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Executives

Alex Tramont– IR, FD

Alexander Izosimov – President & CEO, VimpelCom Ltd.

Boris Nemsic – CEO, OJSC VimpelCom

Martin Furuseth – Chief Marketing Officer, OJSC VimpelCom

Elena Shmatova – EVP and CFO, OJSC VimpelCom

Dmitry Kromsky – VP, CIS Business Development, OJSC VimpelCom

Taras Parkhomenko – Chief Marketing Officer, Kyivstar

Analysts

Jean-Charles Lemardeley – JPMorgan

Viktor Klimovich – VTB Capital

William Kirby – Nevsky Capital

Ivan Kim – Renaissance Capital

Sean Gardiner – Morgan Stanley

Elena Mills – Alfa Bank

Olga Bystrova – Credit Suisse

Herve Drouet – HSBC

Alexander Balakhnin – Goldman Sachs

Tatiana Boroditskaya – UBS

Igor Semenov – Deutsche Bank

Anna Kurbatova – Gazprombank

Maurice Patrick – Barclays Capital

Vimpel-Communications (VIP) Q1 2010 Earnings Call Transcript May 26, 2010 10:30 AM ET

Operator

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

Alex Tramont

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

Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties. These statements relate in part to

one, expected benefits from the combination of OJSC VimpelCom and Kyivstar; two, the Company’s 2010 capital expenditures; three, the Company’s future revenues, margins, pricing, capacity, and competitive position; and four, predictions about future market and economic conditions in Ukraine.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in

one, the Company’s press release announcing first quarter 2010 financial and operating results; two, the Company’s earnings presentation entitled Pro Forma First Quarter 2010 Operating Results and Selected Financial Data; three, the Company’s registration statement on Form F-4 filed with the SEC; four, OJSC VimpelCom’s Annual Report on Form 20-F for the year ended December 31st, 2009; and five, other public filings made by the Company with the SEC, each of which are posted on the Company's website at www.vimpelcom.com.

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

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

If you have not received a copy of the first quarter 2010 financial and operating results press release, please 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 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.

Alexander Izosimov

Thank you, Alex. Hello everyone. Thank you for joining the first quarterly conference call of VimpelCom Ltd. Let me introduce the people participating in this call. Here with me in Amsterdam is the OJSC VimpelCom, including Boris Nemsic, Chief Executive Officer; Elena Shmatova, Chief Financial Officer; Martin Furuseth, Chief Marketing Officer; and Dmitry Kromsky, Head of the CIS business. From Kyivstar we have Taras Parkhomenko, Chief Marketing Officer of Kyivstar.

On this call, we will discuss the transformational deal, which we recently closed, and our operational results and certain pro forma financial results for the first quarter of 2010. Before going into financial and operational details over the first quarter, let me say a few words about the transformational deal, which resulted in creation of VimpelCom Ltd.

Kyivstar is the leading mobile operator in Ukraine with the largest customer base, excellent networks, and superior financial metrics, fixed perfectly into the view of the world. The overwhelming support from our shareholders gives us confidence that we embarked on the right path of value creation. Yesterday, we announced the terms of the squeeze-out of the OJSC VimpelCom minority shareholders and plan to complete the process as soon as practically possible. We are in discussions with the Ukrainian authorities in respect of their decision to review the permission granted for the transaction in March. We hope that the situation will be resolved quickly to allow us to start integrating our Ukrainian business.

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

For the first quarter, we present the combined financial results in a pro forma basis assuming the consolidation of OJSC VimpelCom and Kyivstar. Starting from the second quarter, we intend to provide a complete set of consolidated operational and financial results. The combination of the two companies increased substantially the scale of our business. The Group revenue in dollar terms increased by almost 30% compared to the first quarter of 2009.

I am especially pleased with our ability to maintain a high OIBDA margin. Combined OIBDA reached $1.2 billion and we achieved the best-in-class OIBDA margin in excess of 47%. We intend to maintain this level of operational efficiency and continue to focus on cash generation, which we see as the foundation for further business development and improving shareholder returns.

The balance sheet and the cash generation ability of our operating companies continue to be very strong. As promised, we continue to improve the OJSC VimpelCom’s debt terms and structure. By the end of the first quarter, the portion of rouble debt increased to 30% compared to the 15% at the end of 2008. OJSC VimpelCom as of today repaid more than 60% of its debt due in 2010, bringing the net debt of the company to less than $5 billion. This is substantially less than the $7.5 billion reported at the end of 2008 and considerably improves our total debt-to-EBITDA ratio, which is now 1.5, compared to 1.7 at the end of 2008.

The combination with Kyivstar, which has practically no debt, will improve VimpelCom Ltd. Financial position even further. The combined total debt to OIBDA ratio for VimpelCom Ltd. on a pro forma basis is just 1.3. In the future we plan to establish a consolidated treasury function in the new headquarters to manage our balance sheet and cash flows more efficiently.

Now, let’s look at our quarterly operational and financial performance in greater detail. We start with the OJSC VimpelCom, our largest operational company. Overall, the first quarter performance was in line with our expectations and to a large extent reflect the macroeconomic reality in the region. Pockets of growth with early signs of recovery in some of our markets. Appreciation of local currencies against the U.S. dollar helped to strengthen the top line compared to the first quarter of 2009. We attribute the quarter-on-quarter decline in revenues to normal seasonality.

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

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

Our fixed line revenues were particularly affected by the economic slowdown, although the fixed segment remained stable in the U.S. dollar terms year-over-year thanks to the diverse revenue streams. It declined in rouble terms partially due to the rouble appreciation. In a complicated macroeconomic environment, we strongly believe that management should focus on efficiency. We are pleased that our consolidated fixed and mobile OIBDA margin remains in the high 40s area, which is slightly up quarter-on-quarter. The mobile margin on a stand-alone basis remains above 50%.

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

Now, we look at the operational performance in Russia. We are pleased that data services are becoming a more substantial part of the revenue mix. Our active mobile broadband customer base increased to 1.2 million subscriptions. Value-added services as a percentage of mobile service revenues exceeded 20%. However, it is becoming more difficult to measure the true underlying market dynamics and operational performance in the mobile segment using traditional KPIs such as subscribers, MOUs and ABPM [ph]. Presently, we are exploring opportunities to come up with a new framework of KPIs to enable a better understanding of our business. But for the purpose of this presentation, we continue with the traditional metrics.

We see broadband as a new core market for us Russia. We continue to build up the active customer base using both fixed and mobile solution. By the end of the quarter, we served 2.3 million broadband customers in Russia, with monthly ARPU of 395 roubles for fixed access and 325 roubles for mobile access via an USB modem. Our quarterly broadband revenues increased 59% year-on-year in rouble terms.

In the fixed line segment, the revenues in U.S. dollar terms remained stable year-on-year. We are pleased that the revenues in the residential segment improved year-on-year and demonstrated stable quarterly dynamics in line with our expectations. The wholesale revenue remained essentially flat despite the overall wholesale market slowdown. In the corporate segment, the first quarter of the year was seasonally weaker as it has 12% less working days than the fourth quarter. The year-on-year results of this segment reflect lower business activity of our customers in the wake of the economic slowdown. It was further amplified by the Russian rouble appreciation as a significant part of our client base is billed based tariffs pegged to the U.S. dollar and the euro. Fixed line OIBDA margin remained at 29%, essentially flat quarter-on-quarter.

Now, let’s look at the next reporting segment, the CIS. In this release, the CIS segment includes VimpelCom’s operations in Ukraine, URS, and former Golden Telecom, Ukraine. Starting from the next quarterly earnings release, we plan to present Ukraine as a separate consolidated reporting segment. We began consolidation of the Kyrgyz mobile operations of Sky Mobile, which has a management contract with KaR-Tel, our subsidiary operating in Kazakhstan.

Sine June, 2009, Sky Mobile has been operating under the Beeline brand. It serves 1.8 million customers with quarterly revenues of almost $26 million. I would like to highlight that Kazakhstan, our largest CIS market; we delivered 10% year-on-year revenue growth in local currency. In our opinion such results reflect encouraging signs of a return to stability in that market. Another achievement here is that the number of broadband subscriptions in the countries increased 1875 year-on-year as we started to actively develop our broadband projects in Ukraine, Kazakhstan, Uzbekistan, and Armenia.

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

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

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

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

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

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

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

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

Now, looking at the operational highlights at Kyivstar, the competitive situation in Ukraine remains challenging, driven by the ongoing market shift towards the zero on-net pricing model, which is primarily aimed at price-sensitive low tier customers. The ARPU remained essentially stable year-on-year reflecting good quality of our customer base, which we serve under our core brand, Kyivstar. To address the competitive pressure, we actively marketed the zero on-net pricing model under our second brand, DJuice. Presently, we serve over six million customers under this brand primarily in the youth [ph] segment.

This approach helped us to stabilize subscription market share. As expected, the usage increased, but it had limited impact on our profitability as the overwhelming majority of all calls were on network. Overall, the quarterly results were in line with our expectations and reflect our focus on stabilization of subscription market share and protecting ARPU. Further development of the business in Ukraine will be determined by further market economic recovery, and integration of our two operating companies.

And now, few closing remarks. A month ago, we successfully closed a pivotal transaction that combined two regional market leaders. As management, we are really enthusiastic about the new opportunities that are ahead of us. Our quarterly results give us confidence that our business is standing on solid ground even amidst some macroeconomic uncertainty. Until the local markets stabilize and begin to rebound, we will remain focused on efficiency and shareholder returns.

VimpelCom Ltd. is an excellent platform for future growth and value creation. Going forward, we will explore these opportunities. Once the macroeconomic situation in the region improves, we expect the growth to return.

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

Question-and-Answer Session

Operator

(Operator instructions) And we’ll take our first question from Jean-Charles Lemardeley with JPMorgan.

Jean-Charles Lemardeley – JPMorgan

Yes, hello, question is on the pricing trends in the Ukraine, we understand from recent comments from Turkcell as Turkcell made recent comments to us that following your management change at Astelit, there is a (inaudible) they are actually moving away from the zero on-net model. Is that not something that you are observing in the market phase there will be positive moves from them?

Alexander Izosimov

Yes. We have seen positive movements on the market with the pricing. And Astelit and Kyivstar has – we saw some action from the main players, which contains these expectation. So, we can expect stabilization (inaudible) in the second half of this year.

Jean-Charles Lemardeley – JPMorgan

But specifically on the on-net they started to large or otherwise they discontinued on zero on-net, is that something that just for new customers or what’s happened around the zero on-net from Astelit?

Alexander Izosimov

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

Unidentified Company Speaker

And increase in tariff, which like a penalty [ph], if you are not (inaudible) then you should pay some penalty. So this tariff they are also increasing.

Alexander Izosimov

So, it’s indirect increase in tariff.

Unidentified Company Speaker

Yes.

Jean-Charles Lemardeley – JPMorgan

Okay, thank you.

Unidentified Company Speaker

(inaudible)

Jean-Charles Lemardeley – JPMorgan

Thank you. Just a follow-up on the question of spectrum. Could you may be just share your expectations in terms of spectrum needs going forward in Russia, in Ukraine. When will you need spectrum as you foresee your growth going forward? What are your views on how much spectrum could cost, obviously seen some pretty expensive auctions in Germany and in India recently. And maybe if you can contrast the Ukraine and Russia. I could understand you got a pretty strong position in the Ukraine and what it means for CapEx going forward, CapEx sales?

Boris Nemsic

Yes, Boris Nemsic speaking. On the behalf of – on the Russian spectrum, as you know, we have different spectrum allocations in different regions of Russia mixed between 900 and 1800, but we have a pretty good spectrum allocation on 3G, which is not utilized yet at all. We are now in all our 3G regions and we active in all the regions working with just one frequency pair out of three we have. And there is lot of room to improve both on capacity on carriers and on speed. We are now in average of 3.6, so up to 20 we can go. So, the comparison you are taking with – or auctions in India, which was 3G auction on a very specific environment; I would not compare it with Russia. In Russia we did not pay for spectrum on our auction and there are no indications that this will change. We have some frequency freeze on our running base, but they are, let’s call it fair for time being.

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

Jean-Charles Lemardeley – JPMorgan

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

Boris Nemsic

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

Jean-Charles Lemardeley – JPMorgan

Thank you.

Operator

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

Viktor Klimovich – VTB Capital

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

Martin Furuseth

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

Viktor Klimovich – VTB Capital

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

Alexander Izosimov

This is Alexander Izosimov. Let me make one overall comment I mean that goes to Kyivstar as well. I think that in the current macroeconomic environment, then what happens was the economy and volatility on the banking market and so on, naturally responsible investments would be the key lever for us to gain efficiency and generate good return on capital particularly this year. Therefore, we need to strike that accurate balance between growing the traffic and stimulating the traffic with the on-net, off-net and finding the right CapEx, which we can afford in that sense. All our indications and all our calculations show that we will stay close to the indicated levels of Group CapEx to revenue ratio, which is about 15%, maybe slightly above, but somewhere, that’s the ballpark. And as we were talking about Kyivstar that in the long run we intend to be within 14%. It might be a slightly higher at the earlier part of the year. And that clearly that merger with the URS will help us significantly to optimize our CapEx because quite a bit of capacity might come on stream in the step function. And also leverage more optimal spectrum in Ukraine. But this is subject to antimonopoly decision. In any case, we do not intend to view CapEx as a runaway train, and we will maintain appropriate CapEx to revenue ratio.

As far as Russia is concerned, Boris, please.

Boris Nemsic

Thank you, Alexander. Yes, we are staying with our estimation, projection of between 15% and 20% of CapEx to sales ratio for the year 2010. We slightly increased the CapEx in the first quarter compared with the year before. And this process will speed up in the second – first quarter. As you know that we just received the frequencies and licenses for Moscow end of last year, so Moscow is a big part of it. Second part of the CapEx spending is FTTB, the broadband game, which was mentioned in the main presentation by Alexander. And the third one are the transport networks, which costs on the operational costs in some parts especially Eastern Russia are extremely high, so it’s very favorable to get it in ownership, but it is not building up, it’s also exchanging with our main competitors. So, this is a very efficient way of spending it. We are staying with our projection between 15% and 20%.

Operator

(Operator instructions) We’ll go next to William Kirby with Nevsky Capital.

William Kirby – Nevsky Capital

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

Elena Shmatova

Well, actually, there was no restatement in fixed-line revenues. The – what we were talking about is that we see impact of the exchange rate on the fixed-line revenues or really might not –

Unidentified Company Speaker

Eliminations.

Elena Shmatova

– might not understand your question.

William Kirby – Nevsky Capital

Or it could be something to do with eliminations done?

Elena Shmatova

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

William Kirby – Nevsky Capital

What you report in fixed line for example corporate or wholesales revenues what you reported historically and for example Q4 ’09 doesn’t match with what you are reporting for historical numbers now.

Elena Shmatova

Well, actually there was no change in methodology.

Alexander Izosimov

William, we are puzzled by the question. So let us explore it. I mean basically doing it on a qualitative basis, there were no significant changes in the fixed line therefore, which would lead to any meaningful changes of the numbers. It might be some sort of eliminations or that type of technicalities. What we talk about fixed line and we are trying to stress, that fixed line turned out to be in the first quarter a very complex beast. It comprised three segments, which behave very differently. One is residential behavior and it’s growing and growing very well. The wholesale business is also showing very robust dynamics and we are happy with that development and actually that happens on the backdrop of the declining market. So, it’s a very good news. Where we see the decline is in the business segment. And there are two. I mean one is the seasonality of course impacted the first quarter as long holidays in Russia and so on. It’s 12 days, 125 or less working days naturally impacts the business traffic. Prices of course takes a toll as well and still the mindset is not entirely of very aggressive spending. So people still in the cost-cutting mode. And what really exacerbated the story here is that the invoicing currency for many of the contracts is U.S. and euros, which served us very well when rouble declined and it protected our base. It was a reverse effect in the first quarter when rouble strengthened. And therefore while we see a flat underlying business essentially and flat revenues in U.S. dollars, we see a stronger decline in roubles. So that was the key thing, which we are trying to articulate about our fixed line business

Elena Shmatova

Yes, may be – some followup may be your question relates to the change of how we showed segments, reporting segments, fixed and mobile segments in Russia. Isn’t it, because, yes, previously we showed that segments on a gross basis. Starting from this year, we show it on net basis and the…

William Kirby – Nevsky Capital

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

Alexander Izosimov

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

William Kirby – Nevsky Capital

Okay, great, thank you.

Operator

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

Ivan Kim – Renaissance Capital

Yes, hi. A couple of questions from our side please. So, basically both on the competitive situation one in Russia and one in Kazakhstan, so basically what’s – what are the latest trends in Russia because it seems that you are probably losing some market – revenue market share to MegaFon as their revenues went up faster compared to yours in the first quarter. And Kazakhstan, actually what kind of impact from Tele2 are you seeing in the market and how fast are they, I mean how aggressive are they? Thank you.

Martin Furuseth

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

Ivan Kim – Renaissance Capital

Yes, sorry, I was just talking about year-on-year comparison, not quarter-on-quarter–

Martin Furuseth

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

Dmitry Kromsky

Hi, it’s Dmitry Kromsky. About Kazakhstan, the market situation is quite stable for us. We’ve increased our market share revenue in the first quarter. We still don’t see any activities from Tele2. The third operator operates under brand NEO, and in the first quarter there was practically no activities from this operator. So, we expect that Tele2 could be active somewhere at the end of the second quarter.

Alexander Izosimov

Summarizing what’s been said, that we observe actually fairly stable and anticipating the question on Kyivstar market share. So what we believe that yes we have been losing some market share towards the end of 2009, but I think that the management made all the right moves, adjusting the retail positioning and marketing moves and situation has been stabilized. I would like to stress that we do not intend to engage in a heavy battle for subscriber market share. So revenue market share is how we are going to assess ourselves. Why we talk on Kyivstar, we say that we stabilize subscriber market share because there was a true departure of our subscriber base. And reduction of acting subscriber. So, we had to act on this. And we believe that, that situation has been stabilized as well. So, in that sense, we are not reporting of any great victories but certainly a very stable situation.

Operator

And we go next to Sean Gardiner with Morgan Stanley.

Sean Gardiner – Morgan Stanley

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

Martin Furuseth

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

Sean Gardiner – Morgan Stanley

Okay. And then just a follow-up question on Russia. This roaming investigation that’s taking place, is there any timetable, any progress or any sort of thoughts that you can help us understand and then may be if you could add in those comments whether you are seeing any other form of regulatory oversights coming through this year or ministerial oversights coming through antimonopoly oversight coming through? Thanks.

Elena Shmatova

Well, actually yes, there was certain request to provide some information from Antimonopoly Committee and we are now kind of in the situation of discussing it with them.

Alexander Izosimov

But the general sentiment, A, it’s relatively insignificant even if something is in jeopardy. It’s not at all the same flavor and the order of magnitude as it is in Europe when there was a pressure two years ago on wholesale roaming rates. This – we do not factor it in as a serious threat or any meaningful threat to our business. overall, regulatory environment remains benign, I would say and the regulator is focusing more now on how to stimulate actually in line with European regulators, how to stimulate the investments, and how to assist actually to the communication community to continue to advance in terms of absorbing latent demand on data. And that’s been discussed at the presidential commission and so on. So I don’t therefore anticipate change in the pressure on the margins through regulatory moves.

Sean Gardiner – Morgan Stanley

Okay. Thank you very much.

Operator

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

Elena Mills – Alfa Bank

Yes, good afternoon, everyone. Just a couple of questions on Ukraine, if I could. Can you talk a little bit about the timing of the regulatory review process? Do you have any sense of when the regulator will make a decision? And my second question relates to Kyivstar and around the launch of – the rollout of the FTTB network, which just completed in March and the launch of various fixed line services. Can you a talk a little bit about how you see that evolving given the opportunities for integration that you mentioned, Alexander later in your comments between Kyivstar and a fixed line business (inaudible) market. Thanks very much.

Alexander Izosimov

On the regulatory normal process, normal duration of the process about three months, and so in the – we’ve submitted all the answers to the commission. So, we have begun now waiting for their response. Will it take shorter or longer it’s hard to say at this moment, but we will be actively discussing it with them and helping them to arrive hopefully to the right decision. And as far integration plans are concerned Taras, your comments.

Taras Parkhomenko

We have launched commercially mass marketing activity services on Kyivstar this middle of March. Now are preparing plans how we can develop these projects understanding the future of cooperations, how it could be optimal done.

Alexander Izosimov

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

Elena Mills – Alfa Bank

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

Alexander Izosimov

It’s actually the request was both to us and to the shareholders, and to the – to my understanding that shareholders provided all of their information last week. But–

Elena Mills – Alfa Bank

Three months from last week –

Alexander Izosimov

Yes.

Elena Mills – Alfa Bank

– that you expect – within three months from last week –

Alexander Izosimov

Elena, if you don’t mind, we will come back to you with a specific timeline because I am afraid that I am not entirely sure when the three months starts ticking from the submission part of the question.

Elena Mills – Alfa Bank

Okay.

Alexander Izosimov

So, we’ll just provide you the exact data.

Elena Mills – Alfa Bank

Thank you. That would be very helpful.

Alexander Izosimov

Thanks.

Operator

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

Olga Bystrova – Credit Suisse

Good afternoon. My first question is regarding strategy of the consolidated or the more sort of enlarged entity. Now basically that technical details are out of the way now, how – say, when and how do you think you will be able to articulate the strategy? And also what do you think format it will take, will it be something more specific or very conceptual at this stage.

And the second question – I will ask the followup question later. Thank you.

Alexander Izosimov

Okay. The strategy is a living thing. It is always progressing from first fairly conceptual to more detailed execution in the markets. And the key elements of this strategy going to be discussed within the next sort of month or so with the Board and so on and then we’ll communicate it to the market when we have it, and we also review how the equity story of VimpelCom will be impacted. And when we have the general scope and the architecture defined, we will (inaudible) for the execution in the market. What I can anticipate at the moment and what I can say that the strategy will be focused and will be exploring two things. One is how can we strengthen the returns and we are looking at the – introducing key metrics like return on invested capital and return on capital employed, depending on where we are and through that achieving even better efficiencies and probably return to the shareholders. That’s one side of the equation. The other side, we are trying to understand if there are opportunity for us and is there a logic, industrial logic to make some – grow the geographic moves. And explore opportunities of combining ourselves with other businesses, either through mergers, which probably is the preferred option, or through acquisitions. The answer is not clear at all on that question and therefore that probably will take a little bit more time to contemplate and to answer. I hope it clarifies somehow.

Olga Bystrova – Credit Suisse

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

Martin Furuseth

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

Olga Bystrova – Credit Suisse

Okay, great. Thank you very much.

Operator

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

Herve Drouet – HSBC

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

Alexander Izosimov

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

Herve Drouet – HSBC

Alright, okay, and do you have any estimation of cost that you may done for shifting those customers?

Alexander Izosimov

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

Herve Drouet – HSBC

Okay, thank you. And just a followup question on the fixed line business segment. I understand you said there are two reasons to why we have seen some weakness in the business segments. I think you mentioned the lower number of working days if we do a “comparison” and the fact that the currency which is used in particular business segment in U.S. dollar and there is a FX impact. But even adjusting with that, it looks like there was still a bit of weakness still. Are there any other reasons that may explain what has happened in the fixed line business segments? I mean do you see may be some international companies closing down some of their affiliates in Moscow and in Russia, I mean is there any other trends that may explain some of the weakness we’ve seen?

Alexander Izosimov

Yes, we have to look at it in a more granularity than broad essentially speaking. We have actually three segments within the fixed line segment and two out of three are performing very well. That’s the residential fixed line, which is stable, which is a big success in these times. The wholesale, which is also stable with very sound margins, which is also very positive, and the third one is the (inaudible) business segment, but there we have of course impacts that a lot businesses went out of business during the last year and imposed a very strict cost control of the so-called private usage on the business phone on the employees. Nevertheless, we increased the number of business subscribers. We increased substantially even the cross-selling and the so the mobile business subscribers went up double digits. And of course this is the contrary of this is the pricing issue, which is the normal in the cost-cutting area.

So, when you mix these together with the impact of the dollar billing, which is actually, this mitigating and then positive for us, it just shows in rouble a little bit a strange behavior. We see it’s pretty positive as such one is stable and two of them are positive.

Herve Drouet – HSBC

Okay. Thank you very much.

Operator

And we’ll go next to Alexander Balakhnin with Goldman Sachs

Alexander Balakhnin – Goldman Sachs

Yes, hi, can you just comment on the dynamics of your Russian mobile business profitability, because historically your first quarter was stronger than fourth quarter, so we saw sequential improvement in EBITDA margin in 2007, 2008, 2009 and this year the EBITDA margin is pretty much flat. Can you please comment on these dynamics, what was the reason and if it is possible can you just cast some light on how this profitability will be evolving in 2010 from your standpoint?

Boris Nemsic

Yes, the point is that first we should distinguish between the fixed line and mobile. The mobile margin is with 50.9% in the first quarter actually stable, slightly better than in the quarter before, but very similar to the margin of 51.8%, which was one year before. One of – some of the impacts are seasonal and one of them is that we changed the commission structure, which is more focused on quality subscribers, which are then measured in distant periods, and this distant periods starts form the fourth month of operation, so you can imagine that you are paying full cost in the first quarter and then you get some positive signs on the quality of subscribers or you get some commissions back, so this a little bit shifted in the timing. On the other side, we had pretty good growth on data subscribers. So, it’s a mix, which we think is stable. I would not compare it with the years before where the growth was very high in the year 2007-2008.

Alexander Balakhnin – Goldman Sachs

And if I may, a quick followup on this changed communication structure, so should we just think about this as a sort of one-off and going forward the profitability will be broadly unimpacted and hence will probably see – even see a release of profitability right?

Boris Nemsic

The profitability should not be impacted on the long term on a yearly basis. What should come out is higher quality of subscribers and that’s linked to the strategy which Alexander explained before. We are very much looking on quality and efficiency not on the number of subscriber, which was definitely one of the things of the first half of the year 2009, which inflates the number of subscriber and some of the other KPIs. So, you are right, this structure, this commission structure we’ll start it between the first half of year for three months, later on it’s normalized, but should deliver a better quality of subscribers.

Alexander Balakhnin – Goldman Sachs

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

Boris Nemsic

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

Alexander Balakhnin – Goldman Sachs

Thanks so much.

Operator

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

Tatiana Boroditskaya – UBS

Good evening and thank you very much for your presentation. Tatiana Boroditskaya from UBS. Two questions if I may. First of all, can you please comment on your plans in relation to any debt issuance in rouble market, international market on syndicated loan? And secondly, a few days ago, statistics on the subscribers in Russia came out and VimpelCom is now number three in Russia, after MegaFon, basically (inaudible) when you lost your market share second place. Do you intend to do anything in this regards and how do you intend to reclaim this place? Thank you.

Elena Shmatova

Tatiana, let me start with the debt and the plans for debt issuance. Actually, we registered the issuance of 20 billion rouble bonds and that was kind of continuation of what we had before the structure which we will discuss that we would like to switch more to rouble lending to bring more in line our operating cash flow to the debt structure. But as long as we do not see kind of immediate necessity for this that will take certain time periods where we will see that whether we – at which time point we need to do so. And the registration is valid for a year, so we have this time.

So, talking about the other possibilities of funding, again that all depends on the future plans of VimpelCom Ltd. and every time again (inaudible) every time we need the additional funding. We are looking on all the best possible ways to get it and you know that we are using normally different instruments, both syndications, Eurobonds, and rouble bonds. And so going further, that will be the thing.

Martin Furuseth

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

Tatiana Boroditskaya – UBS

Thank you.

Operator

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

Igor Semenov – Deutsche Bank

Yes, thank you. I have question, yes, can you comment on the decline in the operating cash flow and operating cash flow margin please? And also I just wanted to ask about the decline in ARPU in the fixed broadband, do you see that continuing into the year?

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

Elena Shmatova

So, let me start may be with operating cash flow. So, actually I don’t think there was a substantial decline in operating cash flow because, yes, the difference, which can be seen in financial statement of OJSC VimpelCom is that cash provided from operating activities first quarter 2009 was 838 million and first quarter 2010 is 803 million. So practically it stayed on the same level, and if you remember that in 2009 in the first quarter of 2009 we undertake quite substantial efforts to improve our working capital. It doesn’t mean that we are not taking any steps right now to manage working capital, it seems to me that we are more or less staying on the same level. Of course you are right, that fluctuations [ph] in tax payments, in accounts receivable are favorable, but generally speaking within debt, we are more or less on the same level.

Unidentified Company Speaker

Could you repeat your question on the fixed broadband because–?

Igor Semenov – Deutsche Bank

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

Unidentified Company Speaker

Yes, that is I am not able to find against that confirm your assumptions, because we see basically the same trend (inaudible) in the mobile we see stable EBIDTA and in ARPU. You will also see from our side an increase bundling of IPTV and fixed broadband for our customers, which is all marketing actions that should contribute to stabilizing and increasing the ARPU. So, I would have to look at in more – into more detail on that assumption.

Boris Nemsic

May be just one comment to that. There have been strength in sales activities in FTTB sector. Some of them have also promotion periods of one, two, or three months. So, maybe this is what makes this difference on the increased number of subscribers and the divisions we are doing it.

Igor Semenov – Deutsche Bank

Okay, and then –

Boris Nemsic

May be that expense stay the same.

Igor Semenov – Deutsche Bank

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

Unidentified Company Speaker

Well, as you would have seen we have stated that we will be launching branded handsets. That is not to be in the handset business, but it drives the usage and the ARPU development among our customers. One of our biggest challenges in the connection with the rollout of 3G in Moscow is that – in Russia is that the population of 3G-enabled handsets is very low. Of that again you have setting problems. And of that again you have awareness problems, so this is a big challenge to increase the platform of data enabled handsets. This is not only a challenge for VimpelCom, but for all mobile operators in Russia, as you have seen in other markets as well. So, we hope to avoid subsidizing, but we believe that branded handsets with customized settings for our customers will drive usage and ARPU in the future.

Igor Semenov – Deutsche Bank

Is this – have you seen a positive response to that already, or this is a like a test and you have sort of expand that it’s a result are positive?

Unidentified Company Speaker

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

Operator

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

Anna Kurbatova – Gazprombank

Yes, good afternoon. One short question. Can you disclose Kyivstar cash position?

Elena Shmatova

Well, actually in our financial information, see in the presentation that’s’ the debt is extremely low, but the cash balance is pretty good. So, we have approximately 150 million of U.S. dollars on the cash balance of Kyivstar.

Anna Kurbatova – Gazprombank

Thank you.

Operator

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

Maurice Patrick – Barclays Capital

Yes, I am Maurice Patrick from Barclays. Just a quick question on the Russian market. Too much is made of the capacity pressure caused by predative pricing. If you look at your own business where you have low entrants, low-priced entrants like that in your other regions, do you see differing trends? Obviously you have bought the blend? Just curious if there is any different trends taking place across those businesses?

Martin Furuseth

Yes, this is Martin Furuseth. To understand the (inaudible) dynamics of the Russian market, which is there are big basic [ph] pressure, it’s one country or nine countries or 86 countries. You see either a shine [ph] in 86 different branches and each operator has a different competitive situation in each of these branches depending on the (inaudible) of the licenses and other things. So, as you say, in the ABPM and the ARPU we are showing or it’s blended across all these branches and it’s of course incorporating the fact that in some of these branches, we are fighting number three or number four operators and also in some of these branches, Tele2 is the leading operator. So we basically don’t see these dynamics changing very much, so this is incorporated in my statement that we think the ABPM will stabilize and potentially grow towards the end of the year.

Maurice Patrick – Barclays Capital

Fair enough. Thank you.

Operator

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

Alexander Izosimov

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

Operator

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

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Source: Vimpel-Communications Q1 2010 Earnings Call Transcript
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