VEON Ltd (VEON) 2010 Q3 法說會逐字稿

. Good day, everyone, and welcome to the VimpelCom Ltd third-quarter 2010 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Alexandra Tramont. Please go ahead, ma'am.

Good morning, and welcome to VimpelCom Ltd's conference call to discuss the Company's third-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 synergies in our Ukrainian operation; two, the Company's 2010 capital expenditures; and three, the Company's future competitive position, tax rates and margins.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in one, the Company's press release announcing third-quarter 2010 financial and operating results; two, the Company's third-quarter 2010 earnings presentation; 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 ending 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 third-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 revisions to any of the forward-looking statements made on this conference call or to make corrections to reflect future events or developments. If you have not received a copy of the third-quarter 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. Hello, everyone. Thank you for joining our quarterly conference call today. As always, allow me to introduce people participating on this call. Here with me in Amsterdam are Henk van Dalen, our Chief Financial Officer; Andrew Simmons, the CFO of Ukrainian Operations; and Alexey Subbotin, our Head of Investor Relations. Elena Shmatova, who runs our business in Russia and Dmitry Kromsky, Head of CIS Operations, have joined us from Moscow.

On this call, we will discuss the operational and financial results for the third quarter of 2010 and some recent highlights. Well, let's start with the highlights. During the third quarter, we increased our revenues across all key segments, consolidated OIBDA margin stayed in the target range of high 40s percent, while operating cash flow for the first nine months exceeded $2.9b. In line with our dividend policy, we declared an interim dividend, and will pay out $600m before the year end.

Recently, the anti-monopoly committee of Ukraine gave us the green light for integration of our operations there. Good financial and operational performance in Ukraine demonstrated the ability of our local management team to turn around the situation despite difficult market conditions. We are confident that we will maintain our market leadership in Ukraine and deliver synergies as planned.

The Russian business became a challenge as we continued to lose mobile revenue market share. The new local management team already launched a number of initiatives. They include prioritized acceleration of network deployment, distribution optimization and fine-tuning of pricing and employing targeted marketing approach for each region. We allocated, we believe, sufficient resources and are confident in our ability to restore VimpelCom's market position in Russia.

Then, of course, there was an announcement of our potential transaction with Weather Investments. We believe it is a good opportunity to benefit from industry consolidation and given the size and complexity of the transaction, we are satisfied with the progress made thus far. We remain committed and continue to move forward as outlined in our October 4 announcement. We are working to fulfill all necessary conditions precedent, including getting final approval of our Supervisory Board and securing the necessary regulatory approvals and have targeted the closing in the first half of 2011.

Now I will pass the floor to our CFO, Henk van Dalen, who will describe the Group financial performance. Henk, go ahead.

Thank you. Well, talking about the financial results, please bear in mind that we present the consolidated financial results with Kyivstar operations incorporated starting from April 21, when the transaction was effectively completed. In the accompanying press release, you will also find the pro forma financial results on the consolidated level and for our Ukrainian business unit.

Our revenue increased almost 7% quarter on quarter to more than $2.8b. Consolidated fixed and mobile OIBDA was up 1 -- to $1.4b with the best-in-class margin of more than 48%. Year-on-year margin decline is in line with the previous quarter and reflects the return to a normal operational pattern after the removal of all crisis-related [limitations] on OpEx and CapEx.

Sequential OIBDA margin growth was driven by good performance in the Ukraine and cost control across the board. We intend to maintain these levels of profitability and cash generation going forward.

The Group's net income this quarter increased to almost $0.5b. Return on capital employed declined slightly, mainly due to higher investments. However, we reiterate our commitment to keep it above 20%. And the $600m dividend payment announced recently reiterates our commitment to shareholder returns.

Then taking you through the Group financial position. I would like to highlight here that the cash from operations -- from our operating activities that increased by almost $100m quarter on quarter and amounted to $1.1b. Free cash flow dynamics reflect our increasing capital investments to capture reemerging growth opportunities across all markets where we operate.

Our liquidity position remains very strong, with a healthy cash balance and balance sheet ratios. The total debt to OIBDA at 1.4, while the net debt to that ratio is below 0.9. Lesser debt load and our proactive approach towards debt capital markets allowed us to decrease interest expense, improving the interest cover ratio to 8.5.

Withholding tax on dividend payments from Russia increased corporate income tax rate by approximately 5 percentage points to 31.1% quarter on quarter. We expect the effective tax rate to decrease going forward, after we complete implementation of our tax optimization programs over the years to come.

Now, let's look at the consolidated debt. VimpelCom continues to actively optimize its debt portfolio, managing duration, currency composition and the cost of debt. As of today, we repaid more than 69% of our debt due in 2010, and the remaining amount will be paid off shortly, with funds already allocated for this purpose.

Currently, the net debt of the Company is slightly above $4b. We successfully placed ruble-denominated bonds on October 19, raising RUB20b or $658m for five years at 8.3%. And we expect that it will increase the portion of ruble-denominated debt to around 50% by the end of the year.

As promised during the last conference call, we paid in the meantime the $470m bridge loan that we took for financing the OJSC VimpelCom squeeze out.

Now let's look at the dividend policy. As promised during the setup of VimpelCom in Amsterdam, a new dividend policy has been put in place, and the key features are as follows. The annual dividend shall equal at least 50% of the free cash flow from Kyivstar and 50% of the free cash flow from VimpelCom's Russian operations.

Free cash flow is defined as the consolidated net income plus depreciation and amortization minus capital expenditures calculated according to the US GAAP measurements. Annual interim and extraordinary dividend payments can be made throughout the year. VimpelCom's supervisory board shall approve exact amount and timing of the dividends.

The $600m dividend payment declared on November 15 will be paid before the year end.

Now I am going to pass the floor back to Alexander to present our business units, starting with Russia.

Thank you, Henk, and yes, let's look at our largest business unit, Russia. As we already mentioned, we are having problems here and we are dissatisfied with the recent loss of market share in mobile business, both in subscription terms and revenue.

As a result, our top-line growth rates, although solid for a saturated market, are clearly below those of our key competitors in Russia, both year on year and quarter on quarter. We see stagnation and quality erosion of our core active customer base as the key reason for the underperformance. Our focus on debt repayment and the consequent ceiling imposed on CapEx and marketing spend in 2009 limited our ability to expand networks and run effective marketing campaigns. The competitive gap in the fast-growing mobile data market clearly illustrates this.

In order to turn around this situation and regain competitive momentum, the new management team in Russia focuses on improving the quality of our customer base through tighter control of our distribution channels coupled with tailor-made pricing and backed by acceleration of targeted investments in infrastructure.

We also intend to improve our position in the mobile data segment, which is important not only as a source of revenue but also as a factor in attracting high-end users. The very high level of consolidated OIBDA margin reported last year also reflects the spending cap in 2009.

Starting from the second quarter of 2010, we return to more adequate modus operandi and increased marketing spend, OpEx and CapEx. As a result, our consolidated OIBDA margin declined to 47% in the first half of 2010.

Following this similar pattern, we substantially accelerated investments in scale and quality of our networks, especially in the second half of 2010. However, despite high investments, we managed to keep return on invested capital in Russia above 30% and intend to maintain this level.

Stagnating subscription growth in mobile was partially offset by a positive trend in usage. In the voice segment, a 3.8% quarterly increase in ARPU came on the back of seasonally high usage and stable pricing, supported by higher roaming revenues. Revenue from value-added services continues to grow and represents 17.3% of total mobile revenues, up from 14% reported a year ago. Here, as we just mentioned, mobile data is especially important as a new, separate stream of revenues and increasingly as a factor considerably impacting the loyalty of existing voice customers.

We continue to see broadband as the next catalyst for growth in the industry. Some might say that we have lost the beginning of the race in the mobile broadband but we intend to regain our position and aspire to be the leading alternative broadband provider in the country.

Our integrated model allows us to offer customers different types of data services with varying speeds, quality and price. Our total broadband subscriber base in Russia increased to 2.8m subscriptions. We continue to expand our high-quality IPTV product, which we increasingly see as a key driver of our growth in FTTB by bundling it with internet access and voice services.

During the third quarter, we achieved good progress in fixed-line operations, reaching record high revenue in rubles over the last six quarters. We are satisfied with progress in both mobile and fixed B2B segments.

In the fixed segment, we continue to increase our customer base and demonstrate a growth of revenue in ruble terms in the normally slow summer season. The development of our transport network and strengthening ties with Russian and foreign voice and data carriers enhanced our leading position in the country's wholesale market and supported continuous growth of revenues there. The residential segment, driven primarily by FTTB and IPTV, continues to demonstrate good growth rates.

Now let's move to our new strategic business unit, Ukraine, which is our second-largest market. And our performance in the third quarter in Ukraine, beyond seasonality, was largely defined by the following factors. First, continued macroeconomic recovery, with real GDP up more than 4%. Second, more stable competitive environment. And last but not least, our effective marketing strategy adapted to the new market realities.

As a result, we were able to reverse the negative trends of several previous quarters. On a pro forma basis, our revenues increased by almost 10% quarter on quarter and approximately 4% year on year in local currency.

Our mobile data revenue increased 17% quarter on quarter and more than 46% year on year. We expect the data market in Ukraine to become a major growth opportunity going forward.

Our OIBDA increased quarter on quarter by more than 17%, while the margin reached almost 57%, the highest figure of any country where we operate. As we mentioned, our CapEx in Ukraine will continue to be substantial, around 15% of revenue on an annualized basis, in order to accommodate the growing demand for more sophisticated voice and data services.

Our next slide -- for our next slide, there is a more detailed view on our operational performance in Ukraine. In our marketing efforts in the mobile business, we used the targeted marketing approach, with a focus on the lower income customer segment. This helped us to reverse the negative trend and increase our active mobile customer base by 4% as compared with the previous quarter. Now our active customer base exceeds 25m.

We also recorded an increase in ARPU of more than 7% quarter on quarter and more than 4% year on year in local currency. This was helped by growth in minutes of use, seasonal trends and change in revenue mix.

We are the fastest growing broadband operator in the country, and this was, again, proved by our impressive progress in fixed-line broadband subscriptions. At the end of the third quarter, we had 214,000 subscribers or 30% more than in the previous quarter, and more than double the number of subscribers we had a year ago. Generally, we are pleased with our performance in Ukraine in the third quarter and look forward to more progress going further.

If now we look at the CIS operations. Overall, performance in the CIS segment was very good. Our revenue grew more than 21% year on year and 7% quarter on quarter, while OIBDA grew almost 14% year on year and 9% quarter on quarter. OIBDA margin also improved to reach 48.8%. This progress was supported by economic recovery in the CIS countries, particularly visible in Kazakhstan, Tajikistan and Georgia. You can see the basic figures for each country in the attachments to our earnings release, which we published earlier today.

And as usual, a few words about Kazakhstan, our largest and most developed CIS market. Our performance was strong, with more than 12% revenue growth year on year and 7.6% growth quarter on quarter. OIBDA margin was very high, almost like in Ukraine, at 56.6%. We actively monitor the competitive situation in Kazakhstan in order to maintain our strong market position in view of relaunch of active operations by Tele2 expected in the first half of 2011.

Our CapEx in the CIS market continued to grow to support the 2G and 3G rollout as well as our broadband projects. Overall, we see strong potential for further progress in our operations in the CIS markets.

Now, moving to our new geography, Southeast Asia, and here operations delivered rather mixed results. In Vietnam, we are still trying to find a common approach with our local partner to financing the next stage of expansion. We continue to offer constructive engagement and expect the situation to be resolved shortly. Consequently, our operations in Vietnam remain limited. They operate in a kind of hibernated form.

In Cambodia, the worst seems to be over as we managed to reverse the negative trends stemming from the regulatory actions earlier this year. Although the third-quarter dynamics are slightly below our expectations, we are confident that by the year-end, development of our business in Cambodia will be back on track.

Well, and that brings us to our last slide where, in conclusion, I would like to say that our third-quarter results do reflect solid financial performance. We do recognize the problems that we are facing in Russia. The new local management team has already started to implement steps to regain momentum and restore our market positions. Our Ukrainian team managed to turn around the situation despite a challenging market environment, and I am confident that we will be able to deliver synergies as expected. The integration plans we prepared for our Ukrainian operations are now being executed.

I cannot discuss details of the transaction we entered into with Weather Investments, but we continue to advance as was outlined in our release from October 4. We are working to fulfill all necessary conditions precedent, including getting final approval of our board and securing the necessary regulatory approvals. And I repeat have targeted the closing in the first half of 2011.

With this, thank you for your attention. Now we can open the floor for questions. Operator, please give the guidance.

Thank you. [Operator Instructions]. We will take our first question from Cesar Tiron with Morgan Stanley.

Yes, hi. So my first question would be on the measures you have taken in Russia to improve your market share. Can you please tell us when do you expect this to show on the numbers, and also tell us if you expect the Russian margins to further decline in the next quarters? Thank you.

Elena, this is for you.

Okay, thank you for the question. Yes, the measures, they are based on the three milestones which Alexander mentioned. So first of all, of course we are planning to accelerate our investments into the network, because we are lagging behind our competitors in terms of construction of 3G network. And this gives the basis for the products that we consider to be flagship products. So access to Internet through mobile is essential. So that is one point.

Another point is that of course we have to support this network development with good marketing activities, pricing excellence, and for this we performed some analysis on the market what are the customer preferences, actually both in voice and data, and we are coming with a set of sales plans which will address all the needs of the customers in more appropriate ways.

Then, of course, we are talking about loyalty programs and customer service and our presence in distribution channels. We would like to pay much more attention to all different ways of the distribution that is available for us on the market. And so we go with this.

As for the results, of course the steps which we are taking right now first cannot give results immediately. Yes, we are looking for some results coming in the beginning of next year.

Thank you, and do you think this will affect EBITDA margins for the next quarters as well?

Well, it's hard to say, specifically because this all depends on the situation on the market itself. Of course the level which we saw in 2009 was not, I would say, natural for the current stage of the market. That was the crisis mode rather than normal. So now we are coming to a more normal situation with maybe margins staying somewhere around current levels.

Thank you very much.

Our next question comes from Alexei Gogolev with JP Morgan.

Good evening, Alexander. I had a question, whether you have any plans to launch an RDR program at the end of this year or maybe next year? Thank you.

We have analyzed this, and I think, Henk, actually, you might pick up that question.

Yes, we have analyzed it and, at least for the moment, decided to wait at least until we know how the whole Weather transaction completes over the coming months, because that might, of course, change the picture of the kind of choices you want to make.

On the other hand, the results are there are also factual things we need to take into account, how to look at the liquidity of the share, is there sufficient available if you go for an RDR? And the second thing is, of course, also to evaluate the additional disclosure requirements. So let's say when we have clarity on the realization of the transaction with Weather, we will, of course, look at the completely different picture and we will evaluate it then.

Thank you.

Our next question comes from Tibor Bokor with Otkritie.

Hi, I have a question on CapEx and 3G rollout in Russia. So on CapEx, on the consolidated level, we have seen your competitors postponing the CapEx guidance and lowering the guidance for 2010. Can you update us on how do you see your CapEx for 2010?

And on 3G rollout in Russia, do you expect that to be completed in 2011 or what is the latest on that?

Well, for CapEx, as you can see on the presentation, our capital investments in the third quarter were already equal to all investments in the first half of the year. So we are accelerating in this regard, and the only thing I can say is that in the fourth quarter, it will be even higher.

As for the completion of 3G network, of course we cannot say that it will be completed next year, because the network always is in development. Currently, we are even developing 2G network, because first of all, there are certain questions with coverage because Russia is too big to be covered completely. And second, of course you always have to add some capacity if you have growth in traffic. But the majority of the work, we assume that should be done by maybe the mid of 2012.

Can you share with us how many base stations you plan to have by mid-2012? I mean 3G base stations.

No. Of course, it's too precise, I would say, guidance. And normally we are not giving guidance on that.

Thank you.

Our next question comes from Alexander Balakhnin with Goldman Sachs.

Yes, hi. Two questions, if I may. First is on mutual pricing strategies. As, so you mentioned you wanted to fine-tune your price, it was quite noticeable that VimpelCom has a premium, a price premium, in the Russian MTS and MegaFon price per minute. My question is, do you think it may jeopardize the whole competitive environment in the country and when you start fine-turning your prices, that may trigger a price war of probably a small-scale but nevertheless?

And my second question is on your profitability dynamics. Could you please explain your sequential EBITDA margin in Russia given that on one hand, VimpelCom didn't have a lot of marketing activity, or at least noticeable margin activity, but at the same time, the profitability declined in MTS trends for example, which had more marketing activity in the quarter. Any clarifications here would be helpful. Thank you.

Let me start with the pricing. Yes, of course, fine tuning is necessary for us, but we don't think that this will change the whole situation because actually what we are targeting is definitely some selective approach for pricing of certain services, which should increase consumption and increase average revenue per user. So that's where we stand now.

Talking about profitability, actually we think that we increased our marketing activities in the third quarter, and if you will look in the press release, we have a table that shows that our sales and marketing expenses increased year on year at 22.6%.

But what I want to say is that unlike MTS, so MegaFon didn't really translate into the revenue dynamics. So the cost increase happened, but the revenue increase didn't fall at the same magnitude.

No, of course, because it has some delay. Our share of voice is equal among all three of the racers in the third quarter, and so that, we think, should give some impact on the development in the fourth quarter.

Understood. Thank you so much.

Your next question comes from Herve Drouet with HSBC Bank.

Good evening. My first question is, in fact, a confirmation. I just wanted to check with you -- I thought you were saying, in answering the first question that was asked you, that you would expect margins in Russia to remain stable. I just wanted to understand a little bit more how you are going to manage that in Q4. Usually Q4 margins tend to be weaker. We see quite a lot of advertising inflation cost at the moment in Russia and also quite a lot of pressure in terms of commission from the dealer. So I was wondering. If you can elaborate a little bit more about will you think that the margins, especially coming in the next quarters, is going to remain stable?

And my second question is regarding, maybe, the deal towards Weather, Orascom Telecom and Wind. In the event that, for whatever reason, something cannot happen on Orascom Telecom, will you be interested to make a deal just on Wind? And if it is the case, do you think Telenor will back up that choice? Thank you.

Let me start on the margins. Yes, thank you for the question. Actually, yes, it needed clarification. Right now, we are talking about around the same level. Of course it is not exactly the same level. It can be plus, minus certain percentage points, because, of course, of the seasonality. And definitely the fourth quarter will be lower as well as the second, third quarter most probably will be higher. So the same question.

With this, of course, that means that somewhat average for this year, most probably, will be somewhere around the average for the next year.

Does it mean also maybe -- because there is currently inflation on advertising cost -- you are going to maybe maintain in absolute term the spending but in terms of, say, share of voice, all mobile operators may decrease relatively speaking, their spending in terms of share, voice, all of them. Is it your expectation?

Well, actually, we think that we are pretty effective in buying, and that's our intention that, yes, we understand that there is certain inflation, but our negotiation power and our history shows that we managed to get pretty good prices on the market and that's what we are trying to do and also we have a plan, maybe, to change a little bit of the mix, extending, switching, from more expensive channels to less expensive channels, but keeping the share of voice on par with our competitors.

Okay. Thank you.

Before I answer on Wind, I just want to reiterate what Elena said, that in principle, VimpelCom has always been run as a very disciplined company on the margins. Our credo always was that margins do not happen to us. We make them happen at a certain level. And therefore, naturally, if we see that inflation pushes on one side, we need to find ways to compensate it either through efficiency or allocating less resources to some other areas. And in that sense, the conscious decision, which has been made by the management, to target margins in a longer period over the year and so, at the levels which we currently see.

So we believe that it will be sufficient investment for us to restore market position in Russia. If we see it doesn't work, then we probably need to revisit it and understand the consequences of it, and then we'll inform the market as well. But so far, that's the target.

Now, going back to your question on eventualities around the transaction, we tend not to engage in what-if discussions. I probably will say that we like all of the assets of the transaction of Weather, and they offer different composition of maturity and risk and the premiums and the rewards. So we believe that they balance and in that sense, each asset stands alone would be also attractive. But we are still aiming at transaction in full.

As far as Telenor's position is concerned, I don't think it is an appropriate place, or I am not the right person to discuss what Telenor will or will not back up. I am pretty confident that Telenor, as a both shareholder, and as Telenor representatives as members of the board of directors, will act in the best interest of the company and will back up a solution and transaction which creates value for the shareholders.

Okay. Thank you, Alexander.

Our next question comes from Ivan Kim with Renaissance Capital.

Hi, a couple of questions, please. Firstly, can you elaborate on your distribution strategy? And what's the strategy within the Euroset network, and what kind of influence you have on Euroset now, given that they got the deal with MTS, for instance?

And the second thing, on video as well. So it's about the shareholder meeting. So basically will it happen before the Algerian government makes up their minds on whether they buy Djezzy on the price, and whether the shareholder meeting can be postponed from January? Thank you.

Let me start with the distribution strategy. Yes, the distribution strategy which we have and which we are going to pursue is based on three milestones, that we should continue work, as we did with national dealers, such as Svyaznoy and Euroset. And talking about Euroset, our relations with that company, it's arms length. And we are signing the contract with them for distribution. And of course they can sign contracts with other operators, like they did with MTS. Like before, they had a contract with MegaFon. And here we don't see any change in this regard.

Now we also would like to increase our presence in different other channels, which may be not, I would say, traditional, like big malls and increase the presence of kiosks there, and also go through such -- with such means of distribution, like telesales. And with this, we are putting together the plan of improving our position in all channels, including the mono-brands, which we have through the franchising network. So this is very complicated and a detailed plan. And I've just described the major points of what we are planning to do. The question is that of course we have that plan. And we want to track our progress on this on a monthly basis, which is the main point of success in implementation of that strategy.

And as far as transaction is concerned, the approval process we believe has been pretty clearly specified in our earlier press release. And any of the decisions by the Algerian regulator or the governments are not on the timeline -- are not defining the timeline of how transaction being moved towards closure. There are a number of approvals which need to be received, some of them regulatory in the different markets, some of them internal review with the Board one more time. But Algerian government decision, whether to buy or not to buy, or any other to that matter, is not affecting that timeline.

Again, I just want to reiterate that we are happy to receive either outcome of the discussions with the Algerian government, whether we retain the asset in amicable terms and we continue to operate it. That would be the best outcome for us. And we are ready to explore and are exploring different options there. Or if the government insists and will continue down the road of taking over the asset, we are ready to transfer it to the government, if it's done at a fair value, at a fair price. So we're standing exactly where we were on October 4th. And I reiterate that it's not incorporated, discussions with the government, into the timeline of closing the transaction.

That's clear. Thank you.

Our next question comes from Will Milner of Arete Research.

Yes, thank you very much. A couple of questions. I just really want to follow on from the last question on Weather. I'm a bit confused here how you can hope to close the deal, given the timing of the Algerian nationalization. The Algerian government only seems to have just appointed international advisors. So it seems more likely that you will have no view on the valuation of that asset by the end of the first half 2011. So I guess the question is how you can hope to close the deal without knowing what the valuation might be that you receive for Algeria, which I don't think you will by the first half 2011. So if you can speak more clearly on that, that would be very helpful.

And the second question is on -- actually on Euroset. I understand your partner in Euroset has a put over a 25% stake of Euroset in 2011. I just wanted to understand on what valuation basis the put was calculated and whether Euroset's proposed IPO might change the terms of that put. Thanks a lot.

We're sitting and using telecom conference here with Moscow and trying to understand whether Moscow can answer the question on the put. Indeed, it has been part of the original negotiation. And to the best of my knowledge, the put -- there is a call on the put exchange. And put is calculated at the original price with a small percentage increase. And the call is done at market. But I have to confirm it with my colleagues. But that was the original thinking on Euroset.

As far as valuation on Weather and so on, like any transaction it will incorporate certain risk and certain reward ratio. And for us, therefore, that's exactly the judgment we had to exercise, how we incorporate that risk in our valuations. And then we'll identify what our ability to recover the values which we saw into Algeria. But I repeat that it's not a foregone conclusion that the asset will be taken over by the government. Thank you.

Okay, thank you. If I can just have one quick follow-up, just a clarification. Everything you said on stepping up investment in network and making up share on mobile broadband suggests that total CapEx in 2011 will be higher than 2010. Is that the right conclusion to draw? Thanks.

Well again, it's a forward-looking statement. And we are not yet announcing any guidance on 2011 until the budget (technical difficulty).

Okay, thank you.

The next question comes from Dalibor Vavruska with ING.

Hello. Good evening. I have two questions. One is about the Russian situation. Obviously you're now very clearly saying that you're underperforming, in terms of market share, and that you'd like to do something about it. I'm just wondering. When I look at your competitors and your numbers, obviously the growth rates are a little bit lower than MTS and more significantly lower than MegaFon's.

But there's three components. There's voice. It's data. And then there is retail. I think MTS numbers, if you look at Russian mobile, are boosted by retail, which you don't consolidate or you chose not to develop in your own business. So I'm just wondering, how do you -- if you're saying that you want to boost your market share, what exactly you want to do. In my numbers, you seem to be underperforming on the data side because perhaps lower investment. Is that where you want to mostly focus on?

And that leads me to the second question, which is the phenomenon which appears to happening where basically dealers are selling discounted SIMs in the low end of the market. And they basically subsidize some of the credit which leads still to high churn and perhaps higher net additions than will be healthy in the market. And you seem -- is my understanding correct, that you try to stay away from this market or from these practices? Now obviously MegaFon seems to be pushing with both data and this kind of high churn practices which seem to be a bit affecting margins for both MTS and MegaFon, less so for you. Do you want to join this game or do you think you want to play it differently? Thank you.

Well, let me start maybe with the second half, about the high churn and the sales of -- a lot of sales of SIMs, which are pretty evident that it's hard to imagine that there can be 2m or 3m of new subscribers every month in Russia. Yes, of course, we are acting slightly different in this regard because we are concentrating on the quality of the sales. And we can see that it will be much more appropriate for us to continue to look for that quality and to try to get subscribers with high ARPU and who may stay longer with us.

And talking about the focus of regaining revenue market share, Dalibor, you are absolutely right in your analysis that, yes, we are behind mainly in data. And that's the main focus where we are concentrating, in data. Let me again kind of reiterate that the basis for this will be accelerated rollout of 3G, then special pricing for small screen, large screen. And we would also like to enhance our position in sales of handsets. And for this, already in December, we are launching certain programs of selling, I would say, (inaudible) handsets, smartphones which are targeted specifically for Russian markets, with the capabilities that will allow subscribers to use them and to use much more data services than what we see currently. So definitely, that's the basis of this strategy.

And sorry, if I can just ask a quick follow-up. Obviously lots of people have doubts about the returns on the 3G investment. And I think MegaFon is quite clearly leading the way. And the other two operators seem to have been wondering, where did they see these high returns? The fact that you now want to go into -- is it partially defensive, because you just see it happening and you don't want to stay out of this market? Or are you changing your view, in terms of the visibility or perhaps level of returns that you can get on 3G?

Dalibor, this is Alexander. I think it's a phenomenally complex question and that we clearly cannot accurately yet assess the returns, going forward. And we are not hiding this. And I think that anybody who pretends they can, they're pretending. And therefore, our investment profile, which we will be maintaining going forward, is not going to be radically different from what we used to have. But we will be shifting gradually and more intensively, going forward, investment from 2G to 3G and certainly, investing into longer lead time elements of infrastructure, like transport network.

The choice of that type of profile is dictated by our view that actually -- and view actually hold during last six months -- that capacity in 3G on the radio part will come at a relatively rapidly declining cost, going forward, and therefore accelerating investment of that capacity of that nature right now probably it will be difficult to justify from the returns standpoint.

Transport network, on the other hand, will remain a necessity. And we don't envisage a decline -- costs declining there as rapidly as in [RAM]. So that's the equation we're trying to work out now. We don't have all the answers, all the Ts crossed and the Is dotted. But we're trying to figure out, where would be the no-regret moves?

In general, the strategy which we're now deploying -- and all the operating companies are going through that exercise -- it's a three-tier approach to our CapEx, the one which is necessary to maintain what we call business continuity, i.e. zero growth and basically replacement of some elements of the infrastructure, and so on, and legal obligations. Then the second tier, which is calculated already with -- on the IRR basis and we estimate the NPV for bulk of the elements of the investment. And that we restrict to 12% of our revenue. And the rest will be going, will be released, depending on which geography shows better promise, better returns, after very thorough strategic review which we'll be having early next year.

So as you can see that our commitment to deliver consistent return on investment capital is intact. And part of the success in this story, when the visibility is so poor, is to [tread] very carefully. And that's exactly what we will try to do with our CapEx.

But on the other hand, of course when you have such a gap which is being built, our analysis shows that MegaFon out-invested us by roughly 30% during last two years. And of course it creates a gap in perception and quality, which we cannot afford to continue to expand. And we do need to bridge this gap somewhat, partially through more accurate, more targeted investment. But we do need to have improvement in our network. I hope that clarifies.

Okay, that's appreciated. Thank you, Alexander.

The next question comes from Alex Wright with UBS.

Yes, thank you. I just had a couple of financial questions, please. Henk mentioned that you'll be working on bringing down the effective tax rate, going forward. And I wondered if you could give some indication of what consolidated effective tax rate you think is achievable over the medium to longer term.

Secondly, in the P&L this quarter, there was a $26.5m other expense. I just wonder if you could clarify what that is related to.

And then finally, on the balance sheet, I notice that the minority interest, which I think largely relates to Sky Mobile has decreased quite significantly this quarter. I'm just wondering what happened there. Have you written down some assets or is there some other factor which is explaining that change? Thank you.

Yes, on the ETR, I think it's too early to give a precise indication. We will have to go through a range of measures to optimize the intercompany funding structure for the Group. And that, in a way, that it effectually also helps to create intercompany interest to (inaudible), perhaps at a lower rate than you could say the nominal rate. Strategies for that are currently being investigated and will be brought in place over -- effectually over the coming one and a half years, because it requires, of course, a full optimum of the fiscal, the legal, the accounting and the funding structures that you need to implement. So I would like to wait till the moment that they have these analyses done. And of course, including whether the structure will already be different than excluding Weather. So let's wait for that. And there will be, in the coming years, certainly a moment that we can give a further indication.

I do not have any particulars on that other expense. We should have to come back on you. Do you have it, Alexey, or not? We don't have it here. So we will give it later on.

And on the minorities as well, I think it's just a shift in the quarter. But there is no specific reason to be mentioned for that.

Okay, thank you very much.

The next question comes from Viktor Klimovich with VTB Capital.

Good evening. I have two questions. The first is quite technical. When do you expect to get approval in Pakistan of the deal with Weather Investments?

The Pakistan approval process consists of two stages. First stage is kind of a first round of review. And if nothing noted there, the approval will be granted within 30 days after the application. And if the government and the regulator decide to go into a deep analysis, that will take extra 60 days -- 90 days, sorry. So that's the process. And we hope that we will file as soon as we reach the obligation date, as we indicated on October 4.

And my second question is regarding Russian fixed-line operations. Can you please elaborate on the new construction of fixed-line broadband network? So do you -- will you continue to build out the network in 2011/2012? Or will you start to -- continue to monetize the current network? Thank you.

Well, for -- as to the construction, of course we will continue to build and continue to monetize, of course, because the take-up rate which we have currently is somewhere around 14%. And that's mainly connected with the fact that we are coming to new cities. And there, in the new markets of course, the take-up rate in the buildings cannot be on the level as, for example, we have in Moscow.

The number of households passed increasing. And currently, it's around 8.6m. So we resumed the construction. And yes, there are plans that we should have much more in 2011. But again, this is the question connected with calculation of return on investment. So we are very careful in this. And we will look on each particular city what we will do.

But talking about FTTB, I have to mention that we practically in the third quarter, and hopefully by -- launched a regional expansion of a new product, IPTV. And it looks like people are very fond of that product. And we also have plans to develop IPTV services in the region. So currently, we have presence in -- at the end of the third quarter, we have presence in 13 cities. And by the end of the year, we will be in 18 cities with IPTV. So everything is on track and we are moving in that direction because fixed broadband is also considered by us to be the future product which will bring us future, together with mobile broadband.

And can you please elaborate on this IPTV? Do you need upgrade of your networks in these cities when and where you launch IPTV?

Actually, we have chosen the cities that are sitting on our own network. So with this, we are on the safe side. But going further, of course that's one of the questions which Alexander already touched, that we have to develop our transport network to accommodate all new products, both mobile and fixed. And that's one of the points of future investment.

Okay. Thank you very much.

Our next question comes from Nadezhda Golubeva with UniCredit.

Good afternoon. I wanted to come back to your margin in Russia. So you said that there is a delay in marketing spending and revenue effect. So may I put it this way? Do you believe that you have to further increase marketing as percentage of revenue or what you're -- or let's say the extent to which you already have increased the marketing, yes, it's enough to start to gaining the market share, which is your aim? So of course I mean net of seasonality, so adjusted for normal reduction in margin in fourth quarter. And also, do you believe that we might see some market share stabilization already in fourth quarter 2010 or do you think it's likely to start realizing not earlier than in 2011? This is my first question.

And secondly, I want to talk to you about CapEx. So it did increase. But I got an impression that it's highly postponed towards fourth quarter 2010. So could you please tell us, how much do you expect -- how much did you plan to spend in Russia for the whole 2010? And so why your CapEx is so heavily shifted towards fourth quarter? So essentially, given that you're always having problems with the market share in data, so does it have to do with some difficulties with supplier? Thank you.

Thank you, Nadezhda. With marketing spendings, we think that we will stay more or less on the same level as we have now, again on the average for the year, because we think that currently nothing, I would say, dramatically changed on the markets. We think that, again, having the share of voice on par with competitors, we are fine with this. And that's how we see it.

Talking about CapEx, of course we cannot say right now what will be the capital investment for the whole year. But again, as I said already, that we hope to further accelerate the investment. Unfortunately, as you know, with our history, we were always bringing to the fourth quarter in our capital investment. And this year is not an exception. Yes, there were certain questions with the delays of equipment. But currently, we are on track. And we don't anticipate that we will see any problems in the fourth quarter fulfilling our plans.

So in other words you think that -- you still believe that 20% of sales will be fulfilled yet this year.

No. Actually we're not saying 20%. We were -- our guidance was between 15% and 20%. I think that, yes, it will be --

But if I'm not mistaken, last time you said that your CapEx are likely be close to the high end or maybe I'm wrong.

Yes.

Okay. And about the market share improvement, so I understand that you can't say it like for sure, but do you believe that in fourth quarter, your market share can still be under pressure and may come under further pressure? Or you hope that we -- you are now at the bottom, let's say, of your cycle?

Again, we know what we will do. We cannot speculate what our competitors will do. And we hope that, yes, we will do our best and deliver our best and then we'll see the results.

Okay. And my last financial question, what is the payment for shares in Golden Telecom on your cash flow statement, of $144m for nine months? Could you remind me, please?

I think it's, as far as I know, it's a settlement and then remaining tax situation in the US.

And what was the situation?

Just a tax return that still had to be fulfilled in the US.

In the settlement, there was a group of investors who decided not to take the offer. And they went to court. And that was a pending litigation there. And that was the final charge. It was a small group of investors, which argued with us that we should have paid -- buy them at a higher price.

Okay. And did this expense happen in third quarter?

It's a cash recognition.

Okay. And there are, I see -- but the physical payment was made early, correct?

Say that again.

The recognition, yes. I mean the cash transaction. When did it take place, in third quarter or earlier?

[In the] cash flow statement of the third quarter. It is in the third quarter.

No, it's for nine months. So I can't say whether -- okay, I can look. Okay. Thank you very much.

Thank you.

Our next question comes from Yavuz Uzay with Goldman Sachs.

Thanks for the presentation. Most of my important questions have been answered. But I just want to ask something about Weather Wind transaction. At one point, on several different media sources, we had read that you mentioned -- VimpelCom management has mentioned $7.8b as the fair value for Djezzy asset for Algeria to buy. Or alternatively, if this keeps operating, we're looking at a $1b to $1.1b per year EBITDA business. Can you confirm whether you actually said that $7.8b as a fair value for Djezzy?

Yes, that's indeed been said. And the logic of that is kind of multifaceted. We know that there were quotes in that order of magnitude by other companies. Also, if you look at, for example, recent transactions -- we're not taking transactions like Zain African business acquired by Bharti. But if we look simply at recent sale of Tunisiana, which is non-controlled stake of a very similar operating environment, been sold at a multiple of 6.7. So if you apply that to the EBITDA of [1.2, 1.3], which was in the previous years, you will end up very close to the numbers which I quoted. So indeed it has been said by me.

Okay. So when you -- then when you say you want to either operate Djezzy or you want to sell it to the Algerian government at those prices, we're actually talking about a similar level of valuation in each case. So can we assume that in your bid for Weather, that's the -- that's sort of the valuation you incorporated into your bid?

The Weather is a very complex transaction. We're buying a whole set of businesses. And I would rather not to engage now in discussion how sum of the parts has been constructed.

Okay, no. Thank you very much.

Our next question comes from Tatiana Boroditskaya with UBS.

Good evening. Tatiana Boroditskaya from UBS. One question, if I may. Can you please comment on any intentions you have to raise debt in international and domestic markets towards the end of this year and in 2011? Thank you.

No, actually we cannot give any comment on that. Of course we indicated on October 4 that in the connection to Weather, we will be looking at a short-term block for refinancing -- intercompany refinancing for a portion of the Orascom debt. We also indicated that we expect to attract additional, up to $2b, $2.5b of debt for the cash consideration in the particular transaction. But any further things that are going on, we will only comment and give reaction when things are ready to communicate. And for the rest, there is no comment.

Thank you.

We will take our final question from Cesar Tiron with Morgan Stanley.

Hi. I would like to ask you if there is any probability that this Weather -- VimpelCom, Weather transaction would be renegotiated in terms of a different price.

Well, I don't see how I can answer that question. We announced the [SPA], which has been signed. And we are working on closing that deal. If the price would be renegotiated, it would be a completely different deal, completely different transaction. So I cannot comment on that. Thank you.

Thank you.

Thank you. Ladies and gentlemen, that does conclude our question and answer session for today. I would now like to turn the conference back over to management for any additional or closing remarks.

Well, our closing remark is only to thank you for your participation and your questions. And of course, there are more questions which remain unanswered. And please do not hesitate to contact our Investor Relations department, who will address most of your inquiries. And with this, thank you once again and have a nice day. Goodbye.

That does conclude today's conference. Thank you for your participation.