VEON Ltd (VEON) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the VimpelCom conference call. Today’s call is being recorded. At this time I’d like to turn the call over to Mr. Michael Olivio (ph). Please go ahead, sir.

Good morning, and good afternoon everyone, and welcome to VimpelCom’s conference call to discuss the Company’s fourth quarter and annual 2004 financial and operating results. Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward looking statements that involve certain risks and uncertainties.

These statements relate in part to the Company’s strategy and development plans, such as national and CIS expansion, 2005 capital investment, the consummation of the merger between VimpelCom and KB Impuls and expected growth in subscribers and penetration.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements, including those risks detailed in 1, the Company’s press release announcing the fourth quarter and annual 2004 financial and operating results, 2, the Company’s earnings presentation entitled The Presentation of Fourth Quarter and Annual 2004 Financial and Operating Results, 3, the Company’s annual report on Form 20-F for the year ended December 31, 2003, 4, 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 fourth quarter and annual 2004 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission’s website at www.sec.gov. And VimpelCom disclaims any obligation to update development of these risk factors or to announce publicly any revisions to any of the forward looking statements made on this conference call in a correction to reflect future events or development.

If you have not received a copy of the fourth quarter and annual 2004 financial and operating results press release, please contact Financial Dynamics at 212-850-8600 and they will be forwarded to you. In addition, the press release and the earnings presentation, each of which include reconciliation of non-GAAP financial measures presented in this conference call can each be downloaded from the VimpelCom website.

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

Thank you. Good morning everyone. Thank you for joining us 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 CFO, and Valery Goldin, our Vice President of International Relations.

Today we will cover the following issues, first, market overview of the progress on our strategy. Then we will talk about our fourth quarter and 2004 financial and operating results, and we also will give you an update on our corporate activities.

Let’s start with the market. Subscriber growth in Russia again exceeded all expectations. During 2004, the number of mobile subscribers increased by 38m, and this growth continues. During the first quarter of this year, almost 12m new subscribers were added, so that the number of mobile subscribers in Russia reached approximately 86m. National penetration rate is approaching 60% and penetration in Moscow is almost 110%. Even if some of this growth is driven by multiple SIM card effect, we should give full credit to this achievement.

We also believe that the potential for further subscriber growth in Russia is far from being exhausted. However, with this penetration rate, we are detecting signs of mature market behavior, particularly in Moscow and other more penetrated regions of Russia. Our strategy fully reflects this dichotomy, and positions us very well to go forward.

The main directions of our strategy were discussed at our third quarter conference call, and remain unchanged. They include, first, maximizing the growth of our customer base during the remaining period of rapid subscriber growth in Russia, second, expanding into the CIS countries as a natural area for continued growth, third, extracting maximum value from existing operations.

This strategy is largely of an evolutionary nature, although sometimes it requires to make more radical moves. 1 of those moves is rebranding, that we launched on April 4. Our Beeline brand is 1 of our most valuable assets. It was introduced in 1993 and it played a prominent role in our progress during the past 12 years.

However, 1 of the key challenges for any great brand is to remain contemporary and relevant. This is the only way to meet the rising challenges and to capture opportunities offered by the market. Now, we are seeing that there are a number of factors that dictate such a change, among them, a mature market with high penetration rate and growing importance of subscriber loyalty, also, diminishing technological differences among the players which might lead to price competition, increasing competition, particularly in high-end user segments, and growing usage of value added services.

In repositioning the brand, we would like to make it more vivid, cheerful and attractive, capable to establish lasting emotional links with the customers. In dealing with the business segment, we would also like to wipe out the remnants of the lower quality perception created long ago at the time when we were in a transition from the GMs to GSM technology. We very much hope that the new image of our brand will help us to achieve ambitious goals we set for the Company in 2005.

We believe we were very successful in executing our strategy in 2004. We increased our subscriber base by 132%. Our market share in Russia increased from 31.5% to almost 35%. Our market share in Kazakhstan also increased, from approximately 30% in September 2004 when we closed the acquisition, to 35% in February 2005.

Our consolidated financial figures also show steady progress. We crossed 2 benchmarks in 2004, $2b in total revenues and $1b in OIBDA. OIBDA margin in 2004 reached a new record of 47.8%. We continued to maintain leadership in product innovation. According to independent reports, our market share of GPRS users was 44% which actually makes us the biggest internet provider in Russia.

In total, cash generated by value added services in 2004 constitutes approximately 15% of our service revenues, which is an increase of 3 percentage points compared with 2003. We see our current position in this domain as strength, and we will continue working to further increase both penetration and usage of value added services.

Among our achievements in 2004 is a substantial reduction in churn rate. Indeed, we saw a constant improvement of this parameter and our annual churn rate declined from 39.3% last year, or 2003, to 29.6% in 2004. It shows that churn reducing measures introduced earlier this year have had their effect. It looks very encouraging, although we are not going to be complacent about it.

We consider subscriber loyalty as 1 of the critical issues for the Company. We introduced a whole set of activities to increase loyalty. Among them was our Customer Relationship Management program. We have been the first in Russia to introduce an integrated billing and CRM plus form on a national scale. We hope that it will help us to improve quality of our services and create a more loyal subscriber base.

The repositioning of the brand is aiming in exactly the same direction, by creating stronger emotional ties for our customers to the Company. We believe that this kind of multi-faceted and well executed effort will yield a long-term positive effect for the quality of our subscriber base.

Moving back to our financial results, we believe they show a very good progress, due to our ongoing rapid subscriber growth and efficient cost control, enhanced by economies of scale. As compared with 2003, we reported revenue growth of approximately 61%, OIBDA growth above 67% and net income growth of 53%. Let me now ask Elena to present our fourth quarter and annual 2004 financial results in more detail.

Thank you, Alexander. Due to our balanced approach to expansion and market development in Russia, our fourth quarter results demonstrated stability. Our revenue increased compared to the third quarter by $33m, or 5.5%. Partly this growth can be attributed to Kazakhstan acquisitions, but Russia, on a stand-alone basis, also showed growth of approximately $10m per quarter.

Revenue growth, quarter-on-quarter, slowed down due to a usual seasonal effect when we see promotion campaigns and substantial decreases of roaming revenues. This time, roaming revenue decreased by $17m. But total revenue spend shows good progress, almost 61% increase over 1 year. Of course, the biggest impact of seasonal effect came to the OIBDA margin. The drop was approximately 4 percentage points from 49% in the third quarter to approximately 45% in the fourth quarter. Mainly, it was the result of rapid sales level which we had in the fourth quarter and particularly in December.

SG&A, as a percentage of revenue, was approximately the same in the fourth quarter year 2004 as in the fourth quarter year 2003, 36.4% and 36.5%. So there in total year 2004, SG&A expense was that of year 2003. We can see that it represents a small percentage to revenue, 35% in year 2003 and 33.5% in year 2004, which we consider the move in the right direction.

As you know, during December last year we had some disputes with the Tax Inspectorate regarding our tax position in year 2001 and 2002, which resulted in additional taxes and related fines and penalties in the amount of $17.7m for year 2001 and $17.1m for year 2002. Most of this amount is related to VAT calculation and that does not have any profit and loss effect, but for the rest, such as fines, penalties, income tax and some other taxes, we put an accrual in our year 2004 financial statement. As a result of these tax issues, our net income decreased by approximately $60m.

Developments in minutes of use per subscriber during the fourth quarter of year 2004 were better than a year ago. Branded minutes of use for the fourth quarter were 97.3 minutes, which is only 2% less than in the third quarter, while in the fourth quarter of year 2003, this decrease was 7%. And if we look at Moscow and Regions separately, we will see that minutes of use outside of Moscow, even increased in the fourth quarter.

The Moscow minutes of use slightly decreased only due to a larger portion of prepaid subscribers in the total base. While Moscow prepaid minutes of use were stable, the contract minutes of use increased by 2.6%. Our average revenue per user in the fourth quarter dropped compared to the third quarter of year 2004 by 15.7% which is in line with a change we have seen in year 2003.

Our subscriber acquisition costs decreased from $14.2 in the third quarter to $12.3 in the fourth quarter, or 13.4% which was mainly connected with more acquisitions coming from the Regions, with lower dealer commission.

As long as the volume of our operations is growing, our asset base is growing accordingly. In year 2004, we experienced even more rapid growth of our asset base due to the merger with VimpelCom-Region and acquisition of KaR-Tel, a Kazakh operator. Our assets more than doubled compared to the year 2003. The funding focus of this growth was cash from operations, external financing and new equity.

As our merger with VimpelCom-Region was performed through a share swap, we increased our equity by approximately $795m. We were also very active on that market last year, and in addition to bonds placed during the summer in the amount of $450m, we made a $300m new bond issue in October last year.

During the year, we repaid almost $200m of our debt, so together with some U.S.A. backed financing, our total debt in year 2004 increased by approximately $974m while our equity increased by approximately $1.2b and thus, our debt/equity ratio at the end of the year was well below 1.

Our new borrowings also carried better terms and conditions compared to the repaid ones, so interest expense increased only by 25% and proportional, unsecured debt increased substantially. Taking into account that OIBDA during the year increased by 67%, our OIBDA interest coverage ratio also improved from 9 to 12.

Our capital investments, excluding acquisitions, increased by approximately 71% compared to the year 2003, as we established our presence in 19 regions of Russia and in Kazakhstan, and our subscriber base grew more than 130%. Our loan cash generation in year 2004 covered approximately 65% of our capital investment, which we consider as a good coverage, taking into account the size of our investment and [considered] expansion.

This year, we assume our capital investment will be around $1.4b as it should follow subscriber growth and we also have to make some catch-up in network constructions in certain regions as December subscriber’s acquisitions turned out to be much higher than we planned.

Taking into account that our cash generation is also growing quite rapidly, and we have secured at the beginning of this year close to $700m of external financing, we hope that we are well positioned for further expansion.

Thank you, Elena. Let me now move to our corporate activities. Let’s start with the numbering capacity. This was a big issue in 2004, and it has been resolved. Now we hold 50m federal telephone numbers, which is sufficient for our current growth plans.

We also completed our merger with VimpelCom-Region on November 26, 2004. According to the law on communications, we should have had all licenses, frequencies and other permissions reissued to VimpelCom within 30 days. The process was delayed, however, because of procedural issues and some gaps in the legal framework.

In February, the Government approved all necessary documents and the Regulator was able to start the reissuing process. The decision to reissue the licenses was taken on March 30. We received the new license numbers, and expect to receive the hard copies of the reissued licenses shortly.

There is another merger approved by our shareholders. That is the merger with KB Impuls, our wholly owned subsidiary which operates in the Moscow license area. We decided to postpone the implementation of this merger until we have fully completed the transfer of all the regional licenses, frequencies and other permissions to VimpelCom.

A few words about the tax issue. We discussed this issue at separate conference calls in December and January and Elena described there also a small effect on our financials. Another effect of this measure, to our satisfaction is that the Government has decided to review the whole issue of tax administration in order to make it more consistent and transparent.

Completing our presentation, I would like to say that the Company has successfully implemented its plans for 2004. We increased our national market share by more than 3 percentage points, [ledger] rates for regional subscribers and improved our financial results. The size of the Company reached a level when it became an important factor in the economic and social life in Russia. We also became an international operator, starting our expansion into the CIS.

We believe we have the right strategy and capabilities to continue our successful growth in 2005 and beyond. Thank you for your attention, and let me now open the floor for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS]. We go first to Tom [Ferda] with Citigroup.

Good afternoon. 2 questions, firstly, I was wondering if you could management’s view on the potential expansion in the Ukraine? And secondly, I was wondering if you could give us some guidance in terms of where you see ARPUs on a blended basis in 2005, and where you see EBITDA margins coming in this year as well? Thank you.

Right, let me take the first 1 on the Ukraine. The board approved the strategy of expansion into the CIS, so this is an integral part of what we’re doing, and naturally, the Ukrainian market is a key market to follow this strategy. So we’re looking at all the opportunities which could be opened for us to enter this market and to give opportunity to our shareholders to participate in the growth which is presented in Ukraine. Currently, we are evaluating these opportunities and we hope shortly to present them to the board for discussion.

In terms of dynamics on ARPUs, I would say the following. First of all, we will continue to have this regional growth in 2005, and of course, bigger share of regional subscribers would lead to some decrease of [inaudible] going forward, although we believe that it will be some possible news as well, like increasing minutes of use. We have bigger networks right now in all regions of Russia, and in those regions we’re expecting some growth of minutes of use per subscribers.

Secondly, we will have some increase in growth of value added services. We have very positive trends in 2004. In the fourth quarter, we had 15% of our revenues coming from value added services, but we believe it’s not the end, so we have big hopes for the value added services. And of course, then we have this pricing issue which on the 1 hand is very tough in Russia because of their competition.

On the other hand, we see more mature behavior of all players in the market. That’s why we believe that the price erosion in 2005 and looking forward would be limited.

We go next to Sergei Arpenyev (ph) with Goldman Sachs.

Oh, good afternoon. Can I just follow up on the Ukrainian issue? I mean, clearly it has attracted a lot of attention in the last couple of days. I’m just wondering whether you, as the management, believe that [Telenor] is wrong when they say that the Ukrainian acquisition is not in the interests of all of the shareholders of VimpelCom?

And my second question is just on your views on ARPUs in Kazakhstan. I’m just looking at your yields, and in Kazakhstan it looks like your average revenue per minute is around 23 cents compared to about 8 cents in the Regions. I’m just wondering whether you would see, or whether you plan for a convergence in this average revenue per minutes going forward and how long this process will take?

All right, thank you Sergei. Naturally the Ukrainian issue indeed attracted a lot of attention. And let me answer it that way, that the management is committed to secure shareholder value for all the groups of shareholders, and that actually involves a complex balancing process. And here we believe that the board of directors, which actually is comprised of very professional and strong individuals, will be able to navigate and make the right decision for the Company and for the shareholders.

So management develops and presents the opportunities and we believe it’s up to the board and, to a large extent, in our circumstances in the Ukraine, probably a very big role will be played by the independent directors on the board that decide whether it’s acceptable or not for the Company to pursue this route, but again, let me to repeat that. The management is trying to work in the interests of all the shareholders’ groups and it is a complex balancing act here.

With regards to Kazakhstan and the ARPU, naturally, when you see the penetration at the level, and intensity of competition where we have basically a duopoly you would expect much higher APPMs, price per minute, and as we progress with the penetration and competition continues to intensify, we’ll see some erosion. It’s nothing new and I don’t think that Kazakhstan will be following any different pattern with that of the Ukraine. Probably the Ukraine is a more correct comparison as it’s enjoyed longer time as a duopoly structure and therefore the evolution of pricing in the Ukraine can be taken as a model.

And there is still a significant upside in minutes of use, because minutes of use in the Kazakh market is very low right now, and we see that with some attractive proposals on the market and launching prepaid very actively on this market. We can grow minutes of use and total penetration significantly.

We go next to Rizwan Ali with Bear Stearns.

Yes, my question is regarding Kazakhstan. I believe that the SSCs and the ARPUs that you’re giving us is a blended average of Kazakhstan and Russia, and if that’s the case, can you tell us, give us an idea of what the ARPU and SSC is in Kazakhstan? I know it has very little impact on blended average right now, but will you be giving us separate numbers at some stage in the future?

Yes, we can tell them right now. ARPU in Kazakhstan in the fourth quarter was $15.6 and subscriber acquisition costs $19.1.

We go next to Alex Kazbegi with Renaissance Capital.

Yes, good afternoon, gentlemen. Sorry to go back to this Ukrainian question but I don’t quite understand, sir, 1 thing there. As far as I understand, VimpelCom has already put a bid for the [O] Ukrainian operator, and moreover, you applied to the Anti-Monopoly Committee for the approval which then would mean that the VimpelCom management has actually sided already with 1 of the shareholders and went to this transaction without proper board sort of reconvening and approving it as it should have been. Is that the right understanding? That’s sort of the first question, on who made the decision on sort of going into the Ukraine?

And the second 1 is more sort of a general 1. There is a lot of talk about introduction of the mobile number portability, the [indiscernible] sometime during this year. I wonder whether you can comment on that, and what you think the impact will be on the Company’s operations? Thank you.

Thank you, Alex. On your first question on Ukraine, no, it’s wrong. Of course, the Company will never ever act around the Board of Directors and we strictly adhere to our Corporate Governance rules. And of course, our corporate governance suggests that we have to bring every acquisition to the Board of Directors for approval.

And that’s exactly what we intend to do. There are a number of ways we can consider entering in Ukraine. Just to illustrate this, I mean, it could be a virtual operator, it could be acquiring a full company or minority stake and it could be virtual operator actually on 1 or 2 networks so the whole raft of opportunities is currently being analyzed.

The mandate we’ve got from the Board of Directors is to explore the opportunities to enter into the CIS market, but of course we have to bring each business case as usually requires quite a significant investment, to the Board of Directors for approval.

As far as Anti-Monopoly Committee is concerned, we asked for that. It’s true. But it’s more of a preliminary request which would allow us to clarify whether at all this transaction would be feasible or not, rather than post-factum, applying for approval. So that’s where we are.

And Jere has a couple of [inaudible].

To add for mobile number portability in the CPP, indeed, the Minister has been talking about it quite a bit in the last few weeks, even saying that mobile number portability could come about as soon as the end of this year. The way we view these 2 things are both positive. We know that the number, a person’s number, a client’s number is 1 of the main reasons why they stick with their current operator.

Beeline being second in many of the markets and not having as large of a market share in some of the heavier market segments and some of the corporate segments would actually welcome such a decision, and we think we could take advantage of it and actually have a net positive result.

As for CPP, we’ve seen in other markets around the world that as soon as calling party pays have introduced you get a spike in penetration, but given the fast growing penetration in Russia, I don’t think it will have that big of an impact, and likewise, most of the mobile operators do not charge their customers for in-bound calls from another mobile operator, and that currently represents about 80% of all telephone calls.

We’ll go next to Martin Taylor with Thames River Capital.

Hi, my 2 questions were, well, the first 1 was a follow-up to earlier. I’m not sure if you gave a guidance in terms of EBITDA margin for ’05, so I wonder if you could do that, and the second question is, given the big increase in penetration we’ve seen since, particular acceleration since last October, what kind of marginal ARPU do you see now in terms of your Regional adds and your Moscow adds?

Thank you. Talking about the EBITDA margins, we think that the previous guidance which we gave in this regard is still valid, so we think that in the middle-term EBITDA will be in between 45% and 50%.

And in terms of our ARPUs for the new subscribers, our estimation is showing that our new subscribers have $6 ARPUs in their regions, and approximately $10 in Moscow.

We go next to Lila Dachan (ph) with Edgerton Capital Limited (ph).

Yes, hi, I have a couple of questions. The first 1 is just going back to the margins, you mentioned 45% to 50% for the medium-term. Could you give an idea if you expect this year to be more at the lower or upper end, and does that include or exclude the USF fees?

The second question is just on the first quarter so far, just to get an idea of how things are looking and if the promotional activity that you have seen in December and earlier this year has now ended, and if the incremental ARPU figures you mentioned have still been consistent in the first quarter?

And the third question is, I’m actually sorry, just a bit confused again about the Ukraine. I didn’t really understand. Telenor gave a very complicated press release which basically said that they’re not allowed to be involved with some of the decisions on the board any more regarding this Ukrainian issue. I’m just not very clear about where things stand regarding who is actually for the board to approve, whether or not to go into Ukraine and whether or not you really think it makes any sense to go in as a fourth player with penetration where it would be by the time you have a network fully up and running. Thank you.

So let me start with the EBITDA margin. Yes, talking about 45%-50% as we talked earlier, and this was not included – doesn’t include Universal Service Fund fees. But taking into account that the last information we have that the size of the Universal Service Fund will be 1.2% so that means that most probably still it will mean that we will be in the same range, maybe with the exception as usually of the fourth quarter, which is normally quite low. But again, it’s very hard to say what will be the actual size of Universal Service Fund right now.

As for the comments for the first quarter, I would like to say that usually we see in our markets that the first quarter is not very active months, and actually, in Russia, we have some issues this year. It was 10 holiday days introduced in January, so it was kind of a very slow month. In January then we have February with only 28 days. It’s very important on our business, number of days then corresponds to our total traffic, but right now in March we see that the traffic is increasing and we believe that this seasonal effect we should take into consideration.

On the other hand, of course, we have the bigger volume of our subscribers, and subscribers are active, and we are kind of improving our profitability in a lot of the regions around Russia, so that would be the kind of comment about first quarter.

And I’ll just jump in as well with, if we look at the Q4 in terms of the aggressive marketing campaigns that we’re running throughout Russia, in the first quarter we have seen a subside, meaning there seems to be a little more maturity into the market place now than there was through the end of Q4 and part of January.

Would you like me to chip as well then? On Q4, it’s actually very important to note that erosion of ARPU in the fourth quarter was not out of character for VimpelCom because, what I mean is, not beyond what we historically used to show. If you compare, for example, Q4 ARPU over Q1 in 2003, and the same comparison in 2004, you will see that it is roughly the same erosion of about 8%. So we did was pretty much normal seasonality as we would expect from the business, hence the behavior in Quarter 1 would be projected on the same trajectory.

Now coming back to Ukraine, yes, indeed Telenor and [Elsa] issued very complicated press releases and kind of, let’s say, the flow is overwhelming, but trying to help you to understand the situation, that there are a number of lawsuits filed by a minority shareholder, which basically called for a suspension of 1 of the provisions of our Charter, which established a higher threshold for certain issues, in terms of votes.

And currently, we also have been informed, although we learned it only from the press today that there is an intervention from the Supreme Court which actually suspends the decision of the Court taken in [indiscernible] and which came into effect on April 12, after the third round of appeal. So we’re trying to find out where exactly we stand.

If the decision which has been upheld by the Court is in effect, then it means that interested parties and Elsa and Telenor in that case considered to be interested parties because of their presence in the Ukraine and participation in [KievStar]. I’m not allowed to vote, and then it’s only down to independent directors to decide the fate of this acquisition, this particular acquisition, or this particular issue, rather.

And if the Supreme Court’s decision is in effect, and it’s true, as we haven’t been informed, then our Charter has been seen, historically, is in full force. The management believes that we have to defend, and we will defend, our Charter as it’s been adopted by 99% of the shareholders, and we consider that the Court misinterpreted the law which actually allows for the companies in their Charter to provide for higher threshold than recently stated in the law for the [rules]. So that’s where we stand on the legality of that side.

Regarding the fourth player, the penetration in Ukraine is still kind of [low 30s] and we saw many markets in Russia were prevented at that level of penetration and still we’re very successful, catching up with the leader. The size of the Ukrainian market is so big that basically, it’s still a very attractive business proposition. One can argue how risky or less risky this 1 is, and how big or small the end-game will become, but as we see the business case, it can be constructed at the moment.

With time passing by, of course, the attractiveness of that market will be going down, but everything is a matter of risk and price and the end benefit relation, right, so that’s what we need to figure out.

We go next to Anastasia Ovakova (ph) with the United Financial Group.

Yes, hi, congratulations on good results. I have a question not related to the Ukraine, actually, to the financial statement [inaudible]. The effective tax rate for the fourth quarter, according to the P&L was much lower than in the previous 3 quarters. Why is that?

So, talking about the income tax, normally we calculate the income tax provision for the quarter based on our yearly expectations of what will be the effective tax rate. Then in December we make actual calculations for the whole year. And in this particular case, we had 1 event. Previously we had disputes with Tax Inspectorate regarding the possibility to use accelerated depreciation for our telecom equipment, and being on the conservative side, we didn’t use, for tax purposes, this accelerated depreciation.

But recently we’ve got a positive Court decision on giving us the possibility to use this benefit for taxes, and that’s why we have this recalculation and I would say, catch-up for the whole year, so effective tax rate for the whole year is approximately 26%.

We’ll go next to Jean-Charles Lemarde (ph) with JP Morgan.

Yes, just a couple of questions. First on [indiscernible], I was just wondering, how you think this would impact the interconnection regime between the mobile [indiscernible], effectively when you’ve got a full guarantee system where you’ve got no exchanges. Do you think that you would establish on that regime a formal interconnection, and do you think as a result the interconnection rate would put a floor on pricing for off-net traffic?

The second question is on your SIM card reissue, it’s very high in Russia. Do you know why it’s particularly high? Do you see a –- could you just point to factors going forward, changes in the market that could drive that ratio down, and would there be any financial benefits to that in terms of reduced subscriber acquisition expenses? And then finally, on CapEx, could you give us some guidance for when we could expect some significant CapEx reductions as a percent of sales?

Well, could I ask you to clarify, what did you consider? What ratio did you consider high?

The SIM card ratio to actual users. It’s –- the between, whatever, 1. –- you know, 25% and 30% of users having multiple SIM cards is –-

Oh, okay.

Is very high. You know, do you see, going forward, changes in the market that could drive that ratio down, that could require people to have less SIM cards potentially, and could there be a financial benefit attached to that, because you’re paying acquisition costs for those.

Yes, so let us start with this 1. First of all, I think that some of this is also the case in our other markets, but we have some peculiarities of their recent launch of the new operators to their new regions during some recent period of time. And usually when that new operator is coming to the regions, of course, they have some temporary campaigns, attractive on the pricing, etc. And that was the case during the last couple of years in Russia.

As all national players will be in all regions of Russia and they will stop their kind of temporary promotion, we believe it will be significantly less advantage for the customers to having 2 or 3 SIM cards or migrating heavily from 1 operator to another. That’s why that will help us in the future.

As for CPP and interconnect agreements, of course, we would need to come to an agreement with the fixed providers in order to terminate their traffic for them. We have a couple of precedents already in that we work with some of the mobile operators on a bilateral basis, and have agreements in place, so in terms of setting a floor, to a certain degree, yes, it would set a floor for the fixed to the mobile operators in terms of a CPP environment, but the details will need to be described and kind of looked at a little bit further than I can tell you right now.

Talking about capital investments going forward, of course, this is not a straightforward answer because of course, if we are talking about 2.5G and current state of development of the network in Russia, definitely we have to see some slowdown starting from the next year, but we should also keep in mind that there are possibilities of new technologies, 3G coming.

It’s still unclear when and how it will be implemented in Russia, and also, of course, talking about our expansion in CIS, this will give additional impact on our capital investments going further, so it’s a very complicated matter, but nevertheless, we think that we have already reached very good results in terms of decreasing capital investment needs per subscriber and so we think that we are able to expand this knowledge in our present developments.

And did we answer the SIM ratio?

Just, I would probably like to add on the SIM ratio. There are different ways to look at it. If you look at the CapEx which is required to maintain a subscriber like that, we calculated it as very low, so no more than 10% of our CapEx actually goes against maintaining inactive subscribers on our network. However, when you have multiple SIM users, interestingly enough, that just 25% correlates very well in many markets when you start estimating the prize hunters and people who arbitrage on the different deals offered by the different operators. You will find that this is roughly the size of that segment, price segment, so again, nothing new here.

And the postpaid, sorry, prepaid environment in Russia creates, of course, this situation when many people hold multiple SIMs. But on the other hand, it gives you an opportunity and it’s not that dissimilar to the situation which you have with credit cards. In your wallet, you have multiple credit cards, and then your marketing task is to convince people to use your credit card versus your competitors. It will be exactly the same with the SIM cards, how to create more convenient and friendly environment for people, and better environment for people to use your SIM cards versus the others.

We’ll go next to Elena Bossanova (ph) with Essen Brokers.

Good afternoon. I have questions, actually, the questions are regards, you announced today as regards to the sale of 50% minus 1 stake in KaR-Tel. If I’m not wrong, your accrual investments paid you roughly $350 per subscriber, and as we know, VimpelCom paid roughly $700 per subscriber last year in KaR-Tel. Could you please give me of your opinion and explain the amount of the deal and correct me if I am wrong, and the next question also regards KaR-Tel. What’s the [comprehensive] vote that VimpelCom exercises a call option to repurchase the stake in KaR-Tel? Thanks.

I didn’t quite get the end of the question, please. It was static.

The second question?

Is it correct, what are the terms of the call option?

Yes.

On the price, basically, it’s been a long and winding road, structuring this deal and making sure that it’s all proper and all the diligent things done, and actually, our partner is the number 4 banking group, actually the shareholders of the number 4 grouping bank in Kazakhstan, ATF, wanted to secure international funding for that, so it took us a while.

And the price did increase actually, a long time ago, and it’s not per subscriber. It’s actually 50% of the price we’ve paid, so we paid $350m for the company and 50% is being sold at that price. That’s as simple as that. As far as the option goes, there is a pre-agreed formula which is linked to EBITDA and net debt on the future performance of the company and there is a time, term time for a certain portion of that for us to buy out earlier, and the remaining part stays there indefinitely unless there is a deadlock situation then we have a negative clause here which allows us to buy our partner out. So that’s how the deal is structured, again, on a pre-agreed formula.

We’ll go next to Istan Malatov (ph) with Credit Suisse First Boston.

Good evening, gentlemen. I think it’s fair to say that from the Government we have an increasingly co-competitive rhetoric for number portability, interconnect rates, and so on and I think at the beginning you also mentioned that you see the Russian mobile market exhibiting signs of a mature market, which I would have thought would also translate into increasing competitive pressures. Yet at the beginning you also said that you expect the pricing pressure which we have seen last year to moderate this year.

Could you please square this – I mean, for me, I consider it conflicting factors, and could you also use this opportunity to elaborate on your views how the competitive dynamics are likely to develop in Russia, in your views?

I’ll give a stab at this, and then my colleagues will complete my answer. If you started it by the [mid-liberalization] of long-distance and so on, that’s good news, because when you have a monopoly and under-invested infrastructure, and hence [chaos] resource, you have higher prices, and therefore, we would expect that increasing competition on long-distance and so on will yield including new interconnect regime and so on, will yield more opportunities on the market and better cost side for us.

In terms of the revenue side, and in terms of pricing pressure, if you look at the market share evolution you will see that the market continues to consolidate, and for appearance of smaller players who is the only competitive edge is pricing because it’s more difficult for them to offer favorable roaming regimes or invest money in new product development and so on. So basically, it’s the regional, smaller regional operators who are the disturbing factor on the pricing arena.

Therefore, consolidation of the market will yield more stability, and from there, it’s basically everybody said that they are not interested in rocking the boat on the pricing element, and nobody is interested in this. So passing the stage of rapid penetration, we hope that market will stabilize and will focus on improving the yields, and therefore pricing behavior will be more rational from the national players.

Just as an addition, I think that we also will benefit from their low development, or poor development of fixed telephony in some parts of Russia, because in some territories where it’s poor fixed telephony and huge investments needed to construct this fixed telephony, mobile telecommunications services is kind of very efficient opportunities. And what we see is in a lot of rural areas is a very good growth of the mobile traffic and use of internet. It’s actually, in some cases, only 1 alternative to get internet except through their mobile telephony, and that’s good revenue opportunities for us moving forward.

And let me add from Moscow, where we have penetration of close to 110% at the end of March, that the picture isn’t all rosy. In other words, there is still pressure on pricing. We are seeing more mature behavior in terms of operators that have a value proposition and are offering a branded experience coming to the market place, but if we take a look at our third competitor in Moscow, they just came out with a new tariff plan which is slightly higher than 1 of their more, what we would call, I guess, a dumping type tariff plan, but it still has a 20% discount to MTF and VimpelCom, so there are still a lot of competitive pressures on the market place. We’re not saying everything is perfect, but we are seeing that the very aggressive stance that we saw in Q4 is starting to be alleviated.

We go next to Stanislav Uden (ph) with Gerald Keep Financial.

Good evening, congratulations on your good results, and for meeting market consensus expectations. 2 small questions, first, given your aggressive campaign in the fourth quarter, what [indiscernible] on your churn rates in the second and third quarters? And the second question, when do you expect VimpelCom to receive a [indiscernible] license for the [indiscernible]? Thank you.

What was the first question?

Churn rate.

Our expectation on churn rate, well, yes, we actually had a very good year in terms of churn development, going from 39% down to 29%, 2003 to 2004. Going forward, we think the improvements will be maintained, in other words, be stable. It’ll be a little bit harder to tell at the end of the year once subscriber growth starts to slow down that could work negatively on our churn rate, but we’ve been actively working on this priority for 2 years now, and have a plethora of programs in multiple segments, and we believe the churn will remain stable. It’s actually going down, especially in the segments that we target.

But also, if you look at the evolution of ARPU, let’s say, suggest that the quality of the subscriber base which we’ve acquired in Quarter 4 is not that bad, and therefore, having active subscribers, it suggests that the churn dip, it goes up, and probably it will somewhat, it wouldn’t be that significant.

In terms of Far East, of course, our target is to be in all regions of Russia, and that’s kind of the last part of Russia where we don’t have license, and we of course are looking for all options, so on the 1 hand we are trying to get the license, and in fact now we have the words of our Minister of Telecommunications that he also thinks that all national players need to have the full national coverage.

On the other hand, we’re exploring opportunities for acquisitions in this region. But important to mention that still it’s kind of a relatively small part of Russia, and kind of big territories but with small population. In the biggest cities, of course, we have only the coverage and we have plans for development.

We go next to Alex Koznetsov (ph) with Bear Stearns.

Good afternoon. Thank you very much for the presentation. As you pointed out, development of value added services is going to be 1 of your priority tasks in the current year. Could you probably highlight your approach to value added services development and expected growth area within the Group?

Sure.

Thank you.

Currently, our value added services, if we take a look at the growth in 2004, the revenues from that bucket of services grew 140% from 2003 to 2004 and we’re seeing the biggest uptake, of course, in SMS in 2004, but more recently, revenues are growing very strongly in our GPRS, basically, our access to the internet, and our content related services.

So in terms of actively developing products in the near future, we’ll be offering applications on the basis of those technologies. For example, we’re currently testing and offer a Blackberry type mobile mail solution for our corporate customers. We’re actively working with more than 50 content providers to provide things like games and information to our customer base. These are the main areas for growth.

And I will just add that this unified business model will help us because, as an example, this unified product portfolio like GPRS and [MMS], only VimpelCom is providing in all regions of Russia, and that’s, we believe, will be our competitive advantage moving forward.

We go next to Tom Ferda with Citigroup.

Oh hi, I just had a follow-up question. Just on subscriber acquisition costs, in Moscow, you’ve had a very sharp decline in your SAC there in the fourth quarter compared to the third quarter of last year, and I was wondering what was behind that and I was wondering if also you could give us some guidance on where you’d be SAC going in 2005? Are they going to continue to come down or what are the pressures there? Thanks.

Sure. SAC did drop in Moscow near the end of 2004, and the primary driver of that was our new dealer commission scheme where we only paid dealers for the usage on the customers over a certain period of time. So we have seen some savings from that. In addition, all of our advertising expenses nationwide are being amortized over more regions, and I think that also helps a bit.

We have time for 1 further question. We go next to Sergei Arpenyev with Goldman Sachs.

Hi, just if I can follow up on the SAC question. Your SAC is – well, regional SAC is $10 versus your MTF SAC is $19. I mean, it’s not apples with apples, of course there. So I’m just wondering what’s the main difference, why you are able to get away with so much lower subscriber acquisition costs than MTF? And secondly, I was just wondering if you could give us the EBITDA margin for Kazakhstan in 2004, the EBITDA number.

In terms of subscriber acquisition costs in the regions, we believe they are very efficient and that’s a reflection of their unified business model where we’ve got branches all across Russia which have their unified model, unified dealers agreement across Russia and they have this unified approach. We believe these are synergies which we’re getting from this unified business model.

If we would look forwards, we believe that moving forward we will even see some advantages of this structure with new services launched in all regions, and this tough control of their cost control, and control of all expenses including those for acquisition. We would be targeting on maintaining them.

Regarding OIBDA margin for Kazakhstan, actually, in our consolidated financial statements we recognized Kazakhstan as a segment and we are not giving our OIBDA margins by segments.

That concludes our question and answer session for today. At this time, I’d like to turn the call back over to senior management for any additional or closing comments.

Well, thank you all for participating in our conference call and if you have more questions please contact us, and we will be happy to answer all of them. So, with this, have a good day and goodbye.

That concludes today’s conference call. Thank you for your participation. You may now disconnect.