VEON Ltd (VEON) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to this conference call to discuss VimpelCom's second quarter 2007 earnings results. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Peter Schmidt. Please go ahead, sir.

Good morning and welcome to VimpelCom's conference call to discuss the Company's third quarter and nine month's 2007 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, one, the Company's strategy and development plans in Russia and the CIS, two, market growth and the competitive environment in Russia and the CIS, three, 3G developments, and four, projections related to the Company's cash position, dividend payments 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, one, the Company's press release announcing third quarter and nine months 2007 financial and operating results. Two, the Company's earnings presentation entitled Presentation of 3Q 2007 Financial and Operating Results. Three, the Company's annual report on Form 20-F for the year ended December 31, 2006 and, four, other public filings made by the Company with the United States Securities and Exchange Commission, each of which are posted on the Company's website at www.vimpelcom.com. In addition, the Company's third quarter and nine months 2007 financial and operating results press release and Form 20-F are posted on the SEC'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 these forward looking statements made on this conference call, or to make corrections to reflect future events or developments.

If you have not received a copy of the third quarter and nine months 2007 financial and operating results press release, please contact FD at 212 850 5600 and it 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 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. Alexander.

Thank you and hello everyone. Thank you for joining our conference call today and let me introduce the team participating on this call. Here with me are Elena Shmatova, our Chief Financial Officer, Nikolai Pryanishnikov, our Executive Vice President who is in charge of operations in Russia, Kent McNeley our Chief Marketing Officer and Alexander Boreyko, our Director for International and Investor Relations.

Today's presentation will start with a general overview of our performance in the third quarter of 2007. After that we will review each of the markets where we operate in more detail. Now let me ask Elena to present our consolidated financial results.

Thank you Alexander. Discussing our third quarter results I would like to highlight a few key numbers.

First, we are very pleased with revenue and OIBDA growth both over 40% year on year. It is particularly important to note such level of growth in the third quarter because now we can see a proper comparison not affected by changes in interconnect regime in Russia and the corresponding tariff rebalance.

Second, our third quarter OIBDA margins was strong at 51.9%. It was slightly less, however, than what we saw a year ago or in the previous quarter. But if excluded $17m of additional accruals connected with stock option as a result of higher stock price volatility, our OIBDA margin would be approximately 0.9 percentage points higher. This accrual was reflected in Russia and thus impacted the Russian OIBDA margin as well.

Third, it is important to mention our very strong growth in net income, more than 70% year on year, which was to some extent helped by Ruble appreciation against US dollars and the slowdown in depreciation expense.

Based on these operational results we continue to see substantial improvements in our cash generation. Consistently our free cash flow over the last 12 months is more than $1b. Two factors contributed to this - strong operating cash flow and relatively modest capital investment during the first nine months of this year. Although our annual CapEx profile is traditionally skewed to the fourth quarter, we believe that at year end our free cash flow will not differ much from what we see now. This strong cash generation gives us good ground for further development and dividends.

Our balance sheet continues to be strong with net debt decreasing since the beginning of the year by 20%. Last 12 months OIBDA interest ratio more than 17 shows our ability to reliably service debt. And looking at our debt to OIBDA ratio, one can see that we are able to more than double our debt if needed for our development purposes.

Let me now turn the call back to Alexander to discuss in more detail developments in our key markets.

Thank you Elena. Let's start with Russia. Overall, the Russian telecom market continues to be very strong and the competition remains fairly benign over the past several quarters.

Against this backdrop we believe our third quarter results were very good. We have posted 9% quarter on quarter growth of ARPU driven predominantly by continuing growth in usage. Our active subscriber base keeps increasing and in the third quarter it grew by 4%.

Growth in ARPU and active subscribers led to a strong 15% sequential and 35% year on year increase in our revenues in Russia.

Our OIBDA margin remains strong at 52.7%. As already mentioned it would be approximately 1 percentage point higher if we exclude the non-cash effect of high volatility and, by the way, very high growth in our stock price in the third quarter.

Our CapEx in Russia as percentage of revenue continued to decline in the third quarter and is now firmly within the target corridor of 15% to 20%.

We are on track with our 3G implementation schedule, and, as we said before, 3G is not going to have any significant effect on this year's numbers. As usual we'll provide a 2008 CapEx guidance early next year after our budget is approved by the Board of Directors.

Before reflecting on our performance outside Russia I would like to draw your attention to the fact that the contribution to our business from the countries of the CIS continues to grow. In the third quarter 29% of our year on year revenue increase and 31% of our OIBDA growth came from the CIS. In terms of subscriber growth 63% of new additions came from the CIS countries. The third quarter OIBDA margin in the CIS was 47%, a significant improvement from approximately 40% recorded a year ago. I would also note that in addition to Tajikistan we recently received 3G licenses in Uzbekistan and Armenia which will further bolster long term growth in the CIS.

Let's now move to Kazakhstan, our second largest market. Our Kazak conversions continue to show strong growth. The number of active subscribers grew by almost 13% compared to the second quarter. Minutes of use was also up dramatically.

We work to build a habit of increased usage in lower network utilization periods. Our promotional activity offered on-net minutes at very low prices resulting in a temporary decline in average price per minute. We believe that these efforts make sense as our usage has historically been less than half of the level of Russia.

Our strong operational performance translated into good financial results. Our revenues increased by 12% compared to the second quarter and by more than 60% compared to the third quarter of last year.

OIBDA increased by almost 10% on a sequential and almost 80% on a year on year basis. OIBDA margin was 52.7%, slightly below our exceptionally high margin of 53.7% in the second quarter. Although we're still in the network build our space in Kazakhstan, our CapEx has a percent of revenue is rapidly declining. On a last 12 month basis CapEx fell to 30% of revenue in the third quarter as compared with 64% recorded for the same period a year ago.

As penetration in Kazakhstan will likely exceed 80% by year end and competition for subscribers is in decline, in our view, it is time to begin shifting our focus to the acquisition of high quality subscribers and revenue market share. A game, actually, where we're well familiar with in Russia.

Now let's move to Ukraine. We're glad to note that very good progress happened here. For the second consecutive quarter we increased prices per minute despite continued aggressive pricing environment. This, coupled with seasonally high guest roaming, allowed us to increase our ARPU by 38% on a quarter on quarter basis. On top of this, our active subscriber base grew by 21% quarter on quarter and is now up 189% year on year.

As a result of subscriber and ARPU growth we were able to achieve impressive 60% quarter on quarter revenue growth. On a year on year basis, revenue growth was over 200%. In other words, we tripled our revenue in 12 months. At the same time our sales and general and admin expenses remain flat quarter on quarter. This allowed us to reach positive OIBDA in the third quarter essentially in line with our earlier projection.

Our focus in Ukraine remains on increasing our subscriber base, paying particular attention to the profitability of the business.

We also demonstrated very strong subscriber growth in Uzbekistan. Our active subscriber base more than tripled year on year and grew by 33% quarter on quarter. We increased our subscriber market share from 25% a year ago to 36% in the third quarter of this year. Our financial performance in Uzbekistan was also very good. Impressive subscriber growth, coupled with an almost 6% increase in ARPU, led to a healthy 29% revenue growth and OIBDA margin expansion in the third quarter as compared to the second quarter.

With mobile penetration rate of only about 17%, our focus in Uzbekistan remains on growing our subscriber base. To that end we will accelerate network build out and continue developing our sales and distribution network.

Let's now move to Armenia. The Armenian business acquired in the fourth quarter of 2006 continues to show stable financial performance. Our Mobile revenues demonstrated solid 11% sequential growth and OIBDA margin remains strong at the level of 51.9%. At the same time, our subscriber market share in the Mobile market remains our key area of concern. According to independent research, in October it experienced further drop to 25%.

In order to rebuke that position we have already launched a focused program which includes changing management, strengthening presence in re-sales, increasing marketing efforts, launching new tariffs and accelerating network construction. We can already see initial signs of progress, however it will take time to realize the full effect of these efforts.

Finally, a couple of words about Georgia and Tajikistan. We launched operations in Georgia in the end of the first quarter, so currently we are still in the early phase. We continue to build the network and develop our sales and distribution channels. In the third quarter we reached approximately 27,000 active subscribers and doubled our revenues.

In Tajikistan we continue to demonstrate excellent dynamics with consistent growth in our market share. On a quarter on quarter basis the Company reported 48% growth in revenues backed by 31% growth in the number of active subscribers. Subscriber market share increased to almost 17% from just 2% a year ago. With current mobile penetration level in the country of just 25%, we see this dynamic as very promising.

OIBDA, which turned positive in the second quarter, continued to grow in the third quarter with the OIBDA margin expanding to 21.5%.

So, in summary, it was another record quarter for the Company. Company is strong and getting stronger and we're very optimistic about growth potential in each of our markets.

So with this I would like to thank you for your attention and let me now open the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS). We'll take our first question from Sergei Arsenyev with Goldman Sachs.

Good afternoon. I would like to ask you about your acquisition strategy and especially given the very intense press speculation about your interest in Golden Telecom and the potential for a deal with Golden Telecom. And I appreciate that maybe you can't talk about this specific transaction especially if you're in the process of it. But I'm just wondering whether you can make a generic comment on how you would rationalize acquiring a business which trades at a significant premium to your own multiple and that will result in an also pretty considerable short term and medium term earnings dilution for you.

Actually you're absolutely right, we are not commenting on the rumors because it would be very difficult to run the business otherwise.

In terms of logic of thinking of acquisitions which we do, they have to fit our strategy and our strategy has been clearly communicated. It includes three major growth platforms. So platform number one, that's the consolidation of the market in Russia and to that extent acquisition targets in the mobile sector in Russia would be of interest to us.

Number two. That we will be continuing to expand geographically, both in the CIS and outside of CIS, so any country inside of CIS is of interest to us. Outside of the CIS we say that everything which is South and East of Moscow would be of interest and we would go with such a strategy where we target major markets and unless we can establish a presence over time in the major markets probably wouldn't go with the smaller ones. Hence the discussion with Vietnam which would be in line with that.

The third element, the third leg of the strategy, we said that we will be exploring opportunities to enter adjacent businesses. And adjacent businesses would be either of a new nature, let's say Mobile TV which doesn't exist, or actually a territory which well established but where we believe we have a competitive edge, or we have assets which could be leveraged effectively in that area. That would include wholesale in the long distance, for example, of the capacity, attacking the Broadband territory both wirelessly and in a wired sense.

Executing that strategy, if we see an opportunity which allows us to either accelerate or to do it more efficiently, our assets weighting game so to speak, then we'll pursue it. To that end, as soon as you start looking at the businesses which operate in a different domain, in a different environment, to say that everything should be either at the same multiple as we are or they should be operating in the same margins would dramatically limit the opportunity for us to enter into the new areas. So each case will be very carefully analyzed and each case will be judged on the merits of strategic fit and delivering value to the shareholders.

And what would be the timeframe for delivering the value to the shareholder from an acquisition in the circumstances that you've described?

If we're looking at earnings diluted acquisition from that perspective, I think that in our industry normally we would be looking two years or thereabouts of that.

Okay. Great. Thank you very much.

Our next question comes from Alex Kuznetsov with Bear Stearns.

Good afternoon. I'd like to ask you a couple of questions. First of all your MOUs amounted to 171 minutes in Russia last quarter, and it's my understanding that it takes it close to the European level. What further upside for MOU expansion do you expect?

And secondly, could you provide us with some further information on your expansion in Vietnam please? Maybe could give us some key strategic goals you expect to achieve by expanding in Vietnam. Thank you.

Let me start with the minutes of use. We believe that there is potential for growth of minutes of use in Russia. If you compare our numbers with European it's important to note that most European operator calculate mobile to mobile minute as one minute and we calculate this as two minutes, which puts us into a bit different comparison. And it's clear that if you talk -- if you take our minutes of use per active subscriber, which is right now 200 minutes, it's only 6 minutes per day, which is not too much. And it's clear that with continuous economical growth in Russia, with the subscriber base becoming more mature, with our continuous traffic stimulation program, there is clear potential and we would like to explore it and to use this potential going forward.

And as far as Vietnam and our strategic aspirations there are concerned, we're prepared not to talk much about it and that's why we didn't include anything into our press release and into our presentation. I mentioned it answering the previous question only as an illustration to the strategic direction.

The reason why we're doing that, as we mentioned before, we would be the first Company ever to establish a joint venture and actually direct equity presence in Telecom industry in some major fashion. And that became possible only after accession of Vietnam to WQ and that happened early this spring. Hence all the legislation and regulatory framework is not robust yet. So we're now in a clearly intensive and lengthy process of negotiating this structure and joint venture with the Government. And our partner there will be Minister for Public Security. So the idea is to establish a joint venture which would be a fourth GSM operator in the country.

Nevertheless, when we look at the penetration level in Vietnam, which is currently operating around 30% because there are also not requirements for ID in person when they are getting the number, so there are multiple SIMS, same story as in Russia, and a lot of SIMS are used actually to -- as a payment terms rather than real SIM cards. So that all gives us a hope that penetration game is far from really being played out and it leaves ample room for a fourth player. Market size of 85m people suggests that. And our initial assessment was targeting 10m subscribers, and that's where the number of $1b actually which has been indicated in the press and our earlier statement came from. Our normal level of investment is about $100 per sub, so you take the 10m subscribers and you will end up with $1b investment. Our strength has always been that we invest as we grow. And this initial investment of $1b allows us to create sufficient network with adequate coverage. But if we see that we are competing successfully, which I wouldn't rule out, then we will, of course, readjust our plans. But initially we think along those lines.

Thank you. And do you have any guidance in terms of ARPU?

Of course, not, because we haven't started any operations there. We haven't got license. We haven't set up joint venture. So, of course, we don't guide on anything in that sense.

Thank you very much.

Our next question comes from Vladimir Postolovsky. Please go ahead -- I'm sorry with UBS.

Good afternoon. I'm just wondering about the way you see competitive dynamics developing in Russia. Could you tell me first of all how much of revenues you derived from your Kazak acquisition, and if I'm right, and making my estimates, it looks like a long term trend growing faster than MPS in absolute terms is no longer there. Any comments on that? Do you believe that the low base effect for you disappeared or MTS management has gotten stronger, or is it just a temporary phenomenon? Basically you've been very impressive over the years gaining market share away from them. Is that still possible going forward or do you think that the competitive dynamics has changed? Thanks.

It is from [Erkutsa] operations we got $8m additional revenues and that's half of the quarter because acquisition was in the middle of their third quarter.

As compared to our competitive situation, we believe it's, in general, mature behavior of all players. So all players right now are more concentrated on revenue growth and we see clearly the interesting steps of all players. But we're trying to work harder and actually our target is continuous revenue growth in Russia. We believe we're delivering that and that will be the focus going forward.

Alright, thanks. And if I may have a question on Ukraine. How much of revenues -- how much of total of roaming earnings revenues in Q3? And do you believe that this exaggerates seasonality a little bit at this stage whilst the subscriber base is still low?

I will just start that in our consolidated revenues, revenues from roaming was -- were representing 6% of total revenues. And in Russia it was slightly higher. It was approximately 8% of Russian revenues.

Ukraine, I will just check.

I'm curious about Ukraine in particular because obviously quarter on quarter ARPU dynamics was really impressive. But just wondering how --

We usually don't give this exact number how much of roaming revenues was sitting in each of the markets and each of the countries. And you can contact our office actually who will probably give you some trends in general. But I would confirm that your feeling is absolutely right and that's what we were trying to say in our press release that the volatility in the top line in Ukraine would be much more pronounced because of two reasons. It's roaming effect of people coming in and out but also a lot of Russians, because still there is no requirement for ID while acquiring SIM cards, a lot of Russian visitors coming and buying, of course, non-Russian as well, coming and buying SIM cards. And they use it only for the short season.

And in terms of overall trends what we can assign for the roaming in that sense would be about probably 14% of third quarter revenues.

Thank you. Our next question comes from Alex Kazbegi with Renaissance Capital. Please go ahead.

Yes, good evening. On Russia I was just wondering, you had one of the slowest growth in terms of subscriber numbers in this quarter, but yet your sales and marketing actually grew quite considerably and added to the margin. So if you could maybe discuss the reasons for that and what should we expect specifically in Q4 and possibly going forward?

And the other question probably is going to be on Kazakhstan. You mentioned about the competitive situation, but I just wanted to also know your view, how do you view the current economic health of the country, potential slowdown of the economy in specifically probably next year and some pressure probably for depreciate and what sort of effect that could have on your numbers? Thank you.

Alex, thank you. First of all our growth of active base was not that slow. Actually we grew from 48m active subscribers in the second quarter to 41.8m. There is the Kazak acquisition there included. But, of course, even without that, it was more than 1m growth of active users. And if we take that our --

Organically it was one of the slowest in the last three quarters. Sorry, that doesn't matter. Let's get to the answer.

First of all just to confirm if you look to dynamic of active base, it's not there, it's not the slowest. You can clearly on our chart. And if you think that sales of gross additions of that quarter that was not small either. Actually our gross additions were more than 5m during the quarter. But, of course, we can see that in general in Russian market we see there are some indicators for saturation. As you can you see there most of the market, most of the regions are in saturation phase, and of the recent growth, but in rural areas and that's not that pronounced. Most important going forward would be, of course, MOU and ARPU growth. That would be the main driver for the revenue growth in Russia.

Alex I just wanted -- I just checked our presentation and you can do the same, checking the numbers, increase last year between quarter three and quarter two in Russia of active subs was 600,000. And organic increase this year is 900,000. So we're probably on the same pace for practical reasons.

And on Kazakhstan in terms of economy, we really don't incorporate this into our calculations firmly, to be honest. So we don't take macroeconomic factors. The reason being that we wouldn't do anything different as a management because we have -- we're experiencing still very, very strong growth which currently outpaces our ability almost to develop the network. And therefore we will continue to put investments in Kazakhstan and develop sales further.

Also it seems to me that stability of ARPU, which was very remarkable when you have such a growth in subscriber growth, we have never experienced anything like that in Russia at that stage of development in the market. So having a virtually flat ARPU indicates the resilience, at least so far, of our subscriber base. And, yes, of course, with good inflation and the pension turmoil particularly hitting Kazakhstan and the currency there and so on might have some effect, but we believe that we're very low in the food chain, if you wish, to experience, if any, substantial sequential fashion.

Okay. Thank you.

Our next question comes from [Arsene Dougi] with Merrill Lynch.

Yes, hi, good afternoon. I have two questions. One on the dealer commissions in Russia, there was a big jump in Q3 versus Q2 even on per gross add basis. Is there anything happening here?

And then the second is what percentage of your revenue comes from data non-voice services? Thanks.

First on the dealer commissions, the increase was not that high, it was $2 difference between two quarters. And that was driven by the revenue growth because our dealer commissions are paid as a percentage of revenues and, of course, with revenue and ARPU both have slight increase.

And in terms percent of revenue that comes from non-voice it was 13.6% in the last quarter which is essentially consistent with both the previous quarter and a year ago.

Great. Thank you.

Next is William Kirby with Nevsky Capital. Please go ahead.

Yes, thank you, I have two questions. Firstly, your tax rate in Q3 was lower than we have seen in earlier quarters or earlier years, what is your guidance for that in the future?

And then secondly, what level of advertising inflation are you seeing in Russia? And are you likely to make any changes to your advertising volumes or the amount you advertise in the future?

So let me start with the effective tax rate. Yes, in the third quarter effective tax rate was around 26% and in the second quarter it was around 27%. So the effect comes from the fact that the contribution of CIS countries in taxable income is becoming higher and effective tax rate there is slightly lower.

Going forward we assume that tax rate will be kind of in the range between 24% and maybe 29% because you see the volatility slightly increases as we adopt this T48 standard because we had to make certain accruals and evaluations of potential tax exposures and this may change quarter on quarter. So, in general, we think that it will be in the range that I indicated.

And with regards to advertising inflation. With the changes in the advertising law and the constrictions now on the amount of advertising that you have per hour and per day in the networks, our expectation is that from a total market standpoint that TV will increase by 60% and potentially even a little bit more. And overall that the market will be in the 30% to 40% range when you look at the mix including out of home and print and radio, etc.

And in terms of our specific strategy we're really not disclosing the specifics of what we do. But of course, as different inflation rates are in different media vehicles, we'll re-evaluate what's the most efficient way to deliver our messages to consumers.

Okay, thank you. And so what will be the effect on your SG&A line? Do you see that growing significantly in the future or will you be able to control that?

We have consistently said that, from a marketing standpoint, we would plan to spend between 4% and 5% in total marketing and we would maintain that guidance.

Okay, thank you.

Your next question comes from Alex Wright with UBS. Please go ahead.

Yes, good afternoon. Two questions, please, one on Ukrainian SG&A, which has been very stable now for four quarters despite the very strong growth in revenue and subscribers. Could you tell us how you've achieved that impressive trend and to what extent you think that is sustainable, please?

And the second question is on the Kazak business. You've highlighted your desire to focus more on share of revenue and higher quality of the subscriber base going forward. Could you give any examples of how you intend to implement that strategy in the shorter term, specifically? Thank you.

On Ukrainian SG&A, indeed, it was a lot of focus paid by the management team in the country and actually the management team at the Group level to achieve that. So a few factors. The initial scale has been achieved and we've been saying that we're now positioned well to continue to grow without putting additional people on the ground and incurring additional expenses on the maintenance of the network and so on. So we benefited from upfront investment, if you wish.

Also, there has been really strict budget control exercised in the country, because when you're in red zone and price war raging around you, of course you have to apply latitude towards cost base.

And thirdly, which was probably somewhat seasonal, or political seasonality in Ukraine in that. It was very heavy advertising around election campaign. And we decided not to waste our money, because it would be very difficult to get share of mind of people there, so it was -- the whole third quarter was particularly low on advertising budget.

And in terms of Kazakhstan and addressing a high quality subscriber, number one, the practices that we've been using to both partner with dealers and to acquire through our own offices, we think has been effective in delivering that for us. Some practices that have been done not only in Kazakhstan but in other markets, where SIM cards are given away for free or virtually for free, we will avoid those, as we do in Russia, which has helped the network -- the subscriber base strong.

And then, as we've noted in the press release and presentation, we'll focus on building the MOU of our customers, trying to build the habit of higher usage. And then, over time, based on all of our testing and experience, that should lead to expanded ARPU.

Thanks. Can I just follow up on Ukraine in terms of the outlook? Do you feel that you've grown to the extent, now, that the SG&A should start to grow again, or do you think there's still more scale gains that you can make in the current quarters?

Well, clearly, the current level of SG&A in comparison to revenue is way too high and therefore it will continue to decline. So even if we see increase in SG&A, it will be much slower than the top line growth.

Sure. Okay, thanks.

Next is Andrey Bogdanov with Troika.

Good evening. I have a few questions. One was Russia. Can you give some generic guideline as far as the usage versus ARPU performance is concerned? I noted that you have a flat in respect to [middle] during the third quarter, which is actually a very good result. So do you think that such an impressive performance of MOU will continue with flattish or relatively stable pricing per minute, which, in other words, will result in good growth in ARPU going forward?

Second question is with regards to Ukraine. Am I right to assume that your cooperation with Ukrtelecom can actually help you in getting the market share in the Ukraine? As far as I understand, Ukrtelecom has started 3G business in early November in six major towns. And outside of them, the so to be Ukrtelecom new customers will be effectively using your service in GSM outside of those six cities. If that's a right assumption, what impact do you see on your business from that cooperation? Thank you.

On Russian MOU and ARPU development, I will say that, in the second and third quarter, we had a special summer promotion, which was driving additional minutes of use at low price on-net traffic. This promotion we finished on September 1. And in the fourth quarter, that's why it's -- the trend will be slightly less minutes of use and increased tariffs, if we take this particular promotion.

If we talk about overall seasonal trends, of course, I should say that in general MOU in the second and third quarter summer months are higher and in the first and the fourth quarter are lower. And just overall impression on Russian market, that we don't need for the tariff reduction to keep growing MOU and revenue. That's why we will try to be as conservative as possible in our pricing and not to allow prices to go down.

And before I answer the question on Ukraine, I would like to correct myself on my previous answer. I might have sounded a bit too optimistic on the fourth quarter, because what -- my answer related to the next year perspective, that we would see the ratio going down.

As fourth quarter usually, more intensive in terms of communication and our spend on advertising and promotion. And on top of it, the top line will be affected by roaming not being there and seasonal usage not being there. That ratio of G&A growing slower than -- significantly slower than the top line might not hold for the fourth quarter, so I would like to qualify my answer, that it's been done for the next year projection.

As far as our relationship with Ukrtelecom, this is just a test and we're trying to understand whether we can reach any symbiotic effect there. But so far, we are not budgeting, in whatever shape or form, effects of that cooperation into our operational projections.

Thank you. Our next question comes from Anastasia Obukhova with Deutsche Bank.

Good evening. Congratulations with good results. The question is about the roaming revenues. Can you please split them between your own one and the guest ones?

And the second question, can you please provide the percentage of VAS revenues in the ARPU? Thank you.

In our roaming revenues, 30% came from guests and 70% from our subscribers who were traveling.

And as percentage of value added services, it was mentioned 13.6% of service revenues came from value added services.

Thank you.

That's in Russia. I would just note that, in Kazakhstan, it's a very similar percentage.

Thank you.

Thank you. Our next question comes from Nadezhda Golubeva with Aton.

Good afternoon. My first question is about your costs. Given acceleration of wages and media inflation in Russia, do you believe there are certain areas for cost cutting which could mitigate the impact on margin? And overall, do you believe your current margin level is more or less sustainable next year?

Secondly, could you possibly update me on the promotions in fourth quarter already made and probably planned? And do you risk -- do you see there is a risk of some -- of pricing pressure in fourth quarter? And also, possibly, what's your feeling on 2008, whether there is a risk of unreasonable price competition?

And a third question, if I may. Do you believe we can see further acceleration of usage growth in Russia next year, as the new joined subscribers talk more, or do you think the growth rates are ticking down? Thank you.

Okay. Let me start from costs. Of course, it will be some costs which will have some negative effect. And of course, we have media inflation, we have salary growth in Russia and some other lines. But, saying that, we are trying to be as efficient as possible.

As an example, we launched an OpEx efficiency program in VimpelCom, where we looked to all items and we looked for new savings, and it actually was a very successful investigation. We identified a number of projects which right now are delivering significant savings this year and then bringing even more results next year. That's why it will be, of course, not easy for the development of the business, but we will try to do our best and to be as efficient as possible.

For the promotions, I can say that, during the fourth quarter, we are not making any serious price promotion. Actually, we already launched our New Year campaign, which is an interesting gift for children and their parents. And that's a good new product, but without reduction in tariffs. And that would be our strategy for the next year as well - stable tariffs, not aggressive behavior in terms of tariffs, but more differentiated marketing and innovative solutions.

And just to add one other thing, the -- so far in the fourth quarter, we've launched a couple of other promotions that we think are important. One is a promotion to build our MMS revenue and try and drive penetration of MMS. And another one is with discounts on long distance. We've changed our tariff structure for long distance, both inter-city and international long distance.

Thank you. Your next question comes from Will Milner with Arete Research.

Thanks. Just links back to a couple of the questions already asked on inflation. But you've got inflation running, I think, about 11% in Russia and, obviously, the advertising inflation is running a lot higher than that. Against that backdrop, it seems that ruble pricing in Russia is -- it fell 13% in this quarter year over year. And I just wonder -- you mention that you hope that you can stabilize pricing going forward, but is there a reason why pricing year over year is falling? Obviously, the CPP price rises have annualized now, but it does seem that prices are falling quite sharply against inflation that's going up quite fast in Russia. I wonder if you can comment on that.

We expect to finish the year at roughly the same APPM that we started the year. We have had an impact in pricing that we've talked about last quarter's call and this quarter, which is -- was specifically driven toward carrying higher usage during -- for our existing customers, to try and help build a habit in Russia or improve the habit in Russia. But in general, we expect the beginning and the end point for APPM to be very consistent throughout the -- through the beginning and the end of the year.

Yes. I guess I was more thinking looking out into 2008.

Overall, I would just give a comment on inflation, how you read it. It's easy to -- the intention is to keep prices flat and, if we manage to do that, it will be a great achievement, because, if you look at what's happening in the country, you also have a political connotation here. There is -- there are moves to fix prices in the shops on basic foodstuffs and so on. And don't forget that, when you're looking - and I've always been saying that. But when you have an EBITDA margin over 50%, you're asking for somebody to come and start regulating you.

And if, in the backdrop of inflation and unease in the general population about inflationary pressure in the foodstuffs, we start raising prices, and with our current level of margins, it will be a very, very hard and very risky political move. So we are also feeling a bit constrained by this. If we see opportunity arises, either from the regulatory standpoint that general tariffs being raised or interconnect being raised, then of course we will follow on that opportunity.

Okay, that's great. Can I just have one follow up? Just -- looking at the level of usage increase that you've seen, it looks as though you're carrying about 50% more minutes over the network in Russia than you were last year. I guess also, looking at the --

I think you gave guidance of $1b of CapEx in Russia for this year. I'm not sure if that's changed or not, but that seems to only be right at the low end of your 15% to 20% range of CapEx to sales. It does seem or feel as though CapEx will need to increase quite sharply in 2008 to cope with the extra usage on the network. Is that a fairer understanding of what's going to happen?

So if -- about CapEx overall in Russia, so we still are talking about this target of 15% to 20% and we will try to be within this corridor. In -- during this year, of course, the usage and growth of traffic and revenues was higher than we expected. That's why we can finish the year with slightly higher numbers than it was announced earlier, but the difference would be not so big.

But on the other hand, it would be fair to say that you always have, in our business, compromise between the quality and capacity. And this year, we moved towards higher capacity utilization at the expense of quality. So we will have to pay back that debt at some later stage. So you can say that it's a little bit of a delay in the investment.

Part of it will be offset, of course, with our investments in 3G, when we start migrating traffic away from 2G into 3G. And to that end, actually, all economic equation about 3G is more beneficial in our case when compared to western operators, for example.

Yes. Just to refresh my memory, you haven't given any guidance so far on '08 on 3G CapEx, have you, or any 3G CapEx spend?

Not yet, no.

No.

Our budget needs to be approved by the Board and only after that we will be in a position to give guidance.

Okay, great. Thank you.

For the year.

We go next to Bill Nord with Marvin & Palmer Associates. Please go ahead.

Yes. The immediate release that I read this morning didn't show the consolidated depreciation charge or the pretax income. Could you just give that over the phone, to the -- in thousands of dollars?

I'm sorry, consolidated depreciation?

Yes.

Actually, it's in the attachment B to our press release, the P&L statement, and there is line deprecation and amortization. It's consolidated numbers. So for the third quarter it was $285.5m and amortization $55.6m.

And then how about the pretax income?

Income before income tax third quarter was $648.6m.

$648.6m. And in minority interest in any net income?

Minority interest was $19.5m and income tax expense $171.1m. And so our net income before all the effects of changes in accounting principles is $458m.

Okay. Thank you very much.

Thank you. Next, we'll go to Viacheslav Shilin with UBS.

Good afternoon, everyone. Just a quick question. A couple of weeks ago, there was lots of press coverage stating VimpelCom borrowing up to $3.5b for potential M&A, but I haven't seen the Company either confirming or declining this. Can you please comment? Thank you.

We usually don't comment on the rumors, and that case wouldn't be an exception.

Okay, thanks.

Next is [Gudmelia Khan] with Citigroup.

Yes, hello. How much room do you think you have in your current credit ratings in terms of a potential debt increase?

Again, looking on our ratios, which are quite strong, we think that we at least can double our debt level. So currently, the level is approximately $2.7b and so we can go even above that level and still be with -- in quite good shape in terms of ratios.

You mean credit ratings.

Sorry?

You mean credit ratings.

Credit ratings, yes. Yes.

So you can double, even potentially more than double, your debt level and you're confident that --

Right.

-- you will be able to keep your credit rating. Okay. And in terms of your informal or formal debt policy, are you -- do you think there might be some changes to that, given that you are running a very highly cash generative operation and free cash flow is rising?

Sorry, we couldn't hear you clearly. Could you please repeat your question?

Yes. I'd like to -- if you could discuss your informal target -- leverage target policy. Given that operations are highly cash generative and free cash flow is rising, do you think you might change it?

No, actually, we're always saying that our level of comfort would be on the level of debt to EBITDA around 2. So currently, of course, we are way below that level, so that's why I'm saying that we have a lot of room for additional debt. In general, we think that, still, debt to EBITDA around 2 is quite a good target.

And if there are interesting acquisition targets, would you be looking to finance it primarily with debt, given your debt capacity, or it might be combination debt equity or something --

That's a very --

-- alternative?

That's a question which is very specific to a situation. And also, it would be probably limiting, not from the fact -- sorry. Our constraints would be not from balance sheet capacity and therefore how much debt we can take on top of equity or something like that, but rather market capacity, because you can see that our balance sheet capacity is quite large. And to borrow that in one go and on top of it to place equity would be rather difficult. So it's very difficult to answer this question specifically. It will depend on the situation, given market conditions.

Okay. And I missed some part of the call. Did you discuss the CapEx plans for '08?

No. We haven't given any guidance yet. We're just saying that we will be targeting our corridor, long term corridor, between 15% and 20% to revenue. And more specific number in Russia and more specific number for the Group and broken down to each country, we'll give after it's been approved by our Board later this year. And we probably will let market know early next year.

Thank you. We have another question from Alex Kuznetsov with Bear Stearns.

Hello again. I have a follow up question. Just before I tried to estimate size of the third Kazak operator based on your reported data. And the data suggests that Mobile Telecom Services had approximately 600,000 subscribers at the end of September. Could you comment whether the estimate is correct, please?

And my second question is regarding the new licenses allocated in Russia. As we know, one company called Summa Telecom accumulated quite a sizeable license portfolio and Tele2, one of your aggressive competitors, has presence as well, in terms of license coverage. Could you tell us whether you expect significant risk coming from those two new operators? Thank you.

Let me start with this second question. We really believe that, from the other operators, like Tele2 in particular or other players, there is some threats on the market, especially on price, because they always compete on price, although we believe that this threat and risk is limited, because it's -- first of all, it takes time to build the network. The country is very big. You need to build not only base stations, but transport networks. So it takes time, takes capital and it's probably too late to achieve the just good results to have a good business model in order to have huge investment and huge returns. That's why there is a risk, there is a threat, but we believe it's limited.

And as for number of subscribers, if you clarify the question, it will be helpful. We just missed it a bit.

Sorry. So, based on your market share and --

Yes.

-- and number of subscribers, I estimated the number of market subscribers. And having subtracted the number of your subscribers and the number of subscribers of your major competitor, I came to an estimate that subscriber base of Mobile Telecommunications Services of about 600,000. But of course, there might be some rounding, so maybe you can comment on your estimate how successful is your third competitor in Kazakhstan and what is their likely strategy in the future.

Alex, sorry, which market are you talking about? Russia, or --

On Kazakhstan.

Kazakhstan.

We -- they don't release that number, so we have some estimates, but frankly it's not substantial and we're really not prepared to comment on it.

Thank you very much.

And in terms of strategy, if you talk about strategy in Kazakhstan, how are we dealing with the third competitor, as we said, that we're beginning -- We've learned a lesson, a hard lesson, in Russia, when all the competitors being pulled down into a very hard fight for subscribers, which were actually not very productive. Well, the fight wasn't productive and the subscribers were not productive. And therefore everybody, later on, had to go through a clean up process and gradually shift away from that type of approach to the market towards more thoughtful and trying to recruit subscribers which would bring value in the long run.

And actually, we believe it's time, in Kazakhstan, to start implementing this. Don't read me wrong - it will be -- next year, certainly, will be a year of growth in subscriber base and quite a significant one. But -- sorry. Before, we were talking about anything goes. Now, we will be more selective with quality and we'll try to discern, actually at the entry point, whom we take, whom we don't take. And in that sense, that's where we're changing our approach.

The third operator will continue, of course, gaining market share and probably will take away both from us and from our primary competitor, Kcell. So our objective would be actually not too disproportionately higher but actually make the competitor to lose more than us. But that, more or less, we take as a given. And we are not going to engage in heavy price retaliation trying to defend that least productive part of our subscriber base which is more likely to migrate to a new competitor.

Thank you. We'll take our final question from Nadezhda Golubeva with Aton.

Sorry, I wanted to come back to my third question, which was not answered. The third question was about usage growth. I asked whether you think that the -- we can see acceleration of the usage growth as new joined subscribers start talking more, or do you think that the growth rates are peaking at the moment?

And also, if possible, could you please update us on the 3G, because we have heard about problems with spectrum in Moscow? And so, do you think this could affect your plans on the launch of 3G? Thanks.

Your information is absolutely correct. Moscow has the most difficult situation in the country, and that relates to the defense systems, which are difficult to coexist with, because in Russia, actually, we have frequencies of a secondary nature, so to speak. And everywhere, we're going through a lengthy and elaborate process of creating a coexistence map of military devices and our operation.

In Moscow, 3G will be difficult for all of the operators. We created a joint team and we're trying, together with the military structures and the regulator and among ourselves, to find a solution. How long will it take? We don't currently know. We're expecting answers from them, but I cannot, unfortunately, shed more light. Will it affect our plan in Moscow? Yes, but the rest of the country will proceed according to plan and we will start rolling out the network early next year.

And in terms of usage, we will expect some increase, ongoing increase, in usage. As we said before, that we see on average about 10% for the same subscriber, 10% or thereabouts, of increase in usage, and on a natural marketing stimulated basis, not price stimulated basis. And we probably don't see any reasons why it should disappear now, so we will see some gradual increase.

The $100m question or $1b question, I'm not sure about the price tag, where it's going to stop. And here, I wouldn't dare to speculate, because we struggle to find a relevant benchmark and say where it should stop, at the American level or at the (inaudible) level or at the German level. And therefore, the management is positioned that we have to be capable of accommodating all the growth which comes our way, within a given year, within our budget and have that flexibility. And that's what we're trying to implement.

Okay, but I just wanted to clarify that we are talking about same thing. So I understand that the usage growth likely to continue, but I specifically asked about the growth rate. So now, we see acceleration of the usage growth. Do you think that we can see further acceleration in the growth rate, or you think that the growth will proceed at the same pace where we see it now? Thank you.

Nadezhda, you should be careful taking one quarter, and particularly with the high seasonality, which is loaded with promotional stimulated traffic, to take as a guidance going forward. Clearly, the summer was exceptional, because we put quite a big effort to stimulate usage on a try-and-buy basis, where we provide people with services at certain tariffs and opportunities to try our services at a lower entry cost and then hoping that, when we come out of it, that will -- they will stay with us. Some will, some won't, right?

And therefore, in Russia, both in Russia and in Kazakhstan, the surge of MOUs in the third quarter shouldn't be taken as that will continue. Of course, it will subside, and that's the intention of us, actually, to come out of those promotions. And as a matter of fact, we have already terminated most of them.

Gentlemen, it appears we do have further questions. Next, we'll go to Olga Bystrova with Credit Suisse.

Hi. Good evening. I'm sorry, I think I got disconnected, so I pushed back the line. But if my questions were answered, I would appreciate if you could comment again. The first one is, if you look at the -- your investment priorities currently, you mentioned a few already. And let's say it's expansion in Russia, expansion outside of Russia and maybe adjacent businesses. How would you rank them in terms of priorities and probability of those happening? And what I'm interested in is let's say you have -- you're looking at Asian clusters, you might be potentially looking at the Ukraine or you might not. If you can comment on that, that would be great. And also speculations on Golden are, as well, ongoing. How would you rank those?

And my second question is, it could have been answered already, but, if you look at the seasonality in the fourth quarter this year in Russia, now and then last year, let's say, do you see very similar seasonality by turns or maybe slightly better or slightly worse, etc.? Thank you very much.

As far as our priorities going, I can only give you priorities in terms of what we would like to happen. In terms of what will happen, in our -- unfortunately, in our part of the world, it is not very predictable. And a lot of things depend on the situations and the targets coming up.

In principle, I would believe that the most productive, in terms of returns, and therefore would be highest on the priority list, would be acquisitions inside Russia - easiest to execute, lowest risk and probably highest return, from that perspective. Then comes the SGIS countries, again, from the ease of use, execution.

However, all of this would have very limited long term impact and therefore, as the most desirable, of course, would be entering into new countries where we could create long term growth prospects there. So that I would put, probably, at the top.

As far as adjacent businesses are concerned, that would be number three on our priority list. And the reason to go into that would be to bring both skills, capabilities and scale in-house in order to succeed in those businesses.

In terms of what's going to happen and when going to happen, that would be pure speculation on my side and I don't want to engage in that.

On the usage this quarter, actually, I can say that, on the one hand, of course, there's less traffic seasonally, because there is no, this summer, such season traffic, less roaming. But on other hand, those trends which you see on Russian markets when people can afford using mobile phones, I think, continues. And overall, I think that's overall positive impression of the market. And of course, we're still in the fourth quarter. That's why to announce full trends will be appropriate soon, when we announce fourth quarter results.

Okay, great. And maybe a clarification question. Let's say your financial capacity is also limited, right, [in the way] (inaudible)? And if, for example, you have an opportunity for an investment project which is maybe of a priority -- let's say at the end of your priority list, would you still do it? Or would you continue to look for higher priority or higher impact opportunities now, while you still have the capacity to do so, let's say?

This is -- as they say, we'll cross that bridge when we get there. And so far, all of our -- let me put it that way. We haven't come across that situation yet. And all of our pipeline which we're working on can be accommodated with our balance sheet.

Okay, great. Thank you very much. And sorry, but a clarification on the second question. What I was asking is, if you look at the fourth quarter this year and fourth quarter last year, do you see very similar seasonalities or a dissimilar seasonality, slightly better or slightly worse? I was comparing fourth quarter last year with fourth quarter this year.

Olga, but it's not finished yet, so it's -- we're just in November yet, so it's difficult to comment on full quarter.

But I think that, between very similar and dissimilar, we can say probably similar.

Yes. More similar.

Okay, great. Thank you very much.

Next, we'll go to Alex Kazbegi with Renaissance Capital.

Yes, hi again. Just wanted to ask on the -- we discussed quite a lot on the 3G and I understand you cannot give us the numbers, but just in terms of the benchmarks, and related to CapEx as well, given that you plan to start spending already in the beginning of the year, when do you expect actually to give us the guidance on the next year CapEx? That's the first one.

Secondly, I just noticed that you had recorded about $26m of ForEx gain and you have about $2.7b in debt. And I by no means want to compare you and MTS, but they seem to have a very similar amount in debt and they had about a three times larger ForEx gain. So just wondering what is your composition of your debt and why was it so low, if I may?

And the last one, also, I looked at the depreciation and it fell, actually, in Kazakhstan and Armenia, and just a clarification there. Was it just something you wrote off in terms of the equipment, it's just one off, or it's going to continue, actually, there are some more write offs coming through in the coming quarters? Thank you.

So CapEx, I -- our intention is to let you know first -- right after the holidays, probably, in January, not to do it before Christmas, but--

So we're not waiting for the next -- yes, okay.

But in principle, I can already say now that it wouldn't be far off, or everything we've been saying before. So we can give you an indication of $350 to $400 which will fulfill most of the requirements in Russia for 3G. So that will be total.

I'm sorry, I couldn't hear very well. Which number did you mention? $350 right?

$350 to $400. That would be good so far.

Okay, wonderful.

And talking about ForEx gain which we have was an MTS. I do not know what the reason for MTS of course. But for us I can say that practically more than 95% of our debt is in US dollars but we are hedging all our exchange risks, at least to the extent we can get that hedging arrangements in Russia. You know that normally it cannot be longer than one year. So we are hedging all short term I would say debt and to this extent, do not see that fluctuations to a large extent.

Okay.

The last question, what was another question?

I just mentioned that I noticed that depreciation fell in Kazakhstan quarter on quarter in Armenia I mean. Not by meaningful numbers maybe, but just to know whether this is something which is going to happen also in the future or this is just one off write offs of the Group in there?

Actually it was connected with the discontinuation of depreciation of old billing systems because we replaced them with the new billing systems. And so what was shown in the second quarter was related to that depreciation of old stock.

So it is not going to be happening again in the future?

No, hopefully not.

Okay.

We will not change the billing once more.

Thank you. Our final question comes from Vladimir Postolovsky with UBS.

Hello again. I just wanted to ask again a little bit about Kazakhstan. Looking at the dynamics in pricing on its second or third quarter, I know when pricing is under pressure. Then looking at key numbers, they seem to be regaining a little bit market share -- well quite a bit in market share of subscribers. [Inaudible]. My question to you is how tough is it getting? You are saying that you would like to stabilize the market in exactly the way this happened in Russia about a year ago. But I think that requires cooperation from other players and in Russia you were a little bit luckier that MTS new management was in a position to review their strategy at the time. Do you think you will be able to achieve the same cooperation with the players in South Africa?

And if you could just talk a little bit competitive dynamics at the moment because looking at the numbers, it looks quite tough.

Let's say that it is still [correct] in terms of toughness compared to what we experience in most of the Russian regions where we have really strong players competing on a four or five player basis. Here we still deliver there fairly comfortable environment.

In terms of pricing, re the pricing competition, yes TeleSonera has shown good gains in subscribers. We don't fully see it in the retail data, so that's probably might be related to something they did with recovery of their subscriber base related to the legislation changes and activation changes during last year. However, what we do see, that they are proven done and their actually revenue growth was slower than ours. That reflects -- that is actually giving away SIM card business. No surprise to anybody because we saw it in Ukraine, we saw it in Russia. It doesn't bring you much in terms of revenue. That's why we're not engaging in it and that's why we believe it's not that productive.

One can say that look guys your ARPU was flat, but revenues were up. Price per minute is down, so you then have your price competition. Our invention was not permanently lower prices again like we did in Russia but actually to stimulate usage, as we've said, which was half that of Russia. And to that extent we drove on weekends and at night conversation at the low prices and we already out of it. So we are cutting back in terms of price.

We don't see very aggressive price moves from Kcell. Yes, the third operator is at discount and yes they will take some market share. But on the other hand, if we look at the situation not comparing us against MTS, but rather comparing us and Tele2, that price behavior was demonstrated by all the markets because everybody understands that actually it is in their own interest. All of our data suggests that there is very little price elasticity for the bulk of the base. There is a theme segment which is elastic to price and will be positively responding to price drops. But in general, it is very hard to recover your revenue through dropping prices by growing usage, at least in the mid term. Maybe in the longer term it is possible, but in the mid term we don't see this happening. Sooner or later everybody realize to that conclusion.

Also, when we achieve 100% penetration rate in Kazakhstan and market share should be stabilizing around that time, probably will take us another year or so to get there. That maybe where we will see kind of this on the stance from the smaller competitor as well.

So in that sense, we're not particularly worried about this, about the number of subscriber situation. I think that's what we, when we're making our decisions, what we're worried about the most is what is happening with our real subscriber base and do we see steady increase and how does that increase correspond with what we estimate would be similar base developments for the competitors. And here we don't see real disadvantage so far. It will be a little bit tougher, but again, we've seen harder times.

Thanks very much.

Ladies and gentlemen--

Alright?

That does conclude our question and answer session. I would like to turn the call over to our management team for any closing or additional remarks.

Well what's left for me is just to say thank you for your attention and your patience for being us and if you have more questions, please do not hesitate to contact us and we will be happy to give all necessary clarifications and explanations. With this have a nice day and goodbye.

This does conclude today's conference. We appreciate your participation. You may now disconnect.