VEON Ltd (VEON) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the VimpelCom second-quarter 2009 earnings conference call. Today's call is being recorded. At this time, I would like to the call over to Mr. Mateo Millett. Please go ahead.

Good morning, and welcome to VimpelCom's conference call to discuss the Company's second-quarter 2009 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 CapEx projection, the Company's capacity to accommodate demand and maintain the quality of its services, and the Company's strategic position.

Certain factors may cause the actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in the Company's press release announcing second-quarter and six months 2009 financial and operating results; the Company's earnings presentation, entitled 2Q09 Financial and Operating Results; the Company's annual report on 20-F for the year ended December 31, 2008; and other public filings made by the Company with the United States Securities and Exchange Commission, each of which are posted on the Company's website at www.VimpelCom.com.

In addition, the Company's second-quarter and six months 2009 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission's website at www.SEC.gov.

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

If you've not received a copy of the second-quarter 2009 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'd like to turn the call over to Boris Nemsic, Chief Executive Officer of Vimpel Communications.

Thank you very much, Matteo. Good morning, good afternoon, ladies and gentlemen. Thank you for joining our conference call today.

Let me introduce the team participating in this call. Here with me are Alexander Torbakho, General Director; Elena Schmatova, our Chief Financial Officer; Kent McNeley, Chief Marketing Officer; Dmitry Pleskonos, Executive Vice President for the CIS countries; Andrey Patoka, Vice President, Head of B2B Russia; and Alexey Subbotin, Director of our International Investor Relations.

On this call, we will discuss our operational and financial results for the second quarter of 2009.

When we entered into the economic crisis at the end of the last year, no one could predict how the situation would impact the Russian telecom market and our business. Therefore, we shifted our focus to cash generation until the macroeconomic environment became clearer. Now, after the second quarter, we see that our business remains robust, delivering in ruble terms, 12% revenue growth compared to the second quarter 2008 and 3% revenue growth compared to the first quarter of 2009.

We also improved our consolidated OIBDA margin to over 50%, representing an almost 4 percentage point increase compared to the last pre-crisis quarter of 2008. We attribute this increase to pricing discipline and our comprehensive integration efforts. As a result, in the first half of the year, our operational cash flow amounted to $1.7 billion.

After months of preparation, we launched commercial operations in Southeast Asia. The first results of operations are encouraging. Overall, we are very pleased with the second-quarter results. In the accompanying slides, we will present the results of the key business units.

Let me now pass the floor to Elena, who will present our second-quarter financial results and describe our financial position in greater detail.

Thank you, Boris. First of all, I would like to point out that the second quarter of 2008 was the first quarter when Golden Telecom's operations were fully consolidated. For the first time, we see a like-to-like comparison of our integrated operations year on year.

The results indicate that during the year, our operations showed stability and substantial margin improvement.

The ruble-to-dollar exchange rate fluctuations during the last 12 months impacted our bottom line potentially. In the second quarter, this fluctuation had an impact as well, but on the positive side. Our quarterly net income amounted to RUB22.6 billion, including a RUB10.6 billion net foreign exchange gain due to the strengthening ruble. But even without that impact, our net income improved year on year.

We substantially improved our balance sheet compared to December last year. Cash and cash equivalents increased 92% due to strong operational performance, good management of working capital and [resist] on borrowing.

Our net debt declined for the second quarter in a row from $7.5 billion as of end of the year to $6.3 billion by the end of the second quarter.

Our last 12 months OIBDA in dollar terms was equal to $4.5 billion by the end of the quarter, which is 6% higher than the last 12 months OIBDA a year ago. We consider it as exceptionally strong performance taking into account that devalued approximately 30% during the last 12 months. Therefore, the ratio is below [a second level] of 2.

Debt to asset ratio stayed flat at the end of the second quarter compared to the end of 2008. Our short-term liquidity position improved significantly, as you can see on the chart.

These factors, coupled with a reduction in capital investments, allowed us to increase our free cash flow before acquisitions in the first six months of 2009 by more than 75% compared to the first six months of 2008 from $799 million to $1.4 billion.

Out of our total debt of $1.9 billion new in 2009, as of today, we have already repaid $1.4 billion or 72% of the debt due this year. We continue to improve our debt structure in order to increase the proportion of our debt that was denominated in rubles. In the second quarter, we drew down an RUB8 billion [launch] on [Serbank as I said] as part of our dollar debt. It increased the ruble portion of our total debt from 15% at the end of December to 17% at the end of the second quarter.

We have seen further positive changes in our debt [tentative] structure after we [placed] RUB10 billion once in July and repaid more than USD400 million of dollar-denominated debt in July/August. This last ruble [one] placement allows us not only to improve our debt structure, but also gives us more flexibility in terms of investments.

Now, I will pass the floor back to Boris, who will discuss these and other operational developments in greater detail.

Thank you, Elena. In Russia, our main market, we achieved 12% growth in revenues year on year. Consolidated fixed and mobile OIBDA in Russia increased 21% year on year with a healthy margin of 51.2%. Our CapEx revenue ratio calculated in the last 12 months basis declined to 16%. In 2008, on top of the acquisition of Golden Telecom and Corbina, we invested aggressively in the second half of the year. Due to this, we have been able to be more conservative with our CapEx spending in the first half of 2009.

The cash cushion we accumulated in the first half of the year gives us flexibility to adjust and increase capital investment as necessary. We reiterate our full-year CapEx guidance of 12% to 15% of revenues.

We have accelerated the expansion of our 3G coverage, FTTB networks, and strategic backbone. We are investing efficiently, and we are confident that we have enough capacity to accommodate current demand and maintain the high quality of our service.

We're very pleased with the dynamics in Russian mobile, our largest segment. Our active subscriber base continues to grow in spite of the difficult macroeconomic environment. This growth in subscribers was accompanied by quarterly ARPU growth of 5.2%. We attribute the ARPU growth to a seasonal increase in usage coupled with stable pricing.

We are encouraged to see a 42% year-on-year increase in regulated service revenues, driven primarily by mobile data services and content. With ongoing investments in the quality and the availability of our 3G networks, we continue to see mobile data as a major growth driver going forward.

Best of all, we continue to grow revenues while maintaining high profitability, delivering an OIBDA margin above 53%. We consider the Russian mobile business to be in good shape, especially in light of the current economic circumstances.

In the fixed line segment, our revenues in the business segment grew 33% year on year but decreased by 8.8% quarter on quarter. In the second quarter of 2009, we saw effective cost reduction efforts implemented by most of our corporate customers earlier this year. We also observed an overall decline in business activity during the second quarter, in line with the macroeconomic environment. At the same time, the fact that many of our contracts are denominated in foreign currencies negatively impacted revenues in the business segment as the ruble [factor]. Our quarterly wholesale revenue remains steadily growing slightly quarter over quarter.

We continue to grow our broadband customer base in Russia. Over the year, we increased the number of active broadband subscribers by 1.1 million. A combination of FTTB and 3G technologies allows us to offer connectivity at affordable rates to customers in major Russian cities.

We continue to focus on driving up the take-up rate within the existing FTTB networks by strengthening our sales activities and dedicating CapEx to the existing network. We are pleased to see the take-up rate showing an upward trend nearing 10%.

We attribute a slight decline in fixed-line broadband ARPU to normal seasonality. The decline in mobile broadband ARPU reflects a substantial increase of our subscriber base and seasonal usage dynamics.

In Russia, the retail market is quite different from the European and American markets. Independent specialty retailers drive a wide selection of handsets available in the market rather than a more simplified selection offered by operator-controlled outlets. Consequently, the consumer in Russia has developed a habit of looking for new handsets in multiple retail shops instead of [mono-bred] outlets.

Based on this consumer dynamic, we have developed a three-pronged distribution strategy. First, we have more than 5,000-Beeline branded shops, including our own offices and branded [trace] counters in high-traffic locations.

Second, we have long-term agreements with the two largest national chains.

Finally, we have partnerships with about 300 regional chains throughout Russia. Collectively, this distribution approach provides more than 30,000 points of sales for Beeline SIM cards.

Since moving to this strategy more than a year ago, we have the leading position in gross sales and made consistent progress of [activated] growth. Now, let's look at our CIS operations.

The first is Kazakhstan, our largest business outside of Russia. During the second quarter of 2009, the Company reported continued growth in new subscribers and improved operating performance. We increased the number of active mobile subscribers to 6.6 million, 1.5 million more than we had last year. Means that usage grew by almost 12% compared to the first quarter, which is particularly encouraging in light of the current environment.

Usage growth, coupled with stable price led to an 8% quarterly increase in ARPU in local currency terms or 5% decrease in Russian rubles due to the ruble appreciation against Kazakhstan. Similarly, an 11% increase in revenue in local currency terms corresponds to a 3% decrease of reported Russian rubles.

We continue to focus on operational efficiency and cost control. In the second quarter of 2009, the OIBDA margin in Kazakhstan reached 54.2%, an all-time high for our operations in Kazakhstan.

In the Ukraine, the telecom market remains challenging. Nevertheless, we managed to maintain and even slightly improve our position there. The consolidated fixed and mobile revenue grew by 7% quarter on quarter in local currency, but only 2% in ruble terms as a result of ruble appreciation against Ukraine hryvnia.

In the second quarter of 2009, our Ukrainian business demonstrated significant margin improvement, with OIBDA margin reaching nearly 20%. Margin improvement came about primarily due to cost reduction efforts and synergies from the integration of our mobile and fixed businesses.

In the mobile segment, we recorded a modest seasonal increase in [usage and APP] and stabilization. This, coupled with seasonal growth of international traffic and roaming yielded a quarter-on-quarter ARPU increase of almost 15% in local currency terms. We continue to develop our broadened business and substantially increased our subscriber base in this segment to more than 50,000 active customers.

The next market is Armenia. While the macroeconomic situation in Armenia remains difficult, our Armenian operations demonstrated good results in the second quarter 2009. We are particularly encouraged by a 37% quarterly increase in usage, which arose primarily due to the launch of new marketing initiatives and seasonal effects. It drove ARPU 10% up quarter on quarter in local currency terms, although in ruble terms, it was down 9%. With an OIBDA margin above 50% and a revenue growth rate of 7% quarter on quarter in local currency, our Armenian business remains financially robust, generating healthy operational cash flows.

Next, let's look at Uzbekistan. Our quarterly operational results in Uzbekistan reflected aggressive pricing moves by competitors. The deterioration in the pricing environment resulted in a decrease in average price per minute, coupled with a 5% quarterly decrease in usage, which caused a 15% drop in ARPU. Recently, we introduced new competitive marketing initiatives and already see some signs of improvement.

Despite these challenges, we managed to keep our OIBDA margin above 50% in a country with a very low pricing environment.

Our operations in Tajikistan, Georgia remain on track, demonstrating positive dynamics. In Tajikistan, we delivered strong annual OIBDA growth of 175% with an impressive year-on-year margin expansion from 23.7% to 37.5%. In Georgia, our OIBDA moved into positive territory on the back of strong annual revenue growth of 100% in local currency, which confirms our ability to build a profitable business in that country.

Overall, our CIS operations continue to deliver good results in the current macroeconomic environment. Now let's look at our newly launched operations in Southeast Asia.

We continue to build up our operations in Southeast Asia. In Vietnam, our network covers 16% of the total population, while in Cambodia, our network covers 42% of the total population. Since the launch of our networks in Cambodia and Vietnam, we have seen very encouraging results. The Beeline brand is well-accepted in both countries. We have introduced innovative marketing initiatives and product designs.

From the launch in May to the end of the second quarter, our revenues in Cambodia amounted to RUB28 million. At this stage, the early results of our operations in Southeast Asia are very volatile, so we will report these results in more detail closer to the year end.

To sum it up, it was a good quarter for us. We quickly adjusted our operations to the new environment, grew revenues and maintained our focus on cash generation. Our financial position is sound, and we are efficiently managing our debt portfolio. We continue to invest in our business and are confident that VimpelCom will remain a leader in the telecom industry in Russia and the CIS. We are keeping a close watch on our macroeconomic trends. However, we have adapted to the current environment. Our business is strong, and we are ready to move forward.

Thank you for your attention, and now let me open the floor for questions.

(Operator Instructions). Tibor Bokor, Otkritie.

We have seen quite downbeat dynamics in the second quarter compared to the first quarter in the fixed line. We understand that part of it is because the corporate clients are built in US dollars, but can you give us a little bit more color on that? And perhaps some guidance for the next two quarters this year?

And within the fixed line, I would like to ask also about the FTTB households take a break. It seems quite low at 9.9%. Is it because of the difference between gross and net clients? I mean there's not many new clients coming in and a lot of clients canceling? Or is it that you are saving CapEx into this service and that's why we see such a low number? Thank you.

My name is Andrey Patoka. I'm responsible for the B2B division and VimpelCom. Thank you for the question. You are quite right, where in the second quarter, the fixed line operations on the corporate business segment were affected by the devaluing dollar. The fact that it helped us in the first quarter and in the second quarter we've seen reductions due to the strengthening of the ruble.

The second factor is that in the second quarter, we have seen the enterprises measures taken by our customers taking effect. Now the situation has been stabilized.

Coming to your question on FTTB take-up rate, let me show you a little bit different point of view to this percentage point.

You see on the page 11 of our presentation that despite a substantial decrease (sic) of the households passed from 7.5 to 7.9 million, we despite this, managed to increase the take-up rate. So, if there will be no new households passed, the take-up rate would show up much better. But please take note that this is a relative figure. And you see also that our active base grew in the last quarter.

Again, the broadband subscribers shown here are the active base, which is also subject to some volatility on a seasonal level, and the second quarter is definitely one of the beloved periods of taking holidays, not subscribing each and every week or month.

So, we are taking care that we increase the take-up rate, increase the subscriber base, but in parallel, due to some activities on the network development, we also increased the households passed. So we're definitely investing in this business actively.

As far as the guidance going forward, Boris, for the corporate clients, you said it stabilized. Should we expect similar results compared to the second quarter and third and fourth?

We do not give any forward-looking statements. Just as I said, we see the stabilization of the enterprise measures which have been taken by (technical difficulty).

Thank you.

Alex Kazbegi, Renaissance Capital.

I was looking at your Russian mobile ARPU and obviously you had the roughly 4% increase in usage, about 1.5% increase in the implied tariffs and the resulting in whatever, 6% local currency increase in the ARPU. We also know that sometime in March, you clearly increased the prices to the tune of somewhere even at 15%. So I was just wondering, if you can maybe just walk us through and break down in terms of what is the decomposition of the growth? Clearly, some customers probably traded down. There was probably some pickup in roaming. So if you could give us some color on how this sort of growth in the usage and the ARPUs take up in terms of the different groups of the customers, so to say? And what's your sort of current understanding of how the both usage and the tariff is sort of proceeding?

And the second question would be also on the Russian OIBDA, which was clearly very, very high. You mentioned I think some time ago that we should be seeing the impact from the consolidation, the cost input and cost synergy impact from the consolidation of Golden Telecom before the end of the year. So I was just wondering again, would we expect a better margin than this? Or do you think this pretty much covers all the potential synergies on the cost side which you could have extracted from the consolidation of Golden Telecom? Thank you.

Let me take first the second part of the answer, and then hand it over to Ken.

Thank you for the optimism for better margins, but let's stay on this planet also. I think that these margins are very good. We managed to maybe pick up some integration results earlier than somebody expected. But I would not drive this linearly further, not at all. Again, these are extremely good margins, and let's say this was the right result in the right moment.

Coming out of this, also to your first question, before I hand over to Ken, I want to stress also that we have been taking care very much on the quality of the customers, which without sampling, gives you of course mathematically some ARPU effect. We have had a very healthy growth in the number of subscribers, but we did not exaggerate it or push this growth to the maximum, like maybe some of our competitors sometimes may do.

So, this is the general comment maybe to the first part, to be completely clear for everybody, we are confirming our guidance with the high 40s with the margin.

Just a little bit of a comment on ABPM. As we've said in previous calls, our strategy overall is to hold our ABPM levels about flat, stable to where they are. And in general, there are two components to that.

We do take pricing on some legacy tariffs and make adjustments, but at the same time, we always work to be sure that we have competitive offers on the market in each of the various regions around Russia. And so we have a very good value tariff that is on sale, and then it's offset a little bit by some of the additional actions we are taking. That's what leaves us in this flat environment.

Right, but can you also say that whether there was any pickup in roaming, which typically happens in Q2? Was there anything different in this quarter vis-a-vis the other second quarters you have seen before?

Our roaming results in Q2 were slightly behind where they were a year ago. We've mentioned that in the first-quarter call as well. But, frankly, the delta versus year ago is only in the mid-single digits. So it's not a significant drop from where we were.

All right.

And we did see the seasonal increase from the first quarter.

Okay. Thank you.

Herve Drouet, HSBC.

Good afternoon. My first question is, it looks like there are some sign of stabilization as well in Kazakhstan and Ukraine. In Q3, do you think this stabilization -- the trend and that, we may start to see an improving trend in those two countries now? I mean it's something we can start to expect on?

And my second question is regarding again your broadband residential business. What we should expect in the medium term in your view, and I think let's say in two, three years time in terms of EBITDA margin in that segment and as well the take-up rate on past?

Okay, let's come to Kazakhstan first. What we see now is that after two years crisis in this country, we see now that business starts stabilizing, but we are not sure that it will continue because we see some seasonal growth from one side.

From the second side, we see some usage increased from our additional services, which we introduced in the market. In Ukraine, the reality is a little bit not so good because in general, what we have seen in the second quarter, the total market is declining. And the total market is declining, which shows some positive results. And we don't expect exactly that huge growth or maybe stabilization will be in the third quarter.

Coming back to your question on residential, yes, we are looking at this business definitely as a medium-term business and I will even say long-term business. This is a part of the strategic directions which VimpelCom decided to take. And out of this, I would even say two or three years is a short period. We already passed 7.9 million households. And there's definitely to see some kind of balance between the speed of the new households reached and the balance of entering into the I would say customers flat and then signing up.

This is a balance which has to be seen also in the competitive dynamic and both in the dynamic of other technologies competing for the same customer. So going to the point, what is the critical mass of the city where you are entering with this and so on and so on.

We are not releasing the EBITDA margins on this level of business, so we will refrain from doing this also this time. I would just want to stress to you also that in some other countries where we operate like Ukraine, we have very encouraging results on FTTB.

And one point more, penetration in mobile, mobile voice, reaching 138% is one story which is a fact. And the Internet connectivity in Russia is still, on the broader scale, at the beginning. Of course, you're not talking about big cities. So it's a balance which we will do for the next two, three years. Sorry that I cannot be more precise, but you understand it.

Okay, thank you.

Alex Wright, UBS.

Could I come back to CapEx first of all, please? You obviously reiterated your guidance for the full year. Could you give us any indication as to whether you believe that your low level of CapEx in recent quarters has hurt your business in any markets? We look at one or two of the CIS markets, for example Uzbekistan, it looks as though you've been losing some revenue share there. And I was wondering do you attribute that to the low CapEx spending? Or is there some other factor that is driving that? And do you, therefore, expect to increase the CapEx in the short term?

And then the second question is, on the broadband side of things, it looks as though there's been a slowdown in the mobile broadband subscriber additions. I wondered if you could just comment on what is driving that? The fixed line broadband ARPU dropped by quite a bit in the second quarter compared to previous quarters. So if you could just comment on the dynamics behind that as well, please.

I'll take the first part about the CapEx. I understood that you are also referring also to that overall Russian CapEx, not only to CIS countries, I assume. Is this correct?

Yes. Well it's all of your markets, really.

Yes. You have to see the CapEx amount on the last 12 months, and that's why we intentionally show it in the last 12 months. And you see peak, what was in the fourth quarter of the last year, and even a very high amount of CapEx in the third quarter of last year. So there was definitely no need to go aggressively in the first and second quarter because we already let's say, did our job in the third and fourth quarter of previous year, having a base which is very good.

And that's why in the first half year, we have been really running further on high-quality network, keeping the maintenance and keeping just the normal necessary investments. What we said is that we will, of course, in the third and fourth quarter go into more spending due to two effects.

One of the license obligations on 3G which we have to fulfill this year and beginning of next year. And the FTTB business and strategic backbone business. So this point of view, there was definitely no impact from the CapEx spending to the running business.

After considering this -- yes?

No, that's fine. Thanks.

On the CIS, Ukraine is a pretty -- excuse me, Uzbekistan is a pretty specific country with a, as [Mitsi] said, a low price per minute with the very small moves in the pricing scheme. You can really move a lot of traffic.

Interesting enough, that even with the increase of traffic, we managed to improve the quality. So, let's say there was some potential there of improving quality and when you compare the three networks in Uzbekistan, we are, for the time being, really growing traffic or extremely growing traffic have by far the best quality.

To comment on the mobile broadband subscribers, in the fourth quarter and first quarter of this year, we had done work to launch the product, to get it at the right price, to get excellent distribution, to make a modem that was extremely usable and each of those elements really went far beyond what competition was offering.

And frankly, we took an extremely high percent of the USB modem sales during that period, one that frankly was pretty clear we would not continue forever.

What's happened is competition has expanded their distribution more similar to ours. They've lowered their prices etc. and made some adjustments.

We still believe we have clearly the strongest share in this area and feel that we will do very well in the future. But it's the adjustment from really having the market almost to ourselves to being somewhat more balanced than it was before.

Okay. And what do you see in terms of the growth trend for the overall mobile broadband market then? Do you feel that there was an initial sort of pent-up demand which is now slowed down a bit? Or are you seeing fairly steady growth in mobile broadband subscribers?

Well, I don't think we will give specifics on the exact rates, but I would say that we still believe there's lots of growth left to come, and we still remain very optimistic in this part of the market.

To be clear on this, still in Russia, the 2G later traffic on mobile is bigger than the 3G data traffic on mobile, which shows you this is a lot of potential on the other side, at the normal ratios should be 4 to 2, 5 to 1, or even 10 to 1 in favor of 3G data traffic. So a lot of way to go.

Okay, thank you. And then just finally on the fixed line broadband ARPU, if you had any comments on the reason behind the decline there?

This is partially seasonality. Because, as I said before, in other environments, there was the second quarter, is a lot of holidays. People are going out, even going out of their flats to somewhere else. And then they pretend to be inactive for some time period of time and that's what's going on. We did not decrease the prices, if this is the question.

Alex Balakhnin, Goldman Sachs.

My question is on your perception of the Russian mobile markets, [usually show] elasticity. Do you think it's above 1 now? Or you [feel pressured] basically to grow your revenues by increasing your prices basically and having more or less a moderate level of usage growth? Or you will be at some stage will be reducing prices to stimulate user growth? That's my first question.

And my second question is on the fixed line business, segment, you mentioned that the dynamics and the business has stabilized basically and your customers no longer optimize their IT budgets. And the question is what do you think should happen for this business to start growing with [not] ARPU -- not with the rates we saw two years ago, but to reach, to say double-digit growth? Thank you.

To begin with the first part on elasticity, we continue to believe, as we have said before, that elasticity is less than 1, but when we set our targets on pricing, we've said we believe they should stay stable. I think it's very important that we maintain tariffs that are competitive in the market and frankly, staying where we are is probably about as far as we should be going.

Coming back to your question about the fixed line corporate segment development, development of that segment would be very much dependent on the overall economic environment of the country. That hopefully will improve.

Okay.

William Kirby, Nevsky Capital.

Thank you. Just one question. The cost line in your P&L of service costs has historically sort of trended up as a percentage of revenues, I guess due to more off-net calling and transmission costs. But it seems to have come in quite sharply in the first half of 2009. What's that due to? And what sort of trend should we expect in that in future years, please?

Actually, can you please clarify? The service costs, when we compare, for example year on year is increasing.

It's increasing, but as a percentage of revenue -- of your mobile service revenues, it seems to have stopped growing.

Gross margin is more or less stable during the last several years, but with some certain trend to a little bit improvement because of the fact that we continue kind of to move more traffic on our own network using capabilities of Golden Telecom for the benefit of carrying mobile traffic and further expanding a buildout of our own transport network. And, of course, improving all the arrangements and extracting synergies from the operations between VimpelCom and Golden Telecom.

So do you have a sense that there are further improvements there to come, or have we seen the majority of those synergies?

No, more probably the idea is, of course, that gross margin is impacted not only by costs, but the revenue as well. It depends also on the ability of keeping the prices stable for our own services. So it's pretty hard I would say to formulate what it will be going further. But our idea is that we should keep our gross margin more [with] on the achieved -- on the level which we saw on average for 2008.

Okay, great. Thank you.

Victor Klimovich, VTB Capital.

I have a question on gross sales. You showed -- in the second quarter, you showed a churn number which gives us -- and compared to MTS's churn number. And we have net debts and if we compare [gross] sets of VimpelCom to MTS, we see that MTS has outperformed in Russia in mobile services VimpelCom by around 1 million of new additions. Can you please elaborate on that? Because it looks like very strange we think that probably the sales should be on the same level with probably different quality, but still. How it could happen and what was the reason of that? That's my first question. Thank you.

Overall, we believe that our gross sales modestly exceeded MTS's. The primary difference is, remember that MTS has a six-month churn policy. We have a three-month churn policy. So, in the second quarter, we have already churned out some of the very strong sales that we had in the fourth quarter and early part of the first quarter of this year. And that's what shows up in our churn. MTS's numbers on the other hand are not going to show the churn until sometime in the third quarter when they announce theirs.

I'm sorry, Kent, I'm talking about gross sales, so that's before churn. And so it's just --

The first comment I made. We believe our gross sales are ahead of MTS's.

Yes. Okay. And well, okay. Thank you.

And my second question is on the current cash policy. So, if we understand the current situation, but and previously you mentioned that you will maintain the current total debt. So, if we expect that the situation even will be stable without any growth, you will generate a lot of cash in the second half of this year and next year hopefully. So, will you decrease finally total debt, or you will expand it somehow, dividends, CapEx and so on? Thank you.

Thank you for the question. Actually, it's seems to me a little bit strange. It seems to me that we didn't say that we maintained the level of total debt at the same level.

No; we would like to operate to the best -- to extract the best effects from all our operations. And of course, if we will see that -- currently, we were saying that we are currently seeing no problem in the level of the total debt we have right now, especially if we will look on net debt positions, we are decreasing net debt permanently during the last two quarters.

Going further, the level of debt will depend of course on the needs of the business and of course the decisions, the strategic decisions, of the Company, of how to move forward.

Thank you. Thank you very much.

Kevin Roe, Roe Equity Research.

My first question is a follow-up on Russian ARPU. Is July and August following the same strong seasonal trends as we've seen in previous years? And my second question is for Boris. Could you update us on your strategic vision for Southeast Asia? Is there -- do you see opportunities to expand your footprint there at all either through acquisitions or greenfield licenses?

Kevin, on your first question regarding ARPU, while we're obviously not going to give the specifics, we do see that the growth in usage this year is relatively consistent with what it has been in previous years.

Considering the, how do you call it, strategic regional for Southeast Asia, we are definitely managed to build in a very short time class there, covering as of today roughly 100 million people potential market. We stated how much we are covering technically up to now.

The first results are encouraging, and we see definitely this class term to grow the region of Southeast Asia is our opportunity -- is an area for opportunity for VimpelCom.

For the time being, we do not want to disclose further steps or discussion we are potentially in, so we definitely are committed to the region. We invested a lot. The first results are encouraging, so we actually entered a new market with roughly 100 million people. I would, for the time being, call it -- we do it successfully. And we will go into more detail toward year end.

That's helpful. Thanks, Boris.

Denise Molina, RBS.

Thanks for the call. Just two questions on CapEx and then one follow-up question on the broadband modems. On the CapEx, just wondering on the other CapEx that you reported if that's primarily Vietnam and Cambodia. And just looking at the increase sequentially from first quarter to second quarter, there's quite a big jump. I'm just wondering if that's front-end loaded and if the second half is going to be increasing less sequentially? Because I think it was up not quite double, but close to that.

And then the second question, CapEx question, relates to 3G and sort of how much -- how far you are in that rollout and how much you think you will have to do sort of next year. I'm just thinking percentage-wise, if you think you've got 75% done this year and 25% next year.

And then just on the modems, I think MTS said that they were taking one-third market share of the modems being sold, the broadband modems. And you said that you thought that you had the lead. So I'm just wondering if you have more than one-third of the market. Thanks so much.

I'm not sure that I catch completely the question. I can try to start with the 3G rollout.

We have a license obligation to launch the commercial operations in all 82 regions of Russia with 1st of November this year. And that's what we prepared and we are -- we will fulfill this obligation fully. And of course, the biggest part of this CapEx will be related to the third quarter fulfilling this obligation.

The second event is also part of the license obligation, and this is a precise amount of Note B's active in operation with the 1st of April, 2010. Due to probably well-known circumstance, the winter in Russia is not so easy. We have to build up as much as possible in this year and then to go to put in operation in the first quarter of next year. So you will see this CapEx will be reflected also in the second half of this year.

Considering if I catch completely your question, the first part of the question of the increase of CapEx, you have seen that the first quarter was actually an extremely low level, so this increase -- it's more a relative issue. It looks like a huge increase on percentage base, but in an amount of money it's not so fundamental. But let's say we stay with our guidance of 12% to 15% CapEx sales.

I'm sorry; I wasn't clear on that. I was talking about the other CapEx, which jumped from RUB439 million in 1Q to RUB770 million in 2Q.

Okay. This is Cambodia.

And do you expect the second half to be as -- I'm sorry; do you expect the second half to be as -- doubling again or do you think that it's all front-end loaded?

No, of course the capital investment in Cambodia, they are going in line with the initial business case that's all in all, all that investment is compared to the other part I would say of capital spending, they are not very material to overall operations. Because even in the second quarter, you can see that this is only 15% of the total CapEx spend. And so we do not, answering your question, we do not expect that capital investments will become kind of the major part of our investments overall.

And regarding the sales of USB modems, we continue to believe that we are selling more than our competitors. And I believe a recent article that was published would reconfirm that.

Okay.

Stephen Pettyfer, Merrill Lynch.

Yes, good afternoon. Two questions, please. Firstly, apologies if I missed this, but could you tell us what percentage of your Russian ARPU comes from value-added services?

And secondly, just on the tax rate, could you guys give us some thoughts about where your effective tax rate would be for the second half of this year? Thank you.

Regarding value-added services, this quarter, they were about 15%, which is modestly stronger than it typically is in the second quarter. And, in the CIS, it ranges from 4% in some of the less developed markets to 12% in Kazakhstan.

In talking about effective income tax rate, of course this year, it's becoming a little lower than last year because of the decline in statutory income tax rates. In Russia now, a major market from 24% last year to 20% this year. And also again, internally, we are trying to decrease as much as possible nondeductible expenses and does bring effective tax rate closer to statutory tax rate.

But as we discussed previously, consolidated effective tax rate also relates and depends to a certain extent on the composition of taxable income coming from different countries with different statutory tax rates.

But generally speaking, effective tax rates this year should be lower than last year just due to the fact that we just [passed] that statutory tax rate is Russian decline.

Thanks. So is Q2 a sort of reasonable level to think about for the rest of the year?

No. Again, you cannot pick up one quarter and just extrapolate. It's better to look for a kind of longer period to see the clear picture of the composition of consolidated tax rates.

Okay. Thank you.

Anna Kurbatova, Gazprombank.

Good evening. Regarding your debt maturities [KDO] for 2010, you have approximately RUB2 billion to repay. Could you elaborate which quarter will be the heaviest in terms of the debt payment?

And the second question also regarding the debt, your debt composition currently is 73% is denominated in dollars and 10% in euros. What is your target for the end of this year, maybe end of next year? Thank you.

Yes. There are large repayments of our debt in 2010 coming our first quarter. And, but, you can see that we are starting preparing to it and building our cash on the balance.

Talking about the composition of our debt, we are not giving kind of predictions of what it will be, but in general, overall intentions, long term or short term or mid term is to each more rubles in borrowing because we would like to have our debt portfolio more aligned with our operational currencies. And so as long as the majority of our cash from operations is coming in rubles, of course, the idea is to have the majority of our debt in rubles as well.

Thank you. And the short second question about UBS modem sales. Where do you see the highest sales currently? In the metropolitan markets and (inaudible) [period] work or in regions where you have already launched 3G? Thank you.

I'm sorry; I didn't understand your question on USB modems.

USB modems sales, where do you see the highest additions, connections, in regions or in metropolitan markets and some (inaudible) work in Moscow?

In general, they've been in both. But, where we find the best sales are in markets when we enter with 3G. Because when 3G is in there, the total experience is obviously much stronger and provides a lot of interest. And we actively promote as we go into 3G markets. As we open them up, we actively promote USB modems.

(Operator Instructions). Dalibor Vavrushka, ING.

Good evening. I have two questions. One is about the retail network. I think in the earlier part of your presentation, you mentioned your point of sales and the way you're distributing your retail network. I'm just wondering whether you can compare it with competition because it appears quite strong. And also in light of that, I just wanted to ask about the developments in the net apps in the second quarter. I've heard your answer regarding the gross sense and net sets.

But still, I'm just wondering if you compare your ARPU trends, for example, with MTS, one would have assumed that if you are losing some low usage customers and going for the high-quality customers, that your ARPU would have grown higher than MTS. And I think the growth was roughly the same within 1 percentage point difference. So I'm just wondering whether you think that you will be able to leverage your retail advantage better maybe in the second half of the year?

I also noticed, I'm not sure if that's true, but somewhere in the press that there were some management changes in some of the regional operations. So I'm just wondering whether you can maybe shed a little bit more light on what's happening in the retail and whether you think that some improvements can be expected in the second half of the year?

And well, the second question is basically related to that. Obviously, as you said earlier, you are focusing on the debt repayments, profitability and cash flow generation. And I'm just wondering whether you are going to review the strategy in case if the current market condition continues to be let's say less negative than it was anticipated; and whether there will be some sort of major strategic review. And you will identify some growth areas where you are going to start investing more money, possibly which areas this might be and what timeframe this might happen. Thank you.

Thank you for the long question, but [the part] is I have to make introduction. We consider the results of the second quarter as exceptionally good. We have increased our revenues versus the first quarter '09. We have a substantial increase even versus the year-on-year comparison. So, definitely I cannot share the view that there is some kind of desperate improvement necessary, not even in the ARPU case.

We are very prudent on the definition of subscribers, putting them on three-month period. We are very closely monitoring the one-month actives, and we are the best in this category. So when you look at all these things together, our stability is much higher, which also proves to the higher margins, which we achieve.

Linked to the higher margins is also the issue of the sales strategy, and it's definitely up to each and every competitor in the market to define his own strategy. We defined it on three pillars, which we showed also. We definitely do not want to copy our competition in their moves. And I think that the strategic deals we made were the two biggest chains. And if you remember in Russia, there have been six chains now. There are two in the house. We put on the right course, definitely.

Also, the quality of these customers is much better. I stress also we are not making sampling. So all these things together show that our figures first are stable. Second, are very well underlying the trends.

So, I am sorry for this kind of answer, but I don't want to go to the end of this conference call where we have actually a good feeling about our work in the second quarter to go into some negative direction. Maybe some comments on the ARPU from Kent.

Again, I would just reiterate that from an ARPU standpoint, our objective has been to maintain pricing stable. And MOU trends we have seen have been good seasonal trends. And we are optimistic about those going forward. So that's what's driving our ARPU.

Okay. Thank you.

Evgeny Golossnoy, Troika.

I've got a question; where I probably had missed it, you mentioned it. But your CapEx guidance for this year is 12% to 15% of sales. Is that correct? And, could you give a breakdown of this CapEx roughly per each line of -- major line of investment such as mobile, 3G, broadband? And probably if you could shed some light on CapEx in 2010, it would be perfect. Thank you.

Yes, we confirmed our total 15% CapEx of sales guidance. We're not breaking this down due to many reasons. What we said are the focus areas where we will invest and first you have to bear in mind that the running business of such a huge network like ours in Russia, 11 time zones, big country, and the six CIS countries and so on, you have some kind of basic maintenance CapEx which you have to deploy anyhow.

On top of that, we are investing firstly in the capacity where needed and into deployment of the new broadband networks, both in the fiber to the home, FTTB, area and 3G. As I said, we have the license obligations which we fulfill. We do not make a breakdown on each of them.

First, for example, one of the reasons for this is all the transport network, core network, is used jointly by all the technologies. Secondly, the sites for 2G and 3G network are the same. So it will be deliberately to deploy the costs of the build sites also to 3G on top of it.

We are focusing an integrated network, and this is one of the advantages which we achieved due to the acquisition of Golden Telecom and Corbina; you see it also in some other figures. That's why we are not specifying it in this way.

Okay. And the second question if I may, could you give a breakdown of the households passed in terms of broadband into the regional segment and the Moscow segment? How much is where? And how that can change going forward.

I don't have it on top of my mind, but Moscow is definitely -- I look at a total Moscow, Moscow is covered by the broadband operators in the level of 70% to 80%. It's 450,000 in Moscow. And what we are going now subscribers, yes, subscribers, so almost half is in Moscow. The broadly level households passed in Moscow is up to 70%, 80% of total households.

Where we are going now are more regional cities, which definitely have more potential having not such a big competitive environment until now, but for this you have to be on time there.

The third criteria which is interesting for this business is not so much how big the city is, but is what is the density of the population of the architecture. And in Moscow, of course, you have nine-, 10-story buildings. In smaller cities, you are satisfied when you reach five-, six-story buildings. So the rule of thumb, one building has between 70 and 120 flights. And this makes the economy of scale.

Ivan Kim, Renaissance Capital.

Two questions if I may. First of all on the fixed line side, you've seen 3% growth in fixed line wholesale revenues quarter on quarter. Just curious what are the major drivers there.

And, secondly, you're breaking cash flow was flat in rubles quarter on quarter in the second quarter. But EBITDA was roughly 10% higher. And you talk about the kind of prudent approach to working capital. What are kind of the reasons for these dynamics? [You'd ask] like why EBITDA growth is there but not breaking cash flow growth. Thank you.

Growth of the wholesale revenues in the second quarter was the result of the extending our capabilities and [because] of the traffic of other places, both compared to the Russian Federation and the growth to the destinations in Russia and CIS countries.

And talking about working capital, as we discussed already, we really see improvements in working capital, so it's pretty hard for me to judge really your question. Because in the six months of 2008, cash flow from operations -- free cash flow before acquisitions -- was RUB799 million. And six months this year, it was RUB1.4 billion, so improvement is there.

Tatyana Bobrovskaja, UBS.

I've got two questions. In relation to mobile subscriber growth, where do you see it going forward by the end of this year?

We have continued to have very strong gross sales through our strategy of maintaining a competitive pricing presence among what's on sale and the strength of our distribution strategy, which we discussed today.

So we continue to see strong gross sales, and we believe that a good bit of this will translate into active-based growth as we go forward.

One other point that I would just point out is we are still relatively new in the Far East and are continuing to strengthen our 3G network there, so there's an opportunity for continued growth in that area as well.

All right. Thank you.

Jenny Tung, IGA (sic) Investments.

It's AIG Investments from London. Hi. Yes, sorry, can you hear me?

Yes, please go ahead.

All right, okay. My question is do you mind giving us a breakdown on a quarter by quarter of the debt maturity in 2010? And also, can you talk a little bit about your synergies so far with Euroset? Are you happy so far? And is that potential cost reduction in terms of sales and marketing expenses that you can get some cost reduction from the synergy between you and Euroset. Thank you.

With debt maturity, I do not have that data with me right now, but we can send it to you by e-mail if you will contact our investor relations.

That would be great. Thanks.

Concerning Euroset, we have to underline that Euroset is an independent chain, the biggest [alternate] retailer in Russia who makes his let's say commercial contracts -- it's a multi-brand chain. And that's it. We have a commercial contract with them, which is, I would say, preferable for both sides and does not have any peculiarities compared with other normal distribution contracts.

I think the strategic value is the volume we think we can place through this strong chain, and that's it. Again, we are not controlling the operations of Euroset.

This does conclude today's question-and-answer session. At this time, I would like to turn the call back over to our speaker, Mr. Boris Nemsic. Please go ahead.

Thank you, and thank you very much for participating in this call. If you have more questions, please contact our IR department, and we will be happy to provide you with additional information. Have a nice day. Good bye.

This does conclude today's conference call, and thank you for your participation.