions. We have created a network which spreads over 11 time zones, from Kaliningrad in the Baltics to the Kamchatsky Peninsula on the Pacific coast. We were able to increase our national market share to 33%, 3 points higher than a year ago. And today we have 18.3 million subscribers and we are poised for continued rapid growth.

To support this growth, we have been installing base stations with the speed of 1,000 per quarter, and in July this year we may have set a world record by installing 471 base stations in a single month.

Among other multiple achievements, I would like to mention our progress in introducing new products. We were the first to commercially launch Multimedia Messaging Service on a national scale, and we are moving to the introduction of edge technology, which will increase the speed of data transmission to more than 100kb per second. We successfully tested edge in a number of regional networks, and we plan to gradually introduce it in Moscow within next 12 months, correlating it with the available of edge-enabled handsets.

Russia continues to amaze the world with its phenomenal subscriber growth, and at this phase of market development, increasing the subscriber base is still the most critical factor for VimpelCom. This growth comes primarily from the regions, and it is the success of our regional development model that enables us to steadily gain market share on a national level. We are the leaders in regional growth, and we increased our overall market share in the regions from 19% a year ago to 28% at the end of June this year.

As already mentioned, our national market share grew from 30% to 33% during the same period. On the other hand, our market share in Moscow reduced from 49% last June to 46% in June 2004. In part it was the result of increased competition, although more recently it was primarily due to the acute shortage of telephone numbering capacity. Now that we have received 1 million telephone numbers for Moscow, we will strive to restore our leading position in Moscow.

Coming back to the regions, we maintained and even increased our leading position in Central Volga and Siberia super regions. In the South, we are gaining market share and we finished the second quarter practically neck-and-neck with MTS and [Megaphone], which held the sales of their stronghold for the past 2 years.

Using independent sources and our data, we estimate at the end of July we took the lead in the South, with 31% market share against 29% of MTS and 28% of Megaphone. Of the remaining three super regions, we are improving our positions in the North-West and the Urals, where we started operations fairly recently. We are also quite excited about the newly opened opportunity to work in the Far East.

We already discussed subscriber growth, and now let me talk about churn which remains to be a high priority issue for us. We recorded some reduction in churn in the first quarter of 2004. In the second quarter we introduced new dealer commission structure in Moscow to tackle the problems of internal migration, which is recorded as churn. It is too early to assess the full effect of this, and other measures actually which we are undertaking to combat churn, but the early signs are very encouraging.

However, the improvement has been overshadowed by the fact that we had to temporarily change our churn policy in the second quarter, to cope with the shortage of federal telephone numbers. In these circumstances, we reduced temporarily the termination period for inactive subscribers, in order to release their phone numbers for re-use with new subscribers.

We made approximately 200,000 additional disconnects in the second quarter, which resulted in the increase in churn rate to 9.4%. It is easy to see that our churn rate in the second quarter would be approximately 8% if we used our regular churn policy. Unfortunately, this complicated picture will continue into the third quarter.

In July and August we had to further reduce the termination period down to 3 months instead of regular 6 months. We already disconnected almost twice as many additional subscribers as in the second quarter. Last week we received the first tranche of the requested telephone numbers, and we will be returning to our regular churn policy, as soon as the procedures for receiving additional numbering capacity are finalized.

Summing up, we continue to see loyalty and retention as core areas for improvement for us, and despite some progress, we are far from being satisfied with the results. Let me now ask Elena to present our second quarter financial results in more detail.

Thank you Alexander. Talking about second quarter financial result, the main point which I would like to mention, is our margins improvement due to increasing operational efficiency. Internet revenue decreased in the second quarter to 32%, compared to the last year second quarter result of 35%, and was better than in first quarter of this year.

OIBDA margin reached the best result in VimpelCom's history, 49.8%, and demonstrated growth year-to-year close to 75%, and quarter-to-quarter close to 21%. This is quite remarkable if we will take into account that some of our regional operations are still in the stage of development. And in the second quarter we have launched 5 new branches, and increased capacity in the networks in the regions where we were before.

Due to this fact, our capital investment was quite intensive in the second quarter, $272m, which is $115m more than in the first quarter. And our plans for the second half of the year are even more aggressive.

And the regional indicators in the reported quarter didn't bring any surprises as a fall in the seasonal effect which we have we have seen in the past. The only thing which may need additional explanation is our regional ARPU development. Moscow ARPU demonstrated increase in both pre-paid and post-paid segments, compared to the first quarter, while original ARPU declined quarter-to-quarter by approximately 3%.

This is the result of our regional promotion campaigns, aimed at driving our rapid penetration in highly competitive environment, and continuing growth of on-net traffic share in our traffic mix. However, decrease in subscriber acquisition cost is mitigating negative effect of ARPU decrease. So today we can report that OIBDA in [Moscow] region is 42%, which is 2 percentage points better than a year ago, a quarter ago, and also the best result for VimpelCom's region history.

In the second quarter we have used the benefits of our strong balance sheet ratios, and utilized the chance to go to Eurobond market. We have placed $250m of Eurobond, with 10% annual coupon rate. This placement was considered quite successful taking into account market conditions. The following page of this paper shows quite big interest from investors to our bond, and that would have capped the market in July for another $200m.

So the total issue is equal to $450m which is the largest issue in VimpelCom's history. This cap of $200m is not reflected in the balance sheet for the second quarter but, even if we added and calculate balance sheet ratio on pro forma basis, our debt equity ratio is 0.9%, still below 1%.

Basing on the growth run rate of subscriber base which we have seen in the first half of the year, we have recently changed our forecast for capital expenses for this year. Our current assumption is that we will need approximately $1.1b of capital investment in 2004, excluding acquisitions. This need will be funded by two sources of cash - internal operations and external financing.

On the last 12 month basis, our loan cash generation covers already 73% of our capital investment needs, excluding acquisition, which shows steady improvement compared to previous years. Our cash balance by the quarter end was $243m, and after the second round of Eurobond placement and other financial activities, our current cash balance is $400m to $500m. Because of our strong cash position, we are able to fund our Kazakh acquisition without any additional external financing.

Future developments may require additional external financing but we are planning to follow our prudent funding strategy with external financing, balanced by internal cash generation, keeping debtor ratios below 2.

Thank you Elena. Let me now move to our corporate issues - first numbering capacity. Last week we received approximately 5.6 million telephone numbers in the federal 906 code, and it will cover our needs for the next 2 or 3 months. We have already applied for the remaining 3.4 million numbers within this code, which we will need in the medium-term.

Naturally, we will need another federal code, and we will make an appropriate application in a pro-active manner. We hope that things are moving in the right direction, and we will do our best to facilitate this development.

Moving now to the other issues. We think that we are getting close to the consummation of the merger of VimpelCom-Region into VimpelCom, and we will make an announcement as soon as it is done. Our merger with KB Impuls is also moving but it cannot jump over certain formalities, and require timing [timetables] between sequential events.

After the approval of the merger, the joint VimpelCom-KBI shareholder meeting on October 8, we will be able to start the transfer of licenses and frequencies which precede the merger. We hope to be able to complete it before the end of the year.

Finally, the issue of legality of our operations in Moscow. It has been overshadowed by the numbering capacity crisis and to some extent forgotten. But it has been a very serious matter and it hasn't been closed yet. We were able to defend our position in two Courts, which considered the suit and appeal in our dispute with the regulator. The latest Court hearing is scheduled for Friday, tomorrow, and we hope that there will be no attempts to re-animate the matter, and it will be finally closed with the merger of KB Impuls into VimpelCom.

Completing our presentation, I would like to say that the Company is successfully implementing its plans for 2004. We are increasing our national market share, leading the race for regional subscribers, improving our financial results, and now making our first entry into the CIS. We consider our expected entry to the Kazakh market as an important first step into transforming VimpelCom into an international company, with aspirations spreading well beyond Russian borders.

It is a great challenge but meeting challenges is what we have been doing all along. So, thank you for your attention and let me know open the floor for questions.

Thank you very much, Mr. Izosimov. [Operator's Instructions] We will take our first question from Virginia [Minstock], JP Morgan.

Hello. This is Virginia Minstock from JP Morgan. I have a couple of short questions. First, I am wondering what your incremental ARPU is in both Moscow and the region? And then I'm wondering what's your value-added services as a percent of revenue? Thank you.

As for incremental ARPU or-- our-- we estimate that we're bringing Moscow subscribers with $12 ARPU and regional with $7 ARPUs. And in terms of value-added services, it was 15.2% of our service revenues.

Thank you.

And we'll go next to Maria [Puvlenco] with Goldman Sachs.

Hi. I was wondering if you could talk a little bit about the subscriber acquisition cost in the regions. What I'm trying to understand is, if you are saying that the competition is, in the regions, is pushing you to bring down tariffs, and that is reflected in ARPUs. Aren't we just a few quarters away from competition on the acquisition costs, and therefore lower profitability long-term?

At the moment we see very good and efficient subscriber acquisition cost. Actually we were paying only $11 to bring our new regional subscriber. We believe that competitive pressure, of course, is there but we don't see very big wars on commissions and on advertising. Right now it's really the situation where there is less ARPU in the regions but also lower expenses.

As an example, we're paying only $10 to the dealers in the regions. We're getting a lot of sales through our direct shops, which is operating in the center of the regional towns, and also advertising levels. So it's relatively efficient. We believe that this is healthy business model which we continue to operate.

I just want to add one more comment here that the biggest threat, of course, would be introduction of handset subsidiaries which we don't have on the market. But given that the bulk of the market is pre-paid, and therefore it's very difficult contractually to buy in the customers. We don't think that there's massive blow to subscriber acquisition costs will be introduced in the near future.

And maybe the last one on this issue is that synergies are increasing. The fact that we're right now in 70 regions of Russia and our one advertising on national TV is already in all places increases efficiency.

Thank you.

And we'll take our next question from [Stefan Pettifree] with Merrill Lynch.

Thank you. I wonder if I could follow up on that in terms of what you're seeing today in terms of the pricing trends in the third quarter. Whether or not you're seeing a continuation of the trends you saw in the second quarter?

And secondly, I think in your statement you mentioned that you had some SG&A boost, if you like, because of the change of the commission structure. I wonder if you could quantify that for us, please? Thanks.

Talking about price income, we see some competitive pressure on the market because it's 3 national players, and also there are some local players. That's why there is some pressure on pricing, both in Moscow and in the regions. On the other hand, we see more and more mature behavior. We're right now on the already low level of tariff per minutes in the Russian market.

According to all our research and our competitive-- competitors' research, there is no need for further price reductions. Market can afford to pay this amount for cellular service. That's why there is no need and more and more mature behavior for all the players.

Also important point to mention that still we believe there is also a big potential for growth of the value-added services. Still there is no all content right now available in all regions, not all absolutely all new services and technologies. And we want to continue implementing these services in each regions, and then developing the market, growing there revenues.

And talking about change in commission structure. Yes, we do see the positive effects on our SG&A expenses, due to the fact that previously we have such a structure that we had just one-time payments to a dealer for a contract signing. But right now we changed it to the situation, when we are paying just some portion of the total dealer commission, when the dealer has signed the contract. And then, within 6 months - depending on how much traffic this customer brings to us - we are releasing the rest of this commission to a dealer.

And this has positive effect, not only on financials, but also on retention because this enables our dealers to spend more time on retention, and thus to get the rest of the commission. Of course, one can say that this is kind of temporary effect because we are delaying this payment. But, on the other hand, if the customer will not stay with our network then the rest of the commission just will not be paid. And so, in any case, we see it as a positive change.

Thanks. Just so I'm clear - did you say then that the pricing pressures that you saw in Q2 have continued in Q3 to date?

The pricing pressure is on the market but we believe that there is-- the decrease of average price per minute is not going on rapidly on the market. The rush of campaigns in the new regions which we are launching, that is really the case. And when we are launching in the new regions, we are always having some temporarily pricing campaigns. But then, and after we were building the network and after some time we have some position on the market, we're stopping these campaigns and increasing our tariffs.

Thanks.

And we'll take our next question from Olga [Zinnakiev] from Renaissance Capital.

Good evening. This is Olga Zinnakiev from Renaissance Capital. I have two questions if I may. The first one is, could you please provide us with the financial details for KaR-Tel which you acquired recently? Mainly revenues, EBITDA, net income and net debt for 2003, as well as your Kazakh plans for the Kazakhstan market. Thank you.

Olga, unfortunately I'm afraid I have to disappoint you for the time being because the transaction hasn't been closed yet. And we're under non-disclosure agreement obligations. Therefore we cannot disclose all the details. However, in the next quarter we'll report Kazakhstan separately, so you will see the full picture of this acquisition.

Thank you. And then the other question is, how much new regions do you expect to launch by the year end?

We're planning to launch most of the regions in our licensed territory, and 5 new networks are coming in the nearest months.

Thank you. And then, instead of the Kazakhstan question, what other CIS markets do you consider your future priority in this respect?

Well, to go in the typical sequence. Kazakhstan was number one because it was the most obvious, and most prosperous, and promising from that standpoint. A market with a stable environment and good economic potential. That would be, of course, Belarussia; that would be of course Ukraine; that would be of course Azerbaijan, Uzbekistan. That would be the first tier of the market of our interest, and then more opportunistic stance on smaller markets.

Thank you.

And we'll take our next question from [Herve Drueth], HSBC.

Yes, good afternoon. This is Herve Drueth from HSBC. My first question is, can you tell us when you are going to consolidate on your numbers the Kazakhstan operations? And it is going to be started to be consolidated in Q3 or Q4, i.e., before the end of the year?

And the second question is in term of looking forward in terms of acquisition in CIS. Seen from your perspective and as one of your shareholders has also some assets in CIS, do you have a free ride to go in CIS? Or is there some countries where, for example [Tele Norte], where is already present, is out of the picture for you?

If the deal with KaR-Tel will be closed in September, we will consolidate KaR-Tel numbers in the third quarter. So you will see, as Alexander mentioned, more details on this deal with this quarterly-- third quarter release.

And with regards to our relationship with our shareholders. Of course, it has been debated at length, as you can imagine, and still the Board of Directors took a view that expansion of VimpelCom into the CIS - given actually very rapid penetration growth in Russia which is going to slow down by our expectations by the end of next year - maybe early 2006.

For VimpelCom it's more natural to start seeking new growth platforms in the neighboring countries and to leverage proximity - geographic, cultural, language and strong spillover effects from advertising and actual familiarity with the brand. So there is a lot pros going for that.

Where we have potential issue it's Ukraine and that market we'll discuss when we get there, and we will explore different options here and I hope we'll find amicable solution. But again, the Board of Directors took a view that the Company interest, and expansion in the interest of all the shareholders, that would take the governing here.

Okay, thank you.

And we'll take our next question from Vladimir [Postalovsky], Brunswick UBS.

Good afternoon, ladies and gentlemen. Two questions if I may. The first one is on KaR-Tel. You mentioned something about the local partner, to which you're going to sell 50% minus one share stake in the company after the deal is completed. Is that how it's going to stay for ever, or are you considering some kind of a call option to buy that stake out in the longer-term from them?

And the second part of this question - is it the same local partner that is there at the moment, that owns the company right now, or is it a new local party?

And then the second question, coming back to the pricing pressure. You're basically implying that the pricing pressure you're experiencing at the moment is all about original expansion, original push. Considering that you are soon going to ramp out of the regions where you will be launching, when would you expect this type of pressure to stop? Thanks.

Okay, thanks Vladimir. First we'll take KaR-Tell question. So the partner is needed, of course, for us to, a) to speed up our assimilation in the Kazakh environment, and local knowledge of the country and the habits is - despite of the potentials in this which I have just mentioned - will be very instrumental. And that is one reason, second reason, of course, to share the burden and the risks, our financial burden and the risks. And, therefore, that's the reason to go with the partner.

In terms of stance, the partner, our strategic view is to be an operator with full control and fully consolidating the companies in the long run. Therefore, definitely we will structure the deal that we would have an opportunity to buy back that stake. With regards to who the partner is, unfortunately we cannot disclose at the moment, and as soon as the transaction completed - both the acquisition of KaR-Tel and we finalize our discussion with the partner - we'll inform you.

Concerning the pricing, first of all I think everybody understands that this year and next year are extremely important because it's the years of the interactive growth. And that's why all operators, of course, will compete for their part of the growing market. After that, we believe that situation will be much more stabilized.

But also I will mention again, that we see right now more mature behavior of all three national players in the market which is good. And by the way, VimpelCom is always seeking the position of price follower, not price leader. And there are, of course, low tariffs of local operators on the market but all local small operators right now are losing their position on the market. And in most of the cases, we even don't look at their tariffs when we compete in Russian regions.

Thank you very much.

And we'll take our next question from Olga [Bestrova], Credit Suisse First Boston.

Good evening. This is Olga Bestrova from CSFB. I have two questions. First relates to acquisition of KaR-Tel. How much-- Given that the deal is actually completed, how much are you planning to spend on CapEx in next 2 or 3 years for that operator? And how are you planning to finance it? And the second question I'll ask later.

Well, it's as we said. I mean we can't comment on the projections related to KaR-Tel because the deal is not completed. And, so we will discuss this in more detail when we give the next quarterly release.

Okay, thank you. The second question relates to the new dealer commissions. Do you have any accrual policy for the deferred portion of the dealer commissions?

No, we do not accrue the deferred portion because, as I have said, it's not evident that it will happen at all because this second part of the commission is tied to the activity of the subscriber itself. So if the subscriber is not with us, then nothing is paid, so no need for accruals.

I mean maybe I will add that this new commission scheme was only for Moscow. It was only launched for the Moscow. In the regions, where most of the growth are coming, they are just paying up-front - one small commission. So it is not affecting too much our financials.

Are you-- In this case are you planning to extend this policy, or this dealer commission, into the regions at some point or not?

As the nearest future, no because right now we're paying a small commission which is approximately $10 in the regions, which is enough for a lot of distributors in Russian regions. We're immediately getting up-front first scratch card, first payment, for the same $10 from our new subscribers. That's why it's absolutely no risk of dealer's fraud or anything, so we are having a very good economic right now. That's why we believe that in the regions that we have got already healthy sedation with that growth.

Maybe in the longer-term it will be some commissions aimed on the loyalty, increasing loyalty of the subscriber base. Maybe some bonuses for the best subscribers which dealers are bringing to us. But right now it is good economics in the regions, no need for some-- any increase.

Okay, thank you. Can I just quickly ask the third question since I'm on line anyway. Impaired for long lead assets that you recorded in the second quarter - what is it relate to? And are you planning to have any-- to do the same in the following quarters this year?

This is one-time event and this is connected with [DAC] equipment in [Newline Samara]. So, we are not expecting any further impairment of the assets this year.

We'll go next to Jonathon Moore, Morgan Stanley:

Hello, I have two questions. The first, I think I heard you say on the call that you didn't expect debt to EBITDA to be more than 2 times. It's clearly not at that level. I'm wondering do you see the Company getting to that level in the next year or so, as you raise more money for CapEx requirements?

And then the second question is with regards to the acquisition in Kazakhstan. Would you proceed with the acquisition if you were unable to agree terms with a local partner? Thank you.

So, talking about debt to EBITDA - we're still seeing-- As we always said, that our guideline here is that this ratio should be below two, and we always balance our activity, in order not to violate this internal rule. And as I have said on this call, we are looking for external financing in line with our ability to generate our own cash. So, that it could be balanced and thus keep our debt OIBDA ratio below two.

And with regards-- with respect to KaR-Tel acquisition, yes we would. But I have to repeat again that the purpose of finding the local partner, because that partner is to accelerate our growth in Kazakhstan, and as a secondary purpose, it was to share the financial burden. And to that end, to help us to assimilate in the new market, we will look if this partnership will fulfill all.

Although I believe that we are very close to actually completing it, this partnership but, if for whatever reason it falls through, I think we will be able to locate another partner who will help us to do the same.

Okay, thank you.

We will take our next question from Constantine [Churnachows] with [Nicole] Investment Bank.

Thank you. Do you plan on getting license for the rest of Far East region this year?

Yes, we-- our ambition is to become a national player in all parts of Russia. Important to say that right now we're already operating in all big cities right now, after our launch in Perm region, where all millionaires of Russia. That's one of the key cities that already networked.

But there are still a few networks, a few regions in the Far East where we don't have license. And we're looking for either getting there license, or we're looking for some acquisitions in this part of Russia.

Thank you.

And we'll go next to [Alexei Yelkarvich] with United Financial Group.

Yes, good evening. You mentioned the new dealer commissions which helped drive down your traffic acquisition costs in the quarter. I wonder if there was any other one-off item that you can mention that pushed up your EBITDA margin in the second quarter? Thank you.

No, there was no other one-time items. It's just really effects of increase of scale of operations, which brings well fulfilled, well [indiscernible] expense as a percentage of the revenue to a lower percentage.

Good, thank you.

And we'll go next to [Taj Schmelder] with American Century Investment.

Hi, this is Taj from Melbourne. Two questions - one, with respect to the-- some of the challenges that you had with the receipt of new numbering capacity. Can you give us your estimate, or your view, on where the conflict between Alpha Group and Telecoms Minister [Reiman] stands? And how-- What your concerns or expectations are in terms of how that will impact you?

And number two, can you talk a little bit about that proposed partner in Kazakhstan? Who that entity is and what their current position in Kazakhstan is? Thank you.

Well, it will be difficult to answer both questions because it's difficult for us to comment on the relationship between one of our shareholders and the Ministry. What we see actually with the numbering capacity resolution, actually, let's say, very constructive and decisive position from the regulator, to help the operators to get out of this crisis situation.

Because the decision which has been made indicated quite a bit of goodwill on their side. And to that end, I think that that tension which we saw, probably the first half of the year, is going to be significantly smaller. And that's between VimpelCom and the regulator, and I certainly cannot comment on the relationship of one of our shareholders.

And with regards to the new partner, until the whole deal - including the partnership agreement - been finalized, unfortunately we cannot disclose who it is and what the company is.

Are you in a position to disclose the expected date of completion or is that still too late to make a judgment at this point?

I think that I would be safe to say that it will happen within the next couple of weeks.

Okay, thank you very much.

And our next question comes from [Natalia Guvebeva] from Anton.

Good afternoon. Could you possibly quantify the SMS traffic in your network and give some color on the growth rates, say, year-to-date or year-on-year? And also, I'm interested in what portion of the total SMS traffic is content SMS, I mean all sorts of downloads? So possibly it's more appropriate to talk about Moscow [indiscernible].

And finally, what portion-- What is the portion of data revenues in total value-added revenues? Thank you.

I'll try to do all that. In terms of value-added services, about 10% of our service revenues are data, including SMS traffic. So that includes all of our infotainment, our SMS and our Intranet access/WAP access services. Of that 10%, roughly half of it comes from SMS which means 5% of our service revenues have been SMS. I don't have the exact numbers for SMS penetration but we have seen increase both in terms of the penetration of customers using it, as well as the number of SMSs sent.

Okay, and is it possible to quantify how total SMS traffic is split between SMS-- between your users and SMS from downloads?

We could do that but would have to come back to you. I don't have those numbers right here.

Okay, thank you. Bye.

And our next question comes from Bill North, Marvin & Palmer Associates.

We are shareholders and wish to congratulate on a fine performance with-- under challenging conditions for this last quarter. My question - number one, how many shares will be outstanding when this merger is completed, as you expect before year end? And this there any earning dilution that relates to that final bid, or are the underlying earnings that you'll be acquiring adequate?

And second, in view of this KaR-Tel acquisition prospect, your willingness to give up 50% less one share - is this liberal relative to this one, as well as future precedents that relate other foreign acquisitions? Or do you feel this just has to be done? Could you have gotten by with, say, 20%, 25% instead?

Bill, let me take the second question first and then I will come to the first one. I think that the structure of the deal, as we see it, - we deliberately in the press release indicated the range, and that's exactly the structure of the negotiations that we are running, trying to optimize this.

And everything comes at a price, and therefore our desire to share the risks - we'll try to probably compensate by the time on the call option which we have against this 50% potentially - 50% minus one share given to the partner. And, so, that's-- Yes, we have evaluated this and we believe that it is an appropriate balance of risk, timing and the reward that we're attaching to this structure.

As regards to the shares, it's currently, common outstanding shares it's not ADRs. I'm just checking with my colleagues. Common outstanding shares are $40m, and additional $10.7m will be issued on the event of the merger between VimpelCom-Region and VimpelCom. But this we're talking shares not ADRs.

Well, in that additional $10.7m, do you anticipate on an earnings basis, there will be dilution to this in effecting your total? Or are the underlying earnings, relative to what you're bringing in, adequate to cover such dilution?

My understanding is that it's been priced in and, therefore, it shouldn't be any effect in that sense.

Okay, thank you very much.

And our next question comes from Alistair Jones, Morgan Stanley.

Hi. I was wondering if you could just clarify in the Moscow operations, how your underlying subscriber share is developing. Is VimpelCom maintaining its share of gross additions in the Moscow market? And then also, just in terms of the numbering capacity issue that's been developing. Obviously you're expecting to get the additional numbers or even further numbers up to about 2 or 3 months.

Are you going to be remaining pretty aggressive in signing up subscribers in Moscow in the meantime? Or are you going to hold back slightly for that period? The last question is just on the CapEx forecast, or budget, for 2005. Is that-- Could you give any detail on that, please?

I'll start off with the Moscow market share. We had-- We did have a little bit of a slow start to the year, and the market share was a result of some increased competitive pressures from January of this year. More recently it's been-- the lack of market share has been due to the numbering capacity issue in our de-activation principles. We currently have enough numbers.

We will continue to attack the market very aggressively. There's still very good growth dynamics. However, in terms of going forward, we will not go back to our regular churn policy until the new procedures have been finalized inside of the Russian government.

On CapEx, it's too early to say how it will be in year 2005 but our tentative approach to this is that we invest as we grow. And as long as we're not only anticipate that we have tendered $150 per new subscriber, we can have some projections on what it will be, although currently we deliver lower numbers than $150 per subscriber.

So we see some improvement in this trend. But, again, if we will add these two factors together - the guidance of $150 per subscriber and the projections for the market growth, and the speed of this market growth - then we can come to some revelation of future capital needs. But right now, all I can say is that this year, taking into account this rapid market development, we have increased our capital forecast to $1.1b.

Thank you.

And we'll take our next question from [Svetlana Sukarnava], Alpha Bank.

Good evening. It's Svetlana Sukarnava from Alpha Bank. May I please come back to the question of [sales] expansion. When you were mention countries, you hadn't mentioned Georgia. So my question is, are you going or are you participating in the tender for Georgia new GSM license? And the second question is about Belarus, are you going on or are you participating in Belarus GSM licensing? Thank you.

Thanks for the question. We definitely consider all the markets now, and we're going through an intensive evaluation process of all the possible entries. And we are internally processing data and trying to make up our mind about Georgia and Belarussia. Trying to also evaluate both the risks and economics of this propositions.

You have to appreciate that this [churn] in strategy we've decided reasonably recently and, therefore, we're still in some countries doing our homework.

Thank you.

And our next question comes from Alex [Kazbegi], Renaissance Capital.

Yes, good afternoon. Sorry, I joined quite late so maybe the question which I'm asking already has been answered. I apologize for that. The first question I had was about the pricing policy. Given that the Moscow market sees quite a lot of pricing stability recently, what you can say about the regions in terms of what should we be benchmarking when the pricing pressure will subsidize?

Is it certain type of penetration per region? It is certain type of the market share which is going to be achieved? And related to that, can you give any examples where the pricing pressure has been weaker or non-existent already? Let's say, St Petersburg - do you see any more tariff erosion there?

So that's first question and the second questions if I may, is more general one. Are you generally happy and satisfied with the strengths of the brand, and do you expect to make any changes? And do you think that the brand awareness of the Bee Line is as strong as it probably was a couple of years ago? Thank you.

First of all about pricing. As we have said already, first of we need to understand that we are in this 2 years over-active growth - 2004, 2005. After that situation will be, or definitely be, much more stable and less active on the market. Secondly, it's always some more pressure when there is entry of the new players on the market. As an example, we ourselves we are seeing that we are price follower but not price leader on the market. We're only following if prices go down but not leading in that.

But when we'll launch-- What we're-- When we're entering to the regions we have deals some temporarily, usually half a year, campaign with some good tariff promotion on the market. So, right now we're finalizing this launch phase of VimpelCom to different regions, and our competitors also are in more so of the regions, and finalizing their new launches. After that we believe that much-- will be much less pressure on the market.

And with regards to the brand, it's certainly a very, very important question. Because what we see now in the market, it is a shift from mass market approach to more segmented market approach - at least that's what we're trying to exercise inside the Company. And the reason for that is, given that if you look at the brand and brand profile, it shows signs of any big brand which has been broadly positioned, and enjoyed very heavy advertising support - very successful advertising support.

And therefore, it's higher revenues but suffers from fatigue, and probably somewhat loss of focus and loss of sharpness, and that's what we'll try to bring back into the brand. So revitalize it, focus sharper on the most promising segments. And, therefore, you will see on the market more of a new campaign, what types of campaigns are coming, and more significant shift in how we position the brand in the market.

That probably ties in with the first question, right? In terms of there will be less pricing differentiation but more focus on the brand?

Exactly. The more mature a market becomes that exactly the basis for the competition.

In terms of overall awareness, we're already having 99% of awareness all across in Russia, and in all regions, where we're just launching, everybody's waiting for the line. And already it's interesting to mention that in Kazakhstan, everybody also-- a lot of people know the new Bee Line because of TV advertising which they see, etcetera. So it's only good potential for synergies getting in the [sales] as well.

Okay, thank you very much. Can I just guess back to the first other question and ask whether you had seen the same stable tariffs in any other region but Moscow - say St. Petersburg or elsewhere?

St. Petersburg, by the way, is demonstrating small price pressure. It's already too established - national players, our competitors is for a long period of time there, and there is some kind of promotional campaigns which are doing but that's it. So not a very big pressure. Siberia looks pretty good. There is not big pressure or this time in Siberia.

By the way Far East has very high average price per minutes right now. That's why it is a lot of, how we call, healthy markets. And we see also that in those markets where our average price per minute is already low, there is very much behavior of all key players. And maybe we even could increase some tariffs with the new-- with the launch of the new plans on some markets.

Okay, thank you very much.

And our next question comes from Anna Basson, CAIB.

Yes, hello. Two questions - one was your shareholders changes in recent days, if there's some announcements. Could you perhaps just give a bit of a color as to what's happening there and why the structures seem to be changing?

And secondly, in Moscow, I wondered with your brand awareness and your marketing, is the fact that you have a tighter churn policy has meant you're spending perhaps more on advertising to try and offset that? Or is the advertising budget not changing very much with this situation?

Start with Moscow?

Yes, so in terms of Moscow. We've recognized obviously for a long time the [diconimous] nature of the Russian cellular market. And with Moscow already at 82%, our focus is really been turned to customer retention, obviously working to increase the usage in improving our customer mix. We will continue actually to increase our spend in those areas. So we will increase spending on marketing and sales with those objectives in mind.

And as far as shareholder structure is concerned. So it's changes, not in the shareholder structure and performance, more within a single shareholder. Alpha, Alpha Group, is consolidating all of its telecom interested under one umbrella called Alpha Telecom. And the announcements which have been made in the press recently - it's been completion of this process and the move of shares from Alpha [Eka], which was previously a shareholder of [Infilkom] - their shares into Alpha Telecom.

Thanks very much.

And our final question comes from Douglas [Grayville] of JP Morgan.

Hello. I appreciate that your cash balance is very high right now and that you don't need funding, even in light of the acquisition in Kazakhstan. But I'm wondering if you could give guidance with a 12 month time frame, in terms of what future debt market activity you might be involved in?

Yes, so today we have quite enough cash to fund our Kazakhstan acquisition. But going further, we think that we still come to the market with some additional funding because the plans, which we have for funding in the beginning of the year, as you may see, have significantly changed. But what will not change is our internal policy of combination between internal cash generation ability and external financing.

So, to always keep our balance sheet ratio within our guidelines for financial leverage, and that, of course, you may anticipate that as long as we are adding approximately $100m of equity every quarter. So in this guidelines we may add some additional funding.

And would that come in the first quarter?

Yes, actually, you know that it also depends on the situation in the market. So we are always looking for, well, particularly conditions, and trying to do it as-- to the best of the Company in terms of price and the situation. So if we will find conditions better even, I do not know, in the nearest future and our balance sheet will allows us to do it without jeopardizing our ratios, then we will do it. And so this is how we look on it.

Thank you very much.

Mr. Izosimov, at this time I'd like turn the conference back over to you for any additional or closing remarks.

Thank you. Thank you all for the 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 presentation. It's going to be there for some time. If you have any follow-up questions, please do not hesitate to contact us. Have a nice day and goodbye.

Thank you, that does conclude today's conference call We thank you for your participation. You may disconnect at this time.