VEON Ltd (VEON) 2005 Q3 法說會逐字稿

Good day everyone and welcome to the VimpelCom third quarter 2005 conference call. Today’s call is being recorded. At this time I would like to turn the call over to Michael Polyviou of Financial Dynamics. Please go ahead sir.

Good morning and welcome to VimpelCom’s conference call to discuss the Company’s third quarter and nine month 2005 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 strategy and development plans, such as national and CIS expansion, 2005 capital investments, future cash position, the development of URS and its integration into VimpelCom Group, the consummation of certain transaction with Ericsson 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 the Company’s press release announcing third quarter and nine month 2005 financial and operation results. The Company’s earnings presentation entitled, Presentation of 3Q 2005 Financial and Operating Results, the Company’s Annual Report on Form 20-F for the year end December 31, 2004, and 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 third quarter and nine month 2005 financial and operating results, press release and Form 20-F 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.

And if you have not received a copy of the third quarter and nine month 2005 financial and operating results press release, please contact Financial Dynamics at 212 850 5600, and they will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on 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 our conference call today. Let me introduce the people participating on this call. Here with me are Elena Shmatova, our Chief Financial Officer, Jere Calmes, our Executive Vice President who is in charge of Moscow Operations and Valery Goldin, our President of International Relations. Nikolai Pryanishnikov, who is usually with us on these calls is currently traveling abroad on business.

So, today we will start our discussion with an overview of the latest market developments. Then we will cover in detail our third quarter financial and operating results and, as usual, we will conclude with the report on our corporate activities, which today covers our entrance into Ukraine.

Let’s start with the Russian market. The third quarter of 2005 in Russia was still a quarter of rapid growth. More than 14m new subscribers were added altogether in the third quarter, making it the second highest number of net additions ever recorded by the industry.

SIM card penetration in Russia reached 77% at the end of September, while the figure in Moscow already approached 130%. It is no surprise that with such a high penetration we can already see some signs of saturation. The most telling one would be a drop in percentage of first time users among our new subscribers. Hence, we expect a slow down in subscriber growth rates in 2006, when we enter a new and more mature phase in the development of the wireless industry in Russia.

In no way does this development mean the end of value growth in Russia. The new phase, while still seeing some of the subscriber numbers increase, will require to pursue further growth opportunities related primarily to the increased usage of Voice and Non Voice services. With improving economic conditions in Russia, this scenario looks very realistic and it demands certain changes in emphasis in our strategy.

In Kazakhstan, the penetration rate reached 31%, and we expect subscriber growth there to continue for several years, basically, repeating the pattern we have seen in the Russian Regions. Kazakhstan is a rich and stable country with a rapidly developing economy, and we believe that the Kazak market presents us with great growth opportunities.

The market and competitive development are well addressed by our current strategy, which is based on three key premises. First, extracting maximum value from existing operations. Second, maximizing the growth of our customer base during the remaining period of rapid subscriber uptake in Russia. Third, expanding into the CIS countries as a natural area for continued growth. The key to success of this strategy is timing and ability to adjust priorities, along with the rapid market evolution.

As we have already mentioned on various occasions, our focus in Moscow has gradually shifted from subscriber growth to value extraction. In doing so, we now concentrate our attention on the higher end user segments, stimulating usage and increasing loyalty. We believe that our position in the high end user segment has been improving, showing high ARPU and lower churn. In the Regions of Russia, where the real growth potential is still high, we continue to focus on subscriber growth.

With the recent acquisition of URS in Ukraine, the third part of our strategy - expansion in the CIS - has received a new impetus which we will discuss a bit later. And it is probably needless to say that, while implementing our own strategy, we continue to focus on the cost efficiency to help to balance growth and profitability in pursuit of our ultimate objective, which is to increase value for our shareholders.

The third quarter of 2005 was another great quarter for the Company. Our financial results reached new highs, boosted by positive seasonal effect and continued subscriber growth. Our year-on-year revenue growth again exceeded 50%, with OIBDA growing a bit faster. OIBDA margin at 50.5% was above our targeted quarter, between 45% and 50%. Some decrease compared to the second quarter of 2005, as we explained in our press release, was caused by the seasonally higher share of the lower margin roaming revenues, generated by our subscribers traveling abroad at the peak of the vacation period. It is also worth noting that we had a rapid growth at net income level, with almost 93% year-on-year increase.

Subscriber growth in the third quarter was very strong. We passed the milestone of 40m subscribers at the end of September, and today we serve 42.4m subscribers. We continue to expand our geographic presence. Our ability to continue to grow our customer base has been strengthened by our acquisition of a company in Sakhalin in the Russian [forest], the launch of the network in Ingushetia in the North [Korkoses] and, of course, by our entry into the Ukrainian market.

It is important to note that, in spite of this impressive growth - 4.9m net additions in the third quarter - our ARPU was not diluted, staying unchanged from the second quarter. We are doing our best to prepare the Company for successful competition in the next, more mature, phase of market development in Russia. There are couple of things which I particularly would like to mention in relation to this area.

First, that our network in Moscow has been acknowledged as the highest quality network in an independent line test survey. Second, an influential international agency - Interbrand Group - named Beeline as the most valuable Russian brand, with a value in excess of $5b. We believe both achievements are important as market perception of the network quality which, for historical reasons, has not been on our side before, and the strength of the brand are key competitive factors in mature markets.

Turning to the competition in Russia we can say that there has been no significant change in the market share position in terms of SIM cards in the past quarter, and, as a matter of fact, during the past five quarters. Thus, we probably can say, that relative market positions of the competitors in Russia have stabilized. It is worthwhile to stress, once again, our view that the importance of the SIM card growth and SIM card market share, as a proxy for future value growth of the Company, has been gradually diminishing.

The new reality of the market suggests that we need to shift our focus much more towards revenue market share instead. This shift in priorities will require profound changes in our entire organization, as it means re-orientation of sales, marketing, customer service and other departments. The criteria by which our employees are test, are also going to be changed accordingly. In this, rather significant, shift Moscow is playing a leading role, and we are very satisfied with the results we see so far.

Competition in Kazakhstan is getting tougher. It looks that it was very provocative for the competitor when we gained 8% market share in the first nine months after taking control of operations. In the third quarter, the competitor hit back, effectively offering a heavily discounted pre paid package with almost $9 worth of free minutes. Although growth of the market share remains our key priority in Kazakhstan, we were reluctant to immediately follow this move as it would result in a sharp price decline in the market. We believe that the current competitive situation doesn’t warrant such aggressive price moves, and hope it is not going to be sustained by the competition.

A few more words about our subscribers. Each year for the last five years we have been doubling our subscriber base, and we are still very close to this path. It is now the time, however, to focus on its quality. The word subscriber itself became a bit elusive, ever since we realized that there is a large number of subscribers who have two or more SIM cards. Moreover, the number of multiple SIM card holders is not easy to estimate, let alone to determine. In order to deal with this uncertainty we’ve started to disclose the size of our active subscriber base, defined as those subscribers who made a chargeable event in the past three months.

It is a definition widely used by major European operators, which identifies those subscribers who will likely continue to stay in the Company’s network. We believe that these numbers, to some extent, help to isolate the multiple SIM card effect and to confirm that our subscriber base is not inflated. While in absolute terms, the active subscriber base grew by 3.2m, a decline as a percentage of the total subscriber base is a reflection of an overall competitive market development, and initial signs of saturations in some regions.

Now about churn. As we expected, churn increased substantially in the third quarter of 2005, due to the aggressive marketing campaign around last Christmas and New Year. As always, churn reflected marketing moves and other factors which took place in previous periods. That is why we do not consider a single quarter as a sufficient period to make conclusions on trends. We recognize churn as a key priority and we address this issue in various ways. By improving the quality of our services, working with the dealers, strengthening the brand and using a segmented approach.

As an example, we are currently introducing special programs in order to increase loyalty among our most valuable subscriber segments. It is a long term project that the Company is determined to execute. Let me now ask Elena to present our third quarter financial results in more detail.

Thanks Alexander. The third quarter demonstrated, as usual, good summer seasonal activity of our users, supported by increase of roaming revenues. Both factors resulted in substantial revenue growth year-on-year by approximately 50% and quarter-on-quarter by approximately 15%. Because roaming services are less profitable, we saw some deterioration of gross margin from 83.4% in the second quarter to 82.9% in the third quarter.

Our SG&A was approximately $42m higher than in the second quarter, mainly connected with higher gross sales volumes which resulted in higher total dealer commissions paid. Other factors include continuous growth in the network which increased our rental and maintenance expenses, and revenue growth which resulted in an increased payment to universal service fund.

As a percentage to revenue, our SG&A decreased to 31.9% compared to the 32.5% which we saw a year ago. So our third quarter OIBDA margin this year is equal to 50.5% while a year ago it was 50.0%. This reflects practically the same pattern of development as last year. OIBDA margin is lower during winter season and high in the summer. Net income demonstrated improvement, showing approximately 93% growth compared with the last year, and approximately 23% improvement compared to the previous quarter.

As we have discussed, our customers during the summer season increased their usage, which resulted in substantial increase in minutes of use per subscriber, up to 109 minutes compared to 99 minutes in the second quarter. This was connected with the effect of Summer Nights promotion campaign which we mentioned during the last conference call as it started in June, and this quarter was also positively effected by this campaign, as it ended August 31.

ARPU in the third quarter was stable compared to the second quarter and equaled $7.8. If we look on ARPU development in Moscow and Regions separately, we see growth in ARPU in both areas. In Moscow, by approximately 4% quarter-on-quarter and in the Regions we saw 5% growth quarter-on-quarter. As long as ARPU in the Regions is lower and subscriber base is growing more rapidly in the Regions, on average, for Russia, we see stable ARPU.

A few words about minutes of use and ARPU development in Kazakhstan. We see deterioration in these indicators in the third quarter compared to the second quarter as one-time events connected with interruption of [indiscernible] supply, which lasted for approximately a month and, thus, negatively impacted our performance. Now the situation is fixed and we expect that usage will come to its normal development.

Our subscriber acquisition quarter-on-quarter was lower than a year ago and a quarter ago, as a result of low advertising expenses and higher withholdings on dealer commissions related to SIM card sales in previous periods.

Our cash balance as of September 30 is very high, $674.6m, which came as a combination of different factors. We are better in terms of our cash generation from card incorporation and are slightly behind the plan in terms of our capital expenditures. In the third quarter our total debt increased by $315m as we drew down the full amount of syndicated loans signed in February this year in the amount of $325m, and paid off some of our debts.

In spite of this debt increase our debt weighted average should not change compared to the second quarter, and even improve compared to the previous year end. And our net debt stayed practically stable compared to the end of year 2004.

As I have already mentioned, as long as our margins are stable and volume of operations increase, our cash generation grows. Although capital investments in the third quarter were below second quarter, we expect that we will be slightly above $1.47b, which we indicated as our targeted capital investment for year 2005, as we have seen substantial growth in subscribers and traffic. And we think that the trend which we see right now, that cash from operations is growing faster than capital, means it will continue, and our cash generation in Russia will exceed capital investments very soon.

Of course, our operations outside of Russia, are currently only in the initial stages of development, and it will take time before their contribution to this picture will have pronounced positive effects. But Russian operations in the current business model will be net cash flow positive during next year.

Thank you Elena. And let me now move to our corporate affairs and expansion into Ukraine. In 2004 the Board of Directors approved the strategy of VimpelCom’s expansion into the countries of the CIS as the next area for growth. Among those countries include [indiscernible] Nordic and Ukraine, which is a strategically important market representing approximately half of the CIS outside of Russia.

As you may know, VimpelCom’s entry into Ukraine has been debated for a long time. This issue was originally raised by our public shareholders soon after our main competitor acquired VMC. As this matter was deadlocked at the Board level, it was eventually brought to the general meeting of shareholders by Alfa Group, and on September 14 of this year, the EGM approved VimpelCom’s acquisition of URS with 85% of public shareholders who participated in the EGM voting for the acquisition.

On September 16, the Board of Directors, by a simple majority, affirmed the validity of the EGM decision. Since that time, management worked to implement the acquisition and it was completed last week. Telenor issued a press release after our acquisition, stating that it is still in opposition to the URS acquisition. Nonetheless, we hope that Telenor will accept the will of our public shareholders and work with us to create shareholder value for all shareholders.

On our side, we have taken steps to reduce the cost of investments through a favorable agreement with Ericsson which, in our view, addressing one of Telenor’s declared major concerns. In general, we would hope to see Telenor and Alfa, our two major shareholders, sit together to discuss all the issues and find an amicable solution which will be to the benefit of all VimpelCom shareholders.

In Ukraine we’ll have to work with utmost energy in order to compensate for the lost time. We must very quickly take control over operations and upgrade the URS organization to the level of VimpelCom standards. URS should not be seen as a paper company. It has a network with approximately 550 base stations in the area, and another 150 base stations under construction or in the warehouse. It operates in all Ukrainian regional centers and in other cities and towns. However, the marketing part of URS has been lagging very much behind its technical part, so that the company has only about a few hundred thousand subscribers. To do the strong marketing arm will be one of the priority tasks of the new management.

Of course, we will need some time before we are able to present our plans for Ukraine in more detail. Today I can say that we hope we will be able to attract about 5m subscribers within three years, and we plan to invest approximately $100 per new subscriber, which is in line with our benchmark in Russia. We will use all our experience accumulated during more than 10 years of operations in Russia, and more than one year in Kazakhstan. We’ll be ready to consider all kinds of partnerships and alliances, which will expedite the development of our Ukrainian asset.

In completing our presentation, I would like to say the following. The Company’s business is growing successfully, generating strong financial results. Our third quarter results underscore our ability to secure growth in the top line and to control costs and neutralize economies of scale, so that OIBDA and net income grow faster than revenue. The scope of our operations is increasing in size so that our footprint now covers 200m people. We have a strategy that works, and we have strong and dedicated management team. This team has proven many times its ability to deliver results which we intend to continue. Thank you for your attention and let me now open the floor for questions.

Thank you very much. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. We do ask that you limit yourself to two questions. That’s one question and one follow up question, and if you have any additional questions after that you may re-queue. We will take our first question from Alex -- I’m sorry -- Vladimir Postolovsky with UBS. Please go ahead.

Gentlemen, Vladimir Postolovsky from UBS. A couple of questions if I may. The first one was I was going to ask a question on Kazakhstan, but I think you’ve given a good explanation of what’s going on there. It’s probably the best possible explanation. But I guess my question would still be how do you see the situation developing there? Is this offer by KCell a temporary one, or do you expect that the pricing competition will become stronger in Kazakhstan going forward because, obviously, [with] now going to Ukraine we are all concerned about what’s going on in Kazakhstan, as a case study I guess?

The second question, looking at your G&A, there was a significant increase in, let’s leave alone selling and marketing, but general and admin costs went up by about $40m, from $150m to about $196 actually million quarter-on-quarter. In your press release you mentioned a couple of things like network maintenance costs and compensation -- share based compensation programs for employees. Could you maybe give us some, well, quantify those particular items and maybe give any other large items that could have led to this sequential growth in general and admin costs?

And finally, the last question on ruble pricing. What’s your latest thinking? Are you going to introduce it in 2006? And if yes, do you see a possibility going forward to adjust ruble prices with inflation? Thanks very much.

Vladimir, let me take your first question on Kazakhstan and then Elena will handle all the rest. So, regarding price competition. As it usually goes, our understanding that the competitors need to learn each other, right and sometimes you maybe overshoot, and that’s exactly our hope, that it’s been an overshoot in terms of competitive response, which we believe really unnecessary to go in such deep price discounts.

Saying all this, I believe that competition is actually good news, because putting together our marketing models, the two companies bring the whole market to a faster growth. We saw exactly this happening in Ukraine, for example, where over time the market actually [read it] penetration growth months and months. So we hope that it’s just a one-off, and we’ll come to more normal pricing policy in Kazakhstan. Elena, over to you.

Yes, talking about the increase in G&A. So the change actually between second and third quarters is approximately $35m. So out of which approximately $10m relates to network rental maintenance, plus IT related maintenance and such things which is connected to the introduction.

Then with the additional expenses which were recognized in this year connected with the deviation of top price and, thus, affected accruals on our stock option program is approximately $5m. Then some expenses connected directly with the revenue growth, such as universal service fund. As long as you know that, in the second quarter, we recognized a -- not the full amount for the full quarter because it was enacted in the middle of May. So this, in addition with the growth of revenue, give us an additional $5m of additional hit universal service fund.

Then approximately $3m of bank fees connected with collections of payments and so on, which is also a good sign as long as we are collecting more cash with our commissions increasing. And so practically that’s the major points and the rest is normal deviation connected with the growth of volumes.

Just, the last one on price, on ruble pricing going forward.

On ruble pricing we have mentioned before. We do plan to launch ruble tariffs in 2006. As for re-adjusting them for inflation, it’s hard to speculate but, obviously, having ruble tariffs would protect us from the current decline in the dollar.

And would it be a move to ruble pricing across the board, or is it going to be just, you know, a couple of tariff packages?

Across the board over time. We will ultimately operate in rubles in Russia.

We’ll now take our next question from Alex Kazbegi with Renaissance Capital.

Yes, good afternoon gentlemen and lady. If I can -- the first question I have, basically, what’s your general expectations and the feel about the timing of the introduction of the number of the pending things for the next year, such as calling party pays, mobile number portability, any changes in the interconnect with for the Fixed Line? So the timing and, secondly, how ready do you think the operators, both on the Mobile side and on the Fixed Line are to, basically, to have technically ready, to have those things being introduced?

The second question is probably about Ukraine still and it’s more like a curiosity question I guess, because we saw also one of your more direct competitors, so to say, [Astellit] which is, obviously, a very fresh start up thing that they’re going to spend about $1b over the next -- until 2007 on the CapEx there. And you guide us on half of that number. So clearly, you’re betting either on the existing coverage which URS has, or maybe there is something else. Maybe you could just clarify to the extent of which you can, what could be the different between those two numbers?

Lastly, also just on the Kazakhstan as well, just to follow up. First of all, sorry I missed the explanation for the deterioration in ARPU. And secondly, also the EBITDA margin there has been at 38% over the past two quarters with no change. So I was just wondering also what are the reasons for that, and should we expect the improvement in the margin? Is there any specific reasons why the margin has not been growing as such and as much until now? Thank you.

On the regulatory changes which are pending, actually, we don’t have ultimate visibility at the moment because there are different statements made and the feeling is that not all of it, certainly, will be introduced as of January 1, as has been intended. The feeling is that mobile number portability has been pushed back quite strongly, because all the solutions which have been proposed they were quite costly, and when you operate on such a low ARPU, of course, there is very little goodwill from the operators to start implementing that one.

And the Ministry have been, actually, quite receptive to the voice of operators. There is a working group currently created, reasonably recently established, where operators are trying to work out exactly the questions which you are asking. So what are the real implications and how ready we are and what’s the best way for the industry actually to start implementing this. So finally we see that this kind of merger of legal work and production of the regulation and the opinion which is coming from the industry. So we hope to see some changes implemented, but I’m afraid I cannot give you any more clarity as we lack it ourselves what is going to happen as the beginning of the year.

Now with Ukrainian Astellit, the answer is probably yes on both, that Astellit estimates starting from the smaller coverage. But also Astellit builds its expectations on 1800, and URS has got 900, although Astellit recently received some of 900, which will help them to cover the roads and so on. Still, we have from that perspective, a significant spectrum advantage which should impact our cost bases.

Second, we think that it’s one of our competitive edges to build network at low cost. Our understanding that Astellit is going with a turnkey solution produced by -- including Turkish construction companies and so on, and it seems to us as a probably more extensive set up than what we are using in Russia. And, as you know, construction cost accounts for a large chunk -- civil work accounts for a large chunk of capital investments [inaudible] intensively. So this is basically the logic. Other than that I cannot give you an explanation because, in Russia, we are building at this cost and I don’t see any reasons why in Ukraine it should be anything different. And that’s how we are going forward. And, actually, the discussions -- preliminary discussions we had with different suppliers just confirm our estimates.

Now coming back to Kazakhstan. ARPU deteriorating there was -- we had logistics problems with scratch cards and, basically, the market found itself for over a month, without the most demanded lowest denomination scratch cards which, of course, depressed the usage artificially and, as a result, depressed ARPU. So this now has been fixed. We moved the supply structure into the VimpelCom structure. So now we are having reliable supply secured from two suppliers rather than one, and at better cost and so on. So it was a hiccup on the operational side. Now we are going forward in a more normal way.

On EBITDA, the key reason there is interconnect. We’re still lacking direct interconnect with KCell, and by the law and by the conditions of the license which actually, currently obsolete because the law has changed, but the agreement hasn’t been finalized. But according to that previous law and the license requirements, we had to route our traffic through Kazak Telecom, which was very expensive. And as soon as we drop this, we’ll get improvement in the margin as well. So it’s actually the EBITDA suffering, is coming on the gross margin level, rather than operational cost level. The same goes -- maybe you picked up in the press the debates where we have direct exchange on SMS with the companies and so on. So as soon as we come to a more normal industry set up on the market in Kazakhstan, we expect improvement in EBITDA.

We’ll take our next question from Sergei Arsenyev. Please go ahead.

Good afternoon. Can I just -- this is Sergei Arsenyev from Goldman Sachs. Can I ask you about the fourth quarter promotions and there has been some commentary in the press about some actions that you are planning with [Yevre Seconds and Viznoy] and I’m just wondering whether maybe you can specify this, whether it’s not too early? And maybe also tell us what the monitoring contribution in the fourth quarter of this promotion will be, this specific targeted promotions?

And my second question is on Kazakhstan and on the third license. Are you expecting a third license in Kazakhstan in 2006, and have there been any changes on that front? Thank you.

Let me start off with the promotions and our distribution strategy. As you know the fourth quarter is a very strong season for sales, and we will be taking maximum advantage of that, including some promotions for the end user as well as working with our distribution channels. And we are running joint promos with Viznoy. We are running joint promos with [Euro Set], one of which we’re offering clients that connect through Euro Set 50 free SMS, as well as with Viznoy.

And that’s just that, that’s just 50 free SMS and nothing else? That’s the only promotion -- promotional element in that program right?

For the end user, that’s what the end user will receive, yes.

Okay. And for the distributor, just in terms of the increase in your dealer commission’s expense in the fourth quarter?

We work very closely with our distributors. We try to incentivize them on connecting high quality subscribers. The higher quality subscribers that they connect, they get a larger commission. For example, credit customers bring in over -- almost two times the commission of a pre paid customer. So, therefore, we’re working with all of our distribution channels to ensure more priority recommendations for our services.

Okay and on Kazakhstan’s third license, there are persisting rumors but we and almost the tender been announced, but we still lacking the details on that one, both timing and actually with what is being tendered. Is it a 900, 1800? Don’t forget that already once a tender for the third license in 1800 frequency has been announced and we even considered submitting our applications for that tender, then decided not to do so, because the business case actually on 1800 only is very, very difficult to justify.

So, based on those rumors, one can say yes, we’re probably going to see an entry of the third player next year but, depending on the time of the tender, we will see probably different outcome for the year 2006. So if it’s somewhere middle of the year and likely we’re going to be impacted strongly around New Year’s and Christmas sales. If it’s early in the year then probably we’ll feel the impact, but at the moment we don’t have more information than that.

We will now go to Rizwan Ali with Bear Stearns.

Good morning. My question is regarding Ukraine again, and we have seen in a lot of other markets, especially in Latin America, most specifically Brazil, where four operative markets have significantly lower margins. And so I’m wondering in Ukraine, as a fourth operator, brand new almost, what kind of margin assumptions are you making going forward? In the longer term do you think you can reach margins close to what you have in Russia?

Thank you. First comment on Brazil. One has to be very careful when you take the analogies. In general, the Latin American market is operating on depressed margins and what’s appropriate is to compare the gap between number one and number two operators, who usually run on similar margins and then number three and number four. And you see that that number is actually quite robust, going from market to market. It’s also interesting that our analysis shows that with the evolution of the market when penetration increases and so on, usually the average level of the margin is not being eroded that much and, therefore, currently we’re looking at the two lead operators who are reporting their data. It’s difficult to judge where the lead is at this phase of their development. But [indiscernible] and [EMT] are reporting actually sky high margins certainly realizing on their colleague duopoly evolution so far.

So we believe that it’s a very good starting point. We would feel much less comfortable if they would be reporting low margins, but with such a high starting price -- point, we feel okay. So, what are we targeting? We are targeting -- and hopefully a lot of entry into Ukraine is applying the same experience we saw in the other regions. For example, in North West of Russia where we entered in spring of 2003, we were number four entrant. Actually number five if you count CDMA as well. And the penetration was about Ukrainian level. And we managed now to reach our market share approaching 20% there, and we operate on average margins above 45%. Our EBITDA in the region above 45%.

We don’t see any reasons why it should be different in Ukraine. Our budget assumes fairly low ARPU and, therefore, it reflects the reality that we will be attacking the lower end of the market. And we are targeting our cost base respectively, and the cost base is similar to what we have in tougher regions, so to speak, in Russia.

Thank you. [OPERATOR INSTRUCTIONS]. And we’ll now go to Taras Shumelda with American Century Investments.

Good afternoon. This is Taras Shumelda, American Century. My question is also on Ukraine. Are you seeing any pickup in promotions, above and beyond the seasonal normality by either of the three players in Ukraine, in anticipation of your move, or is it simply too early to be asking this yet?

I think it’s actually both. It’s early to ask of us how we interrupt the market moves. What I can say is that the delay of our entry because we’ve been discussing this transaction for 14 months, certainly allows Astellit to go into play much more aggressively. They made their first call in GSM. The equipment has been delivered and so in February. Actually they launched their marketing campaign in May, and by now they have already 1m subscribers and rolling quite nicely. They apply very aggressive marketing and, from what I could judge being in Kiev, they actually -- is a disturbing factor there. So I wouldn’t call it promotional and seasonal promotions, heavy season promotions. It’s more of an aggressive strategy of new entrant, and we’re certainly going to pose good competition for them and for the incumbents in that sense.

Okay. Thank you.

We’ll now go to Herve Drouet with HSBC Bank.

Yes good afternoon. This is Herve Drouet from HSBC. Two questions. First one is, can you give us an update of the situation in the Far East regions, in terms of possible licenses and how do you assess the probability you may get your license in the regions where you don’t have yet a license in terms of coverage?

And the second one is on expansion outside Ukraine, Kazakhstan. Any possibilities you think where VimpelCom may expand? And I would like, as well, to know in Ukraine if you have to change your business plan, does it mean it will need to go through the Board of Directors to be voted, or should an AGM be called to agree if there are any shifts from the original business plan? Thanks.

Okay. Let’s handle the Far East first. So, the whole far east region, to bring things into perspective, is about 11m people. We have acquired companies which cover 3m out of that. So 8m of population remains out of reach for our services. Of course, we would love to have it, but if we don’t [we delay it]. It’s not really detrimental to the growth and the value of the Company. But it would be nice, of course, to have full federal coverage and compete as a federal player -- fully fledged federal player.

There is currently a discussion going with the Ministry and the Ministry says that there are frequencies identified in probably both 900 and 1800 range, as a result of conversion of frequencies which before have been occupied by the military equipment. And we now are debating how this spectrum should be distributed, because there is another contender who is applying for the same type of license. We believe, after our 36, 37 applications to that matter to the Ministry, we believe we have a certain advantage over the newcomers. So I hope that, either through acquisition, which one or two still available. I mean they are not for sale at the moment, but potentially available, or through this negotiation with the Ministry, we will be in the Far East and I hope it’s going to happen in the course of next year.

Now about your [question] in the business case and how we’re going to handle it. The fact is now, when we -- it’s a very legal question you’ve asked. I honestly don’t know how to answer specifically the question you’ve asked. But I would rather allow myself a more generic answer that, now when URS is part of VimpelCom, we will be following all the procedures which we’re supposed to follow with our other companies acquired and, of course, all the budgets, all the discussions and everything will be brought to the Board of Directors.

We’ll take our next question from Alexei Yakovitsky with UFG.

Yes, good evening. I have two questions. On CapEx, you touched upon 2005 figure. I wonder if you can comment on your CapEx plans for next year, excluding Ukraine if you could?

And my second question is on advertising expenses. Your budget, your ad budget this year seems to be growing much faster than the average rate of price inflation in the Russian media market. Should we expect this to continue going into next year, or you’ll actually go back to growing more or less in line with the media market, like you did in previous years? Thank you.

CapEx for year 2006, well, as usual we are saying that we will invest as we grow. As long as we are currently spending a little bit less than $100 per subscriber, we think that this trend will continue. So practically that’s it, what we can say now about year 2006.

Alexei, advertising is subject to many factors and I can assure you that the prices which we are paying are certainly below average inflation on the advertising. But the philosophy which we applied that in order to expand your market share, your share of Voice, supposed to be above your market share on a rather prolonged period of time and, therefore it’s not just a factor of what we would like to spend, it’s also a competitive situation. And as the competition stepped up as a category advertising spend, we have to follow the suit. So that’s how you need to look at the situation on advertising.

Thank you.

We will take our next question from Nadejda Golubeva with Anton. Please go ahead.

Good afternoon. This is Nadejda Golubeva from Anton. My first question is again on Ukraine. What kind of ARPU do you budget you mention that you do, and how soon do you think you will break even at the EBITDA level after the start of operations?

And my second question is about CapEx in Moscow as a percentage of revenue. Could you give a guidance of how big is it? Thank you.

Great. On ARPU in Ukraine, we don’t guide, right. And so to that end, we don’t give you explicit guidance on what we expect. That’s just our general principle. But we can tell you that it’s on the low side of what we see in the Regions. So that’s how we built our business case. Now over to Jere for Moscow CapEx.

What about the break even at the EBITDA level in Ukraine? When do you expect it to happen after the start of operations?

Again, in terms of guidance, I would be actually rather cautious to give any. But if you look at our operations in other regions, we see anywhere between six to 12 months where we achieve a critical mass, which allows us to get into positive EBITDA territory.

Okay thank you.

And as for the CapEx for Moscow, most of Moscow and the Moscow [oboist] are now totally covered with coverage, therefore, expenses are primarily just in capacity and modernizations. We’re not yet strictly on a maintenance CapEx, but we’re well below 20% of the Moscow segment revenues.

Thank you.

We’ll take the next question from [Romin Telitov] with Templeton.

Yes hello. Over the last several years VimpelCom has demonstrated impressive performance which mainly attributed to the Company’s management team, and at the same time I have noticed that in the last half year, year, VimpelCom has started containing the number of expected staff in its senior management, such as Vice Presidents for procurement, mergers acquisitions, marketing. And as far as I know, only one person was promoted internally. So my questions are, is this correct to attributed recent performance to the quality of VimpelCom’s local management team, or was it mostly due to the other factors?

And the second question is, does the lack of internal promotion say to us an inadequacy of middle management at the Company, and should we be concerned about this?

That’s a rather interesting question, but let may say it like this. That it is a superior management team and it’s probably one of the best which has been confirmed by different Boards, panels and so on and the awards the members of the team received. Therefore, of course, all the achievements which VimpelCom demonstrated so far, is attributed to their hard work and their talent. In terms of bringing or not bringing staff, actually, we are less concerned about the nationality as such. It’s more about the available expertise. And at the different stages of development of the Company and depending on the challenges the Company is facing, the different level and depth of expertise is required and, therefore, when we bring people it’s more about what sort of expertise they carry with them. And to be actually exact here, you are right that our M&A Vice President is an ex-pat, but he is Ukrainian - probably helped us to enter into Ukraine. Thanks.

Thank you.

We’ll now go to Dalibor Vavruska with ING.

Good afternoon and good evening. Just two quick questions. Can you make a comment about the pricing trends in Russia? If I’m not wrong, I’m noticing that the ARPU over MOU keeps falling quite sharply in the third quarter. The MOU growing and ARPU remains flat. So I’m just wondering whether you can make a comment whether that trend is going to flatten out, or whether -- and also in the previous quarter I think there was such a big difference between MPS and VimpelCom [said that there was] a per minute yield [indiscernible] and [MPS] didn’t, so if you maybe can make that comparison as well?

The second question, just to clarify the legal situation on the Ukraine. I know several questions have been asked about Ukraine already, but just to be sure. You bought this company based on the Board approval or the shareholder approval? And if -- just to answer to Telenor’s, basically, objection I just wanted to know [mathematics of the], whether you just thought the shareholder approval was sufficient or the majority vote in the Board was sufficient? What’s the legal standpoint on that question? Thank you.

We’ll start on the pricing. Pricing trends in Russia have been very pressured over the last two years. We’ve seen more than 50% taken out of our average price per minute on a consolidated basis in Russia. This year we’ve actively sought to come out of that and have less pressure, and most -- many of the activities and promotions, initiatives that we’ve done have been more efficient, in terms of increasing our MOU. We have already mentioned that our Summer Nights promotion during the summer has increased MOU and actually dropped our average price per minute, but was utilized in a network that was virtually empty.

Will it flatten out in the future? We certainly hope so, and as we move into the fourth quarter of this year, again, we’re focused on promotions that aren’t so aggressive from a pricing standpoint, and there have been some signs, in terms of the new tariff plans launched by some of our big competitors. They seem to be not drastically declining the APPM, however, there are still a lot of new customers to be gained and we will try to balance that pricing pressure going forward.

Okay, and on the what authority. Basically, the management concluded the acquisition of URS. It’s on the decision of the shareholders’ meeting, when 89% of independent shareholders voted in favor of this acquisition and that has upheld the validity of the decision of the EGM been upheld by the majority vote of the Board. So that’s the legal situation as it is now.

Okay, thank you very much.

We’ll now go to Nick Barnes with Thames River Capital.

Sorry, I missed your earlier CapEx guidance for 2005. I mean, given your low CapEx in Q3, if you could just update us on that if I missed it, sorry?

Yes, previously we said that our estimations for year 2005 capital investments is approximately $1.47b, and now we’re seeing that, as long as we’re getting more subscribers and more traffic that potentially this number will be slightly above.

And is that including or excluding Ukraine?

It’s excluding.

Okay.

We’ll take the next question from Anna Bossong with CA IB Investment Bank.

Yes good afternoon. My question, first of all, is just a simple one on Ukraine. I assume you haven’t settled yet. When do you actually expect to settle on the acquisition?

And secondly, you talk about a medium term target of subscriber numbers of 5m in the Ukraine. Can you give me an idea of what you mean by medium term?

I can give you an idea on medium term, but I haven’t quite yet -- the acquisition is closed - shares transferred, monies paid. We are the owners of Ukrainian Radio Systems. And in terms of medium term, we consider it two to three years.

Great. Can I [indiscernible]. MOU, can you tell me how much uplift the Summer Nights promotion had to your MOU in the third quarter?

The third quarter MOU jumped to 109 versus last year quarter 99. I don’t have a specific break out by region. In Moscow we attributed roughly 3% during those months to that promotion on --

That’s great. Thank you very much.

We’ll go to Alex [Kuznezov] with Bear Stearns.

Good afternoon. It is Alex Kuznezov from Bear Stearns. I have two questions. First, it appears that effective tax rate went down to 25.5% from 27.2% in the second quarter. Could you properly explain this trend? We should we expect effective tax rates in the fourth quarter similar to effective tax rate in the fourth quarter ’04, or should it go below that?

And secondly, I found that there was some downward trend in the market share measured by subscribers, both in Kazakhstan and in Russia. Could you comment on this? Is it related to your focus on revenue and profitability rather than subscriber acquisition?

Okay, let me start with effective tax rate. This decrease actually was connected with, I would say, one-time event. We reversed the income tax accrual, which was done in year 2004 and related to year 2002. So, we -- this reversal was made after the favorable decision of the second quarter instance, which we had the disputes with [tax and tax rate].

And as for market share, may I remind you that the market share has remained fairly stable over the last five quarters, at 34% for VimpelCom. Over the last couple of months we have had a little bit less incremental market share, and that’s primarily driven from our churn numbers and our [gross] sales and our sales through the retail chains remain very robust across the country and that’s the main reason to explain the market share over the last two months.

And, as far as Kazakhstan is concerned, the drop in market share in the last quarter is completely different. In Kazakhstan the market share remains our number one priority, but we simply chose not to immediately respond to a very highly priced cutting promotion launched by the competition. So we see where it leads and we’ll try to avoid simply wiping out quite a bit of value off the market at this early stage of its development.

We’ll take our next question from Anna [Kopianova] with Renaissance Capital.

Good evening. I have two questions related to financial. The first one is about your subscriber acquisition costs. As we see it’s quite low now on those. Could you please comment? Do you expect that in [weeks] that it will go up in the future?

And my second question is related to your effective tariff which is now $0.07, which is quite low. Do you expect that you start growing then and, if yes, when do you expect it? Thank you.

Excuse me, we didn’t quite get your second question. Could you repeat it please?

Sure. My second question is related to effective tariff, which is about $0.07 per minute at the moment. Do you expect that it’s part of the annex of growth or do you expect to stay the same level? Could you please comment on that?

Okay, let me start off with subscriber acquisition costs. The subscriber acquisition costs -- we’re happy to report that they’re very low in the third quarter, and that’s been driven by a few things. Actually the trend over the long run is that dealer commissions in the Regions are substantially lower than here in Moscow and, as more and more of our sales come in the Regions, that’s been reducing the dealer commission component of subscriber acquisition costs. As well as in the third quarter, we had a very effective advertising spending. We had $2m less on $1.6m higher gross sales, which added to this stellar performance in the third quarter. We don’t think that this level is sustainable and we do believe it will come up a bit going forward.

And as for the effective, or the average price per minute at $0.07, going back to my last answer, the average price per minute does continue to decline, however, we’ve very focused on utilizing that decline more efficiently. So, in other words, using our network at off peak times. Actually, we’re getting more on net traffic which is a little bit cheaper, but it carries a higher gross margin and there are other areas that we can improve the business with the decline in APPM. But, as I also said, pricing pressure remains a key focus for us going forward.

Okay, thank you.

And we’ll take the next question from Vladimir Postolovsky with UBS.

Hi again. A couple more questions if I may. The first one, can I go back to Ukraine. Could you tell us, when do you actually plan to launch more or less aggressively under your own brand and/or just when you’ll be seeing your network will be ready for an aggressive launch in Ukraine?

And kind of related to that, financing of your business in Ukraine and, obviously, you dealt with it in the short term with the URS transaction but, going forward if Telenor, as it threatens, will try to block any further financing at the Board level. What are your plans to address that?

So that’s the first question. The second question, MPS is telling me that they started introducing, voluntarily, under some agreement with you, introducing interconnect payments - mobile to mobile termination fees. Is that true? I was just wondering whether that could explain some of the upside in ARPU and some of the pressure on gross margin. Thanks.

Okay, let me start with Ukraine. In terms of timing, we plan actually to launch Beeline brand in six, seven months. So by that time we need to have most of the issues addressed, not only on the quality of the Regions side, but also core of the network and the products and things like that. So six to seven months, that’s the timing for us to go with the brand in full blast.

With regards to financing, I just came to repeat that we plan to bring everything now to the Board. We are not seeking any other creative ways. And just to stress that Telenor cannot block anything. The Directors can who are sitting on the Board, and we hope that Directors will be acting, fulfilling their judiciary duty in the interest of all the shareholders and, therefore, acting constructively on this one. And we hope that Telenor, as a shareholder in that matter, will also come around and will respect the will of the majority of the shareholders going forward.

In terms of interconnect an I turn over to you?

As for interconnect between the Mobile operators, we do currently have termination agreements with all the big three and, actually, with some of the smaller operators, therefore, we do now show revenues. The effect is very marginal at this point. If we back out the revenue generated from terminated traffic, we’re looking at about $0.01 on ARPU in the fourth quarter. There’s about a $2m increase from second quarter to the third quarter in that revenue line.

We’ll now go to Alexei Yakovitsky with UFG.

Thank you. I’ve got a follow up which also relates to Ukraine I guess in some sense. You mentioned your successful conquest of the St. Petersburg market, and can you refresh us on the ARPU evolution in St. Petersburg, where you started over the level of ARPU that’s in spring of 2003, the first month after you started? And what is it today? I’m assuming it’s going up, it has been going up but it would be good to get some figures there. Thank you.

Maybe I’ll just -- of course, we do not remember just now by heart the exact evolution what happened in St. Petersburg. But definitely remember that we launched very aggressively with $0.01 per minute and, of course, by that time ARPU was actually the lowest among all the Russian regions. Now, as long as we moved out of this aggressive promotion campaign and improved the quality of the network and, ARPU is coming closer to the average level for the region.

Okay, thank you.

We’ll now go to Alex Kazbegi with Renaissance Capital.

Yes, I was just wondering because you mentioned also that, in Moscow, you clearly moved to the value extraction policy, as you mentioned. Maybe you could just discuss a bit more what you expect? If you look at Moscow as the proxy to what can happen, let’s say, two, three years down the line across Russia, how the ARPU is stabilizing or not stabilizing, what kind of EBITDA margins you are looking? We understood that you have about 10% of revenues v CapEx right now, but it’s still probably coming down, because you said it’s not yet on the maintenance level. What kind of value-added services you expect -- what you have now, basically, what kind of percentage of the total, and just to get a bit of a feel what is the more or less steady state situation for you?

I’d have to go into our entire Moscow business plan it sounds like. But just to try to highlight the fundamentals, the underlying fundamentals of what’s happening in Moscow. With 130% SIM card penetration, we understand now that -- we understand that this is not the key indicator to generate more growth in terms of revenues for this market. So, our overriding driving principle, in terms of managing this business, is to grow the top line and we do that, still through some subscriber growth, but it’s becoming -- it’s diminishing, becoming less and less. Latest reports show that, of all new connections in the Moscow marketplace, as little as 10% are actually new. So, therefore, our focus has already switched towards one of loyalty and retention, and really improving the quality of the customer base. So we’ve been investing disproportionately in going after the business segments, our small and medium enterprise segments, utilizing VimpelCom’s competitive advantage on its business support system to launch targeted marketing campaigns and, therefore, we’ll continue to execute this to grow revenues faster than our competitors in that marketplace.

And the type of the margins?

Margins are -- we don’t report our segments separately, but margins are significantly higher than what we report on a consolidated basis at the EBITDA level, and Moscow is a cash cow and we try to generate more and more cash with every -- basically every investment that we do, we try to make sure that we’re getting the maximum yield for that additional CapEx. We’re currently in a good situation where modernizing the network is not very expensive, going -- upgrading our network to EDGE and bringing our data speeds upwards to 100KBPS. This, of course, is not taking account any investments in 3G, which could come about next year.

Yes thank you. And lastly the value-added services proportion of the total both Moscow and consolidated total.

Actually, value-added services, it does vary from region to region but, in short, it’s 14% of our service revenues. That’s grown this on a consolidated basis and, as I said, Moscow pretty much mirrors the rest of Russia with maybe an exception in the Urals, where data traffic is still very high. So 14%, having grown from 12% of service revenues in the same quarter last year. It’s primarily driven by SMS, which is about 50% of our total revenue coming from value-added services, and our connectivity, GPRS and data services represent about 25%. The other 25% is in content and basic services.

Thank you very much. That’s excellent.

We’ll take a question from Alexander [Bolotnin] with [Rafian] Bank.

Hello it’s Alexander Bolotnin from Rafian Bank. The Company demonstrated a rather sharp decline in average price per minute, and about 10% quarter-on-quarter. And I just want to ask, is the Company see the standards that have been -- to continue in the coming quarters? Do you expect such a sharp decline in fourth quarter and first quarter of 2006 and so on? Thank you.

Again, the price declines that we’re seeing right now are predominantly driven by utilizing our network more efficiently. We’re offering free traffic at night which, obviously, reduces our average price per minute but, obviously, helps with the acquisition of new subscribers, and getting customers used to using the phone much more and generating more minutes when we’re charging for them. So, going forward, we expect that -- we hope that the trends in APPM decline will slow. That’s what we’re working towards and that’s it.

Thank you.

We’ll go to Alex Kuznezov with Bear Stearns.

Good afternoon. I have two follow up questions. First of all, could you tell us what was the incremental ARPU in the third quarter, and how do you see ARPU trend in fourth quarter ’05?

And secondly, it appears that the percentage of contract subscribers is increasing in Moscow. Do you think this trend is sustainable, and should we expect it in other regions where VimpelCom operate?

Let me go for incremental ARPUs. It’s always a tough question to ask, because we have to wait a year to see what the ARPUs are for the entire year. But the customers that we’re bringing in are mirroring, basically, the average ARPUs that we’re reporting right now. So in Moscow that’s a bit above $13 and a little bit below $7 in the Regions.

As for the trends, we expect the trends in ARPU to follow the last few years. We have very good seasonal positive effects in the summer quarters, usually dips in the fourth and first quarters due to higher sales, as well as less minutes of use during the short Russian winter days, and we don’t expect those trends to deviate dramatically going forward.

And your third question was regarding contract subscribers in Moscow. We’ve been consciously focused on going after credit customers. There has been a new credit law brought into the Russian Federation at the beginning of this year. We’re using it to go after the customers that prefer to speak first and pay later. They usually have a higher ARPU. As for the rest of the Russian regions, it’s marginal at this stage.

Thanks a lot. Just one clarification regarding ARPU trend. So do you expect a similar ARPU trend in the fourth quarter as was seen in the last quarter ’04?

We would expect a similar trend. We can hope that it’s not as pronounced, as we’re not going to be as aggressive on the pricing as we were last year, and we’re hoping our competitors are doing the same.

Thank you.

We’ll now go to [Bolona Creoco] with [BlueBay] Asset Management.

Hi. I have two questions. The first one is on the level of secure debt. As you know, Moody’s keeps one notch differential between the senior employed rating and the unsecured issue rating, partly due to the fact that you had a quite substantial non-secured debt. I was wondering where is this level now and what are your plans going forward in terms of decreasing further the amount of secured debt?

And the second question was on your acquisition, or potential acquisition outside CIS. As you know, some of your competitors are looking at India and Turkey and some other markets. I was wondering whether you at all consider these markets attractive? Thank you.

So let me start with the secured debt. Yes, we are quite happy with the developments of a proportion of secured debt and our total indebtedness. So right now, it’s approximately 15%.

And with regards to acquisitions, yes, the other markets may be attractive, but we operate within the strategy and the boundaries which have been determined for us by the Board of Directors, and that strategy is focused on the CIS. So at the moment we are not considering anything outside.

May I just confirm, on the secured debt are you expecting to decrease it further or are you quite comfortable with the 15% level?

No, actually we are quite comfortable with this level, but again, going further you know we are looking for different ways of funding our operations and, of course, on VimpelCom level we are, of course, looking for unsecured debt. But, as long as our subsidiaries in CIS potentially will go for funding without, I would say, direct involvement of VimpelCom, potentially they will look for secured debt. But in general, I think that the level of secured debt and the consolidated numbers will not grow substantially.

And now I’d like to turn the call back to management for any additional or closing remarks.

Thank you. Thank you all for participating today in our conference call, and please contact us if you have any questions and any more clarifications we will be happy to give you our answers. So, have a good day and good bye.

Thank you very much and that does conclude our conference for today.