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Executives

Michael Polyviou - IR, Financial Dynamics

Boris Nemsic - CEO

Alexander Torbakhov - General Director

Elena Shmatova - EVP & CFO

Kent McNeley - Chief Marketing Officer

Dmitry Pleskonos - EVP for the CIS

Andrey Patoka - VP, Head of B-to-B Russia

Alexis Zubertin - Director of International Investor Relations

Analysts

Herve Drouet - HSBC Bank

Tibor Bokor - Otkritie

William Kirby - Nevsky Cap

Alexander Kazbegi - Renaissance Capital

Alexander Balakhnin - Goldman Sachs

Dalibor Vavrushka - ING

Oleksiy Soroka - BNP Paribas

Nadia Golubeva - Unicredit Aton

Denise Molina - RBS

Victor Klimovich - VTB Capital

Alex Wright - UBS

Yevgeny Golossnoi - Troika

Olga Bystrova - Credit Suisse

Vladimir Postolovsky - UBS

Vimpel-Communications (VIP) Q4 2008 Earnings Call May 13, 2009 10:30 AM ET

Operator

Welcome to the VimpelCom Fourth Quarter 2008 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. [Michael Polyviou] with FD. Please go ahead, sir.

Michael Polyviou

Good morning and good evening. And welcome to VimpelCom conference call to discuss the Company's fourth quarter and full year 2008 financial and operating results.

Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to management's expectations about company's ability to meet its future debt obligations, the company strategy and development plans in Russia, the CIS and South-East Asia, 3G and its fiber-to-the-building development and take-up rate and projections relating to the Company's cash position and capital expenditures.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in the Company's press release announcing fourth quarter and full year 2008 financial and operating results, the Company's earnings presentation entitled “Presentation of Fourth Quarter and Full Year 2008 Financial and Operating Results’, the Company's annual report on Form 20-F for the year-ended December 31, 2007, and other public filings made by the Company with the United Stated Securities and Exchange Commission, each of which are posted on the Company's website at vimpelcom.com.

In addition, the Company's fourth quarter and full year 2008 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission’s website at sec.gov.

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

If you have not received a copy of the fourth quarter and full year 2008 financial and operating results press release, please contract FD at 212-850-5600 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliation of non-GAAP financial measures presented on this conference call, can be downloaded from the VimpelCom website.

At this time, I'd like to turn the call over to Boris Nemsic, Chief Executive Officer of Vimpel-Communications. Boris?

Boris Nemsic

Hello everyone. Thank you for joining our conference call today. Let me introduce the team participating in this call. Here with me are, Alexander Torbakhov, General Director, together with me first time in this VimpelCom conference call; Elena Shmatova our Chief Financial Officer; Kent McNeley, our Chief Marketing Officer; Dmitry Pleskonos, Executive VP for the CIS, Andrey Patoka, Vice President, Head of B-to-B Russia; and [Alexis Zubertin], director of International Investor Relations.

We understand that this announcement is coming later than usual. 2008 was the first year that we are consolidating Golden Telecom and Corbina. We significantly increased the scale and complexity of our operations. In lines of our business practice, we waited to have a complete audit before announcing our results. So, we appreciate your patience.

On this call we will discuss our results for the fourth quarter and full year 2008, we will also provide an update on managements actions, designed to navigate the company’s through this period of macroeconomic uncertainty.

2008 was a very important and dynamic year for VimpelCom. In the beginning of 2008, after the acquisition of Golden Telecom, VimpelCom became a integrated telecom operator, offering our corporate and the residential customers a variety of voice and data services, using a broad range of Mobile, Fixed and broadband technologies.

In addition we embarked in the new distribution strategy working more closely with Kyivstar in promoting our own channels. We also acquired the minority stake in Euroset, the leading telecom retailer in Russia.

The new approach significantly improved our competitive position in the market. We also developed geographically growing our business in the CIS countries and entering Vietnam and Cambodia.

Our efforts in 2008 were rewarded with record high net operating revenue of $10.1 billion, OIBDA of $4.9 million and operating cash-flow of $3.4 billion. However, our bottom-line was negatively impacted by local currency devolution when the crisis reached Russia and Ukraine.

We ended the year in a strong cash position and with a set of anti-crisis measures design to carry us through the uncertain macroeconomic environment.

Lets now move to finance and Elena to present our fourth quarter and annual 2008 financial results and describe our financial position details.

Elena Shmatova

Thank you, Boris. In 2008 VimpelCom financials results were very strong with revenue showing 41% growth year-on-year and OIBDA increasing 35% during the same period. Our operations in the CIS became a stable source of growth and the acquisition of Golden Telecom opened new opportunities in Fixed telecom services. This diversification of our business both through geographies and business lines will bring us better stability going further in the potential tumulus environment.

While the underlying parameters of our business remains solid during the fourth quarter, we began to see the first negative impact of the crisis on our financials. Currencies in Russia and Ukraine experienced sharp devaluation against the US dollar. The Ruble lost of approximately 14% against the dollar and the Hryvnia more than 35% if compared exchange rates as over the end of the quarter.

As a result both top-line and the OIBDA showed solid growth year on year, though both also suffered in the fourth quarter from currency devaluation and showed a decline compared to the previous quarter. This negative effect was mitigated by good operational performance, which is a confirmation of the robustness of all business composition.

Now we have two segments Mobile and Fixed supporting each other. Some decline in revenue in the mobile segment was probably mitigated by stability in the Fixed business segment and growth in FTTB. As a result we have recognized $2.5 billion in revenue in the fourth quarter and $1.1 billion in OIBDA.

In the fourth quarter, our net income before foreign exchange losses and goodwill impairment before tax effects on the state of adjustments was approximately $639 million, reflecting solid operational performance.

Goodwill write-off were a result of the increase in business risk perception. We partially impaired goodwill related to the Golden Telecom acquisition in the amount of $316 million in Russia, certain TV licenses for approximately $38 million and Ukraine operations in the amount of $90 million. Our cash balance at the end of the year was above $900 million which was approximately $200 million more than as of the end of the third quarter.

During the fourth quarter we also repaid approximately $290 million of debt made approximately $865 million of capital investments and spent $478 million to fund acquisition of minority stake in the Vietnamese joint venture and its [rollout].

In October 2008 we closed a syndicated loan deal for approximately €560 million. As a result of all this activities our total debt as of December 31, was close to $8.4 billion, which is approximately $440 more than as of the end of September. In the fourth quarter our capital investment amounted to $855 million. But our CapEx to OIBDA ratio remains flat through 2008 as we continued to increase last twelve months OIBDA to terms in US dollars despite global devaluation.

Our debt-to-OIBDA ratio in the fourth quarter was 1.7, the same as for the previous quarter. Our debt structure as of the 31st of December was very close to what it was at the end of the third quarter with major debt pay out occurring in 2009, 23% of total debt and 2010 24% of total debt. As of April 30, 2009 we have already repaid $609 million, which were due in the first four months of the year. By the end of 2009 we still have to repay approximately $1.3 billion, which was comfortably supported by our projected cash flow for this year.

To strengthen our cash position, with secured additional funding, in March 2009, we entered into two loan agreements with Sberbank, one loan is for 8 billion rubles maturing in 2011 at a maximum 19% annual interest rate, and the other loan is for $250 million maturing in 2012 at maximum annual rate of 13%. The majority of this new loans will be spent on managing our debt portfolio.

Now back to Boris.

Boris Nemsic

Thank you, Elena. In Russia, our quarterly revenues in dollar terms increased almost 27% year-on-year. In the Ruble terms, the increase with 40% year-on-year and virtually flat quarter-on-quarter. Our consolidated OBIDA margin was 44%, which is inline with normal seasonal patterns during the consolidation of the Fixed-line business.

During 2008, we spent approximately $2.6 billion on capital expenditure, approximately 69% of which was spent in Russia on upgrade of existing infrastructure, deployment of 3G equipment, and construction of FTTB networks.

Recent investments in infrastructure and integration of transferred networks of Golden Telecom and Corbina Telecom significantly increased the capacity and quality of our networks.

In the interest of prudence, we temporarily suspended a number of our new orders for capital expenditure. We are focusing on projects, which are essential for the quality of our services and new initiatives with shorter payback period.

Our mobile business in Russia continues to grow; we increased our active subscriber base and now provide services to 47.7 million customers. Fourth quarter was particularly strong from a subscriber acquisition standpoint and we sold more than 8 million SIM cards in the quarter, including more than 3 million SIM's in December.

Despite, this inflow of subscribers, usage per subscribers in the fourth quarter remained flat, when compared to the third quarter of 2008 that’s about 250 minutes per month. We believe that from most of our Russian customers, Mobile telecom services have already become a necessity rather than a luxury.

This is supported by fourth quarter results that showed most of our key operational indicators remaining in line with normal seasonal trend. While we have seen normal seasonal fluctuations continuing in the first month of 2009, we must note that this could still change later in the year.

OIBDA margin decreased in the fourth quarter primarily due to three factors; strong seasonal marketing, sales support of new acquisitions, and the start of sales of iPhones’ in October.

Our Fixed-line business in Russia shows very good revenue dynamics and proved to be prepared for the negative impact of the economic slowdown at the end of the year. We have managed to increase our OIBDA margin in the Fixed-line segment to almost 25% as a result of cost control and synergies coming from the initial integration with our Mobile business.

Our offer to our Fixed-line corporate customers was enhanced with mobile services and solutions coupled with more attractive commercial conditions for bundled products.

In the wholesale segment we continued to grow revenues even in dollar terms, this growth came from increase capacity due to the integration of Mobile Fixed networks and the more proactive sales effort in the national and international long distance communication markets. In the residential Fixed-line segment the gradual replacement of legacy products and services with modern broadband solutions continues.

Despite of devaluation of the Ruble our broadband revenues in dollar terms increased as we continued to increase our subscriber base.

Our two main technologies are fiber-to-the-building networks, which by the year end connect approximately 7.2 million household in 46 cities of Russia and 3G networks that we launched in 40 cities. They significantly boost the construction of our FTTB network after the acquisition and integration of Golden Telecom and Corbina. Recently we revised our broadband strategy in suspending new FTTB construction project and focusing more on sales efforts.

We also made good progress in Mobile broadband. As this indicates we came up with a right mix of product design, pricing, and distribution platform. Overall the residential broadband market in Russia is shaping up to be a bright spot this year and VimpelCom is well positioned to become one of the leaders on these fast growing markets. Now let’s turn to our performance in the CIS countries.

Kazakhstan was the first CIS country to face the current economic crisis when a liquidity squeeze hit the local economy back in September 2007. Despite a prolonged economic turmoil we continued to grow our business, reporting 72% year on year growth. The company’s best strong annual OIBDA margin of above 60%.

During the year, we continued to add new customers growing our active subscriber base at 56% year-on-year. We increased our market share with minutes-of-use remaining within normal seasonal patterns.

In Ukraine, the consolidated operations grew year on year its 152%. The Mobile revenue have increased by 77% on an annualized basis while maintaining positive OIBDA.

Throughout 2008, we also managed to increase the size and the quality of our subscriber base. From the year-on-year perspective our active subscriber base increased by almost 6% and ARPU in US dollar was up 75%.

VimpelCom remains committed to the Ukrainian market. We operate a new high quality countrywide network, providing both fixed and mobile services to our customers.

Our Armenian operations are in good financial shape and continue to deliver stable revenue growth coupled with sustained high OIBDA margin of almost 50%. Our active subscriber base decreased in the fourth quarter of 2008 as we had expected. However, our revenue market share remains stable confirming the underlying health of our mobile business.

In Uzbekistan in the fourth quarter of 2008, our mobile revenues demonstrated strong annual growth of 74% with an impressive OIBDA margin of above 51%.

Facing strong price competition during 2008, we increased our active mobile subscriber base by 71% year on year including more than 16% quarter-on-quarter increase with ARPU showing remarkable stability. With these we managed to improve our revenue market share year-on-year.

Now let us turn to operations outside of the CIS. Our entry into Vietnam and Cambodia was one of the key events of 2008. In terms of population these two countries equal approximately the population of all CIS countries outside of Russia. In both countries we put professional teams in place, established an organizational structure, started network planning and construction, and developing sales channels.

In October 2008 we made $267 million cash contribution into our venture in Vietnam. These funds combined with the [in cash] contributions made by our Vietnamese partner should be sufficient for this year’s development of the networks throughout the country.

In Cambodia the scale of construction and the required CapEx is for a lesser extent, the commercial answer of operations in May of 2009 has already taken place.

Now a few words about the recent organizational changes, Alexander Torbakhov and I joined the company on April 2nd. In increasing complexity and scale of VimpelCom operations given the current economic turmoil, the split of responsibilities between two top managers is the best way to assure smooth operational transition.

Our splits though capitalize on the strength of each manager and we will allow each of us to focus on the areas in which we are most competent. Alexander Torbakhov is an experienced Russian General Director familiar with all of the Russia specific issues.

He will be responsible for legal and regulatory, government relations, human resources security, finance, internal audit, all these issues which are crucial for smooth running operations and financial stability of the company.

I myself have also experience as a Telecom Executive running both fixed and mobile business in emerging and major markets. I would be responsible for operational management in Russia, CIS and International markets.

Concluding our presentation, I would like to say that this year the company made a great step forward in our drive to become a leading world class international telecomm operator.

In 2008 we passed $10 billion in revenue. We grew to more than 60 million mobile subscribers. We diversified our offerings include fixed, wireless and broadband and related ground work for expansion into South-East Asia. 2008 also presented challenges for the company, through the beginning of the economic crisis.

We continue to focus on operational excellence, cash flow and debt repayments to carry the company through the uncertain environment, and keeping the prospect, we would also like to give CapEx guidance for 2009. We estimate our CapEx in 2009, to be in the range between 12%, to 15% of group consolidated revenues. Of course, in the current environment we will be monitoring the situation closely and our Board will be reviewing and adjusting the CapEx plans on a quarterly basis.

As we look forward, we believe that the scale of our operations, our financial position and anti-crisis measures that we had implemented to help VimpelCom to effectively weather the economic crisis with our strategy and key components from the business in place, we are confident that we will continue to be one of the flagships across the industry.

Now let me open the floor, for questions. So operator, can you take over please?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Herve Drouet with HSBC Bank.

Herve Drouet - HSBC Bank

My first question is regarding the CapEx. I mean regarding their relatively strong CapEx cuts for 2009, what for you will be the priority in term of the cut, where do you think you are going to cut more? I think you mentioned the fact on the broadband rolled out; it’s going to be slowed down in term of the home path. Either any other area where there will be a lower investment?

And my second questions will be competition; looks like you have increased your coverage in part of Russia but this move hasn’t been followed by other competitors. Do you expect some market share erosion in Russia? And what for you will be the most critical elements, will it be more market share, will it be more margin consolidations? And if you can indicate, if did you see any change of trend during Q1 either in terms of subscribers base there or usage? Thank you.

Boris Nemsic

I’ll take the first part and Kent McNeley will take the second. We give guidance for the CapEx in a pretty broad range from 12 to 15%. We’ll not cut down or brake down this CapEx, but of course we have some license obligations to fulfill on both on 2G and 3G and we of course fulfilling all the quality needs and expansion needs with our customer base. We think that to reduce guidance, we can fulfill all this necessary investments and especially we are looking at this very dynamically reviewing both the amount and the priorities each and every quarter.

Kent McNeley

In regards to our pricing, in the first quarter we really played out what our pricing strategy has been for a long time, which has been the focus on an overall stable pricing in [operating] terms we will have one tariff that will have… that will be competitive on the market and then we make some adjustments to other tariffs to keep us at a flat pricing. We have executed that strategy and what we look at is how does it effect the number of active subscribers we have and how does it effect our gross sales, and without going into specifics in this call we are satisfied with the results we’ve had so far.

Herve Drouet - HSBC Bank

Okay, does it means that you don’t see any change of trend compared with Q4 so far?

Boris Nemsic

No, we don’t.

Operator

Thank you. Our next question comes from Tibor Bokor with Otkritie.

Tibor Bokor - Otkritie

Hi, Tibor Bokor from Otkritie Financial Corporation from Moscow. I have two questions so please. One would be regarding Cambodia and Vietnam, if you could guide us towards how much cash outflow toward these markets VimpelCom plans for 2009 in terms of CapEx or investments? Second question would be regarding the Euroset, if you could tell us some financial results for Euroset and how does it impact financials work and we see these results in your financial stings?

Boris Nemsic

I think the first part Cambodia and Vietnam, we stated our investments of 267 million in Vietnam which should be enough for financing of the company network rollout in operations for the year 2009. And for 2009, we do not foresee additional fund.

Tibor Bokor - Otkritie

Very good, thank you.

Elena Shmatova

You have said financial results, you recognized only of course only possible for their results we are minority 49.9% and actually in the press release in P&L you can see a line equity in net loss of associates and there you can see a combination of URS and other holdings of minority stakes such as Vietnam.

Tibor Bokor - Otkritie

Is it correct that was $18 million for the fourth quarter?

Elena Shmatova

No. On page 15, of the press release you can see that in that line is fourth quarter is 63.7 million.

Operator

Our next question comes from William Kirby with Nevsky Cap.

William Kirby - Nevsky Cap

Please could you just guide through the trends you are seeing within the main cost items in SG&A and are we likely to see that continuing to increase as a percentage of revenues in coming quarters? Thank you.

Elena Shmatova

Major cost items in SG&A, you mean whether there is the possibility for increase?

William Kirby - Nevsky Cap

Well sort of passing trends you are seeing in advertising and rent and in the cost of your employees?

Elena Shmatova

Yes well. First of all the majority of our costs, especially of course the major contributors through our consolidated numbers is Russia and in Russia majority of our revenues in cross-selling to Ruble and so to this extent of course there will be a certain inflation and some increase in that particular item but we hope that we can mitigate that impact -- negative impact from the P&L by our measures in a sense to operational efficiency, and the way we are now dealing with the supplies is trying to optimize our costs. And specifically talking about marketing expense it seems to me that we have great achievements and Kent may talk about this.

Kent McNeley

From a marketing standpoint we have renegotiated a number of our key agreements, including our media agreements with a television channel, with the out-of-home advertisers, out-of-home media placement and our internet provider, all three. So, in the key areas of media, which is the bulk of our spending in marketing, we've made some reduction versus where we were in 2008 and been able to reduce our cost.

William Kirby - Nevsky Cap

Okay. So given that you are seeing those price decreases, that you are going to increase volume, so that you still spending the similar amount in ruble terms or are you going to, just not to place the same amount but spend less money?

Kent McNeley

In general, we are planning to spend about the same amount of GRP's, the same amount of media weight, so that would actually result in a decrease in our spending in the absolute.

William Kirby - Nevsky Cap

Okay, got it.

Kent McNeley

It should give us the same media presence that we've had in 2008 and 2007.

William Kirby - Nevsky Cap

Okay, thank you.

Boris Nemsic

Also, I would to kind of answer of on the headcount and HR components of SG&A. As you know VimpelCom acquired Golden Telecom last year and in the fourth quarter. That means in the fourth quarter last year the integration process had started. So, we made approximately 5% to 6% reduction in our headcount and the result of that is not clearly seen in the financials for the fourth quarter but it's made and so you will see that in future, and also we've frozen the headcount with CIS countries. So the components will be stable or slight negative. Thanks.

Operator

Our next question comes from Alex Kazbegi with Renaissance Capital.

Alexander Kazbegi - Renaissance Capital

Could we talk a little bit on the Fixed-line side please? Obviously your business in corporate service revenues fell in Q4 but I was more wondering how does it look in Q1. Maybe you can give us some color on that?

Secondly on the same sort of topic on the Fixed-line you clearly had a very good increase in subscribers in Q4, with fairly limited increase in revenues, which presumably means that you have signed lot of subscribers side on, whatever, free for couple of months packages or something similar to that? Could you tell us what kind of marginal ARPU you are sort of observing within the broadband at the moment and also comment on what do you see in Q1 in terms of again, the take-up rates on the broadband subscription? And that will be very helpful.

And finally I was just wondering the -- I don't think you ever disclosed, what was the amount of goodwill, which was related to lets say, acquisition of Golden Telecom. So, I was wondering if you can give some -- well, first of all, what was the goodwill amount?

Secondly, if you could also give us some understanding of what was used by the accountant to come up with the 300 -- whatever it was $15 million of impairment charge. What were the main assumptions? That will be helpful as well. Thank you.

Alexander Torbakhov

This is, Alexander Torbakhov. We’ll start with the first part of the question regarding Fixed-line for the corporate customer. In the fourth quarter, regardless of the beginning of the crisis in Russia we did not see any dramatic changes in the …

Alexander Kazbegi - Renaissance Capital

Sorry, I apologize, can you move up to the microphone please. Thank you.

Alexander Torbakhov

Can you give hear me better like this?

Alexander Kazbegi - Renaissance Capital

Yes, great, thank you.

Alexander Torbakhov

Well, regarding the fixed line business segment, basically its regardless of the beginning of the crisis in the fourth quarter we did not see any as many changes in our business on the contrary due to the specific price structure that we have applied on the fixed line services we have even managed to retain the volume of the revenues in dollars on the level that we expected.

As far as the first quarter is concerned as the crisis deepens in Russia, we see certain effects on the operations of the issue generally is that we do not see any churn in the customer base though we see that the consumption of the services is slightly lower. Especially in certain segments of the economy which were mostly hit by the crisis such as mass media financial sector from others.

So this is a – it’s called a fixed line incorporated business trends.

Alexander Kazbegi - Renaissance Capital

Could you please… in terms of broadband please.

Elena Shmatova

Pick up rates…

Alexander Kazbegi - Renaissance Capital

Pick up rates, marginal ARPUs and so on.

Elena Shmatova

The pick up rate in broadband is exactly like we were planning, we see the continuous growth of number of the subscribers of the growth that services in all the cities where our networks have been put into operations. As Boris said, our focus this year is to extend our effort mainly in the specification of the sales in those cities where we have constructed the broadband network extend virtually covered now more than 7 million households.

Boris Nemsic

Just one other thing I would add to that is that the broadband numbers that are in the presentation include not only those from fiber to the building but they also include those from mobile broadband from our USB modems that we are selling and we sold those very actively during the fourth quarter so a significant portion of the increase that you see in subscribers are due to the additions that we had in that quarter and much of the revenue of that you will start to see that impact in future quarters.

Alexander Kazbegi - Renaissance Capital

But the USB modems… the mobile revenues from the USB modems are recorded as fixed line revenues or as mobile revenues?

Elena Shmatova

No they are recorded as mobile revenues but in this broadband revenue and in the broadband subscribers it is also counted there.

Alexander Kazbegi - Renaissance Capital

All right okay.

Boris Nemsic

The point of the chart was to give an indication of the significant presence that we are building in the overall internet market.

Alexander Kazbegi - Renaissance Capital

Yeah now that understood could you then may be speak, what kind of offers you see for either of those?

Boris Nemsic

At this point we are not breaking them out we may do that in the future quarters.

Alexander Kazbegi - Renaissance Capital

All right but the overall trends which we saw in Q4 you are saying you have that continuing into Q1?

Boris Nemsic

We are saying we are continuing to see positive dynamics in Q1 yes.

Operator

Thank you our next question comes from Alexander Balakhnin with Goldman Sachs.

Alexander Balakhnin - Goldman Sachs

Hi this is Alexander Balakhnin actually there was a third question of Alex regarding the goodwill assumptions, could you probably answer this before I ask my other question?

Elena Shmatova

Yes off course impairments charge in Russia fixed was too visible through the use of high discount rate of 17% for ruble denominated cash flow compared to 12.8% use in the regional valuation for Golden Telecom acquisition. And of course, the low projection to future cash flows due to the negative impact of the current crisis. Actually, we assume that there will be practically enough growth in major segments of the operations except FTTB, with FTTB will still consider that we will see growth and but again, the assumptions would change to more conservative approach.

Alexander Balakhnin - Goldman Sachs

And my question is on the margins dynamics. In the fourth quarter, EBITDA in Russia in particular suffered from higher sales for margin expenses, and it was understandable given that you had quite a healthy increase in subscriber base. But in the first quarter, you also have an increase in subscriber base. So, should we expect that the pressure on the profitability will, continue or you manage to renegotiate your agreements with retail dealers like you did with media companies?

And my second question overall for 2009. Do I understand, you corrected that, yes there is a pressure from the crisis on the profitability, but you overall will try to mitigate this pressure by cost cutting et cetera so you don't expect the huge deterioration of the profitability year-on-year or on sequel?

Boris Nemsic

Speaking about the margins, I think that when you compare fourth quarter, this year with the fourth quarter of past year, the only one common thing is you have Christmas and the New Year always in the fourth quarter, so the margins are lower. Compare these two quarters with the difference in 2008; we started to sell also iPhone's, which you cannot call high margin business, so you have to account for this also.

So, we think that the results in the fourth quarter, both in the margin side, in last year have been pretty good. We do not want to comment anything about the first quarter, because we should be focused on the year 2008, but it's completely in plan how we plan the year 2009.

Operator

Your next question comes from Dalibor Vavrushka with ING.

Dalibor Vavrushka - ING

Hello. Good afternoon. I have maybe some more strategic question to Boris if I can. I mean first of all when you came to the company, obviously one of the key issues was deal with this fourth quarter results and the discussion with the auditors. Obviously one approach would have been to take really conservative approach and write-down little bit more of a goodwill I think, that there has been some expectations of -- given the market reprising, of all assets in Russia, since the acquisition that the impairment could be a little bit higher to cleanup the balance sheet as much as possible, and it didn’t seem to happen.

So, I was just wondering if you can give some thoughts on pros and cons of these kinds of solution and the follow-up on that would be -- I mean what would be your key priorities at the first couple of months. I mean is it focused maybe on the distribution problem in Russia, maybe some other issues in Russia, and obvious and tight prices or cost issues, or how are going to be looking for into the expansion opportunities.

So what are the maybe two or three main points that you are planning to focus on at the right -- at the beginning. Thank you?

Boris Nemsic

Thank you for strategic question. I will share the first part together with Elena. First, my very personal view. I think that the view of the market through their assets in the east has been in the November, December, January, February almost panic. It was nothing real and I think I proved it personal when I came here exactly in the middle of this. So I believe in this market.

So for this I think that’s the prudent but realistic approach is the right one and this is definitely defined not by myself alone but by the team and I would hand over to Elena to give some more insights.

Elena Shmatova

Yes, exactly as Boris mentioned we wanted to be realistic in this regard, just not to the opportunistic or over-optimistic but really we looked in to very detailed in to all fields of our Fixed line operations in Russia and as I said we projected, I would say, cautious approach in their coming years which we assume will be to certain extent impacted by the crisis. So we postponed the growth to a longer later period. So that was one of the approaches and the real calculations showed us that really what we’ve seen now, again to the best of r knowledge of the current situation, is exactly what we reflected in our financials.

Dalibor Vavrushka - ING

Can I ask maybe Elena on this? When you were buying Golden Telecom using your approach at that time what kind of premium you paid including the Corbina minorities around $5 billion I mean did you see the value significantly higher. I was just trying to see how much your view on this valuation of Golden Telecom has actually decreased with this new impairment test compared to the time when you were buying the asset.

Elena Shmatova

Dalibor, first of all, yes, we paid through for Golden $4.3 billion and that in this we anticipated that first there will be no such huge impact of the prices on operations and we will continue to see growth in Business segment because of course this field still has very great potential in which we believe.

And also actually, currently in our considerations of impairment now we also see very positive moment that for example certain portion of our contract with Business segments are linked to US dollars which helps us to show more stability and if we calculate our cash flow in Rubles, so that gives us certain prudence in all the assumptions and takes kind of out at least some portion of the risk of the devaluation of Ruble.

Dalibor Vavrushka - ING

Okay.

Boris Nemsic

They are considering the key priorities and the thing that you have seen in the set up of our presentation of what is our focus. I would just go briefly through it. One of this is operational excellence and on the operational excellence you can count the cost control, you can count the integration of the assets we newly acquired in 2008.

So all of this should lead to a strong cash flow generation and this cash flow has two aspects. One of them is so that we reduced the CapEx significantly, CapEx of course being mostly in hard currency and we went from 76% CapEx to sales ratio to the projected 12 to 15 which is underlying this strong cash flow generation. And out of this of course the debt repayment which was I think explained very in detail by Elena. So, I think that these are the main points of this year.

The third one which is on the, let's call it, growth side, which is the launch of Vietnam and Cambodia because this is a completely new business for VimpelCom being until now in Russia, Russian speaking countries. So these are the focuses of the management. On other side, good news the 2009 half of the year is over, but so, we know where we are heading and we are in plan with it.

Operator

Our next question comes from Oleksiy Soroka with BNPP.

Oleksiy Soroka - BNP Paribas

Oleksiy Soroka with BNP Paribas. I have a specific question with regards to your debt covenants. Perhaps you can, if you already had mentioned them on the previous calls, refresh them and secondly comment where you are vis-à-vis their quantitative parameters and perhaps you can voice those parameters format at least for 2009?

Elena Shmatova

Well, in terms of covenants, we can say that we are absolutely in line with all the requirements of the agreement. So we are not in any shape or form of violation of the covenants and actually I am not quite as to -- what is the question?

Oleksiy Soroka - BNP Paribas

Well, can you tell me which bank facilities contain covenants and mention financial covenants that you have to comply with for 2009?

Elena Shmatova

There are certain that… well off course there are different sets of covenants in many agreements we have a covenant for example, the word there, which should be below three and the certain agreements we have covenants on level a of equity but practically a very, that is not the major one.

Boris Nemsic

We are fulfilling all the criteria easily.

Oleksiy Soroka - BNP Paribas

Right, so you said… can you just like list, I’m talking about financial covenants obviously there is a whole branch of other covenants that you have? But in terms of key kind of financial leverage coverage equity, can you quantify them?

Elena Shmatova

Yes, I said this should be below three and we were below that, so, currently we are 1.7 and in certain agreements we have equity level at three, we are above it.

Oleksiy Soroka - BNP Paribas

That’s $3 billion.

Elena Shmatova

Yes.

Oleksiy Soroka - BNP Paribas

Okay. Coverage?

Elena Shmatova

Our interest, OIBDA to interest, five.

Oleksiy Soroka - BNP Paribas

Five times? And is in kind of in the quarter annually? It’s quarterly I presume, right?

Elena Shmatova

Quarterly, yes.

Oleksiy Soroka - BNP Paribas

Quarterly. Okay and there is nothing else and that by the way is it, that’s net debt to OBIDA, right, not total debt?

Elena Shmatova

Total Debt.

Oleksiy Soroka - BNP Paribas

Total debt, okay. All right, that’s great. Thank you so much.

Operator

Our next question comes from Nadezhda Golubeva with Unicredit Aton.

Nadia Golubeva - Unicredit Aton

Hello, this is Nadezhda Golubeva from Unicredit. I wanted to ask you about price environment, your prices so much shorter while your competitors seemed to keep them unchanged.

What are your feelings about the price discipline, do you see the risk that your competitors are possibly the region to or might be your major competitors are trying to drop prices similar to the market share or what else, or do you see some hidden price increase led them to increase prices. I mean in liberal terms into market.

So you could talk about your like vision on what could be the price trend to see in the next quarter or so and what are the key risks, it will be very helpful.

And also relating to this price question do you think you could defend your subscriber base given that your prices are above those of competitors if they are so? And what makes you believe that you will be able to do so? Possibly you could talk about how important did your 49% ownership in Euroset and how sustainable is the leverage you actually have in terms of the market share?

And so this is a first question about prices and second question is about broadband could you possibly breakdown your broadband household part in to Moscow, St. Petersburg regions? Thank you.

Kent McNeley

Okay. First of all on pricing, as I said earlier in the call our strategy, our fundamental strategy is to the best of our ability maintain stable pricing and within that we continually monitor the number of active subscribers that we have. The growth of sales that we're making from new sales that are coming in and our churn levels and all of those parameters we feel are in good shape. We are in good shape in the fourth quarter, we had as we reported earlier, an excellent fourth quarter in terms of gross sales and the trends fundamentally have happened as we come into the first quarter as well.

We have not seen any of our competitors dive in a major way. Yes, and frankly the overall pricing environment in Russia has been relatively benign over the last couple of years. So, there's nothing to indicate that that's imminently going to change. Obviously we'll continue to monitor and watch it carefully.

In terms of Euroset; Euroset is a piece of our overall distribution strategy and we've talked about in the past that they are really a number of components, in addition to the minority interest in Euroset, we also have work to shore up other national accounts and our position in other national accounts. We have work to increase our own branded retail, particularly through the boost that we have build and we have continued to work to build relationships with local dealers throughout Russia.

This balance overall, which includes both multi-brand and mono-brand positions has on balance worked out very effectively for us and while Euroset is an important piece, its certainly not the only piece that is having an impact on our overall position.

Nadia Golubeva - Unicredit Aton

Can I have some clarification, so in March your raise prices, yes. And so your competitors kept prices unchanged. So does that would mean that you’re just brought these prices in line with the market, or do you believe that you are able to charge some premium due to -- at least here? And so, seeing that your prices are the lower in line with compared to this, do you think, there is room for future price increase? Could you maybe talk on this please?

Kent McNeley

Yeah, first of all, I think you perception that competition is not great pricing, is not entirely correct. Each of the major competitors has raised pricing to different degrees, certainly but each of them have raised pricing and that goes beyond frankly the three largest operators.

The second point I would mention again is, that in addition to the fact that we have made some upward adjustments on some of our particular legacy tariff plans, we also worked to be sure that we had a competitive offering at all times on the market, and therefore we've continued to be able to see, good gross sales performance in the fourth quarter and carrying on, into the first.

Boris Nemsic

Well if I may interfere, sorry for that. But we are planning, to announce our financial results of the first quarter '09 shortly, and today we want to focus on the matters related to the fourth quarter and the full year '08. And once you release the first quarter numbers, we can discuss the current trends in greater detail. I think that those are compared to, as we released their first quarter result then and we will have a comprehensive picture, but we are very easy on this side.

Operator

(Operator Instructions) One question and one follow-up. We'll take our next question from Denise Molina with RBS.

Denise Molina - RBS

Hi, thanks for the call. Just a question on growth, in terms of the seven million -- home cost for fiber, how many of those do not have broadband at the moment, and have PC or some sort of computer under your estimates? And do you expect to increase CapEx next year for the broadband expansion and also for Vietnam and Cambodia? I understand that this year, you’re focused on cash management.

Boris Nemsic

First thing, Vietnam and Cambodia we announced what we are planning for 2009, and that’s it. Of course, the further years, we don’t want to comment now and they are very much related to the results of operational quarters in their respective markets.

Considering the allotment of broadband fiber to the home, the amazing number of 7.2 million households has surpassed, in my knowledge one of the biggest networks in the world, if you are considering the households passed.

So we definitely are in the very comfortable situation that to focus more on sales, meaning that the households passed should be served where this is minimum CapEx to bring it from the roof, from the basement into the home. So, we are in the very lucky situation that we invested on the right time, meaning 2008, and we are benefiting now 2009, out of it. In my knowledge I can also say that, I think that’s the overall households in Russia there are up to 60% have a PC.

Kent McNeley

I would like to intervene well, in Moscow the figure that Boris said is correct, for Moscow and for the big cities. As, far as the region that are concerned there, the penetration of PCs in the households is lower.

Denise Molina - RBS

And how many of those are currently broadband subscribers. I’m just trying to get out the number of potential customers that aren’t already served by your competitors that have PCs of about 7.2 million.

Alexander Torbakhov

I don’t know if we can give you an exact break down on that it varies quite a bit by city. In Moscow for example the penetration is much higher of the number that would have broadband, in St. Pete its high but not as high as Moscow but in most of the rest of the cities in Russia the broadband penetration per se is fairly small at this point and therefore since we are expanding in to a number of cities we have, we think a very strong potential.

And in addition to the fibers of the building as we mentioned earlier we also count as a very important part of our overall broadband strategy the mobile broadband component that comes through our USB modem and that’s something that can reach really throughout Russia and will often even be a second broadband connection in the home.

Operator

Our next question comes from Victor Klimovich with VTB Capital.

Victor Klimovich - VTB Capital

Yes hello. I have a question on probably you will shed some light on the traffic trends in the first quarter I know that you don’t give a guidance for the first quarter but maybe just some idea, was it stable, was it increasing or some kind of this information?

And the second question very small on the fourth quarter results regarding equipment sales in Russia so you mentioned the total figure for all your countries can you please give us Russian figure on equipment sales. Thank you.

Boris Nemsic

On the equipment sales?

Victor Klimovich - VTB Capital

iPhones and USB modems?

Boris Nemsic

Okay so lets answer the first part. We see as you mentioned the presentation that the means of use are flat so you can consider it as good news of less good news but we see it is a pretty good news because of course the networks can service in high quality and coming to the point that we added tremendous number of subscribers last year having a penetration right in Russia of 132% the customers we are kind of which, our new customers getting in there of course not heavy users and despite of that we kept average minutes of use constant so I think this is a good news. Concerning the equipment sales?

Alexander Torbakhov

The equipment sales if you look in page 15, of the press release equipment sales are broken our for the fourth quarter, $64 million and that again that was a combination of iPhones as we started to launch iPhones so we had some of that is actually filling up the pipeline as well as up take and as well USB modems.

Victor Klimovich - VTB Capital

Yeah but can you give us may be if you don’t have the exact number but can you give us an idea of what part of this equipment sales came from Russia particularly not all those CIS countries and…

Alexander Torbakhov

It is virtually all in Russia.

Victor Klimovich - VTB Capital

Okay and the approximate breakdown between iPhones and 3G modems.

Alexander Torbakhov

iPhone is much more expensive.

Victor Klimovich - VTB Capital

Yeah but I mean, probably the fees are lower so.

Alexander Torbakhov

Contractually, we are not allowed to comment on the specifics of the sales of iPhone so we can’t break that up for you.

Operator

Our next question comes from Alex Wright with UBS.

Alex Wright - UBS

Yeah thank you just had a couple of questions on the Q4 numbers please. First of all of the CapEx in Russia in Q4, could you just breakdown roughly how much of that 642 million was invested in fiber-to-the-building? And also I was just looking to the release of it, I think you broken out the stock option expense reversals in Q4, I apologize if I missed that, but could you just clarify what that was phase?

Elena Shmatova

CapEx, actually we are not breaking it to that level, but we only can break it through the country level. And the second question of our stock option, I just missed it, what it was?

Alex Wright - UBS

You didn't comment on the impact to stock options.

Elena Shmatova

Impact of?

Alex Wright - UBS

Stock option, it's the stock option

Alex Wright - UBS

Can you repeat that part of it a bit?

Elena Shmatova

Yes. We recognized in 2008, stock option base kind of liability method and so the fluctuations of the share is price, share price also impacted our calculation of accruals of on our stock option plan, so what was the exact question of purchase of shares in the fourth quarter went down, so we have some reversal of the previously accrued amount.

Alex Wright - UBS

But can you clarify how much that was because you broken it down in previous quarters and I couldn’t

Elena Shmatova

Around 45 million.

Alex Wright - UBS

Okay. So similar to the third quarter and -- Okay, thank you.

Operator

Our next question comes from Yevgeny Golossnoi from Troika.

Yevgeny Golossnoi - Troika

Yes. I Just wanted to go back to the question on your goodwill impairment. What kind of – there was some kind of very concrete and specific benchmarks against which you can measure the degree to which the asset prices have fallen and one of them is the fallen prices of [share] of some companies and what I’m saying is that last year you decided to write-off or to impair roughly 10% of your investment from Golden Telecom while the rest with the market has fallen 70% or 80%. Does that mean if you stick to, if you change your guideline for your benchmark in 2009 you will have to write-off more of the Golden Telecom goodwill.

Elena Shmatova

No, the benchmark what you are referring to is exactly what Boris mentioned in his reply to that question, that the market has kind of perception on what is right and what is good. Impairment is based on discounted cash-flow and future cash-flow and so this kind of may not be similar. So, we may change our assumptions for impairments only who see changes in the market and that will lead to the changes in the assumptions for our cash-flow projections.

Yevgeny Golossnoi - Troika

Okay. But could I have a follow up with the question done? Assuming 10% impairment charge, essentially you are saying is that the cash or the revenue generation potential of Golden Telecom decreased just 10% as a result of what, lets say financial crisis, but in fact Golden Telecom has fallen more than 30% already. So, how can that be?

Elena Shmatova

First of all we are calculation is based on Ruble denominated cash-flows.

Yevgeny Golossnoi - Troika

What does that change? I mean, no…

Elena Shmatova

Because then you will not see a kind of the impacts of Ruble-Dollar devaluation it’s become slightly different story. Because actually again, as I mentioned that not a lot of contracts in business segment is linked to your Dollars. If the Ruble devaluates of course you will see the increase in ruble revenue.

Of course there will be a kind of different considerations to extent we can go further with all that assumptions but currently our understanding of the situation exactly is reflected in this level of impairment.

Operator

We will time for two more questions and we will go next to Elena Tymchenko with Credit Suisse.

Olga Bystrova - Credit Suisse

Yes, good evening this is actually Olga Bystrova from Credit Suisse. My first question is about your distribution strategy. Given what you must get until Euroset as well as some agreements that you have given in the press on potential business agreements etcetera. How do you view the breadth of your distribution in Russia? Do you think you are still underinvested into it? Do you think you over invested and in addition to that given Boris’s experience in a number of markets? Do you think you will have to continue to pursue a multi-brand distribution strategy or you will end up with mono-brand rather or exclusive?

And the second is a follow up on CapEx. You mentioned that in CapEx numbers you have some more commitments on 2G and 3G licenses. Does s your guidance include only commitments and what is that magnitude basically of the commitments or the CapEx guidance also include some discretionary CapEx, depending on say revenue growth etcetera, thank you very much?

Boris Nemsic

I will start with the second question of course it is not only commitment it is the commitment are more of a legal nature due to effects that we have to launch commercial operations in the regions of Russia and we have also a second check point, which is in April 2010 with a particular number of node piece to be installed in the 3G networking commercial operations. So we have to work on this continuously but this is of course far away from the overall CapEx number.

We think that this CapEx number we can firstly ensure absolute high quality operations for our customers. If we have a growth on data and all this stuff we can work with this and of course on the other side I said one of the main growth for us is cash flow generation and that is the payment. So this is the balance we will achieve.

I mean with the retail strategy we will not give our beloved competitors, effective competitors our retail strategy on the conference call. But you can be sure that we have a very balanced approach and Russia being such a huge country with a 82 different markets I don’t think that one size fits all and I don’t think that just focusing on one either in mono brand or multi brands can be successful. I think that we have to be very sensible of marking the best for the customer, making the best for our sales and for the time being I think we are in a very good position.

Olga Bystrova - Credit Suisse

Okay thank you very much and just sort of follow up on the CapEx. Could you suggest what are the legal commitments -- the magnitude of the legal commitments for ’09 for you? Thank you very much.

Boris Nemsic

No we can not because this is not a legal commitment in money. This is a commitment of launching the service and it depends, what is your contract with the vendor and we have different vendors. So this is cannot be classified this way.

Operator

Our last question comes from Vladimir Postolovsky with UBS.

Vladimir Postolovsky - UBS

Good afternoon, couple of questions if I may. First on these, could you comment on our performance relative to or you and MTS performance so just to MegaFon, the market share or revenue seem to have kind of flourished but gaining market share, it doesn’t seem to change, which we would expect maybe when your market shares equalize?

Why are not you gaining market share, what's going on for you and MTS? And second thing is, we talked about it quite a bit already today, your certain changes in the distribution strategy of the market as a whole. I mean, I don't know think, it's coincidental but both in margins and in pricing of services, there seems to be significant deterioration of market discipline that has been great and you bought Euroset.

So my question is do you believe it coincidental, when it's not, what can you do to stabilize margins and prevent your competition or both your competition from lowering prices? You have to respond to what you've done? I think that's all, thanks.

Alexander Torbakhov

Coming first on market share. Certainly, during the course of the year. MegaFon did make some progress although in the fourth quarter, you may want to go back into review the MegaFon numbers in a little more detail because the fourth quarter numbers include a very high amount of equipment sales, which I think if they are not carefully analyzed can be somewhat misleading and I think as we go forward, the impact to that will be clear and clear.

Vladimir Postolovsky - UBS

And the question on distribution?

Boris Nemsic

I think that this is very-very difficult to judge from one side. I think that every operator is looking to optimize his distribution powers. And this is of course a moving target all the time. I would not say that the accretion of your assets is the figure for some non-logical moves and as Kent said before, there have been price increases with all the major operators, one of them made it more communication parts market and other one more opened.

It depends of course on other stuff, and we see that our competitors are moving more to mono-brand which is fine, it’s their business. We still see that the Russian market is completely, I would say it was a good and normal one compared with my experience from Austria, now this is a paradise.

Vladimir Postolovsky - UBS

Conclusion is it might be the price that’s lowest but we'll have to wait and see.

Boris Nemsic

No, it has to be in good, and then you stay in paradise, but if it was the last question, it was really a paradise one.

Operator

That does conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Mr. Boris Nemsic for additional comments or closing remarks.

Boris Nemsic

Thank you very much. Thank you all for participating in our call. If you have more questions please contact our Investor Relation service and good-bye and good-luck.

Operator

Thank you ladies and gentlemen. That does conclude today's call.

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Source: Vimpel-Communications Q4 2008 Earnings Call Transcript
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