VEON Ltd (VEON) 2006 Q3 法說會逐字稿

We do thank you for standing by and welcome to this conference call to discuss VimpleCom's third quarter 2006 earnings results. Today's call is being recorded. And now, at this time, I would like to turn the conference over to Michael Polyviou with Financial Dynamics. Please go ahead.

Thank you. Good morning and welcome to VimpelCom's conference call to discuss the Company's third quarter 2006 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 in Russia and the CIS market growth and competitive environment in Russia and the CIS, and projections related to the Company's cash position and capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward looking statements, including the risks detailed in the Company's press release announcing third quarter and nine months 2006 financial and operating results, the Company's earnings presentation entitled "Presentation of 3Q 2006 Financial and Operating Results", the Company's Annual Report on Form 20-F for the year ended December 31, 2005, 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 2006 financial and operating results press release and Form 20-F are posted on the Securities Exchange Commission's website at www.sec.gov.

VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward looking statements made on this conference call or to make corrections to reflect future events or developments.

If you have not received a copy of third quarter and nine months 2006 financial and operating results press release, please contact Financial Dynamics, at 212 850 5600, and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliation of non-GAAP financial measures presented on this conference call, can 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. So it was an excellent quarter. Year-on-year and quarter-on-quarter growth were better than in the second quarter, confirming strengthening of the Russian market and the increasing importance of the CIS in our business. But, actually, before I go in more detail into Russia, I have to present the team which is around me, sitting around this table.

So here with me are Elena Shmatova, our Chief Financial Officer, Nikolai Pryanishnikov, our Executive Vice President who is in charge of operations in the Russian region, Kent McNeley, our Chief Marketing Officer, and Valery Goldin, our Vice President of International and Investor Relations.

So, in today's presentation we will start with a general overview of our performance in the third quarter, followed by details on our balance sheet and cash flow positions. And after that, we will discuss developments in each of our key markets.

Coming back to the performance, so, as I said, it was an excellent quarter. So year-on-year and quarter-on-quarter growth were better than in the second quarter, confirming strengthening of the Russian market and the increasing importance of the CIS in our business. We again broke our records in key financial indicators. And our OIBDA margin was the largest ever recorded.

We are particularly pleased with the sixth year year-on-year OIBDA growth. Let me now ask Elena to report in detail on our consolidated balance sheet and cash flow positions.

Thank you, Alexander. Our balance sheet compared with previous periods also shows solid development. During the first nine months of this year, our assets increased by approximately 23%, mainly due to additional profit and equipment associated with network construction and goodwill associated with acquisitions.

Our cash balance was higher than usual as we were preparing for the ArmenTel acquisition, which was successfully closed on November 16. Our liquidity ratios continued to be strong, showing improvement compared both to the previous year and the last quarter.

Our last 12 month debt to OIBDA increased by $268m, as OIBDA for the first quarter of 2006 was higher than OIBDA a year ago by this amount, while our debt during the third quarter decreased compared to the second quarter by $52m. So the debt to OIBDA ratio at the end of the third quarter was 1.1 compared to 1.3 at the end of the second quarter.

OIBDA versus interest was 12.1 at the end of the third quarter, compared to 11.5 at the end of the second quarter.

Last quarter we showed that our operating cash flow was 1 percentage point above capital investment needs. This quarter this surplus is even greater, at almost 9 percentage points. CapEx to revenue ratio is improving in our major markets, Russia and Kazakhstan, as you will see further in our presentation. And we have very encouraging indications concerning our ability to become free cash flow positive quite soon.

Let me now turn the floor back to Alexander to discuss developments in our key markets.

Thank you, Elena. Let's start with Russia, our largest and most developed market. This quarter's results were anticipated with particular interest. They were expected to shed more light on two very important questions, would the ARPU trends which we saw in the previous quarter continue, and how well have the Company and the market navigated through the introduction of CPP?

ARPU growth continued and, in fact, accelerated in the third quarter. Usage increase, amplified by the seasonal effect and good price discipline compensated revenue losses from incoming calls, driving underlying ARPU growth. This was further enhanced by increased interconnect charges in mobile operators.

A year ago, we shifted our focus from subscriber acquisition to driving revenue growth. The market has followed, and that created a favorable business environment. We believe in our Russian strategy, which is focused on increasing value extraction from our subscriber base.

The voice element of it remains the driving force behind the near-term growth and it relies on a few key elements. First, stimulating usage through more granular segmentation and targeting marketing. Second, securing loyalty and retention of high quality subscribers and finally, third, deploying conservative pricing policy.

We also recognize the important of value-added services, both for the current and, particularly, for the future business growth. In that area, we focus on enhancing the ability to differentiate our products while constantly improving consumer friendliness and speed to market. All in all, the Russian consumer market continues to thrive and we should see this translate into further growth of the Russian mobile market.

Following the ARPU trend, our operating revenue grew by 20% quarter on quarter, and by 46% on a year-on-year basis. Our OIBDA, enhanced by our cost control efforts, performed even better, growing by 26% and 55% on a quarter-on-quarter and year-on-year basis respectively. But the margin, of 54.2%, was the highest ever recorded in Russia by the Company.

We are entering the final stage of our network development in Russia. Accordingly, our CapEx to revenue ratio is declining. This decline will continue going forward until it reaches the maintenance level between 15 and 20%. We are confident that our Russian operations will be free cash flow positive this year.

So far, we have not included the 3G factor in our considerations. However, according to the statements made by Ministry officials, the 3G license process may start shortly. As soon as we know all the details, we will review the situation and consider adjusting our plans as necessary.

Kazakhstan. We continue to make great progress in Kazakhstan. In the third quarter, growth in MOU and ARPU, as well as market share gains were impressive. With strong subscriber growth, we are practically at par with our main competitor on the number of subscribers.

Our network now is the best in the country in terms of the number of base stations, coverage and quality. This means that we have been very good at using the benefits of the virtual duopoly in Kazakhstan in the past two years. Now, the third GSM license was issued to the incumbent fixed line operator, and very soon competition will be more intense. We believe that we are now well prepared for that.

Our financial performance in Kazakhstan in the third quarter was also strong. Year-on-year increase in revenue of 115% and an OIBDA of 165% speak for themselves. OIBDA margin has also improved to a record 47%.

Net loss of 600,000 may raise some questions. The explanation is simple and we gave it in our press release. The dollar appreciated against the tenge by more than 7%, which resulted in a foreign exchange loss of almost $16m. The hedging market is not developed in Kazakhstan, but we are taking measures to mitigate this risk going forward.

Our CapEx as a percentage of revenue is still high, but it has been declining from a peak of over 80% in the first quarter of 2006 to 64% in the third quarter. We see our Kazakhstan operations as an increasingly important part of our business and we believe we will be able to make more progress going forward.

Turning now to Ukraine. We see clear progress in our operations. To date we have reached approximately 1.6m subscribers. ARPU in the third quarter grew by 17%, which is very healthy development. Financial figures are also improving.

During the third quarter we continued building our network, installing new base stations and swapping old ones. As a result, we extended coverage and improved quality so that our network is getting more and more competitive.

Assessing growth opportunities, it is important to note that reported penetration of 88% is probably overstated. Absence of required subscriber registration and active user free SIM card distribution in the market are likely to have inflated the true penetration numbers to an even greater extent than in Russia. Therefore, we continue to see good opportunities for further growth in Ukraine.

As planned in September, we launched on Beeline brand in Uzbekistan and Tajikistan. We focused our further network rollout, building retail presence and consumer awareness of the brand. In general, we're doing what we believe is right and appropriate at this stage, and we hope it will bring results, as it has in the other markets.

In July, we announced the acquisition of Mobitel, a GSM-1800 license holder in Georgia. And two weeks ago we completed the acquisition of ArmenTel, the Armenian fixed line and mobile operator. In Georgia, we are building the network and preparing for the launch of operations. In Armenia, we required a full-fledged operator and we have started our standard integration process.

At this point we decided to retain ArmenTel's fixed line component and will explore the opportunity to work with a combination of fixed and mobile networks. We hope to gain experience in that area and see first hand the potential of fixed-to-mobile convergence. If it is successful, we will look for similar opportunities in the other markets.

So, concluding our presentation, I would like to say that we are proud of our achievements. Our business is developing successfully, and management is determined to continue to deliver good results for the Company and its shareholders. We believe we have the right strategy to realize great opportunities to build our business both in Russia and the CIS.

So, thank you for your attention. And let me now open the floor for questions.

[OPERATOR INSTRUCTIONS]. Our first question will come from Alex Kazbegi with Renaissance Capital.

Yes. Good evening. Congratulations on the very good result. I'm not quite sure what I can -- understood correctly how I should be asking this question. But I guess it's one, and one immediately after that.

So the first one probably would be if you could get us maybe a bit more detail on the composition of the growth in the ARPU? I appreciate that you give us the interconnect amount for the entire Group. And if you look, for instance, in Russia, it seems that the total interconnect vis-à-vis Q2 went up by $63m. Obviously that's about 40% of the total change in ARPU quarter to -- quarter on quarter.

So one would be interesting to know how much of that is fixed to mobile and how much of that is mobile to mobile? But in general if you could give us more details in terms of, again, where the 15% growth of the ARPU came from, i.e. seasonality, cyclically, interconnect, call set-up charge? That's -- I don't know whether that qualifies as one question.

And the second one, maybe just on the ArmenTel, when do you expect to start consolidating the numbers? And I think we have some understanding where the number stands for 2005. But maybe you could give us a bit more outlook for 2006 and '07. I also saw that the margin is very strong in ArmenTel. Could you maybe specify how much of that is fixed and how much of that is mobile? Although given that you are not going to split them up, probably, 59% is the consolidated number which you are going to be giving us in the future as well, if I understand correctly.

Alex, let me start with the first question. We are proud to show 20% revenue growth in Russia, which is approximately 200m difference third quarter compared to the second one. And here is number of factors. First, we have new subscribers. And the difference between average number of subscribers in the second and third quarters, with the ARPU of $7, those gives us approximately $38m. So that's a factor, number one.

Secondly, very serious factor is that we changed increase interconnect with all mobile operator and that additional $38m which we bought additionally because of the adjustments. That's the difference between two quarters. Then it was roaming which gave us $19m. That's seasonally best quarter. The third quarter was seasonally best. And that's additional. Some growth of the validated services evolved, $9m. And then it's all seasonality which is better in the third quarter because of the two summer months in Russia. And also, of course, we need to mention that VimpelCom succeeded in improving their subscriber base, quota on the subscriber base and adjusting tariffs.

As for the question from the fixed free-of-charge calls and then recovery from the fixed line operators, we actually had a negative effect. We put a zero charge and we made free incoming calls. But their recovery covers only one-third of this part, which is approximately $33m.

So $33m was a loss?

$33m was the payment from the fixed-line operators.

Which covers only one-third of the -- okay.

Yes, one-third of -- approximately $100m we lost when we made free incoming calls.

If we were to apply our historical pricing for the incoming calls on the traffic, we would have made $100m.

Understood.

Okay. And on ArmenTel, the answers will be very brief, as reported very recently. So we will start consolidating it as of fourth quarter. And, of course, it wouldn’t be full quarter, but it would be from the date of closing the transaction, which is November 16. So it's one and a half months, effectively.

In terms of the margins, we are not prepared to disclose anything at the moment, so we can operate only with the publicly available information which is on the site of OTE and ArmenTel. Yes, they are very high margins. And yes, it's very difficult actually to split them. And it was one of the challenges during the due diligence process.

But it is, nevertheless, our intention to try to isolate the two operations while trying to get all the benefit of having them -- both of them in our hands. We will try to have as clear cut as possible, and therefore monitor separately development on both the economics margins and the revenue streams for the fixed line and the mobile operations.

And no reason at the moment to believe that historical performance is going to significantly change, at least at the moment?

I would be careful of commenting. We simply don't know enough. We just entered the company. I am flying personally tomorrow to Armenia. So with the next quarter results we will give you more information.

Well, at least you have a direct flight, unlike Georgia. Anyway, thank you very much for everything.

Our next question comes from Vladimir Postolovsky with UBS.

Good evening ladies and gentlemen. Again, congratulations. Great results. A couple of questions from me too. The first one would be a follow up. You said that you essentially lost two-thirds of your incoming call revenues on fixed-to-mobile calls. In the past you were saying that the cut off would have been $0.05 and you are getting $0.035 for termination fees. So it looks like it should have been one-third not two-thirds.

The other side of the same question, in case of MTS we saw a significant increase in the receivables on their balance sheet. Basically have you collected all the fixed-to-mobile revenues from July 1 that were supposed to be introduced or supposed to have been affected or not? Will there be a clearly over-positive effective in Q4 from something that you did not manage to collect in Q3, from July 1.

And the second question, if there is anything which doesn't look great in the numbers it's the four months in central Asia. And could you maybe talk a little bit about what's happening there? In Uzbekistan you seem to be losing a little bit market share to MTS, which is growing quite nicely. Tajikistan is stagnating. So if you could talk a little bit about the dynamics then, when do you think it will be able to make an impact?

And finally, I'm terribly sorry, I missed when you're going to fully consolidate ArmenTel and when are you planning to launch in Georgia? Thank you.

Let me pick up the ArmenTel and the Asian question, and then Elena will talk about the other one.

ArmenTel we will start consolidating as of fourth quarter. But we will be taking it from the date when we closed the transaction, which is November 16. So it will be one and a half months of operations and consolidated into the fourth quarter.

As far as Central Asia goes, one should remember that we have launched operations there effectively. When we say operations, it means that we put our systems in place and we started communicating the brand September 11 and 12, so it was one day difference between Tajikistan and Uzbekistan. So in the third quarter you see only a glimpse of the operation basically.

Nevertheless, said all this, Uzbekistan, what we see from MTS is a very formidable competition actually. So very well executed presence in retail and very well executed branding. And that was, to an extent, preemptive to our brand launch. So it takes certain time for us to overcome that resistance. And therefore loss of market share was more or less coming from that. However, we believe that penetration is relatively low. We are still talking about below 10% or thereabouts. And therefore we have ample room to recover what we have lost.

And now we are focusing on developing our retail presence, establishing the brand on a more solid footing on that market, and continue to improve our network. So that's basically where we are. I wouldn’t dramatize the situation there. Certainly it's far from being idealistic. But if you remember that we had similar situation in Kazakhstan.

So what we are learning so far, it seems like our curve -- learning curve on the new markets is actually the initial kind of run in is a bit flatter than we would have expected. So it takes us probably between six to nine months to launch the operations and then probably another half a year to gear it up. And only after that we will start seeing the full results. So I think that one can expect in Tajikistan, Uzbekistan similar timeframe on our development.

As far as the other question goes, you know what you --

And Georgia, when you are entering Georgia?

In Georgia, we made the first phone call last week. So technically the network is up and running, particularly the core part of the network. So now we expanding -- continue to expand the radio coverage and commercial launch is February. So in Georgia we are moving, with all the lessons learnt, we are moving slightly faster. So it took us about four months to bring the network up and we start commercial operations after six months.

And talking about interconnect relations, of course, we accrued all revenues and report to the best of our knowledge, connected with this change and with the contracts which we signed with the companies. And actually we also showed some increase in accounts receivable because compared to the second quarter you can see that accounts receivable increased by approximately $40m.

And I think also to complete this question on the $100m, I think it's correct to say that it's a foregone revenue. So we are comparing the incoming traffic to the pricing which we had before CPP introduction, rather than cost implication.

So the cost went up.

So it's basically we're saying that our pricing for incoming calls was around $0.10. So $0.035 covers about a third of it.

And I have to mention that we implemented measures on incoming tariffs to compensate this. So we introduced this first minute premium and right now we have certain part of that already compensation in the third quarter. But because it was implemented in the middle of the quarter, there is still some loss on that. Going forward, we believe that overall effect of -- on CPP would be neutral.

Okay. Thank you very much.

Our next question is from Sergei Arsenyev with Goldman Sachs.

Good afternoon. Can I just follow up the CPP line of questioning? And if you look at your usage, especially for active subscribers in Russia with 152 minutes of use in the quarter and an increase of 17%, can you break down the impact of now fixed -- or an increase in fixed-to-mobile cost on this number and whether you believe that this will be a sustainable growth number going forward or what will be, in your view, a sustainable element of usage growth, especially for active subscribers going forward? That's my first question.

Actually, we had a 2 percentage point growth of share of fixed-to-mobile calls after introduction of CPP. So it was approximately 4 percentage point of total traffic, fixed traffic -- from fixed operators to mobile. And right now it's approximately 6. But [EBIT] grow -- continue to grow.

In terms of the growth of the total usage, we don't believe that this effect of CPP is significant. We believe that the growth of the usage is because of the improved quality of the base, because of the developed network, because, of course, of good seasonality of third quarter in particular and, of course, because of our overall approach on stimulating traffic.

Right. So you would say that the traffic growth of above 10% for active subscribers will be sustainable going forward?

Probably, yes. And that's actually what we've been saying that if we come back to a year ago, when we were explaining our shift in strategy and we were saying that we're going to bet now not on the new subscribers but on the growth of usage, we were giving the statistics that if we look at the core parts and trace our subscriber [visits] with the network long enough, we see about a 10% growth year on year.

Of course, here is particularly difficult to discern because we have very strong seasonality increase. And the numbers are, to that extent, are polluted right with the seasonality effect. What came from fixed to mobile, what came to mobile to mobile, in coming or going, I think that when we live longer -- a bit longer with CPP and the market stabilizes more, then we can say, okay, what actually really CPP effect done to overall volume of traffic on the entire market.

Right. Thanks. And can I just ask a second question on Ukraine, especially on the Ukraine ARPU number which, again, if you look at the active subscribers, is incredibly impressive. I'm just wondering, given that you're the fourth entrant, Turkcell has been around for much longer than you have, didn't get the market at all. What are you doing so well to get such impressive ARPU numbers in Ukraine?

The biggest difference of Ukrainian market is that the subscribers, when they buy SIM card, do not require registration, like in Russia. You have to submit your pass but not the [stamp]. And therefore, a lot of companies using free giveaways, in terms of attaching SIM cards to the magazines, to the washing powder boxes and so on, and that drives artificially the number of SIM cards distributed.

And then, of course, it's to the churn policy inside the company, how strict the companies are. If the SIM card is not activated or not being used, how fast they churn it out. And I think that the health of the subscriber base differs a lot among the competitors. And I can speculate that Astelit probably has the most relaxed churn policy which determines actually very low ARPU. So their number of active subscribers could be comparable to ours. So that's the first statement on ARPU. So it's more about how good you are at managing your subscriber base, so your denominator.

Second, I would also argue that we're more prepared for intense competition markets, because Russia is cutthroat. In many regions and so on, we have four or five operators. Don't forget that we were the fourth operator in the Urals. We were almost fifth operator in Northwest when we came there. So we know how to play that game when you come as a late entrant.

Relatively speaking, actually, Astelit, i.e. Turkcell, is limited with that experience. They were enjoying pretty much protected environment in Turkey. And everywhere in [centre] operations, they were either the first or the second entrant. And to compete in this new environment, it was relatively new for them. And therefore they -- I think they are still looking for their game, how to do that. That's how I can explain it.

Okay. Thank you very much.

Our next question is from Alexei Yakovitski with Deutsche Bank.

Yes. Good evening. Congratulations again on the excellent numbers. I asked the same question, MTS this question. I will repeat it for you. On the fourth quarter then, you're seen at least some ARPU stability carried over into the fourth quarter, or we should be prepared for the same magnitude of ARPU collapse that we saw in the previous couple of years? Hopefully not, but if you could comment on that. MTS told us yesterday they'd be comfortable arguing that they could deliver an equal ARPU in the fourth quarter in Russia. I'd like to hear your thoughts on that.

And the second question, roughly, it's not exactly one year ago, you promised us that you will deliver year-over-year ARPU growth at some point in the course of 2006. And you've delivered. Congratulations again. Would you be comfortable repeating the same with regards to your 2007 ARPU targeting?

And a very final question on Georgia, if you could give us some idea on the initial cost of the rollout. I understand it will be pretty small. But if you could quantify that a little bit.

And also are you comfortable going into this market now given the current state of Russia's relations with Georgia? Do you feel any resistance pressure inside Georgia? Thank you.

Okay. To address your first question about ARPU in the fourth quarter, we are not going to give specific guidance on that. But I can comment a little bit on some factors that you might consider.

Number one, roaming is historically is seasonally high in the third quarter and so that's a factor that could have an impact.

Second, the fourth quarter is often impacted by the fact that, especially in December, the acquisition numbers rise some and so that has an impact. So without giving specific guidance, those are a couple of the factors that might make a difference in the fourth quarter.

Thank you. I'm pretty aware of those factors as we've seen them over previous many years. My question was whether -- I understand there's going to be weakness in ARPU and will most likely go down quarter over quarter. My question was on a relative basis, will we see the same relative stability in ARPU compared to the previous fourth quarter and fourth quarter of 2004, or again we'll see the same, as I said collapse?

I wouldn’t go -- Alex here, I wouldn’t go to comparison with 2004 at all, no. The dynamics and the drivers are completely different. And therefore you cannot try to draw analogies and say what happened in 2004 will be repeated here.

That's all I needed to know. Thank you. And one on next year.

There's no impact. On next year, well, I would be reluctant actually to give any guidance. It was very important for us to put a stick in the sand and draw a line in the sand and say that ARPU will grow. And that's why we said -- that's why I put my head on the block and said it will grow from the position in Q1. In general, one would expect that the trend, I don't see any indications that the trend would change. But to make the same commitments would be rather risky. So but yes, of course, we will be working, trying to push this trend. Okay?

In terms of Georgia, how comfortable are we? We're very comfortable. Of course, before entering that transaction, we consulted with both Georgian and Russian government and got support on both sides. And when you go there actually, it is -- we sense that there is certain insulation between what business is doing and what's happening in politics. So, from that perspective, we feel very comfortable.

Also our tendency and our desire to go with the local partner helps, and particularly helps when the going gets tough, like we have situation in Georgia. And we rely, of course, to a large extent, on our local partners there.

In terms of size of the investment, I think it would be reasonable to expect that we'd aim at about 1m to 1.5 size of the subscriber base because that's where we learnt, usually, the critical mass is, slightly above 1m. And usually, a network which is able to support -- capable of supporting that size of subscriber base, we price at about $100 per sub. Most likely higher on the smaller networks. So that gives you an indication. $100 to $150m. That's the investment we are planning to put into Georgia.

Thank you.

Our next question is from Alex Kuznetsov with Bear Stearns.

Good afternoon. I would like to turn to the previous greetings with delivering such strong performance in the third quarter. I have noted that your effective tariff went up quite significantly by about 9% last quarter. Could you elaborate on the reason for this upward trend please?

Upward tariff. I will start and then probably Kent will continue. I think that there are a few factors driving there. And I will list first the fixing of the exchange rate, so that helps, of course, because we enjoyed only partially in the second quarter the fixed exchange rate. And then very strong migration to ruble tariffs, which actually produce, in general, higher yield. And those two factors I would cite.

Kent?

And I would just say that in addition to the acquisitions that we've gotten on the new ruble tariffs, we've also gotten a good number of consumers that have changed from the dollar-based tariffs to ruble tariffs. And that combination has helped to increase as well.

And also 3% we are getting just because of the interconnect regime change, because the increased tariffs for interconnect with all mobile operator, they give -- these factors give us, as I said, $38m. And that's 3% of total revenue. And that's, of course, reflected when you calculate the tariff.

May I ask for some clarification please? So regarding interconnect regime, it's my understanding that previously you were receiving revenue for incoming phone calls. And this revenue was higher than the RUB0.95 you are receiving right now. So I'm not quite sure if it might explain the increase in effective tariff.

And secondly, have you discontinued some promotional tariffs, maybe some very attractive tariffs and customers had to switch to less attractive tariffs?

I'll start with the last suggestion. That as well. Across the board we applied extremely rigid pricing policy. Actually, some people only mentioned that we were very rigid, excessively rigid, but we thought that’s important to instill overall pricing discipline and different attitude in the market. So we took actually a lot of hit, if you wish, for doing that. So, of course, the extra aggressive tariff's been discontinued and promotion's been reduced.

But coming back to your question on relative cost and pricing of incoming calls, the mobile incoming calls were virtually for free for the last two years because, as the marketing moves, we have been surrendering gradually. And it was general market that the calls from other mobiles would be for free. It started from on-net calls and then expanded to all other mobile calls. And only fixed line calls being charged at $0.10.

So when we managed to introduce -- and we have some interconnect actually, to be precise, but it was interconnect at the level of $0.01 and $0.0075 per minute. So now we have proper interconnect for all the incoming mobile calls. And that actually bumped up the revenues. So, using your question, I would like to clarify one thing. How we think about effective CPP.

There are two elements to this. One is CPP itself. So loss of the income from the fixed line calls. And that, what Nikolai said, was about $100m on -- if we would price the current traffic at the prices which we had before CPP introduction. That has been compensated by the charges -- interconnect charges from the fixed line operators, which are priced at RUB0.95, so $0.035. Plus, we aimed at introducing our premium for the first minute calls, outbound calls and that compensated the other part of this forgone revenue.

So with these two elements we're basically square. However, introduction of CPP allowed us to implement different interconnect regime with the mobile operators, because they effectively do not have an alternative to grow with very low costs via fixed operators which they had before. And, therefore, they had to interconnect with us, at least at RUB95. And that is a big boost to our revenue line. So when we're talking about interconnect it's often been confused. That's why I thought it would be good to clarify.

Thank you very much. And may I ask my second question. As I recall, originally wireless operators wanted to achieve high interconnect rates and then there was discussion with the Regulator, and I'm under the impression that the Regulator promised some type adjustment in 2007. Could you provide us with some flavor whether this adjustment should be expected and when it can happen?

Well, to be precise, what the Regulator offered was that we could discuss this again at some point later and, in fact, we are petitioning the Regulator right now to re-convene those meetings. Where they will come out -- and by the way, and we do continue to believe that the interconnect should be higher than it is. Where that will come out exactly, in terms of their decision, is -- would be total speculation at this time. But we certainly support continuing to get them closer to the prices that we believe it actually costs.

Thank you very much.

Our next question is from Felix Fischer with HVB.

Good afternoon. Congratulations on the great results. One question regards to Ukraine. You are growing your market share quite nicely. What is your envisaged market share in 12 months? What would you be happy with?

And the second question is in regards to your credit stats. All the credit stats at the moment look very strong. Net debt to EBITDA declined quite nicely. At what level of net debt to EBITDA, or until what level would you feel comfortable with?

Let me pick up on Ukraine. We usually don't guide on the market share and so on, but I can answer it in that respect. That our thinking about our end game in Ukraine is about 5m to 5.5m subscribers and we believe that we're going to get there in the space of next two to two and a half years. So in the third year from now, which is 2009/2010, we expect to have this 5m, let's say, 5m subscriber base generating $5 ARPU. That will put us into a $300 to $350m revenue position. And to achieve all of this we intend to invest at the Russian level, so slightly above, which is about $500m.

And talking about our debt to EBITDA ratio, we were always saying that our level of comfort would be in this ratio would be somewhat below 2. And now, yes, we are on the level of 1.1 and that is, of course, the situation where we should start thinking of what we are doing with our cash the Company is generating. But it's a different question. So, generally speaking, we think that, of course, if we will see some potential of further investments above our operating cash flow, of course, we will go to the markets with -- looking for another debt. But, if not, then we will stay on the current level.

Thank you.

Our next question is then from Olga Bystrova with Credit Suisse.

Oh, good evening. Congratulations with the strong results. First question, I would like to explore in terms of your experience and opinion, how much usage can grow at the current price levels and at the -- let's say, the stability of the price or you will have to take a more flexible approach towards pricing?

And related to that, you mentioned that you have been hit in a way from the rigid pricing policy and I think we're seeing some impact from that in October net adds. I understand it was a deliberate strategy but do you think you might have to adjust your thinking on that front?

First of all, on October net adds we believe that that was mainly influenced by the churn from the old tariffs. So we had that very aggressive promotions in the past and right now we see some churn on quality of subscribers. But our active base, which is most important, is still growing and in October it was 200, approximately 200,000 active subscriber growth. And that's our main focus, not to lose any active subscribers.

In terms of tariffs, we see it right now that the market is absolutely fine with today's level. We have just recently research on the Government agency of their total market which was clear information that, therefore, the Russian, this price level is absolutely acceptable. The majority of the population sees cellular -- expenses on cellular as not a serious part of their budget.

I would just add one comment about the relationship between tariffs and usage. The research that we've done and that we've talked about on previous calls, we really believe that if you make the tariff very straightforward, very transparent, very easy for a consumer to identify which tariff is best for them then, in fact, that in itself will drive better usage if it's at a reasonable price. And we believe that's a lot of the dynamic that is played out here. So we're going to continue to find tariff schemes that meet particular needs as segments, and we think that in itself will help to support MOU.

The other last factor is, obviously, as the economy continues to expand, that should also have an impact.

Okay that's great, thank you very much. And the second question is on the costs side. Obviously, there was the seasonality in the third quarter, but general administrative sales and marketing expenses have declined. Could you, perhaps, elaborate was that, indeed, the seasonality or there were certain initiatives that you undertaken and that could work for you in the fourth quarter and in 2007?

Yes, it's both. Certainly we do watch our cost, right, and we have a few programs going inside the Company. And the philosophy which we are deploying, that we are not into active cost reduction mode yet, because that requires completely different focus of the personnel and it actually, more important, we believe at -- for time being to be focused on capturing growth which is still left on the market.

But, at the same time, we would like rein the costs and not allow them to balloon and that's where the effort goes. So we're constantly monitoring it and, where possible, we are not allowing it to expand. At the same time, clearly, quarter three was lower in terms of seasonal activities on advertising and marketing and I wouldn't take -- I wouldn't extrapolate necessarily this reduction into the fourth quarter. We probably will see, actually, increase in the fourth quarter into advertising and marketing expense.

Okay, but were any initiatives undertaken in the third quarter that helped the cost to improve -- cost base to improve?

As I said, all our initiatives they -- in general I don't, apart from crisis modes, when the Company is in a crisis mode when you slash and burn and you really trim your cost base, any cost change program which we implement now has a longer effect. Therefore, I wouldn't dare to say that this specific initiative delivered that much cost reduction in this given quarter. That's not how we view. It's just a general day to day cost management and the budget management by the budget holders, and the cost discipline which delivers this cost performance. So that's how I would answer that question.

Okay great, thank you so much.

And our next question is from Nadejda Golubeva with [Aton].

Good afternoon. Congratulations on great results. My first question is about interconnect. Could you possibly break down the total interconnect revenue in Russia by interconnect from fixed and from mobile operators? And also, I'm interested, how much of your current traffic is now on that traffic?

And second, it's about pricing. Could you possibly share your feelings about what, in your view, could happen with the pricing going forward, say, in 2007? Do you think that we are going to see roughly same levels of prices in ruble terms, or do you think we should be prepared for some prices sleeping rubles?

And also it would be very helpful if you could possibly give separately the impact of additional per minute charge on your total and 9% price per minute growth in the third quarter. Thank you.

Let me start with the interconnect. The total revenues in Russia in the third quarter was approximately $130m. As we mentioned, $33m came from that compensation from fixed line operators and the rest, which is $98m, came from the mobile interconnect. So that's different. That's why we see that this $98m is, right now, a significant part of the -- of revenues which we had on the different level during the previous quarters.

In terms of price --

Sorry, could you also tell me about also for interconnect, how much of your traffic is on net now?

On net traffic is approximately 60%.

Thank you.

In terms of how much price first minute premium gave us, I already mentioned that the aim was to compensate the remaining loss in revenues, which means that their competition, if it would be the full quarter effect, would be approximately two-thirds of $100m. So it will be approximately $67m. But we did not see that full effect in the third quarter yet, because we launched it in the middle of the quarter.

Well, but my understanding was that the compensation should have come from two factors. First, this is a switch to ruble pricing and, second, this is additional per minute charge. So what I am looking for, I am looking for how much impact came from each one.

We were not connecting a change to the ruble tariffs or fixing the rate to the CPP introduction. That was a quite different issue. We were moving to the ruble because, right now, for the Russians of course it's natural to have all tariffs in rubles. And, of course, while doing that we were thinking about our revenues and we introduced our ruble rates very attractive for our customers but with slightly higher PPM but that's a separate factor.

Okay, so we can say that additional per minute charge is roughly compensated, not full year, but almost compensated the loss from the CPP?

That in combination with interconnect charges [inaudible].

Yes okay, yes sure.

Yes.

Okay thank you. And what about pricing? How do you see pricing going forward?

From a pricing standpoint, as we design our tariffs we look at what we need to do to provide a tariff that's going to be interesting to consumers. And we look at a vast amount of research we have in designing those tariffs. And some, in fact, have lower APPMs and deliver higher MOU. Some are flatter, obviously, in what they do. And so as we have designed those we'll continue to look at what needs needs and keep them between the various tariff plans in a fairly narrow range.

Okay, thank you.

Our next question is form [Abid Joseph] with Thames River Capital.

Hi, thank you for the call. A fantastic set of numbers so I apologize if I focus here on the one very small negative surprise to me. That was on the depreciation line in this quarter and the fact that the implied asset life has fallen. I assume that this relates in part to the $380m purchase of long-life assets. Can you confirm this please? Tell me what that relates to and also maybe you can let me know if there were any specific write-offs in the depreciation and amortization line?

Actually, depreciation was on approximately the same level as it was in the second quarter and mainly the growth is coming from amortization actually --

Okay.

-- related to licenses of acquired companies. And talking about one-offs, yes, there were some quite, I would say, modest one-offs. A write-down of some equipment which is no longer used in cartel and some amounts in Russian.

And should the amortization, therefore, be stated to continue at this rate or is this, in fact, an initial amortization charge on licenses?

No it's not initial, it's -- amortization will continue on approximately the same level with, of course, potentially some increase if we make some additional acquisitions or decline when the asset is already and not used.

In terms of depreciation, we think that actually in Russia you may see that we are already on approximately the level of 18% to revenue which we think is normal.

Right. Which license is it in particular that has driven the increase in the amortization, because I'm assuming that the recent acquisitions have been relatively low-cost licenses haven't they? So, for example, in Georgia it was only $12.7m for the total spend?

Yes that's true but also we acquired two companies in Uzbekistan. We have acquired Tajikistan. And actually if you will look on our balance sheet, which is attached to the press release, you will see that even net book value increasing in the line of telecom license and allocation of frequencies. So, end of the year, it was 826m and now it's 879m.

Okay, thanks very much.

Our next question is with Will Milner with Arete Research.

Thanks, just a quick clarification. Can you just confirm what percentage of your customers are on the new ruble-denominated tariffs? And are there any plans to change the 28.7 conversion rate for the old dollar-denominated tariffs?

Currently, as of today, there is almost 30% of our consumers, of our active consumers, are on ruble-based tariffs. And in terms of the 28.7, we will be making a fuller conversion as changes in our billing system come into place in early 2007 so that all of our tariffs, including our legacy tariffs, are denominated in rubles. And so, at that point, the conversion rate will no longer be a meaningful item.

Okay. Can I just have one quick follow up? Is it then reasonable to expect that once you have transitioned customers to ruble tariffs you will be able to, effectively, raise those ruble tariffs in future in line with ruble inflation? Is the Russian consumer conditioned and expecting their prices in rubles to increase, at least in line with inflation?

I think that's going to depend on, frankly, each region within Russia exactly how much price sensitivity there is. In some markets we'll have less and in some, obviously, we'll have a greater ability to do that.

Okay thanks.

Our next question is then from Steven Pettifer with Merrill Lynch.

Thank you. Two quick questions please. Firstly, in Ukraine, have you had any further thoughts about sharing some network with one of your lesser able competitors?

And secondly, could you just give us the figure in terms of your value added services as a contribution to revenue in Russia? Thanks.

Ukraine and network sharing. We certainly are exploring it. Certainly it would be an attractive proposition for the participants but, unfortunately, at the moment I cannot tell you of any progress that we've managed to achieve. So we keep on rolling our networks so far, but we continue talking.

And value added services in the third quarter, it was roughly 11% of our total revenue.

Thanks very much.

Our next question will come from [Andrea Bogdana] with [Pananka Dialogue].

Hi, it's Andrea Bogdana from Pananka Dialogue. I have two questions if I may. Well, the first one actually concerns your subscribers. I noticed that if you basically take your subscriber base and take active subscribers from the total, the number of inactive subscribers I think increased at the Q3 to 8.9m from 8.7m. [Inaudible] it's 9m subscribers. Do you think that, going forward, maybe next year, maybe Q4 you can get more revenues from those inactive subscribers, or they will basically churned away as happened last month? And do you think that apart from probable ARPU stability or even growth next year, that should be the factor that could lead to your growth for next year in Russia? That's one question.

Secondly, it's concerning -- with regard to Ukraine. Actually, it's a kind of continuation of the previous question by the previous analyst. I think that yesterday in Ukraine in the local [duma] the first reading was with regard to changes in local Ukraine telecoms law where they basically want to change a few things.

One, everybody will be obliged for networking sharing, as the previous speaker said, with the less able companies, meaning that Ukrtelecom when they will start their 3G or mobile services will probably benefit from it. Do you think it's a danger of any kind to your development?

Second, that Ukrtelecom which now seems to have much higher fixed to mobile tariffs is in Russia will be able to basically decrease them the way they wish. Meaning that they will probably get more traffic fixed to mobile and, basically, more flexible than it is now. In any event, all in all I think what they want to do in Ukraine is to make Ukrtelecom look better prior to potential privatization next year or 2008.

Apart from the general competition with and UMC and Astelit, do you think it will be a factor which impact, somehow, your performance in Ukraine? Thank you.

Well it's a -- let me start with the Ukrainian question first. The question is fairly loaded I would say right. It's not really a question to tackle on in this format but let me try nevertheless.

In Ukrtelecom, basically, what they're talking about is not, as I understand because we haven't seen the legislation what you are referring to, but my understanding being of the speculations which were around, that that is the forced roaming rather than network sharing and this is fundamental difference.

And in some of the countries where the new entrant got 3G license, they also kind of inherited the forced roaming, understanding that 3G coverage predominantly will be in the densely populated areas and create really a competitive presence, they need to have access to other networks.

And forced roaming means simply regulated pricing on the roaming tariffs and, to some extent it could be good for us as well right. In certain areas of Ukraine we don't have good presence, good coverage. We can enjoy actually different roaming arrangements with other networks. That's how I read it. But, overall, we can expect stronger competition with the new player coming in and, of course, trying to pull the levers on either interconnect or on the forced roaming.

Coming to interconnect, it actually depends where you are in your development phase. When you are in an attack on the market, high interconnect is not necessarily a good thing for you right because you might hit a wall of protected interconnect charges. And when the bulk of the population is sitting on the other networks it could be more difficult for you to build your own critical mass.

Therefore, if we can assume that it would be a symmetrical lowering of the interconnect, then it could be good for us as well. But, again, it's very difficult to speculate in general what will happen if Ukrtelecom does something like that. We need to see more specific moves on their part and then we can evaluate it. So far we don't factor it in in our development model.

In terms of working with the subscriber base, of course, our priority is retention and increasing value from all our subscriber base. And, of course, there are some segments in subscriber base which becomes inactive for some period of time and then continues to be our subscribers and today it's money.

And, of course, we will try to first retain all subscribers and, secondly, to make sure that they continue to bring us revenue. For that I would mention our special system and approach of targeting marketing when we see some prediction on customer behavior and then try to approach the customers, send SMS or call him and propose some additional campaigns, tariffs, proposal to make sure he continues to be our customer and brings us revenues.

Okay, thanks a lot.

Our next question is from Lyudmila Kan with HSBC.

Yes hello. Let me congratulate you as well. And I have a question regarding your bonds. You've done a refinancing of the 2009 bond and I wonder if there are any plans to do something similar in the next few months, provided there are no significant acquisition opportunities? Thank you.

Actually yes, you know that our -- we performed this swap this year and additional funding for the whole year was approximately 700m. And going further, as I said before, it all depends on the needs which we have because, again, as you may see in our cash flow statement we are generating quite a good solid stream of cash from our own operations. So it's too early now to say what will be the real plan for year 2007.

So you're saying that you might do something along those lines next year?

No, potentially yes of course, if we will have the projects that we think will be beneficial for us and for this we will need external funding.

Sorry, I'm just a bit mixed here. So my question was whether you would consider buying back some of the shorter dated bonds and issuing longer dated, similar to what you've done earlier this year with the '09 bond.

No, it will depend on the market conditions of course. Because we saw the good opportunity to improve our amortization schedule and decrease interest paid, so we took that opportunity. If we will see that the market develops in the right direction potentially, yes, we will look again to this.

And what about buying bonds -- buyback of bonds outright if there are no significant acquisitions?

I'm sorry, why we should buy the bonds? I just don't understand the question.

Usually when we looked at the buyback bonds it incurs some premium and we couldn't make it work for us financially and that's why we went into a swap. But again, if the market condition is right and there is some interesting offer, how we can do it we are open always to the deals to improve our cost of financing.

Okay, thank you very much.

And next we return to Alex Kazbegi with Renaissance Capital.

Yes, hi again. Can I clarify a couple of things? In Kazakhstan specifically the -- sorry that's my phone. In Kazakhstan specifically your usage has been growing actually by about 30% in Q2 versus Q1 and Q3 versus Q2. So despite the [10 year] depreciation you are, of course, pretty strong. So I was just wondering is that stimulation of the usage is there some specific reasons why the usage has been surging so much and what should we expect again going forward? This is quite remarkable, this increase on the usage side.

On the same topic on the Kazakhstan, you mentioned $60m of the charge in the Q3. I haven't seen a gain in Q2. Did you get the debt, which is probably about 225m or something like this somewhere in between, or am I missing something there?

And lastly, maybe just on the CapEx side. I understand generally the direction you mentioned in terms of percentage of the revenue, but -- and sort of overall numbers for the full roll out in different countries but maybe just a couple of words for specifically 2007, how the CapEx is going to be split between the countries would be very helpful as well. Thank you very much.

Alex, on Kazakhstan on ARPU usage, yes of course, it's -- we have been stimulating and we deployed actually the whole arsenal of tanks driving it out and deploying a lot of the programs which we used in Russia a year or two years earlier than in Kazakhstan. But, apart from that, I would like to note that the network has been improved dramatically. And if a year ago we were far behind the competition now we are ahead of competition in terms of number of base stations and coverage and the quality.

So when you have this at this --

Also [completion] rates.

Sorry.

It's for completion rate and so on?

Yes. So the quality of the service is significantly up. And also when you look at the specifics of Kazak ARPU, actually, you will see that price per minute is much, much higher than it is in Russia or elsewhere. That's why I was saying that the weakness of ARPU is very misleading there and finding the right balance between decreasing gradually the prices and for being able to absorb more traffic and, by doing that, driving ARPU up was dependent heavily on our capability to perform on the network right. So we increase capacity and so that could bring the price down and, using elasticity above one, we drove revenues significantly. So that's the reason.

And the other question was on --

Well, would you say that was a 68 minute given -- despite the fairly high tariff there is still room to improve the usage?

Correct, but it will be rebalancing between the tariff and the usage. However, we expect that price elasticity should remain above one.

Okay.

Okay?

Yes.

And on the gain and losses, Elena, over to you.

In Kazakhstan, yes, this quarter we recognized loss on the debts of the Company stated in U.S. dollars because local currency depreciated against the dollar. But in the first half of the year that trend was different and so, on year to date basis, we have [14m] gains for nine months.

Oh, so there was a gain in Q2 as well?

Yes there was a gain.

[Inaudible].

Second quarter, yes.

Okay. And on CapEx overall?

Well, on CapEx we actually -- we cannot guide you on the next year yet right because it hasn't been discussed with the Board and it hasn't been approved. So on this year we can simply, I repeat, that it was overall we said it's 1.6b for this year and 1.2 that goes for Russia. And about 200 or just under goes to Ukraine and a similar amount goes to Kazakhstan and the rest goes to the rest.

Okay, thanks very much.

And with that there is no further time and I'd like to turn the conference back to Alexander Izosimov for additional or closing remarks.

Well, thank you for your attention and your questions and if you have more questions please do not hesitate to contact us and we will be happy to give you all necessary clarifications and explanations whenever we can. So have a nice day and goodbye.