VEON Ltd (VEON) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the VimpelCom first quarter 2010 earnings conference call. Today's call is being recorded. At this time, I would like to turn the call over to Alex Tramont with FD. Please go ahead.

Thank you. Good morning and welcome to Vimpelcom Limited's conference call to discuss the Company's first quarter 2010 financial and operating results.

Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to, one, expected benefits from the combination of OJSC VimpelCom and Kyivstar; two, the Company's 2010 capital expenditures; three, the Company's future revenues, margins, pricing, capacity and competitive position; and four, predictions about future market and economic conditions in Ukraine.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in, one, the Company's press release announcing first quarter 2010 financial and operating results; two, the Company's earnings presentation, entitled "Pro Forma First Quarter 2010 Operating Results and Selected Financial Data"; three, the Company's registration statement on Form F-4, filed with the SEC; four, OJSC VimpelCom's annual report on Form 20-F for the year ended December 31, 2009; and five, other public filings made by the Company with the SEC, each of which are posted on the Company's website at www.vimpelcom.com.

In addition, the Company's first quarter 2010 financial and operating results press release and Form F-4 and OJSC VimpelCom's Form 20-F are posted on the SEC's website at www.sec.gov.

VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of 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 first quarter 2010 financial and operating results press release, please contact FD at 212-850-5600 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call, can be downloaded from the VimpelCom website.

At this time, I would like to turn the call over to Alexander Izosimov, Chief Executive Officer of VimpelCom.

Thank you, Alex. Hello, everyone. Thank you for joining the first quarterly conference call of VimpelCom Limited.

Let me introduce the people participating in this call. Here with me in Amsterdam is the OJSC VimpelCom team, including Boris Nemsic, Chief Executive Officer; Elena Shmatova, Chief Financial Officer; Martin Furuseth, Chief Marketing Officer; and Dmitry Kromsky, Head of the CIS business. From Kyivstar, we have Taras Parkhomenko,, Chief Marketing Officer of Kyivstar. On this call, we will discuss the transformational deal which we recently closed and our operational results and certain pro forma financial results for the first quarter of 2010.

Before going into financial and operational details of the first quarter, let me say a few words about the transformational deal which resulted in creation of VimpelCom Limited.

Kyivstar is the leading mobile operator in Ukraine. With the largest customer base, excellent networks and superior financial metrics, fits perfectly into the view of the world. The overwhelming support from our shareholders gives us confidence that we embarked on the right path of value creation. Yesterday, we announced the terms of the squeeze-out of the OJSC VimpelCom minority shareholders and plan to complete the process as soon as practically possible.

We are in discussions with the Ukrainian authorities in respect of their decision to review the permission granted for the transaction in March. We hope that the situation will be resolved quickly, to allow us to start integrating our Ukrainian business.

The combination of the two market leaders into one company created a spectrum of opportunities for business development. This is especially important in a mature industry which is going through transformational changes, driven by technology, regulations and competition from adjacent sectors.

For the first quarter, we present the combined financial results on a pro forma basis, assuming the consolidation of OJSC VimpelCom and Kyivstar. Starting from the second quarter, we intend to provide a complete set of consolidated operational and financial results.

The combination of the two companies increased substantially the scale of our business. The Group revenue, in dollar terms, increased by almost 30%, compared to the first quarter of 2009. I'm especially pleased with our ability to maintain a high OIBDA margin. Combined OIBDA reached $1.2b and we achieved the best-in-class OIBDA margin, in excess of 47%.

We intend to maintain these levels of operational efficiency and continue to focus on cash generation, which we see as the foundation for further business development and improving shareholder returns.

The balance sheet and the cash generation ability of our operating companies continue to be very strong. As promised, we continue to improve the OJSC VimpelCom's debt currency structure. By the end of the first quarter, the portion of ruble debt increased to 30%, compared to the 15% at the end of 2008.

OJSC VimpelCom, as of today, repaid more than 60% of its debt due in 2010, bringing the net debt of the Company to less than $5b. This is substantially less than the $7.5b reported at the end of 2008 and considerably improves our total debt-to-OIBDA ratio, which is now 1.5, compared to 1.7 at the end of 2008.

The combination with Kyivstar, which has practically no debt, will improve VimpelCom Limited financial position even further. The combined total debt-to-OIBDA ratio for VimpelCom Limited, on a pro forma basis, is just 1.3.

In the future, we plan to establish a consolidated treasury function in the new headquarters, to manage our balance sheet and cash flows more efficiently.

Now, let's look at our quarterly operational and financial performance in greater detail. We'll start with the OJSC VimpelCom, our largest operational company. Overall, the first quarter performance was in line with our expectations and to a large extent reflects the macroeconomic reality in the region, pockets of growth with early signs of recovery in some of our markets.

Appreciation of local currencies against the US dollar helped to strengthen the top line, compared to the first quarter of 2009. We attribute the quarter-on-quarter decline in revenues to normal seasonality.

OJSC VimpelCom generated $1.1b of OIBDA, maintaining an OIBDA margin above 47%. Strong operational cash flow of over $800m reflects our consistent focus on cash generation and working capital optimization.

The next slides describe our performance in the largest markets. So let's move on to Russia. Overall, in Russia the Company achieved very good results. We increased our mobile revenues by more than 5%, compared to the first quarter of 2009. During the first quarter of the year, we did not see a true recovery in the business segment. The situation certainly stopped deteriorating, but the growing demand for communication services is still accompanied by a cost-cutting mindset.

Our fixed line revenues were particularly affected by the economic slowdown, although the fixed segment remained stable in US dollar terms, year-on-year, thanks to the diverse revenue streams. It declined in ruble terms, partially due to the ruble appreciation.

In a complicated macroeconomic environment, we strongly believe that management should focus on efficiency. We're pleased that our consolidated fixed and mobile OIBDA margin remains in the high 40s area, which is slightly up quarter-on-quarter. The mobile margin on a standalone basis remains about 50%.

Further growth in Russia to a large degree will be determined by the continuation of the macroeconomic recovery. We plan to further increase capital expenditures through the rest of the year, as we accelerate the rollout of our 3G and FTTB networks on the back of robust demand for fixed and mobile broadband Internet services.

Now we'll look at the operational performance in Russia. We are pleased that data services are becoming a more substantial part of the revenue mix. Our active mobile broadband customer base increased to 1.2m subscriptions. Value-added services as a percentage of mobile service revenues exceeded 20%.

However, it is becoming more difficult to measure the true underlying market dynamics and operational performance in the mobile segment using traditional KPIs, such as subscribers' MOUs and APPM. Presently, we're exploring opportunities to come up with a new framework of KPIs, to enable a better understanding of our business. But for the purpose of this presentation, we continue with the traditional metrics.

We see broadband as a new core market for us in Russia. We continue to build up the active customer base, using both fixed and mobile solutions. By the end of the quarter, we served 2.3m broadband customers in Russia, with monthly ARPU of RUB395 for fixed access and RUB326 for mobile access via a USB modem. Our quarterly broadband revenues increased 59% year-on-year, in ruble terms.

In the fixed line segment, the revenues in US dollar terms remained stable year-on-year. We are pleased that the revenues in the residential segment improved year-on-year and demonstrated stable quarterly dynamics, in line with our expectations. The wholesale revenue remained essentially flat, despite the overall wholesale market slowdown.

In the corporate segment, the first quarter of the year was seasonally weaker, as it has 12% less working days than the fourth quarter. The year-on-year results of this segment reflect lower business activity of our customers, in the wake of the economic slowdown. It was further amplified by the Russian ruble appreciation, as a significant part of our client base is billed based on tariffs pegged to the US dollar and the euro.

Fixed line OIBDA margin remained at 29%, essentially flat quarter-on-quarter.

Now, let's look at the next reporting segment, the CIS. In this release, the CIS segment includes VimpelCom's operations in Ukraine, URS and former Golden Telecom Ukraine. Starting from the next quarterly earnings release, we plan to present Ukraine as a separate consolidated reporting segment.

We began consolidation of the Kyrgyz mobile operations of Sky Mobile, which has a management contract with KaR-Tel, our subsidiary operating in Kazakhstan. Since June 2009, Sky Mobile has been operating under the Beeline brand. It serves 1.8m customers, with quarterly revenues of almost $26m.

I would like to highlight that in Kazakhstan, our largest CIS market, we delivered 10% year-on-year revenue growth in local currency. In our opinion, such results reflect encouraging signs of a return to stability in that market. Another achievement here is that the number of broadband subscriptions in the countries increased 187% year-on-year, as we started to actively develop our broadband projects in Ukraine, Kazakhstan, Uzbekistan and Armenia.

Overall, in our CIS markets, we continue to focus on cash flow and profitability. While the situation in Armenia and Uzbekistan remains challenging, we are pleased with our progress in Kazakhstan and Georgia.

Our operations in Southeast Asia are still in a very early stage of development. In Cambodia, after the first year of operations, we are now the fourth-largest player out of nine operators. We attribute this successful start to good network quality, effective marketing campaigns and a proactive approach to distribution.

In Vietnam, our network covers approximately 57% of the total population and we operate in 51 out of 63 provinces, where our active customer base reached approximately 1.6m subscriptions.

Overall, we are optimistic about the potential of the Southeast Asia mobile market and continue to enhance our presence in this region. We stick, however, to our philosophy of investing as we grow and are exercising a cautious approach to our investment decisions.

Now, let's move to Kyivstar. As I said previously, we are pleased that the deal creating VimpelCom Limited has closed. In combination with Kyivstar, our position in Ukraine became much stronger. The political situation in Ukraine became more stable after the presidential elections. We anticipate that the Ukrainian economy and its telecom markets will rebound after a steep decline of 2009, and in the short and medium run are likely to outpace the economic development in Russia.

Now, the operational highlights. The quarter-on-quarter revenue dynamics reflect the typical seasonality and our efforts to stabilize subscription market share. Year-on-year decline in revenues was largely driven by a lower number of active subscriptions. Reduction of the interconnect rates starting from the beginning of 2010 was another key contributor to the decrease in revenues.

The OIBDA margin in the first quarter was almost 51%, lower than the historical levels at Kyivstar. The decrease was caused in part by approximately UAH50m of one-off costs related to transaction expenses and shareholder charges. We intend to maintain the Kyivstar OIBDA margin in the mid-50s level.

Regarding the recent decision of the Ukrainian antimonopoly committee to review its permission granted in March 2010 for combination of Kyivstar and URS, I can say that we are cooperating with the authorities. We hope that after all questions are answered all the restrictions will be lifted.

Now, looking at the operational highlights at Kyivstar. The competitive situation in Ukraine remains challenging, driven by the ongoing market shift towards the zero on-net pricing model, which is primarily aimed at price-sensitive low-tier customers. The ARPU remained essentially stable year-on-year, reflecting good quality of our customer base, which we serve under our core brand, Kyivstar.

To address the competitive pressure, we actively marketed the zero on-net pricing model under our second brand, DJuice. Presently, we serve over 6m customers under this brand, primarily in the youth segment. This approach helped us to stabilize subscription market share. As expected, the usage increased, but it had limited impact on our profitability as the overwhelming majority of all calls were on network.

Overall, the quarterly results were in line with our expectations and reflect our focus on stabilization of subscription market share and protecting ARPU. Further development of the business in Ukraine will be determined by further macroeconomic recovery and integration of our two operating companies.

Now, a few closing remarks. A month ago, we successfully closed the pivotal transaction that combined two regional market leaders. As management, we are really enthusiastic about the new opportunities that are ahead of us. Our quarterly results give us confidence that our business is standing on solid ground, even amidst some macroeconomic uncertainty.

Until the local markets stabilize and begin to rebound, we will remain focused on efficiency and shareholder returns. VimpelCom Limited is an excellent platform for future growth and value creation. Going forward, we will explore these opportunities. Once the macroeconomic situation in the region improves, we expect the growth to return.

Well, thank you for your attention and now let me open the floor for questions. Operator, please give the audience instructions how the Q&A sessions will be conducted.

Thank you. (Operator Instructions). And we'll take our first question from Jean-Charles Lemardeley from JP Morgan.

Yes, hello. Question is on the pricing trends in the Ukraine. We understand from recent comments from Turkcell -- Turkcell made recent comments to us that following your management change at Astelit, the subsidiary, they're actually moving away from the zero on-net model. Is that not something that you're observing in the market today? Have there been no positive moves from them?

Yes. We have seen positive movements on the market with the pricing and Astelit and Kyivstar has -- we saw some actions from the main players which confirms these expectations. So we can expect stabilization APPM -- in APPM in the second half of this year.

But specifically on the on-net, have they started to charge for that or have they discontinued on -- zero on-net? Is that something just for new customers or what's happened around the zero on-net from Astelit?

Our view on this is that these price adjustments are coming in the form of not direct departure from zero on-net, but rather tangential things attached, like for example shortening the top-up period. Because how the model works, that it's zero on-net but you must top up your account within a certain period of time. And shortening that period naturally increases effective pricing.

And increase in tariffs, which are like a penalty. If you are not top-upping, then you should pay some penalty. So these tariffs, they are also increasing.

So it's indirect increase in price.

Yes.

Okay. Thank you. Thank you. Just a follow-up on the question of spectrum. Could you maybe just share your expectations in terms of spectrum needs going forward in Russia and the Ukraine? When will you need spectrum, as you foresee your growth going forward? What are your views on how much spectrum could cost? We've obviously seen some pretty expensive auctions in Germany and India recently.

And maybe if you can contrast the Ukraine and Russia, because I understand you've got a pretty strong position in Ukraine, and what it means for CapEx, going forward, CapEx to sales?

Yes. Boris Nemsic speaking. On the behalf -- on the Russian spectrum, as you know, we have different spectrum allocations in different regions of Russia, mixed between 900 and 1800. But we have a pretty good spectrum allocation on 3G which is not utilized yet at all. We are now in all our 3G regions and we are active in all the regions, working with just one frequency pair out of three we have. And there is a lot of room to improve, both on capacity, on carriers and on speed. We are now in average of 3.6, so up to 20 we can go.

So the comparison you are taking with auctions in India, which was a 3G auction on a very specific environment, I would not compare it with Russia. In Russia, we did not pay for spectrum on our auction and there are no indications that this will change. We have some frequency fees on a running base but they are -- let's call it fair for time being.

LTE is a different story, which you referred in the German example. I think that LTE in Germany was not very expensive. Actually, the assumptions have been double price for which one was achieved. But again, it doesn't fit to Russia as a model because in Russia historically the spectrum was not auctioned and not paid for. On other side, it of course depends which kind of spectrum will be allocated. Will it be range 13, 14 and 800 megs or 2.6? So we do not see some backdrop there. We have a good frequency allocation and I don't see this as a problem at all.

What spectrum do you think is most likely going to be allocated for LTE?

We are working very much with all the authorities and other operators that a chunk of 800 megahertz should be allocated, actually the very similar one as in Europe. Good news is that in Russia the DVB-T is not active yet. So there is a nice separation. Of course, as usual, there are some frequency parts, but not very big, allocated for military and governmental purposes, but not so many. So in my opinion, there is a good chance that Russia can free up up to 90 megahertz in 800 megahertz spectrum and others can be [found], both of 1800 and additionally 2.6.

Thank you.

And we'll go next to Viktor Klimovich with VTB Capital.

Yes, hello. Good evening. I have two questions. First of all, can you please comment on a change in methodology in content revenues? As far as I know, you switched to the same methodology as MTS. Can you please estimate the potential result of this change? Thank you.

This is Martin Furuseth. The change in methodology was from net to gross. That means that we count revenue before revenue sharing with our content partners. So we say that the revenue from value-added services is now around 20% of total mobile revenues. And if we had continued counting net, it would have been about 1 percentage point lower. The main adjustment was done to align with the competition on how to account for these revenues.

Thank you very much. And may I ask one follow-up on CapEx in Ukraine? You said during your presentation that the traffic in Ukraine is growing, that there is quite tough competition there. And we see that the current traffic trend for Kyivstar it shows that probably you will have to invest more in -- not in coverage but in capacity. And can you please comment on your Russian CapEx as well? So do you see any changes in your current guidance regarding MTS' and MegaFon's CapEx guidance? Thank you.

This is Alexander Izosimov. Let me make one overall comment, and that goes to Kyivstar as well. I think that in the current macroeconomic environment and what's happening with the economy and volatility on the banking market and so on, naturally, responsible investments would be the key lever for us to gain efficiency and generate a good return on capital, particularly this year. Therefore, we need to strike that accurate balance between growing the traffic and stimulating the traffic with the on-net, off-net and finding the right CapEx which we can afford, in that sense.

All our indications and all our calculations show that we will stay close to the indicated levels of Group CapEx to revenue ratio, which is about 15%, maybe slightly above that somewhere. That's the ballpark. And as we were talking about Kyivstar, that in the long run we intend to be within 14%. It might appear slightly higher at the earlier part of the year.

And clearly that merger with the URS will help us significantly to optimize our CapEx, because quite a bit of capacity might come on-stream in the step function and also leveraging more optimal spectrum in Ukraine. But this is subject to antimonopoly decision. In any case, we do not intend to view CapEx as a runaway train and we will maintain appropriate CapEx-to-revenue ratio.

As far as Russia is concerned, Boris, please.

Thank you, Alexander. Yes, we are staying with our estimation projection of between 15% and 20% of CapEx-to-sales ratio for the year 2010. We slightly increased the CapEx in the first quarter, compared with the year before, and this process will speed up in the second and the third quarter. As you know, that we just received the frequencies and the licenses for Moscow end of last year, so Moscow is a big part of it.

Second part of the CapEx spending is FTTB, the broadband game which was mentioned in the main presentation by Alexander. And the third one are the transport networks, which costs and operational costs in some parts, especially going east in Russia, are extremely high so it's very favorable to get it in ownership. But it's not building up. It's also exchanging with our main competitors. So this is a very efficient way of spending it. We are staying with our projection between 15% and 20%.

(Operator Instructions). We'll go next to William Kirby with Nevsky Capital.

Thank you, yes. There seems to have been quite a big restatement in fixed line revenues. Could you just describe what that's due to, please?

Well, actually, there's no restatement in fixed line revenues. What we were talking about is that we see an impact of the exchange rate on the fixed line revenues, or really I don't quite understand your question.

Or could it be something to do with eliminations down?

You mean in value-added services or what? What was the question?

What you report in fixed line, for example, corporate or wholesale revenues, what you reported historically in, for example, Q4 '09 doesn't match with what you're reporting for historical numbers now.

Well, actually, there was no change in methodology.

William, we're a bit puzzled by the question so let us explore it.

Okay. I --

Basically, doing it on a qualitative basis, there were no significant changes in the fixed line, therefore, which would lead to any meaningful changes of the numbers. It might be some sort of eliminations or that type of technicalities.

What we talk about fixed line and we're trying to stress, that fixed line turned out to be, in the first quarter, a very complex beast. It comprises three segments which behave very differently. One is residential behavior and it's growing and growing very well. The wholesale business is also showing very robust dynamics and we're happy with that development. And actually, that happens on the backdrop of the declining market, so it's very good news.

Where we see the decline is in the business segment. And there are two. One is the seasonality of course impacted the first quarter. As you know, long holidays in Russia and so on. It's 12 days -- 12%, sorry, less working days naturally impacts the business traffic. Crisis of course takes its toll as well and still the mindset is not entirely of very aggressive spending. So people are still in the cost-cutting mode.

And what really exacerbated the story here is that the invoicing currency for many of the contracts is US dollar and euros, which served us very well when ruble declined and it protected our base. It was a reverse effect in the first quarter, when ruble strengthened. And therefore, while we see a flat underlying business, essentially, and flat revenues in US dollars, we see a stronger decline in rubles. So that was the key, I think, which we were trying to articulate about our fixed line business.

Yes. Maybe some follow-up. Maybe your question relates to the change of how we show segments -- reporting segments, fixed and mobile segments in Russia. Is it this? Because yes, previously we showed the segments on a gross business. Starting from this year, we show it on net basis. And there we do not --

Okay. Thank you. Yes, that could be the difference. And then I just have one question on Kyivstar. I appreciate there was a one-off which depressed margins this quarter, but how should we be thinking about margins there in the future? Is it a sort of mid to high 50s EBITDA margin business, or should we expect low 50s in the future?

If we take Kyivstar business standalone, we don't see any underlying reasons to expect less than mid 50s EBITDA margin. It might be impacted by the consolidation of lower-margin business of URS, which combines both mobile and fixed. So Ukraine, as a reporting segment, might show a lower margin, but the underlying core business of Kyivstar, from the marginality standpoint, should continue with the level of mid 50s.

Okay. Great. Thank you.

And we'll go next to Ivan Kim with Renaissance Capital.

Yes, hi. A couple of questions from our side, please, so basically both on the competitive situation, one in Russia and one in Kazakhstan. So basically, what are the latest trends in Russia, because it seems that you're probably losing some revenue market share to MegaFon as their revenues went up faster compared to yours in the first quarter?

And in Kazakhstan, actually, what kind of impact from Tele2 do we see in the market and how fast are they -- I mean how aggressive are they? Thank you.

This is Martin Furuseth again. First, on the Russian situation, I'm a bit surprised by the statement because if you look at the Q1 revenues, our decline quarter-on-quarter is smaller than that of MegaFon. So we see that we have increased our revenue market share towards both competitors in Q1. We also focused a lot on profitability and exercised a considerable price premium in the market. So we are pretty satisfied with the Q1 development on the revenue market share for the Russian market.

Yes. Sorry, I was just talking about year-on-year comparison, not quarter-on-quarter. Thank you.

Okay. But then you must remember that MegaFon comes from a much lower customer base at the end of -- at the beginning of 2009. So that is the reason for the year-on-year comparison.

Hi. Dmitry Kromsky. About Kazakhstan, the market situation is quite stable for us. We increased our market share revenue in the first quarter. We still don't see any activities from Tele2. The third operator operates on the [brink] now and in the first quarter there were practically no activities from this operator. So we expect that Tele2 could be active somewhere in the end of the second quarter.

Summarizing what's been said, that we observe actually fairly stable -- and anticipating the question on Kyivstar market share. So what we believe that, yes, we have been losing some market share towards the end of 2009. But I think that the management made all the right moves, adjusting the retail positioning and marketing moves, and the situation has been stabilized. I would like to stress that we do not intend to engage in a heavy battle for subscriber market share, so revenue market share is how we are going to assess ourselves.

While we talk on Kyivstar, we say that we stabilize subscriber market share because there we saw the true departure of our subscriber base and reduction of active subscribers, so we had to act on this. And we believe that that situation has been stabilized as well. So, in that sense, we are not reporting of any great victories, but certainly a very stable situation.

And we'll go next to Sean Gardiner with Morgan Stanley.

Thank you, yes. Just for the current quarter that we are in, the second quarter, have you seen any signs of a true recovery yet, whether it be in corporate or the consumer space, in Russian mobile? I'll start with that question.

Well, we've seen -- this is Martin Furuseth. We've seen a nice increase in the mobile and residential revenues. In the corporate segment, we are still seeing a lot of cost consciousness but on the mobile also there we see growth. On the fixed side, we see still a lot of cost saving from especially the big corporate customers. You see some other early signs that things might be turning to the better and that is that we estimate that the prices for advertising media might start increasing towards the end of the year, which is always a very early signal that the recession might be stabilizing and going towards some more positive times.

Okay. And then just a follow-up question on Russia. This roaming investigation that's taking place, is there any timetable or any progress or any sort of thoughts that you can help us understand?

And then, maybe if you could add in those comments whether you're seeing any other form of regulatory oversight coming through this year, or ministerial oversight coming through or antimonopoly oversight coming through. Thanks.

Well, actually, yes, there were certain requests to provide some information from antimonopoly committee and we are now kind of in the situation of discussing it with them.

But the general sentiment, it's relatively insignificant. Even if something is in jeopardy, it's not at all the same flavor and the order of magnitude as it is in Europe, when there is a -- there was a pressure two years ago on wholesale roaming rates. This, we do not factor it in as a serious threat or any meaningful threat to our business.

Overall regulatory environment remains benign, I would say. And the regulator is focusing more now on how to stimulate actually in line with European regulators, how to stimulate the investments and how to assist actually to the communication community, to continue to advance in terms of absorbing latent demand on data, and that's being discussed at the presidential commission and so on. So I don't, therefore, anticipate a change in the pressure on the margins through regulatory moves.

Okay. Thank you very much.

And we'll go next to Elena Mills with Alfa Bank.

Yes. Good afternoon, everyone. Just a couple of questions on the Ukraine, if I could. Can you talk a little bit about the timing of the regulatory review process? Do you have any sense of when the regulator will make a decision?

And my second question relates to Kyivstar's plans around the launch of -- the rollout of the FTTB network, which was completed in March, and the launch of various fixed line services. Can you talk a little bit about how you see that evolving, given the opportunities for integration that you mentioned, Alexander, earlier in your comments, between Kyivstar and the fixed line business of VimpelCom in the Ukraine market? Thanks very much.

On the regulatory, normal process -- normal duration of the process is about three months. And so we've submitted all the answers to the commission, so we will be now waiting for their response. Will it take shorter or longer, it's hard to say at this moment, but we will be actively discussing it with them and helping them to arrive hopefully to the right decision.

And as far as integration plans are concerned, Taras, your comments.

We have launched commercially mass market FTTB services from Kyivstar the middle of March. Now we are preparing plans how we can develop this project, understanding the future of cooperation, how it could be optimal done and prepared.

The reality of the issue is it's very hard to comment on it because it hugely will depend on to what extent we can and how fast we can integrate the businesses. So far, we keep on rolling, predominantly on the URS side, the FTTB project because they have a head start. And that would be most likely scenario for the next few months. So bulk of the CapEx will go into the FTTB on the URS side and Kyivstar will continue to invest in its core business, and we'll see where it takes us. We might have to reconsider it a few months down the road, but at the moment we are simply standing and waiting and developing the plan. So all the planning work is of course not postponed; it's being done. And I think that when we get the green light, we will be absolutely ready to go.

Thank you. If I could just ask a clarification question on your answer with respect to the regulatory review of the proposed merger, when did you submit your response to the regulator and does the three months start ticking from that time?

It's -- actually, the request was both to us and to the shareholders. And to my understanding, the shareholders provided all of their information last week but --

Three months from last week that you --

Yes (multiple speakers).

Within three months from last week you (multiple speakers)?

Elena, if you don't mind, we'll come back to you with a specific timeline because I'm afraid that I am not entirely sure when the three months starts ticking, from the submission or the request and so on.

Okay.

We'll just provide you the exact data.

Thank you. That would be very helpful.

Thanks.

And we'll go next to Olga Bystrova with Credit Suisse.

Hello, good afternoon. My first question is regarding strategy of the consolidated or the new enlarged entity. Basically, that the technical details are out of the way now, how -- so when and how do you think you will be able to articulate the strategy? And also, what do you think format will take? Will it be something more specific or very conceptual at this stage? And the second question -- I'll ask the follow-up question later. Thank you.

Well, the strategy is a living thing. It always progresses from first fairly conceptual to more detailed execution in the markets. And the key elements of the strategy are going to be discussed within the next month or so, with the Board and so on, and then probably we will communicate it to the market when we have it. And we'll also review how the equity store of VimpelCom will be impacted. And when we have the general scope and the architecture defined, we will start (technical difficulty) it for the execution in the market.

What I can anticipate at the moment and what I can say is that the strategy will be focused and will be exploring two things. One is how can we strengthen the returns. And we are looking at introducing key metrics like return on invested capital and return on capital employed, depending on where we are, and through that achieving even better efficiencies and total return to the shareholders. That's one side of the equation.

The other side we are trying to understand is there opportunity for us and is there a logic, industrial logic, to make some broader geographic moves and explore opportunities of combining ourselves with other businesses, either through mergers, which probably is the preferred option, or through acquisitions. The answer is not clear at all on that question and therefore that probably will take a little bit more time to contemplate and to answer. I hope it clarifies somehow.

Yes, a little bit. Thank you very much for this. And the follow-up question is on Russian pricing. It looks like in the first quarter the pricing was flattish to even slightly improving, depending how you look at it. Is this something that you are leading the market, because we've seen a slightly more negative dynamics at MegaFon and even Tele2 in the first quarter, or this is somehow a one-off sort of structural change in the accounting, etc.?

This is Martin Furuseth again. I think we will stick to our statements from the Q4 conference, where we basically said that we foresee a stable APPM for the first half of the year and potentially signs of an increasing APPM at the second half of the year. We are exercising a considerable price premium in the market, despite the fact that across the 86 branches of Russia we are competing pretty heavily with Tele2 in some of them. And we don't see this -- we see this disciplined competition continuing throughout the year. So, as I said, we see stable APPM towards the end of the summer and then potentially increasing APPM towards the end of the year.

Okay. Great. Thank you very much.

And we'll go next to Herve Drouet with HSBC.

Yes, good afternoon. My first question is regarding Ukraine. Have you started to shift some of the VimpelCom customer into Kyivstar? If not, when do you plan to do that and at what cost do you estimate that shift of customer to cross the entity? That would be my first question. Thank you.

Herve, we haven't started, and here I just spare the guys from Kyivstar to answer that question. We haven't started doing it because we don't have a green light on the legal and regulatory side. So we are preparing for this. We know pretty much how to do it because we went through similar exercises in the other markets. Some of the regions in Russia, for example, went through a very similar exercise. So, technologically we know the process, but we haven't started any execution of it and probably are not going to do anything until we've got clarity on the legal stance which we can take.

All right. Okay. And do you have any estimation of costs you may have done for shifting those customers?

I don't think that we can give you the specific number, but from the experience which we observed it's not a large number because it's a fairly straightforward process. And actually, in Ukraine it could be even more straightforward than it was even in Russia because we have the same technology and we have the same vendors, both on the billing side and on the hardware side. So, from that perspective, it would be fairly easy for us to do.

Okay. Thank you. And just a follow-up question on the fixed line business segment. I understand you said there are two reasons why we have seen some weakness in the business segment. I think you mentioned the lower number of working days, if we do a quarter-on-quarter comparison, and the fact that the currency which is used in the fixed line business segment is US dollar and there is an FX impact. But even adjusting with that, it looks like there was still a bit of weakness still. Is there any other reason that may explain what has happened in the fixed line business segment? Do you see maybe some international companies closing down some of their affiliates in Moscow, in Russia? Is there any other trends that may explain some of the weakness we've seen?

Yes, we have to look at it in more granularity. Boris Nemsic speaking. We have actually three segments within the fixed line segment and two out of three are performing very well. That's the residential fixed line business, which is stable, which is a very big success in these times. The wholesale, which is also stable with very sound margins, which is also very positive. And the third one is the real poor business segment. But there we have of course an impact that a lot of businesses went out of business during the last year and imposed very strict cost control of the so-called private usage of business phone on the employees.

Nevertheless, we increased the number of business subscribers. We increased substantially even the cross-selling, so the mobile business subscribers went up double digits. And of course this is -- the counterweight of this is the pricing issue, which is normal in the cost-cutting area.

So when you mix this together with the impact of the dollar billing, which is actually risk mitigating here and positive for us, it just shows in ruble a little bit strange behavior, we see it's pretty positive. As said, one is stable and two of them are positive.

Okay. Thank you very much.

And we'll go next to Alexander Balakhnin with Goldman Sachs.

Yes, hi. Can you just comment on the dynamics of your Russian mobile business profitability, because historically first quarter was stronger than fourth quarter? So we saw sequential improvements in EBITDA margin in 2007, '08, '09, and this year the EBITDA margin is pretty much flat. Can you please comment on these dynamics, what was the reason? And if it is possible, can you just shed some light on how this profitability will be evolving in 2010, from your standpoint?

Yes. The point is that first you should distinguish between the fixed line and mobile. The mobile margin is with 50.9% in the first quarter. Actually it's stable, slightly better than in the quarter before, but very similar to the margin of 51.8% which was one year before.

One of -- some of the impacts are seasonal and one of them is that we changed the commission structure, which is more focused on quality subscribers, which are then measured in different periods and these different periods start from the fourth month of operation. So you can imagine that you are paying full costs in the first quarter and then you get some positive signs on the quality of subscribers or you get some commissions back, so this is a little bit shifted in the timing. On the other side, we had pretty good growth on data subscribers. So it's a mix which we think is stable. I would not compare it with the years before where the growth was very high, in the years 2007, 2008.

And if I may, a quick follow-up on this changed commission structure. So should we just think about this as a sort of one-off and going forward the profitability will be broadly un-impacted and hence we'll probably even see a release of profitability, right?

The profitability should not be impacted on the long term. On a yearly basis, what should come out is the higher quality of subscribers and that's linked to the strategy which Alexander explained before. We are very much looking on quality and efficiency, not on the number of subscribers, which was definitely one of the things of the first half of the year 2009, which inflates the number of subscribers and some of other KPIs. So you are right. This structure -- this commission structure works asymmetrically in the first half of the year or for three months. Later on, it's normalized but should deliver better quality of subscribers.

And I promise this is the final one. You said you basically started paying for the quality of subscribers but do you have any change in terms of the percentage you pay as a percentage of your revenues, basically? Are you paying the same percentage of revenues for this high quality of subscribers that you were paying before?

I would not define it as a percentage. The point is that we are ready to pay to the sales channels for quality subscribers. What we don't want to pay is to pay a commission for a subscriber who is just a virtual SIM card carrier or holder. So what we are saying, everybody should earn his fair share of wallet, also the sales channels, but they have to deliver the quality subscribers. So, from our point of view, it's not a matter of percentage. They should get commission, which is fair, but linked to the quality of subscriber.

Thank you so much.

And we'll go next to Tatiana Boroditskaya with UBS.

Good evening. Thank you very much for your presentation. Tatiana Boroditskaya from UBS. Two questions, if I may. First of all, can you please comment on your plans in relation to any debt issuance in ruble market, international market or syndicated loans?

And secondly, a few days ago statistics on the subscribers in Russia came out and VimpelCom is now number three in Russia after MegaFon. Basically, the first months when you lost your market share, second place. Do you intend to do anything in this regard? And how do you intend to reclaim this place? Thank you.

Tatiana, let me start with the debt and the plans for debt issuance. Actually, we registered the issuance of a RUB20b bond and that was kind of continuation of what we had before, the structure which we always discussed, that we would like to switch more to ruble lending to bring more in line our operating cash flow to the debt structure. But as long as we do not see immediate necessity for this, that will take a certain time period where we will see that whether we -- at which time point we need to do so. And the registration is valid for a year, so we have this time.

So, talking about the other possibilities of funding, again, that all depends on the future plans of VimpelCom Limited. And every time -- again, that was our standard philosophy that every time we need the additional funding we are looking on all the best possible ways to get it. And you know that we are using normally different instruments, both syndications, euro bonds and ruble bonds, so going further that will be the same.

This is Martin Furuseth. To your questions about the market share on SIM cards, as we've said earlier in the conference, our priorities are number one profitability and margin and number two revenue market share. So the short answer is, no, you will not see any big targeted activities for us to regain the number two position on the SIM card market share. This is underlined by the fact that the penetration in Russia on SIM cards right now is approaching 150%. And with the expansion of machine-to-machine communication and embedded SIM cards in other appliances, the market share in SIM cards is becoming, in our opinion, a more and more meaningless comparison of strength between operators. So we continue to focus on profitability and the revenue market share.

Thank you.

And we have time for three more questions. We'll go next to Igor Semenov with Deutsche Bank.

Yes, thank you. I have a question. Yes, can you comment on the decline in the operating cash flow and the operating cash flow margin, please?

And also, I just wanted to ask about the decline in ARPU and the fixed broadband. Do you see that continuing into the year?

And finally, maybe, if you could comment on the launch of your handset and how it's correlated to your focus on the margins. Thank you.

Well, let me start maybe with the operating cash flow. So, actually, I don't think that there was a substantial decline in operating cash flow because, yes, the difference which can be seen in financial statement of OJSC VimpelCom is that cash provided from operating activities first quarter of 2009 was $838m and first quarter of 2010 is $803m. So, practically it stayed on the same level.

And if you remember that in 2009 -- in the first quarter of 2009 we undertake quite substantial efforts to improve our working capital, it doesn't mean that we are not taking steps right now to manage working capital, but it seems to me that we are more or less staying on the same level. Of course, you are right, the fluctuations in tax payments, in accounts receivables and payables, but generally speaking we think that we are more or less on the same level.

Could you please repeat your question on the fixed broadband, because --?

Yes. There was a substantial decline in ARPUs in fixed broadband, and so your revenues were stable but whereas you had a pretty significant growth in the subscriber base. So clearly there is dilution of ARPU, so I was just wondering whether you see this trend continuing or -- because I was under the impression that in many markets the ARPUs in broadband are stable and you are competing on quality, on speed, but not really on price. So I just wanted to get a comment on where it's going.

Yes. That is, I am not able to find the figures that confirm your assumptions, because we see basically the same trend here as we said in the mobile, that we'll see stable APPM and ARPU. You will also see from our side an increased bundling of IPTV and fixed broadband to our customers, which is all marketing actions that should contribute to stabilizing and increasing the ARPU. So I will have to look at -- into more detail on that assumption.

Maybe just some comments on that. There have been strengthened sales activities in FTTB sector. Some of them had also promotion periods of one, two or three months. So maybe this is what makes this difference on the increased number of subscribers and the divisions for revenues.

Okay. And then can you (multiple speakers)?

The (inaudible) stay the same.

Right. Okay. And then maybe just how your launch of the handsets relate to the focus on profitability.

Well, as you will have seen, we have stated that we will be launching branded handsets. That is not to be in the handset business but is to drive the usage and the ARPU development among our customers. One of our biggest challenges in the connection with the rollout of 3G in Moscow is that -- in Russia is that the population of 3G-enabled handsets is very low. Of that again you have setting problems and of that again you have awareness problems.

So this is a big challenge to increase the platform of data-enabled handsets. This is not only a challenge for VimpelCom but for all mobile operators in Russia, as you have seen in other markets as well. So we hope to avoid subsidizing but we believe that branded handsets with customized settings for our customers will drive usage and ARPU in the future.

Is this -- have you see a positive response to that already or this is like a test and you'll sort of extend it if results are positive?

No, this is too early to say in Russia, because we have just announced that we will offer these handsets. But given the experience from almost all other markets, I'm sure we will see the effects I just described.

And we'll go next to Anna Kurbatova with Gazprombank.

Yes, good afternoon. One short question, can you disclose Kyivstar's cash position?

Well, actually, in our financial system you can see in the presentation that the debt is extremely low but the cash balance is pretty good. So we have approximately $150m on the cash balance of Kyiv.

Thank you.

And we'll take our final question for today from Maurice Patrick with Barclays Capital.

Hi, yes. Maurice Patrick from Barclays. Just a quick question on the Russian market. Much is made of the competitive pressure caused by Tele2's pricing. If you look at your own business, where you have low entrants -- low-priced entrants like that and -- in your other regions, do you see differing trends? Obviously you report the blend. Just curious to see if there's any different trends taking place across those businesses.

Yes. This is Martin Furuseth. To understand this, you also have to understand the dynamics of the Russian market, which is there are big debates if Russia is one country or nine countries or 86 countries. You divide Russia in 86 different branches and each operator has a different competitive situation in each of these branches, depending on when they got the licenses and other things. So, as you say, the APPM and the ARPU we are showing is blended across all these branches and is of course incorporating the fact that in some of these branches we are fighting the number three or number four operators, and also in some of these branches Tele2 is the leading operator.

So we basically don't see these dynamics changing very much. So this is incorporated in my statement that we think the APPM will stabilize and potentially grow towards the end of the year.

Fair enough. Thank you.

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

Well, thank you and thank you again to all the participants. And I only can say that it's great to have you on our call and please do not hesitate to contact us, our IR team, in case you have any questions or queries and we always will be happy to help. And have a nice day and goodbye. Thank you.

Again, that does conclude today's presentation. We thank you for your participation.