VEON Ltd (VEON) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the VimpelCom conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Michael Polyviou with FD. Please go ahead, sir.

Good morning and good evening, and welcome to VimpelCom's conference call to discuss the Company's third quarter 2008 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 management's expectations about the Company's ability to meet its future debt obligations, the Company's strategy and development plans in Russia, the CIS and Southeast Asia, 3G and its fiber-to-the-building development and take-up rate and projections relating 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 2008 financial and operating results, the Company's earnings presentation entitled Presentation of 3Q 2008 Financial and Operating Results, the Company's annual report on Form 20-F for the year-ended December 31, 2007, and other public filings made by the Company with the United Stated Securities and Exchange Commission, each of which are posted on the Company's website at vimpelcom.com.

In addition, the Company's third quarter and nine months 2008 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission's website at sec.gov. VimpelCom disclaims any obligation to update developments of these risk factors, or to announce publicly any revision to any of the forward-looking statements made on this conference call, or to make corrections to reflect future events or developments.

If you have not received a copy of the third quarter 2008 financial and operating results press release, please contract 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 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. Alexander?

Thank you, Mike. Hello everyone, and thank you for joining our conference call today. Let me introduce the team participating in this call. Here with me are Elena Shmatova, our Chief Financial Officer, Jean-Pierre Vandromme, our Executive Vice President of Russian Operations, and Dmitry Pleskonos, our Executive Vice President of CIS Operations. Also with us are Kent McNeley, our Chief Marketing Officer, and [Alexei Saboten], Director of International and Investor Relations.

Moving now to our business, I can say that we had a very good quarter. Our net operating revenue grew in all of our markets, reaching $2.8 billion. Our subscriber base expanded by more than 4 million and our market position strengthened both in Russia and in the CIS. On top of it, we also improved our consolidated OIBDA margin to 48.8% and the only dark spot so far was a decline in our net income, driven entirely by the weakening of the Russian ruble.

Our business outside of the CIS was also developing successfully. Our joint venture in Vietnam received all necessary licenses and frequencies and we began network roll out in Vietnam as well as in neighboring Cambodia.

Well, things did look good in the third quarter. The problem in that these objectively strong results might not be a good indicator for the near future. With the financial storm raging around us, most of the reference points and priorities have shifted. Therefore, apart from presenting today the Q3 results, we are also going to discuss some of the measures we are taking to make sure that the Company is well prepared to weather the storm.

Now I will ask Elena to present our third quarter financial results and describe our financial position.

Thank you, Alexander. Third quarter was strong as usual, showing positive dynamics both on the top line and the OIBDA level. Revenue increased year-on-year by more than 45% with solid contributions coming from our fixed segment, due to the Golden Telecom acquisition in the beginning of this year.

OIBDA also showed improvement both in fixed and mobile segments. In mobile, that results was largely connected with the reversal of an accrual of our stock-based compensation plan. In the fixed segment [the stock] came to a more normal level compared to the second quarter, which was impacted by one-time expenses connected with the acquisition of Cardina.

The negative deviation which we see in net income in the third quarter is the result of devaluation of our U.S. dollar-denominated debt, due to the significant ruble devaluation against U.S. dollar during the third quarter. This caused an accrued FX loss in the amount of $341 million. However, this loss does not directly translate to a cash flow loss. Further, we will discuss impacts of ruble depreciation on our cash flow.

Our cash balance at the end of the third quarter was equal to USD$727 million. This is approximately $250 million lower than at the end of the second quarter, primarily due to the $587 million dividend payout.

Our debt during the quarter increased by $250 million, while our last twelve months OIBDA increased by approximately $370 million during the same period. This improved our debt-to-OIBDA ratio to 1.7 instead of 1.8, which we saw at the end of the previous quarter.

In anticipation of worsening economic conditions, our first priority by definition is servicing our debt. Accordingly, we have revised our CapEx plans to a level that will provide enough free cash flow to cover our existing debt obligation, even if we will not have access to the debt market during the next year.

Now a few words about our debt structure. Our cash management policy contemplates that our debt amortization schedule should be smooth. And in any given year the debt repayment should not be higher than 30% of the total debt. So as of today, our debt repayment for 2009 is $1.8 billion, which constitutes approximately 20% of the total debt that we expect to have on our balance sheet by the end of 2008.

The structure of our debt in terms of currency composition is tilted towards U.S. dollar and now approximately 8% of our debt is in dollars, a [first year] dollar debt where a weakening ruble in price at-risk to all dollars denominated cash flow. To mitigate this risk, our cash management policy stipulates hedging of interest and debt repayments for the next 12 months.

So a weakening ruble will have limited short-term impact on our current dollar-denominated cash flow because we are hedged till September 30, 2009 with a zero cost [callers]. All repayments of debt and interest in U.S. dollar are hedged with FX rate capped at levels ranging from RUB27 to RUB33 per U.S. dollar. So the maximum exposure which we may see through the end of the third quarter 2009 is the purchase dollar in the third quarter 2009 at the rate of RUB33 per dollar.

Nearly 99% of our debt is unsecured. So for us there is no risk of margin falls or losing assets. We are also quite comfortable that we will not violate any covenants that we have in our loan arrangements.

Now back to Alexander.

Thank you, Elena. Before we start discussing specific markets I would like to point out that our revenue base is becoming more diverse, which should help us to be more resilient and adaptive in the current turbulent environment. With the CIS business accounting for almost 15% of our consolidated revenue, the acquisition of Golden Telecom gave us an additional exposure to both fixed line and corporate market segments.

The nature of services and level of technical sophistication makes customer relationships in this segment more sticky, which is especially important in times of economic downturn. At the same time, our billing of most of our fixed-line corporate customers is back to the U.S. dollar, which helps to mitigate the currency risk as well.

Let's now move to specific geographies, starting with Russia. In Russia our revenues grew by 47% year-on-year as a result of strong organic growth in both mobile and fixed segment, as well as consolidation of Golden Telecom. Our consolidated OIBDA margin in Russia was 50%.

This is a very good result, particularly taking into account margin dilution caused by the intensive start of sales of devices such as iPhones and 3G models where we have a very low OIBDA margin. To protect the OIBDA levels going forward, we have embarked on a number of cost-reduction activities and already renegotiated a number of the contracts, executed a hiring fees and have cut non-essential expenses.

We have also frozen non-critical CapEx orders and will be significantly reducing CapEx plans for 2009. The effect of the measures we have taken will become visible in the first quarter of the next year. And we will provide a further update after our Board of Directors approves the 2009 budget.

In the Russian Mobile segment, our active subscriber base exceeded 45 million and revenue was up 23% year-on-year. Seasonal ARPU strength was supported by stable pricing and more than 9% increase in usage year-on-year. Our OIBDA margin of 54% was a factor of both stock option accrual reversal and our cost reduction efforts. We have launched 3G services in 20 cities as of today and we will build the 3G network to the point needed to meet minimal license requirements.

Now to our fixed-line business. On a pro forma basis, our fixed-line revenues in Russia grew year-on-year by 37%. Third quarter demonstrated normal seasonal trends in our business segment, while the wholesale segment grew faster, capturing synergies from our transport network integration.

In the residential segment our sales were affected by seasonality and continued reductions in legacy products and services such as dial-up. The OIBDA margin now of fixed-line business was 24.5%, which was almost 3 percentage points higher than reported in the previous quarter when OIBDA margin was affected by one-time write-offs.

Our focus in residential broadband is on 3G/HSDPA and fiber-to-the-building technologies. While our 3G rollout only began in the third quarter, with FTTB we've already made substantial progress. At the end of the third quarter, we had 5.9 million households and we had 538,000 FTTB subscribers using a current take-up rate of 9.2%.

We plan to finish construction of the FTTB networks in the cities where we already started as this requires less incremental CapEx. As a result of the unfolding crisis, plans for the entering new cities are being revised.

At the same time, we have shifted our focus on sales by leveraging our Beeline brand and vast distribution network. In September 2008, we had e-branded our residential broadband services under the Beeline brand, which we expect further acceleration will help us further accelerate the take-out rate.

Earlier this year we re-examined our overall distribution strategy and in June we began to implement a new strategy. The reason for the new approach was that it became clear that the industry was poised for a major change. The economics and business models of existing mobile retailers were becoming unstable and, in our view, unsustainable in the long run.

This led us to adopt a three-point strategy on distribution. First, we more aggressively pursued long-term agreements with key retails. Second, we began setting up mono-brand sales booths in key consumer traffic locations such as shopping centers. Finally, while we would have preferred to maintain the status quo regarding mobile retailers, it became clear that this would not happen. So, we decided to acquire minority stake in Euroset, the largest retailer in the market.

This new strategy allowed us to significantly improve sales and strengthen promotion of our new products and services, which becomes increasingly important in times of economic difficulty as we expect more consumers to shop around for better deals. We are encouraged by the early results of our new distribution strategy.

Now moving to the CIS countries, Kazakhstan remains our largest market outside of Russia. Here we continue to focus on improving network quality, strengthening direct dealership and intensifying sales activities. We grew our active subscriber base by almost 30%. It led to a 7.2% quarter-on-quarter revenue growth.

The financial crisis reached Kazakhstan in the fourth quarter of 2007 and we continue to see its effect. While we see some growth in subscribers, usage and ARPU remained essentially flat for the last twelve months.

In Ukraine we continue to invest in building a high quality subscriber base. To that end, in Q3 we have executed a number of strong campaigns targeting high usage subscribers. This resulted in a very strong ARPU growth, which is now at an all-time high and translated into 49.2 organic growth in mobile revenues. That was percentage points of course.

However, this investment in building the high usage subscriber base, coupled with unbalanced interconnect charges, continues to put pressure on our mobile OIBDA margins in Ukraine. While we will aim for the OIBDA margin to be in the positive territory, significant margin improvement will only happen after interconnect rates will get in line with the European levels.

The integration of our fixed and mobile business in Ukraine has been completed. The fixed line segment showed 14.4% quarter-on-quarter revenue growth.

In Armenia, a strong marketing campaign resulted in a gain in consolidated revenues of more than 6% quarter-on-quarter. We are encouraged by improvements in profitability with the combined OIBDA margin increasing to 48.7%. However, declines in MOU and ARPU suggest that the quality of our subscriber base has deteriorated and this might result in a higher churn in the future.

In Uzbekistan, a significant increase in the number of mobile subscribers led to an 84% annual increase in our mobile revenues. We managed to keep our OIBDA margin well above 50% in a country with a very low pricing environment. We also monitor developments in Georgia and Tajikistan and see good progress in our operations in those countries. Development of our CIS operations is an important cornerstone of our strategy going forward.

Our joint venture in Vietnam received all of the licenses and frequencies necessary to launch the rollout. We contributed $267 million as paid in capital, which will be sufficient for the first year network rollout. The management teams in Vietnam and Cambodia have been recruited and are comprised of experienced professionals from VimpelCom and other major international operators, as well as strong local specialists. We aim at launching operations in both countries by mid next year.

Well, approaching the end of the presentation let me reiterate that management understands that the turbulent economic times require a change in focus. Hence, presently management focus has shifted towards maximizing cash flows. Throughout our recent history the Company has consistently been prudent, which has helped us to keep our business in good financial shape.

Focus on cost control has always been a high priority and, under the current conditions, we will be even more aggressive in cost management. For example, we have cut out all non-essential costs. We have imposed a hiring freeze and are working to identify further headcount optimization opportunities.

We also started to cut our CapEx by putting non-critical CapEx orders on hold and by renegotiating vendor agreements and by reviewing our 3G and FTTB plans. In the extreme case, we can cut CapEx to the minimum affordable level to keep our network operating.

Prior to the crisis we already had implemented our policy of twelve months currency hedging of our dollar-denominated debt. This policy has served us well in the crisis by protecting against sharp ruble devaluation through September 30, 2009. All these measures are aimed at cash generation and accumulation so that the Company can make it through the financial crisis.

In summary, the third quarter was a strong quarter with good results across all geographies and business lines. Our Company is in good financial shape and is well positioned for the future, despite the rough times ahead of us.

Revenue growth has been high on the agenda for a long time and our 3Q results show that we are on track with this as well. Our focus is on maximizing our cash flows so that we meet all our obligations and continue to develop our business. I remain confident that VimpelCom will weather the storms and continue to deliver outstanding results.

With this thank you for your attention and let me now open the floor for questions.

Thank you. (Operator Instructions) Our first question comes from Stanislav Yudin with UBS.

Yes hi, congratulations with good results. The first question is, could you please specify your priority areas in CapEx cutting in next year? Could you be first of all cutting 3G CapEx or FTTB? And what is the minimum maintenance level of CapEx for next year, you can specify it please?

The first thing that you have to understand in CapEx is that all mobile operators in Russia have [the sequented] in December. So the network rollout as it is in December can create further traffic up until the month of April/May.

So what that means is that on the 2G network we do not have to do any rollout in the first quarter and will still be ultimately enable to deal with the traffic increase if that happens. In the first quarter we can monitor how severe the crisis is, if we come to the conclusion that traffic does not increase and stays at the level below the December 2008 levels and, theoretically, we could not invest in the 2G network itself.

As far as 3G is concerned, those cities where we have started deployment of the network in 2008, we will finish that deployment and get the revenues from it. So further than that we don't need to do any 3G deployment other than those are necessary for our license. And the minimum requirements would be over there to have long base station per city.

As far as the FTTB network is concerned, we could theoretically stop all investments in any new cities. So there again, we only have to deploy new cities. So again, this is a theoretical exercise. Nobody knows today how the crisis will unfold. We have plans in place that, if it is necessary, we can reduce the CapEx to an absolute minimum.

As far as maintenance level is concerned, in the traditional network that is 20 years or 30 years old, maintenance CapEx is usually being defined, and those replacing those elements that no longer supported by the vendor. That type of equipment, this is a network that is only five, six years old, so there is that low replacement CapEx. So there again, that can be cut, if that would be necessary, to an absolute minimum.

But as I said earlier, it's very difficult to forecast how the situation will unfold. We will monitor and shift CapEx deployment towards the second half of the year if traffic will justify to deploy any further network. I don't know whether that answered your question.

Yes thank you, it's very clear. Thank you very much.

Our next question comes from Leila Govi of Egerton Capital.

Hi, I have two questions. One is have you conducted any surveys with parts of your customer base to have a sense for how much they think of cutting back on their bills or on usage spend in the current environment? That's the first question.

The second question is just another question on CapEx. And actually it's conversely, if going into next year you see slightly more traffic than you saw in the scenario that you outline just before, how quickly can you react to put CapEx back into the network to make sure you're suffering on quality? Okay thanks.

Well let me tackle the first one. We've run actually, in anticipation of the questions on how we see evolution of the demand in Russia, we've run already two waves with our targeted marketing and quite representative samples have been done on this.

The first wave shows that, which was done three weeks ago, that people effectively didn't have any expectations, virtually negative expectations, about the crisis. So more than 90% didn't expect to lose their jobs or wouldn't see their income deteriorating and therefore wouldn't anticipate any changes. However, clearly that, with what happened in October and quite more volumes now in the press and more companies talking about layoffs and so on, this sentiment will be shifting fast.

Our second wave indicated that there is a move downwards but still, actually, a significantly more optimistic view prevails compared to the European or American research which has been done. So we will continue to monitor it, but currently we cannot say that we can identify that it would be a significant change in the spending patterns. We can only guess that it will come.

And with CapEx, to Jean-Pierre.

As far as CapEx rollout is concerned, when we deploy base stations, that consists of three distinguished steps. The first one is the size acquisition itself, we have to look for where the size will be and acquired it. The second part is the site survey and the projecting.

The cost relates to site acquisition, site survey and projecting our minimum. We usually do routinely, we do this in advance. So in the fourth quarter of any given year you do the site survey and site acquisitions for those sites that will be deployed somewhere at the back end of the second quarter. So we have continued to do that and we will continue to do that.

Once survey and projecting, and that takes about six months these two steps, the third step is then the installation of the equipment itself. Depending of the type of installation you do, whether that's on-the-roof installation, [telecom free] tower or [full-prime] tower, that takes between three months and six months. So we could gear up the network to, if traffic would increase substantially, anywhere around three months and we would be able to take for any increase that would be necessary.

All right, our next question comes from Igor Semenov of Deutsche Bank.

Yes hi, thank you, I have two questions, one is a follow up on CapEx. So first of all, could you possibly give us a specific minimum number for the CapEx? Your competitors have scaled down to $500 million or even below in the worst case scenario, could you provide a similar specific number?

Secondly, on a follow-up on the CapEx on the previous question, what you're suggesting is that presumably if the traffic volumes don't fall in the first half next year, you are already prepared. You have done your site surveys and you have done the homework and so you can roll out networks and base stations in the second quarter, because first quarter obviously difficult because the weather conditions. So that job has been done, right?

And one technical sort of question on the balance sheet, can you explain what happened with other current assets and other assets on a balance sheet? It seems between second and third quarter something happened in these two categories. There's a big increase in other current assets and a decrease in other assets. Could you please specify what's going on there?

Let me tackle the first question. So yes, the answer to your second question is yes. And you rightly pointed out that most of the service has been done, it's identified and so. And this is minimum cost but saves us a lot of time. So in that sense we're in good shape.

And I guess it's a good interlude to the first question as well. We don't believe that anybody can pin down a number at the moment, because the crisis projections are so ambiguous at the moment and it's so difficult to predict how it will be unfolding.

Hence, our philosophy is that to be maximum flexible and adaptive, and we have a few scenarios, or rather we actually define sort of what are the potential avenues. And in that sense, the minimal number would be whatever has been already committed and will be irrevocably committed. And that would be couple of hundred million dollars.

I'm not sure that we would be willing to provide you with any other specificity at the moment, because we will have flexibility to adjust and we will be very carefully watching the development in order to tighten the reigns. And it will be less dictated by the market development as such. To some extent of course it will be, but also it will be dictated by the availability of funding on the debt markets and whether we can go and borrow the money, because that will affect our decision pattern and behavior as well.

So with this now to Elena.

Yes as for the changes in current assets with long-term assets, so that was connected with the reclassification of 350 million loan given so one of our partners for 18 months, so previously recognized as a long-term asset. And now this loan is becoming due less than 12 months it's now recognized as a current asset.

All right, our next question comes from Sergei Arsenyev, Goldman Sachs.

Good afternoon, I wanted to talk you about the fixed line outlook. Especially in the business segment, presumably the corporate customers see a little bit earlier than the residential customers what is coming in the next year. And I'm just wondering whether you noticed any change in the behavior of the corporate customers in the last month and half or so? And what are generally your expectations in terms of the corporate volumes, pricing going into 2009 and in 2009?

And similarly, you talk about decreasing investments in broadband, but obviously you passed a relatively large number of homes already. Do you anticipate any changes in the broadband demand outside of Moscow? Or do you think that the market is so unsaturated that the broadband growth should still continue in Russia in 2009?

On the behavior of the corporate, we have seen three types of behaviors. There are a number of small companies, [that we are] monitoring the situation very carefully that have simply disappeared. But the amount of those is still very, very small. The second group of corporates is those that have already laid off staff, some of them are banks which represent [6,000 phone mobiles]. There we have of course seen that 25% less staff automatically results in less cost, up to 25%. So there is a reduction admitted, but nothing dramatically.

And then the third element is that the number of the larger customers have contacted us and asked for a reduction in rates. But you have to bear in mind that with all of our larger customers, largest corporate customers, that we're in constant dialog and that we routinely reduce the rates as time goes by.

So these are not people that have been clients for us for one year or two years, 15 years or longer. So for most of them this is the second crisis that they go through. So yes, there are demands for reductions, but in most cases what happens is that people agree to commit to the same kind of expenditure but that they want more services for that. So that it sometimes takes from others as a redundancy measure. They cut all those things and for the same amount of money spent with us, they want us to do more.

So up until now that's more or less the trends that we see moving into the future. I think at this stage it's too difficult to say what is going to happen. Logically speaking, we would expect the revenues in the corporate sector not to significantly grow but more or less stay on the same level.

As far as the broadband is concerned, especially in the regions, we are only now really starting to connect building in the regions. So it's still very early stages to see what goes on. But on current demand of both FTTB and the USB models we see an unexpected high demand, especially for the USB models. So USB models Internet access, especially in those cities, early end of September, October where I have a 3G network, that amount is surprisingly strong.

Okay. Thank you very much.

All right, our next question comes from Herve Drouet, HSBC.

Yes good afternoon, my first question is can you share with us more light about how you are going to deal with this dilemma, which is you explained to us on the one side, especially first on the corporate segment, you just cite there is a need on the demand side maybe a reduction of rights and I assume as well as tariff.

And on the other side, if you decide to slash CapEx, obviously there will be a limitation of the network in terms of what you can handle in terms of volume growth in terms of traffic. So I'm just trying to find out what will be the key decision making process you would use to balance those two things.

The second question is regarding your debt in terms of the hedging update. I just want you just to clarify some of the hedging up to date. Can you confirm you are going to hedge most of your debt, which is U.S. dollar denominated? And if it is the case, can you give us kind of an estimation about the cost associated with the hedging? Thank you.

So I can start with the cost of hedging. Up until now it's zero because we are using such instruments as zero cost caller.

How is that possible to cut the hedging to zero?

Because how these instruments work, VimpelCom buys from the bank a call option let's say for RUB27 to dollars a cut and at the same time sells to the bank a put option, let's say it's RUB23 per dollar the floor. So cost of call option equals to the cost of put option and that results in zero puts for Vimpel cost.

So when we are within that corridor, first we bear all the kind of risk, but if we are crossing either capital floor, then either we have gains or the bank.

Okay. And can you share with us what is the bank you are using for the hedging?

So currently we have several agreements. One explained that with the cap of 27 and for the floor of 23 and another one, I would say, several arrangements with the capital RUB33 per dollar.

All right, our next question comes from Alex --.

I think I still owe you the answer on the question of the corporate rates and tariff. What usually happens with clients is they ask for a reduction in rate that agree that instead of that rate reduction is accompanied by increase in services. Again, they use sometimes two, three providers and they cut out one of two providers and we provide more services for the same amount of money.

So that's a practical rate reduction to see the fact that they take more service from us. What they spend with us is the same amount of money. You are right, that leads to a need of additional capacity in the network, but there is sufficient headroom in both the local network and in the long distance network that whatever increases there are is really insignificant as far as that is concerned, so that it doesn't result in any additional CapEx.

We usually go to buildings with either [SDH] equipment and in many cases the customer is only using a couple of [E1s]. So the standard equipment is an [SDM1] equipment and the cost of that uses one tenth or one twentieth even, so plenty of capacity.

All right. We'll go next to Alex Kazbegi of Renaissance Capital.

Yes. Good evening. Can I start actually with several just qualifying questions? I mean, on the CapEx, could you just confirm that your guidance for the full year 2008 rather than 2009, which was, I think, $2.5 billion is still on? Because you spent about 1.7 until now? Secondly, on operating cash flows, which you have possibly that goes back to Igor's question about the increase in the other assets, but your operating cash flows actually decreased in Q3 vis-a-vis Q2. If you could give us the reasons again why that happened?

On the hedging also, I was wondering, as of the end of the 2007, you had only $300 million of debt hedged. So you are saying that since then, you have actually put all these instruments of debt. If you can clarify on all of that?

And the question, which I have actually, is that are you applying to VB at all? Because I think a lot of people do. And secondly, I believe there is about $800 million debt on your assets and that should be about short-term debt. So could you just tell us when is that due? And how does your assets, which plans to pay it? Thank you.

All right. So out of your ten questions, we will pick a couple. So I'll start with [VAMP]. No, we are not applying. And actually, from that perspective, we believe that it will be some instruments available in the global market, we're investigating opportunities to borrow. But it's not through VAMP.

Now with all the operating cash flow and hedging it's over to Elena.

Actually, about operating cash flow, it's mainly connected with some advances, which we paid in the third quarter and one of them for iPhones, so it was all connected with the current business.

And I follow the question related to your receipt?

The debt of euros sat at $800 billion. Actually, Alex, it's slightly less than that. And the management, not the shareholders, we're just a minority shareholder is it. The new management that will usually come and [Italy Podolsky], that you probably know from the [lent] and expired date, are renegotiating that debt with the different banks and it's sold understanding as shareholders that they have been quite successful in that exercise.

Yes, our understanding is that they are not in the danger of immediate threat by the banks recalling the debt and again one of the most fundamental premises of that acquisition was that we are buying a minority stake and therefore we are limiting exposure for the shareholders by the amount of equity we contribute. And also by the amount of money we pay in normal course of business.

And that means we are paying the contract similar with what we've done with [Sisnoy] and other major retailers. So that's our risk. And we are not assuming risk of bad debt on us.

As far as overall CapEx guidance for this year is concerned, that yes, we are saying that our total number will be similar to what we indicated earlier. We are going very thoroughly through all the outstanding orders. But unfortunately, the lead-times are long enough that our reaction at the end of Q3 and currently is not going, probably, to be visible in the Q4 numbers. So you'll see the results coming in Q1.

All right. Our next question comes from Olga Bystrova, Credit Suisse.

Yes. Good evening. My question is mainly regarding costs. The first one is in terms of operating costs, because you are implementing headcount freezes, what can you say about your ability to control growth or the inflationary growth over many other cost items? Relative to, let's say, revenue? And I'm basically trying to figure out how much control over EBITDA margin you can have next year.

And the second, and related question, is the cost, but a bit more strategic, is you have had a very successful quarter in terms of gaining subscriber market share and revenue market share in Russia. However, your SMS costs have not really increased that significantly in relative terms. So could you maybe talk a little bit more, how is your spending on a new and existing subscribers structured currently? And how should we think about it next year? Thank you very much.

On the costs related to inflation, there are a number of costs, which are not subject to inflation at least at this stage. The majority of our costs relate to interconnect costs, with the other mobile operators and with the dominant players, the [MS Caf]. Both rates are regulated and even if the costs would go up, the revenues would go up also. So it's kind of an automatic offset mechanism. So there the results, whatever happens, is the net result is zero on these.

As far as the second element is concerned, which is related to headcount, we are reducing headcount and we, at this stage, do not envision any salary increases for next year, but again that is difficult to forecast because nobody can say at this stage what the inflation is going to do and what the ruble exchange is going to do.

The third element of cost has to do with stipends and rent of office premises. We believe that stipends will probably stay on the same level, while if anything to go by, office rents are in the process of declining. So there again one should offset the other one.

As far as the sales and marketing costs are concerned, we have deployed a number of strategies to increase sales. One is the long-term agreements with a number of retailers. The second one is the acquisition of Euroset and the third one is the deployment of these booths that you see everywhere in shopping centers.

The reason why you haven't seen a substantial increase in SMS costs is the mix is such that one individual line, if it was up, it's in the mix of the three stays more or less on the same level. So at this stage, there is no immediate reason why next year, the total of sales and marketing costs would substantially increase. Meaning, total on a further acquisition basis, if we sell more, of course, it will go up.

All right. Our next question comes from Jean-Charles Lemardeley from JP Morgan.

Yes. Hello. Good afternoon. Could you just maybe, we're two months into the fourth quarter now, so could you give us any indications into the fourth quarter? I understand that October was on budget, but how does November look so far and how does seasonality look versus prior years?

And then the second question would be, what's your expectation for yields per minute in Russia? It looks like, I mean, they were pretty good rubles in Q3 versus Q2, so similar LMTS, there would seem to be, maybe, sensible to seek at least stabilization of yield in this environment. Or even a slight improvement. We see some of that happening in Western Europe in prepaid segments of - could you address that?

Yes. Hi. I have to apologize if I mislead you, to say that October was on budget. Because we never, ever guide on the existing quarter on future results and we are not going to deviate from this practice as well. So we -- the only thing, which I can say so far, that we do not see change in the behavior of patterns of our subscribers. That's what we haven't detected. And this sentiment, unfortunately, is fairly volatile and subject to manufacturers. So it might change quite rapidly. But we haven't seen it so far. That's all I said and please you make your own conclusions about the results in the quarter.

Seasonality so far is in line with prior years of traffic in Russia?

We haven't seen change in the pattern of behavior.

I'm sorry. Your second question was on -- ? We lost him.

Just a moment, I apologize.

I'm sorry. That's okay. We -- use per minute in Russia.

The APPS has stayed stable throughout the last quarter and I believe that from competition that they have had the same evolution. So it has stayed, even in dollar terms, at the same level.

But what's your expectation going forward? What are your plans in this respect? And would it make sense to try to achieve slightly better yield going forward?

The designs would be, of course, to sell more at a higher price. But unfortunately, it's not always possible and here we will be responding to the evolution of the market conditions.

To that end, Russia was historically or at least the last couple of years, enjoying very responsible industry conduct in terms of pricing. And we hope that this conduct will persist going into the next year.

Okay. But can you give us the value of services and share of revenues and share of ARPU in Russian mobile and split between messaging and non-messaging?

Yes, We were fairly confident of percentage of revenue was about 15%. Just under 60% of that was messaging, both SMS and MMS. And about 25% of it was Internet traffic. So those were the two major components that we saw over the last quarter.

All right. Our next question comes from the line of Rhys Summerton of Citigroup.

Yes. Hi. Good afternoon. I just need to clarify a few things. My understanding is that, if I look at the results that you've reported, we're not really seeing any slowdown in any of the markets. And that kind of is in line with what we've seen in a lot of other sort of emerging markets in this quarter. And so your decision to cut back on CapEx, I must understand that to be entirely driven by your view that even though something has changed, and you kind of just said that traffic patterns haven't changed, or that the funding requirement for next year is going to be quite onerous.

Now if I look at the funding, as you disclose, then your short-term debt in the second and third quarters next year, I still think, in terms of the numbers, that I can calculate, you will still be able to maintain your CapEx at the same kind of level as you had in 2008, if you see the same kind of growth in EBITDA coming through.

So maybe you can just kind of correct me, where I'm missing the point here. Is it that you have seen a slowdown or you're just being ultra cautious on your CapEx guidance in 2009? Or can you reverse that decision once the Board approves the lower CapEx number?

I think the closures would be the third option here, that we historically have been investing. Our motto was investors will grow. And the risk that the behavioral patterns will change quite abruptly is quite high.

Because what happens in our business, in consumer business, people don't adjust while their income is there, but they might adjust quite sharply where unemployment rate, for example, surges. And currently, unemployment rate in Russia is not that high, but expected to go up quite sharply early next year.

If we take the proxy Kazakh development in Kazakhstan we saw last year, financial crisis hit that economy at about the same time, September, October 2007 and we saw a very sharp decline in usage in Q1. And actually the usage, although up, significantly lower than we anticipated. And interesting enough, that actual current forecast on GDP development in Russia is very close to what Kazakh economy experienced during last year, about 3%.

So being sort of with that anticipation, and also taking into account earlier, Jean-Pierre's remarks that maximum available minutes, and therefore capacity, maximum capacity, comes in December. And then there is a trough. And then we gradually build up the usage towards the summer, which is simply have that time to react.

And we intend to use this time to observe the situation more and to understand the evolution of the market more, make whatever possible preparations, which are very low cost, and by having those preparations in place, we can activate CapEx relatively fast. And that will be the discussion we're going to have with the Board that actually we will go on a much shorter planning horizon and we will revise these commitments in a much more frequent manner.

So our statement of cutting CapEx down relates to immediate orders, which would have been executed and built in Q1.

All right. Our next question comes from Stephen Pettyfer of Merrill Lynch.

Yes. Hi. Good afternoon. I was wondering if I could go back to a couple of points earlier made. One was on CapEx for this year's guidance, whether or not you're still standing with your 2.5 billion.

And secondly, I wondered if you could provide a little bit more color as to what was happening on the income tax expense line this quarter? And finally just on the issue of pricing, I would be interested in your thoughts. If there is a significant devaluation of the ruble, do you feel the consumer would be responsive to you trying to raise prices? Thank you.

So let me start with income tax. So yes, effective income tax rates are increased in the third quarter after profit at 32%, but that was connected with the ones kind of additional accrual and reserve on the tax risk provisions connected with some recent kind of new view of tax and tax rate on carry forward losses and the rest is connected to an increase of non-deductible expense.

And on CapEx, I just wanted to reiterate that, yes, this year we're probably going to see 2.5 billion or slightly above on -- in terms of spend. I also would just like to remind you that we have always been saying that our CapEx program is designed in such a way that we could either accelerate or slow down up to 20% of CapEx volumes. And that would be done without any significant disruption to our operating models. So that flexibility we're still observing and if we go for more drastic measures, of course, we will communicate explicitly this to the market.

As far as pricing is concerned, Jean-Pierre, why don't you?

As Alexander said earlier, the Russian operators have been in the past that is disciplined when it concerns pricing. We expect that the discipline, or we at least hope that the discipline will continue and that all operators will continue to behave rational.

If that is the case, then you can raise prices. But raising prices does not only depend on the consumer alone, it also depends on what your competition is doing. So if that past pattern continues, that the operators behave in a responsible way, then there should indeed be a possibility to have the rise of the ruble rates, raise more or less in line with the devaluation of the dollar. And I believe that one of our competitors has indicated that he believes that the same thing would happen and he also believes in the rational behavior of his competitors.

So I think that answers your question.

All right. Our next question comes from William Kirby of Nevsky Capital.

Thank you. Yes. Two questions please.

Firstly, what impact do you think handset subsidies are likely to have on EBITDA margins? And are you planning to launch subsidies for any other groups of consumers? And then secondly, on your debt hedging, is the amount you've hedged just interest payments and principal payments for the next 12 months? Or have you hedged the whole amount of outstanding valid debt? Thank you.

No. Hedging, yes, of course it's principal repayment and interest within 12 months.

And as far as subsidies is concerned, we are not subsidizing the iPhone. And we're not planning to subsidize it in the future either. So I think that answers the question, we don't believe that is a good model.

And I don't see any of our two competitors, main competitors in Russia, embarking on the road of subsidies. My feeling is that most European operators or U.S. operators will get out of the subsidy side and they would gladly step out of it. So I don't see any reason why we would get into circus, if all the others want to get out of it.

All right. Our next question comes from Nadezhda Golubeva, Unicredit.

Good afternoon. First of all, I wanted to come back to the ruble devaluation. So assuming we see a sharp and fast ruble devaluation, let's say, down to RUB35 to $1 by the end of the year, of the February or March, do you think and I believe you considered such a scenario, to raise days in rubles or do you think that this is pretty unlikely?

Or the alternative view, is it possible that you will return to say deliberate prices or family unit prices or what else? Could you please share your view on the company payers and revenues under such a scenario? Because I understand that this could be very critical for you, in case ruble devalues, but pricing stays the same or even grows in response to the more affordable, say, tariffs in dollars?

And second question, I wanted to ask what happened to sales of handsets and accessories in third quarter? As they jumped up compared to the first and second quarter. Thank you.

This one is easy. We started selling iPhone and also very successfully launched 3G models, which is part of our broadband strategy development. So that goes into that category.

As far as pricing is concerned, it's a really complex matter. The easy answer is, can you increase prices? The answer is yes, we can. But --

We do it routinely.

And as rightly, Jean-Pierre points out, that we do it routinely (technical difficulty) in our legacy tariffs and so on.

However, when there is a sharp dislocation of that magnitude, when the currency devalues so much, and if it's layered over surging unemployment, then a lot of other factors kick in. And it's not simple mathematical exercises that if the valuation is this, we will bump up our pricing by that amount. It would be another number of iterations to find actually new price equilibrium on the market.

And therefore, I have to exactly where it will end up and what relation that new equilibrium will vary to reinflation or to evaluation is probably premature. But certainly we will try to protect our margins and the cash flow. That is, I repeat, key focus for the management going forward.

We now shift it, if before we've been driven by our strategic ambitions and had mainly implementing sort of long-term decisions, and that's what we've been discussing on these calls before. Right now, we take much shorter horizons and we actively manage to maximize our cash flow.

Thank you. (Operator Instructions) Our next question comes from Will Milner, Arete Research.

Thanks. I have just a couple of questions, actually, on the balance sheet. But on the absolute debt load, which I think is about 1.7 times EBITDA now, obviously a very different world. I mean, looking into next year, beyond just meeting the refinancing requirements, what sort of level of debt are you happy with before you think about restarting investments?

And second question, what is that actual amount of committed credit lines that you have available at the moment? Thanks.

So talking about, I would say, kind of more or less the level of comfort that we have with that ratio, we are always saying that internally we think that we should not cross debt to EBITDA above two. And so here we think we will stay and that was our activities to be in the range between 1 and 2 in debt to EBITDA.

Actual credit lines, we do not have currently any credit lines available.

Our next question comes from Josephine Shea of Hartford.

Good morning. Could you perhaps give us some color on what percent of your payables and other working capital liabilities are in foreign currencies? And if there are any foreign currency liabilities, would you consider hedging this exposure as well?

And then secondly, do you expect your days receivables to start increasing? Is there a risk there? And maybe you can highlight a little bit more your working capital management strategy? Thank you.

Thank you. So talking about our accounts payable, actually, practically no. The countries we are trying to balance revenues and costs to be in the same currency.

So for example, in Russia, in our largest operations, most of our costs are also in rubles as well as revenues. And so to this extent, all our payables are in rubles and so there is really kind of no need to hedge. Because, yes, only our kind of bank loans and bonds and such type of things, stated in U.S. dollars.

As for accounts receivable, actually, we have pretty stable, I would say, days sales outstanding ratio and we are managing it in a way that it should more or less match their key rate of accounts payable and accounts receivable. And so that's why kind of the needs in our working capital are more or less the same, if not taking kind of some items for sometimes it's, for example, now we are paying for advances for handset searches, iPhones and so on. So.

All right. Our next question comes from [Marina Vlasenko], Commerzbank.

Hello. I just wanted to briefly get back to the hedging issue, which is already a long time on the screens. Excuse me, what was the reason for such a loss on currency depreciation? Because I always thought that the telecoms are very sophisticated. So I'm a little bit surprised that you have any loss at all. Why do you think your new strategy, your new hedging strategy, will be more successful than the previous one? Sorry for asking that.

Oh, actually we are not changing our hedging strategy. I mean, we were always saying that we are hedging only the next 12 months' statement. Actually that's pretty hard to find Russian instruments that are longer than 12 months. And so we will follow the same route.

But of course, as long as it's also debt, of course the maturity is much longer than 12 months, of course we have that revaluation of debt and that's what is reflected in the P&L. That's what you see.

Balance sheet transaction, not cash flow transaction and that's why we have it hedged like that.

Our next question comes from Victor Klimovich of VTB Capital.

Hello. Good evening. I have a question on your Ukraine operations. Can you please explain the current trends? I mean, ARPU increase and the very slow MOU increase. So that is the essence of the question. So how do you manage to increase ARPU with such a low traffic increase. Thank you.

In general, we introduce (inaudible). We introduce some special tariffs for high quality subscriber base. And from this case, from this tape, we have some subscriptions here. And these subscription fees will give us additional ARPU and they're more exactly what we'll see now.

Our next question comes from Ivan Kim of Renaissance Capital.

Hi. Actually, it's a couple of questions. First is regarding the subsidies. I think you announced yesterday that you launched a 33% subsidy for handsets in the Moscow-Moscow region. And just wondering if that's a short term, it's kind of promotion campaign?

The second question is about your Kazakh operations, which the MOU has performed there not kind of, I'd say one would expect for third quarter? Presumably the crisis affects your Kazakh operations earlier than, let's say, in Russia, probably I could say the Kazakh business can be some kind of proxy for what will happen in Russia, though it's probably just a brief one. Technical. So what's the actual amount of your reversal for sub-based concession accrual? Thank you.

I'll take the first one about the handsets. Actually what we launched yesterday was a two-month pilot where we will lock post-paid customers in for one year and at the end of that period, rebate a portion of their payments over the year and unfortunately I think the tone of the press release came out to sound like a subsidy that's really more of a reimbursement of a bonus. And so it doesn't reflect any shift in our policy. And as we said before, we don't subsidize handsets.

The amount of reversal of stock-based accruals in this quarter was 43 million.

And for Kazakhstan, the crisis started only one year only. And what we've seen is that we continued to increase the number of subs and the reality is that the number of subs, which were increased at 30% compared to previous year and the third quarter was really good in terms of new subs. We increased our active base by 10%. And more it's continued to be flat, but it's trends during full year.

All right. Our next question comes from [Jose Claxburg] of Black River.

Good morning. I wanted basically to ask a question regarding your dividend policy, I think it hasn't been asked before. What are you forecasting or what would be the strategy going forward, given the current situation?

Our dividend policy says that we're supposed to pay a minimum 25% of our net income. And we do not intend to deviate from that.

To that end, we would like to stress that priority for our cash flow allocation would be prepayment of debt, because if we don't do it, we simply go bankrupt. Then we put dividends. And then we put cash flow. That's how -- sorry, CapEx. And that's how we look at our priorities next year.

As far as we feel fairly confident, that we'll meet our debt obligations going into the next year, we intend to recommend the Board to pay the dividends next year as well.

Our next question comes from Alexander Balakhnin, Goldman Sachs.

Hi. I have actually a quick question on the dynamics of broadband ARPU, which is declining for the third sequential quarter. Would you explain the reasons for these dynamics? And do you expect some stabilization or probably turnaround going forward?

And a quick question on handsets and accessories. I just wanted to check. I believe you started selling iPhones since the beginning of October, so iPhones sales should not be reflected in the third quarter revenues. Is this some sort of accounting reform or something else? Thank you.

On iPhone (inaudible), we simply shipped iPhones into retailers and therefore recognized (inaudible).

On the ARPUs, the ARPUs between the second and the third quarter actually increased. They went from 16.6 in the first quarter to 16.9 in the second quarter and then dropped to 15.5 in the third quarter, which is exactly same as what you see last year, between Q2 and Q3 last year, there was a drop from 16 to 15.2 and then a further increase again in the fourth quarter.

So you traditionally see a drop in the third quarter because that's the holiday month in Russia and the way we bill for the broadband is on a daily basis So in other words, what happens is someone goes on holiday, he can put his account in hold. So he will pay first or second of August then put the account on hold, so we don't recognize the revenue for that anymore, and then reactivates when he comes back on the 26th or something like that. So it's a normal seasonal trend that we expected to come back in -- to normal levels as we have seen in the fourth quarter last year.

All right. Our next question comes from Stanislav Yudin of UBS.

Good afternoon everyone. Two quick questions please. The total debt that we see on the balance sheet, is this the nominal value or the fair value?

And the second question is, talking about your focus on cash generation, what's your, let's say, not projections, but your view on the repurchase of your debt? Especially euro bonds? Because they're traded at much lower levels than the nominal values. And the future M&A activities. Thank you.

In terms of debts, in our situation, it's (inaudible).

And we have discussed a repurchase of both stock and debt and decided currently against this for a very simple reason. Although it looks extremely attractive to buy it back at such a high discount, which clearly has very little to do probably with the company, per se, more with perceived country risk in general and emerging market areas, but on the other hand, when it's still quite an uncertain situation going forward, in terms of availability of financing and so on, that would be a fairly risky proposition for us.

As far as M&A is concerned, all of the activities have been suspended in terms of active M&A if you enclose included. We will continue to discuss, clearly, we'll continue to monitor the situation. But we do not expect any major transactions over the next two quarters to be closed.

Our next question comes from Nick Ivanov of Prudential.

Hello. Can you please describe the loans granted to your customers? What is the total amount? Are they secured or unsecured? And given the tight liquidity and tight financing, whether in the future, you intend to continue granting loans to your customers?

Could you please clarify your question? Because we do not grant any loans explicitly.

Oh, basically you don't finance your customer purchases?

I mean, if you refer to the purchase of the handsets, we are not at all involved in any financing of the hardware. If we are talking about our subscribers, the bulk of the revenue we receive from the prepaid customers, which actually helped a lot our working capital as well, and the post-paid customer represents only 5%. And from that perspective, we have a pretty good track record of collecting and therefore we can see that it is unsecured.

Thank you.

Our next question comes from (inaudible).

Yes. Hello. Congratulations on good third quarter results.

I have got a question for Elena, I guess. Again coming back to your hedging strategy. Do I understand correctly that you have several contracts and that they actually have different maturities? They are not -- they do not all mature in September '09? So if you could give some more details on what sort of maturities are those?

And just to make sure I understand it correctly, as long as rubles stays within this -- like below the cap level, then the hedge effectively doesn't protect you. It only protects you if the ruble did depreciate below those levels, right?

Yes. You have both of those right. So we have a series, I would say, of contracts, with all that kind of equal put and call options and as I had in my example that for example when we sit below RUB27 per $1, so there was the kind of no benefit for us. But when the rates crossed the level of 27, then we have a right to buy -- still to buy dollars at maximum of 27.

And at this time, I would like to turn the conference back over to CEO, Alexander Izosimov, for any additional or closing remarks.

Well, I don't think there will be many on my side. Thank you very much for participating on this call and thank you for your questions. And if anything left unanswered and you would like to get more information, you're always welcome to contact our IR and thank you very much and have a good day.

And again, ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may disconnect at this time.