Vimpel Q3 Earnings Call Transcript

123jump.com Staff
17 Dec, 2008
New York City

Russia based wireless carries revenues rose 50% to $2.845 billion and net income declined to $269 million or $0.27 per ADS from $458 million or $0.45 per share a year ago. Subscriber base expanded by more than 4 million in the quarter.

Vimpel-Communications ((VIP))
Q3 2008 Earnings Call Transcript
November 25, 2008, 10:30 a.m. ET

Executives

Michael Polyviou – Investor Relations
Alexander Izosimov – Chief Executive Officer
Elena Shmatova – Executive Vice President & Chief Financial Officer
Jean-Pierre Vandromme – Executive Vice President, Russian Operations

Analysts

Stanislav Yudin – UBS
Laila Goby – Edgerton Capital
Igor Semenov – Deutsche Bank
Sergei Arsenyev – Goldman Sachs
Herve Drouet – HSBC
Alexander Kazbegi -- Renaissance Capital
Olga Bystrova – Credit Suisse
Jean-Charles Lemardeley – J.P. Morgan
Rhys Summerton – Citigroup
Stephen Pettyfer – Merrill Lynch
William Kirby – Nevsky Capital
Nadezhda Golubeva – Unicredit Aton
Will Milner – Arete Research Services LLP
Josephine Shea – (Inaudible)
Marina Vlasenko -- Commerzbank
Victor Klimovich – VTB Capital
Ivan Kim – Renaissance Capital
Jose Klaxburg – Black River Asset Management LLC
Alexander Balakhnin – Goldman Sachs
Yaklav Shamin – UBS
Nick Ivanov – Prudential] Financial
Maxim – (Inaudible)

Presentation

Operator

Please stand by, we are about to begin. Good day everyone, and welcome to this VimpelCom Conference Call. Today''s call is being recorded. At this time, I would like to turn the call over to Mr. 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 third quarter 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 the company''s ability to meet future debt obligations, the company strategy and development plans in Russia, the CIS and South-East Asia, 3G and 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 third quarter and nine months 2008 financial and operating results. The Company''s earnings presentation entitled ‘Presentation of 3Q 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 www.vimpelcom.com.

In addition, the Company''s third quarter and nine months 2008 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission''s website at www.sec.gov. VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call or to make corrections to reflect future events or developments.

If you have not received a copy of the third quarter 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 Alexander Izosimov, Chief Executive Officer of Vimpel-Communications. Alexander?

Alexander Izosimov

Thank you Mike. Hello everyone and thank you for joining our conference call today. Let me introduce the team participating in this call. Here with me are Elena Shmatova, our Chief Financial Officer; Jean-Pierre Vandromme, our Executive Vice President of Russian Operations; and Dmitry Pleskonos, our Executive Vice President of CIS Operation. Also with us are Kent McNeley, our Chief Marketing Officer, and Alexander Boreyko, Director of International and Investor Relations.

Moving now on to our business, I can say that we had a very good quarter. Our net operating revenue grew in all of our markets reaching $2.8 billion. Our subscriber base expanded by more than 4 million and our market position strengthened both in Russia and in the CIS.

On top of it, we also improved our consolidated OIBDA margin to 48.8% and the only black spot so far was a decline in our net income, driven entirely by the weakening of the Russian rouble.

Our business outside of the CIS was also developing successfully. Our joint venture in Vietnam received all necessary licenses and sequences and we began network rollout in Vietnam as well as in neighboring Cambodia.

Well, things did look good in the third quarter. The problem is that these objectively strong results might not be a good indicator for the near future. With the financial storm raging around us most of the referenced points and priorities have shifted. Therefore, apart from presenting today the Q3 results we are also going to discuss some of the measures we are taking to make sure that the company is well prepared to weather the storm.

Now I will ask Elena to present our third quarter financial results and describe our financial position.

Elena Shmatova

Thank you Alexander. The third quarter was as strong as usual showing positive dynamics both on the top line and the OIBDA level. Revenue increased year-on-year by more than 45% with solid contribution coming from our fixed segment due to the Golden Telecom acquisition in the beginning of this year. OIBDA also showed improvement both in fixed and mobile segment. In mobile, better results were largely connected with the reversal of an accrual of our stock based compensation plan.

In the fixed segment, OIBDA came to a more normal level compared to the second quarter, which was impacted by one-time expenses connected with the acquisition of Corbina. The negative deviation which we see in net income in the third quarter is the result of devaluation of our US dollar denominated debt due to significant rouble devaluation against U.S. dollars during the third quarter. This caused an accrued FX loss in the amount of 341 million. However, this loss does not directly translate to a cash flow loss. Further, we will discuss impacts of rouble depreciation on our cash flow.

Our cash balance at the end of the third quarter was equal to $727 million. This is approximately $250 million lower than at the end of the second quarter, primarily due to the $587 million dividends payout. Our debt during the quarter increased by $250 million while our last twelve months OIBDA increased by approximately $370 million during the same period. This improved our debt-to-OIBDA ratio to 1.7 instead of 1.8 which we saw at the end of the previous quarter.

In anticipation of worsening economic conditions, our first priority by definition is servicing our debt. Accordingly, we have revised our CapEx plans to a level that will provide enough free cash flow to cover our existing debt obligations even if we will not have access to the debt market during the next year.

Now, few words about our debt structure. Our cash management policy contemplates that our debt amortization schedule should be smooth and in any given year the debt repayment should not be higher than 30% of the total debt. So, as of today our debt repayment for 2009 is $1.8 billion which constitutes approximately 20% of the total debt that we expect to have in our balance sheet by the end of 2008.

The structure of our debt in terms of currency composition is (inaudible) dollar and now approximately 8% of our debt is in dollars. Our purchase dollar debt with weakening rouble implies a risk to our dollar denominated cash flow. To mitigate this risk our cash management policy stipulates hedging of interest and debt repayments for the next 12 months.

So a weakening rouble will have limited short-term impact on our current dollar denominated cash flow because we are hedged till September 30, 2009 with the zero cost callers. All repayments from debt and interest in U.S. dollar are hedged with FX rate capped at levels ranging from 27 to 33 roubles per U.S. dollar. So the maximum exposure which we may see through the end of the third quarter 2009 is the purchase dollar in the third quarter of 2009 at the rate of 33 roubles per dollar. Nearly, 99% of our debt is unsecured. So for us there is no risk of margin falls or losing assets. We are also quite comfortable that we will not violate any covenants that we have in our loan arrangements.

Now, back to Alexander.

Alexander Izosimov

Thank you Elena. Before we start discussing specific markets, I would like to point out that our revenue base is becoming more diverse which would help us to be more resilient and adaptive in the current turbulent environment with the CIS business accounting for almost 15% of our consolidated revenue.

The acquisition of Golden Telecom gave us an additional exposure to both fixed line and corporate market segment. The nature of services and level of technical sophistication makes customer relationships in this segment more sticky, which is especially important in times of economic downturn. At the same time, our billing of most of our fixed line corporate customers is fixed to the U.S. dollar which helps to mitigate the currency risk as well.

Let''s now move to specific geographies, starting with Russia. In Russia, our revenues grew by 47% year-on-year as a result of strong organic growth in both mobile and fixed segments as well as consolidation of Golden Telecom. Our consolidated OIBDA margin in Russia was 50%. This is a very good result particularly taking into account margin dilution caused by the intensive start of sales of devices such as iPhones and 3G models where we have a very low OIBDA margin. To protect those dilemmas going forward, we have embarked on a number of cost reduction activities and already renegotiated a number of the key contracts - executed a hiring freeze and have cut non-essential expenses.

We have also frozen non-critical CapEx orders and will be significantly reducing CapEx plans for 2009. The effect of the measures we have taken will become visible in the first quarter of the next year and we will provide a further update after our Board of Directors approves the 2009 budget.

In the Russian mobile segment, our active subscriber base exceeded 45 million and revenue was up 23% year-on-year. Seasonal ARPU strength was supported by stable pricing and more than 9% increase in usage year-on-year. Our OIBDA margin of 54% was a factor of both stock option accrual reversal and our cost reduction efforts.

We have launched 3G services in 20 cities as of today and we will build the 3G network to the point needed to meet minimal license requirement.

Now to our fixed-line business. On a pro forma basis, our fixed-line revenues in Russia grew year-on-year by 37%. Third quarter demonstrated normal seasonal trends in our business segment while the wholesale segment grew faster, capturing synergies from our transport network integration. In the residential segment, our sales were affected by seasonality and continued reductions in legacy products and services such as dial-up.

OIBDA margin now of fixed-line business was 20.5%, which was almost 3 percentage points higher than reported in the previous quarter when OIBDA margin was affected by one-time write-offs.

Our focus in residential broadband is on 3G/HSDPA and fiber-to-the-building technologies. While our 3G rollout only began in the third quarter, with FTTB, we already made substantial progress. At the end of the third quarter, we have passed 5.9 million households and we had 538,000 FTTB subscribers using a current take-up rate of 9.2%.

We plan to finish construction of the FTTB networks in the cities where we already started as this required less incremental CapEx. As a result of the unfolding crisis, plans for entering new cities are being revised. At the same time, we have shifted our focus on sales by leveraging our Beeline brand and vast distribution network. In September 2008, we had e-branded our residential broadband services under the Beeline brand which we expect further acceleration -- will help us further accelerate the take-up rate.

Earlier this year we reexamined our overall distribution strategy and in June, we began to implement a new strategy. The reason for the new approach was that it became clear that the industry was poised for a major change. The economic and business models of existing mobile retailers were becoming unstable, and in our view, unsustainable in the long run. This led us to adopt a three-point strategy on distribution.

First, we more aggressively pursued long-term agreements with key retailers. Second, we began setting up mono-brand sales booth in key consumer traffic location such as shopping centers. Finally, while we would have preferred to maintain the status quo regarding mobile retailers it became clear that this would not happen. So, we decided to acquire minority stake in Euroset, the largest retailer in the market. This new strategy allowed us to significantly improve sales and strengthen promotion of our new products and services. This becomes increasingly important in times of economic difficulty as we expect more consumers to shop around for better deals. We are encouraged by the early results of our new distribution strategy.

Now moving to the CIS countries, Kazakhstan remains our largest market outside of Russia. Here we continue to focus on improving network quality, strengthening direct dealership and intensifying sales activities. We grew our active subscriber base by almost 30%. It led to a 7.2% quarter-on-quarter revenue growth.

The financial crisis reached Kazakhstan in the fourth quarter of 2007 and we continue to see its effect. While we see some growth in subscribers, usage in ARPU remained essentially flat for the last twelve months.

In Ukraine, we continue to invest in building a high quality subscriber base. To that end, in Q3, we have executed a number of strong campaigns targeting high usage subscribers. This resulted in a very strong ARPU growth, which is now at all-time high and translated into 49.2 organic growth in mobile revenues. That was percentage points of course. However, this investment in building the high usage subscriber base coupled with unbalanced interconnect charges continues to put pressure on our mobile OIBDA margins in Ukraine. While we will aim for the OIBDA margin to be in the positive territory significant margin improvement will only happen after interconnect rates will get in line with the European levels. The integration of our fixed and mobile business in Ukraine has been completed. The fixed line segment showed 14.4% quarter-on-quarter revenue growth.

In Armenia, a strong marketing campaign resulted in a gain in consolidated revenues of more than 6% quarter-on-quarter. We are encouraged by improvement in profitability with the combined OIBDA margin increasing to 48.7%. However, declines in MOU and ARPU suggest that the quality of our subscriber base has deteriorated and this might result in higher churn in the future.

In Uzbekistan, a significant increase in the number of mobile subscribers led to an 84% annual increase in our mobile revenues. We managed to keep our OIBDA margin well above 50% in a country with a very low pricing environment. We also monitored developments in Georgia and Kazakhstan and see good progress in our operations in those countries. Development of our CIS operations is an important cornerstone of our strategy going forward.

Our joint venture in Vietnam received all of the licenses and frequencies necessary to launch the rollout. We contributed $267 million as paid in capital which will be sufficient for the first year network rollout. The management teams in Vietnam and Cambodia have been recruited and are comprised of experienced professionals from Vimpel-Com and other major international operators as well as strong local specialists. We aim at launching operations in both countries by mid next year.

We''re approaching the end of the presentation. Let me reiterate that management understands that the turbulent economic times require a change in focus. Hence, presently, management focus has shifted towards maximizing cash flows. Throughout our recent history the company has consistently been prudent which has helped us to keep our business in good financial shape.

Focus on cost control has always been a high priority and on the current conditions we will be even more aggressive in cost management. For example, we have cut out all non-essential costs. We have imposed a hiring freeze and are working to identify further headcount optimization opportunities. We also started to cut our CapEx by putting non-critical CapEx orders on hold, and by renegotiating vendor agreement and by reviewing our 3G and FTTB plant. In the extreme case, we can cut CapEx to the minimum affordable level to keep our network operating.

Prior to the crisis we already had implemented our policy of twelve months currency hedging of our dollar denominated debt. This policy has served us well in the crisis by protecting against sharp rouble devaluation through September 30, 2009. All these measures are aimed at cash generation and accumulation so that the company can make it through the financial crisis.

In summary, the third quarter was a strong quarter with good results across all geographies and business lines. Our company is in good financial shape and is well-positioned for the future despite the rough times ahead of us. Revenue growth has been high on the agenda for long time and our 3Q results show that we are on track with this as well. Our focus is on maximizing our cash flows so that we meet all our obligations and continue to develop our business. I remain confident that Vimpel-Com will weather these storms and continue to deliver outstanding results.

With this, thank you for your attention and let me now open the floor for questions.

Question-and-Answer Session

Operator

Thank you. If you would like to signal for a question you may do so by pressing “*1” on your touch-tone telephone. Also, please make sure your mute function is disengaged to allow your signal to reach our equipment. In the interest of time we ask that you please limit yourself to one question with one follow up. Again that is “*1” to signal for a question. Our first question comes from Stanislav Yudin with UBS.

Stanislav Yudin – UBS

Yes, hi, congratulations to you. Good results and the first question is could you please specify your priority areas in CapEx cutting in next year? Could it be first of all cut in 3G CapEx or FTTB and what is the minimum maintenance level of CapEx for next year, you can specify it please?

Alexander Izosimov

The first thing that you have to understand in CapEx that all mobile operators in Russia have the peak minutes in December. So the network rollout as it is in December can create further traffic up till the month of April/May. So what that means is that on the 2G network we do not have to do any rollout in the first quarter and we will still be confident in being able to deal with the traffic increase if that happens. In the first quarter we can monitor how severe the crisis is, if we come to the conclusion that traffic does not increase and stays at the level below the December 2008 level and theoretically, we could not invest in the 2G network itself. As far as 3G is concerned, those cities where we have started deployment of the network in 2008 we will finish that deployment and get the revenues from it. So further than that we don''t need to do any 3G deployment, out of them those are the next (inaudible) and the minimum requirements would be over there to have long base station of cities. As far as the FTTB network is concerned we could theoretically stop all investments in any new cities. So there again, only have to deploy new cities but again, this is theoretical exercise. Nobody knows today how the crisis will unfold. We have plans in place that is, if necessary, we can review the CapEx to an absolute minimum. As far as maintenance level is concerned in the traditional network that is 20 or 30 years old maintenance CapEx is usually being defined, and those -- replacing those elements that are no longer supported by the vendor, that type of equipment which is a network which is five years, six years old. So there is no replacement CapEx. So there again, that can be kept, if that would be necessary to an absolute minimum. But as I said earlier, it''s very difficult to forecast how the situation will unfold. We will monitor and shift CapEx deployment towards the second half of the year if traffic was justified to deploying further network. I don''t know whether that answered your question.

Stanislav Yudin – UBS

Yes, thank you, very clear. Thank you very much.

Operator

Your next question comes from Laila Goby [ph] of Edgerton Capital.

Laila Goby -- Edgerton Capital

Hi, yes, I have two questions. One is, have you conducted any surveys with parts of your customer base to have a sense for how much they think of cutting back on their bills or on usage spend in the current environment, that''s the first question. And the second question -- sorry, it''s just another question on CapEx. And actually it’s conversely, if going into next year you see slightly more traffic than you thought in the scenario that you outlined just before. I mean how quickly can you react to put CapEx back into the network to make sure you''re not suffering on forwarding? Okay, thanks.

Alexander Izosimov

Let me take the first one. Actually, in anticipation of the questions on how we see evolution of the demand in Russia will run already two ways with our targeted marketing and quite representative samples have been done on this. The first way shows that which was then three weeks ago that people effectively didn''t have any expectations, virtually negative expectations about the crisis. So 90 -- more than 90% didn''t expect to lose their jobs or wouldn''t see their incomes deteriorating, and therefore wouldn''t anticipate any changes. However, clearly that with what''s happening, happened in October and quite more volumes now in the press and more companies talking about layoffs and so on, this sentiment will be shifting fast. Our second way indicated that there is a mood downwards but still actually significantly more optimistic view prevails compared to the European or American research which has been done. So we will continue to monitor it. But currently, we cannot say that we can identify that it would be significant change in the spending patterns. We can only guess that it will come. And with CapEx to Jean-Pierre.

Jean-Pierre Vandromme

As far as CapEx rollout is concerned when we deploy base stations that consist of three distinctive steps. The first one is the site acquisition itself, we have to look for where the site will be and acquire it. The second part is the site survey and the projecting. The cost relates to site acquisition, site survey and projecting are minimum. We usually do routinely. We do this in advance. So in the fourth quarter of any given year, you do the site survey and site acquisition for those sites that will be deployed somewhere at the back end of the second quarter. So we have continued to do that and we will continue to do that. Once survey and projecting and that takes about six months, these two steps, the third step is then the installation of the equipment itself. Depending on the type of installation you do, whether that’s on the roof installation instead of concrete tower or a full-time tower that takes between three months and six months, so we could gear up the network to -- if traffic would increase substantially anywhere around three months and we would be able to cater for any increase that would be necessary.

Operator

All right. Our next question comes from Igor Semenov of Deutsche Bank.

Igor Semenov – Deutsche Bank

Hi, thank you. I have two questions. One is the follow up on CapEx. So first of all, could you possibly give us a specific minimal number for the CapEx, your competitors have scaled down to $500 million or even below in the worst case scenario, could you provide us a similar specific number? Secondly, a follow-up on the CapEx -- on the previous question, so what you''re suggesting is that presumably if the traffic doesn''t fall in the first half next year, you are already prepared, you have done your site surveys and you have done the home work and so you can rollout networks and base stations in the first quarter -- rather second quarter, because first quarter obviously difficult because of the weather conditions, so that job has been done, right? And one technical sort of question on the balance sheet, can you explain what happened with other current assets and other assets on the balance sheet, it seems between second and third quarter, something happened in this two categories. There is a big increase in other current assets and a decrease in other assets. Could you please specify what''s going on there?

Alexander Izosimov

Let me tackle the first question. So, yes, the answer to your second question is yes. And you rightly pointed out that most of the service has been done, rightly identified and so, and this is minimal cost, but saves us a lot of time, so in that sense we are in a good shape. And I guess it''s a good interlude to the first question as well. We don''t believe that anybody can pin down a number at the moment because the crisis projections are so ambiguous at the moment and it is so difficult to predict how it will be unfolding. Hence, our philosophy is that to be maximum flexible and adaptive and we have few scenarios and -- rather we actually define sort of what are the potential avenues. And in that sense, the minimal number would be whatever has been already committed and will be irrevocably committed, and that would be couple of hundred million dollars. I am not sure that we would be willing to provide you with any other specificity at the moment because we will have flexibility to adjust and we will be very carefully watching the development in order to tighten the rings and it would be less dictated by the market development as such. But also to some extent of course it will be, but also it will be dictated by the availability of funding on the debt markets and whether we can go and borrow the money, because that will affect our decision pattern and behavior as well. So with this now to Elena.

Elena Shmatova

Yes, as far the changes in context with long-term assets, so that was connected through the reclassification of 350 million loan given to one of our partners for 18 months. So previously we recognize that this long-term asset are now as long as it''s becoming even less than 12 months it’s now recognized as current assets.

Operator

All right. Our next question comes from Sergei Arsenyev with Goldman Sachs.

Sergei Arsenyev -- Goldman Sachs

Good afternoon. I want to talk you about the fixed line outlook. Presumably, especially in the business segment, presumably the corporate customers see a little bit earlier than the residential customers what is coming in the next year. I''m just wondering whether you’ve noticed any change in the behavior of the corporate customers in the last month-and-a-half or so. And what are generally your expectations in terms of the corporate volumes, pricing going into 2009 and into 2010? And similarly you talk about decreasing investments in broadband; obviously, you’ve passed relatively large number of homes already. Do you anticipate any changes in the broadband demand outside of Moscow? Do you think that the market is still unhedged, right and that the broadband growth should still continue in Russia in 2009?

Alexander Izosimov

On the behavior of the corporate, we have seen three types of behavior. There are a number of small companies that are limited. We are monitoring the situation very carefully that have simply disappeared. But the amount of those are still very, very small. The second group of corporate is those that have already laid off staff. Some of them are banks that are represented (inaudible) there we have of course seen that 25% less staff, automatically results in less cost, which works up to 25% so there is a reduction in minutes but not being dramatically. And then the third element is that the number of the larger customers have contacted us and asked for a reduction in rate but you have to bear in mind that with all of our larger customers -- larger corporate customers that we are in constant dialog and that we routinely reduce the rate, as time goes by, so these are not people that have been clients for us for one year or two years, it’s sometimes 15 years or longer. So for most of them this is the second crisis that they go through.

So yes, there are demands for reduction, but in many cases what happens -- or in most cases, what happens is that people agree to commit to the same kind of expenditures that they want more services for that. So services that they sometimes take from others. As a redundancy measure, they cut all those things, and for the same amount of money spent they want us to do more. So I feel now that more or less the trends that we see moving into the future I think that at this stage it''s too difficult to say what is going to happen. Logically speaking, we would expect the revenues in the corporate sector not to significantly grow, but more or less stay on the same level. As far as the broadband is concerned, especially in the region we are only now really starting to connect building in the region, so, it''s still very early stages to see what goes on. But on current demand of both FTTB and the USB modems we see an unexpected high demand especially for the USB modem. So USB modem’s Internet access, especially in those cities, I’ll expect end of September, October where I have a 3G network, that this amount is surprisingly strong.

Sergei Arsenyev -- Goldman Sachs

Okay. Thank you very much.

Operator

All right. Our next question comes from Herve Drouet of HSBC.

Herve Drouet – HSBC

Yes, good afternoon. My first question is can you share with us more light about how you are going to achieve -- to deal with this dilemma which you explained to us, on the one side, especially from the corporate segments in your site, there is a need on the demand side, maybe a restriction of right, and I assume as well of tariff. And on the other side if you decide to cut on -- slash CapEx obviously that would be a limitation of the network in terms of what you can end up from volume growth in terms of traffic. Just trying to find out what we will be the key decision and making process you would use to balance those two things. The second question is regarding your debt and some of your hedging up-to-date. I just want you -- just to clarify some of the hedging up-to-date. Can you confirm you are going to hedge most of your debts which is in U.S. dollar denominated? And if it is a case, can you give us kind of an estimation about the costs associated with the hedging? Thank you.

Elena Shmatova

So I can start with the costs of hedging, okay? Until now it''s zero, because we are using such instruments as zero cost caller.

Herve Drouet – HSBC

How is it possible to cut the hedging to zero?

Elena Shmatova

Because -- still how these instruments work. So VimpelCom buys from the bank call option let''s say for 27 roubles to dollars of costs, and at the same time sells to the bank put option, let''s say it’s 23 roubles per dollar of flow. So cost of call option equals to the cost of put option and that results in zero cost for VimpelCom. So when we are within that corridor, of course, we are there, all the kind of risk, but if we are crossing either capital flow then either we have gain or –

Herve Drouet – HSBC

Okay. Can you share with us what is the band you are using for the hedging?

Elena Shmatova

So currently, we have several agreements, one I’ve explained that with the cap of 27 and with the flow of 23, and other one -- at several, I would say, several arrangements with the capital trajectory roubles per dollars.

Operator

All right. Our next question comes from Alexander Balakhnin.

Alexander Izosimov

Well, I think you still have -- to answer on the question of corporate rates and tariff. What usually happens with clients is they ask for a reduction in rate but agree that instead of reduction – that rate reduction is accompanied by an increase in services. They use sometimes two, three providers and they cut off one or two providers and we provide more services for the same amount of money. So that''s a practical rate reduction, to see -- the fact that they take more service from us. What they spend with us is the same amount of money. You are right. That leads to a need of additional capacity in the network, but there is sufficient headroom in both local network and in long distance network that it''s really whatever increase there are is really insignificant as far as our discussion and it doesn’t result in any additional CapEx. We usually go to buildings with either SDH equipment and in many cases the company will be using only a couple we want so the standard equipment is an SDH STM-1 equipment and the cost are at best, uses of that $0.01 or $1.20 a piece, so plenty of capacity.

Operator

All right. We go next to Alex Kazbegi of Renaissance Capital.

Alexander Kazbegi -- Renaissance Capital

Yes, good evening. I thought actually there were several disqualifying questions. I mean on the CapEx could you just confirm that your guidance for the full-year 2008 rather than 2009 which was I think $2.5 million is still on because you spent about 1.7 until now. Secondly, on operating cash flows which you have possibly that goes back to Herve''s question about the increase in the other assets, but your operating cash flow has actually decreased in Q3 vis-à-vis Q2 if you could give us the reason again why that happened. On the hedging also I was wondering as of the end of 2007 you had only $300 million of debt hedge. So you are saying that since then you have actually put all those instruments after that, if you can clarify on all of that? And the question which I have actually is that are you applying to the Beetel because I think a lot of people do. And secondly, I believe there is about $800 million debt on Euroset and that should be about short-term debt. So could you just tell us when is that due and how does Euroset plans to pay? Thanks.

Alexander Izosimov

All right, so out of good ten questions we will pick a couple. So I will start with WAP. No, we are not applying, and actually from that perspective we believe that it will be some instruments available rouble market, we are investigating opportunities to borrow but it''s not through that. Now, with all the operating cash flow and hedging and so it’s over to you Elena.

Elena Shmatova

Actually about operating cash flows mainly connected with some advances which we base in the third quarter and one of them for iPhone so it was all connected with the current business.

Alexander Izosimov

Alex, what was the question related to Euroset?

Alexander Kazbegi -- Renaissance Capital

The debt of Euroset, the $800 million level.

Jean-Pierre Vandromme

Actually, Alex, it''s slightly less than that and the management, not the shareholder, just a minority shareholder, it is just the new management, they usually come you probably know from a long time expiry date are renegotiating that debt with different banks and it''s sort of understanding as shareholders that they have been quite successful in that exercise.

Alexander Izosimov

Yes, our understanding is that they are not in the danger of immediate threat by the banks recalling the debt, and again, one of the most fundamental premises of that acquisition was that we are buying a minority stake and for a limited exposure for the shareholders by the amount of equity we contribute and also by the amount of money we pay in normal course of business and that means we are paying the contract similar with what we have done versus other major retailers. So that''s our risk and we are not assuming risk of that debt on us. As far as overall CapEx guidance for this year is concerned, that yes, we are saying that our total number will be similar to what we indicated earlier. We are going very thoroughly through all the outstanding orders. But unfortunately, the lead time is long enough that our reaction at the end of Q3 and currently is not going probably to be visible in the Q4 numbers. So we will see the results coming in Q1.

Operator

All right. Our next question comes from Olga Bystrova with Credit Suisse.

Olga Bystrova -- Credit Suisse

Yes, good evening. My question is mainly regarding of course, first one is in terms of operating cost -- because you are implementing headcount freezes, what can you say about your ability to control growth or the inflationary growth overall and any other cost items relative to what''s the revenue? And I am basically trying to figure out how much control over EBITDA margin you can have next year. And the second in a way related question of course, but bit more strategic is you have had a very successful quarter in terms of gaining subscriber market share and revenue market share in Russia, however, (inaudible) have not increased that significantly in relative terms, so could you maybe talk a little bit more how are you -- how are you spending on new and existing subscribers structured currently and how should we think about it next year? Thank you very much.

Alexander Izosimov

On the cost relates to inflation there are a number of costs which are not subject to inflation at least at this stage. The majority of our cost relates to interconnect cost with the other mobile operators and with the dominant players, (inaudible), operators are regulators and even if the costs would go up, the revenues would go up also; so it''s kind of an automatic offset mechanism. So there the result, whatever happens is -- the net result is zero on these. As far as the second element is concerned, which is related to headcount, we are reducing headcount and we at this stage do not envision any salary increases for next year, again, that is difficult to forecast because nobody can say at this stage what the inflation is going to do and what the rouble exchange is going to do. The third element of cost has to do with site rent and rent of office premises. We believe that site rent should probably stay on the same level, while if anything to go by, office rents are in the process of declining, so there again, one should offset the other one.

As far as the sales and marketing costs are concerned, we have deployed a number of strategies to increase sales. One is the long-term agreement to the number of retailers, the second one is the acquisition of Euroset, and the third one is deployment of this booth that you see everywhere in shopping centers. The reason why we haven''t seen any increase in or substantial increase in SMS costs is the mix is such that one individual line goes up, but in the mix of the three stays more or less on the same level. So at this stage, there is no immediate reason why next year the total of sales and marketing costs would substantially increase, meaning total on a per acquisition basis, if we sell more of course, it will go up.

Operator

All right. Our next question comes from Jean-Charles Lemardeley of J.P. Morgan.

Jean-Charles Lemardeley -- J.P. Morgan

Hello, good afternoon. Could you just maybe we are two months to fourth quarter now, so, can you give us an indication into the fourth quarter. I understand that October was on budget but how does November look so far, and how the seasonality look versus prior year? And then second question would be what your expectations for yield per minute in Russia, it looks they were pretty good in rouble terms Q3 versus Q2, similar at MPS that would seem to be maybe sensible for you to seek at least stabilization yield in this environment or even slight improvement, we are seeing some of that happening in Western Europe in pre-paid segment, so you could answer that.

Alexander Izosimov

I have to apologize if I misled you, to say that October was in budget because we never ever guide on the existing quarter on a future result and we are not going to deviate from this practice as well. So, the only thing which I can say so far that we do not see change in the behavioral patterns of our subscribers. That''s what we haven''t detected and the sentiment unfortunately is fairly volatile and subject to many factors, so it might change quite rapidly. But we haven''t seen it so far. That''s all I said. And please infer your -- or you make your own conclusions about the results in the quarter.

Jean-Charles Lemardeley -- J.P. Morgan

The seasonality so far is inline with prior year traffic in Russia.

Alexander Izosimov

We haven''t seen change in the pattern of behavior. And so your second question was on? Oh sorry, yield per minute in Russia.

Jean-Pierre Vandromme

The APPS have stayed stable throughout the third quarter and I believe that from competition that they have had the same evolution, so, I would say even in dollar terms on the same level.

Jean-Charles Lemardeley -- J.P. Morgan

But what''s your expectation going forward? What are your plans in this respect? And is it to the extent to try to achieve slightly better yield going forward?

Alexander Izosimov

The desires would be of course, to sell more at a higher price. But unfortunately it''s not always possible. And here we will be responding to the evolution of the market conditions. To that end Russia was historically or at least last couple of years enjoying very responsible industry conduct in terms of pricing and we hope that this conduct will persist going into the next year.

Jean-Charles Lemardeley -- J.P. Morgan

Okay. But can you give us the value-added services and share of revenues and share of ARPU in Russian mobile, and split between messaging and non-messaging?

Alexander Izosimov

Yes, we were fairly confident that the percentage of revenue was about 15%, just under 60% of that was messaging, both SMS and MMS and about 25% was Internet traffic. So those were the two major components that we saw over the last quarter.

Operator

All right. Our next question comes from Rhys Summerton of Citigroup.

Rhys Summerton – Citigroup

Yes, hi and good afternoon. Just need to clarify a few things. My understanding is that if I look at the results that you reported we are not really seeing any slowdown in any of the markets and that''s kind of inline with what you have seen in almost all other sort of emerging markets in this quarter. And so your decision to cut back on CapEx I must understand that to be entirely driven by your view that either something has changed and you kind of adjusted that traffic patterns haven''t changed or that the funding requirements for next year that’s going to be quite onerous. Now, if I look at the funding as you disclosed and your short-term debts in the second quarter and third quarters next year, I don’t think in terms of the numbers that – I can calculate you''re still looking for -- you would still be able to maintain your CapEx at the same kind of level as you’ve had in 2008 if you see the same kind of growth in EBITDA coming through. So maybe you can just correct me where I am missing the point, is it that you have seen a slowdown or that you''re just being ultra cautious on your CapEx guidance in 2009 or can you reverse that decision once the Board approves lower CapEx number?

Alexander Izosimov

I think the closest would be the third option here that we historically have been investing -- our motto was “invest as we grow.” And the risk that the behavioral patterns will change quite abruptly is quite high. Because what happens in our business and consumer business, people don''t adjust while their income is there, but they might adjust quite sharply where unemployment rate for example surges. And currently, unemployment rate in Russia is not that high but expected to go up quite sharply early next year. If we take as a proxy Kazakh development, in Kazakhstan we saw last year financial crisis hit Kazakh economy in about same time September, October 2007 and we saw very sharp decline in usage in Q1 and actually the usage although up significantly lower than we anticipated. And interesting enough that actually current forecast on GDP development in Russia is very close to what Kazakh economy experienced during last year, about 3%.

So being on that -- with that anticipation and also taking into account earlier (inaudible) market maximum yield per minute and therefore capacity -- maximum capacity comes in December and then there is a trough and then we gradually build up the usage towards the summer which is simply have that time to react. And we intend to use this time to observe the situation more and to understand the evolution of the market more, make whatever possible preparations which are very low costs and by having those preparations in place we can activate CapEx relatively fast. And that would be the discussion we are going to have with the Board that actually will go on a much shorter planning horizon, and we will revise these commitments in a much more frequent matter. So our statement of cutting CapEx relates to immediate orders which would be executed and built in Q1.

Operator

All right. Our next question comes from Stephen Pettyfer of Merrill Lynch.

Stephen Pettyfer -- Merrill Lynch

Yes, hi, good afternoon. I was wondering if I can go back to a couple of points earlier made. One was on CapEx for this year''s guidance whether or not you''re still standing with your $2.5 billion. And secondly, I wondered if you could provide a little bit more color as to what was happening on the income tax expense line this quarter. And finally, just on the issue of pricing I would be interested in your thoughts. If there is a significant devaluation of rouble do you feel that the consumer would be responsive to you kind of raise prices? Thank you.

Elena Shmatova

So let''s start with income tax. So yes, income tax -- effect of income tax rate increase in the third quarter up to approximately 32%, but that was connected with one kind of additional accrual and reserved on that tax risk provision connected with some recent kind of new view of tax effect rate on carry forward losses and so the risk is connected with increase of non-deductible expense.

Alexander Izosimov

And on CapEx I just want to reiterate that yes, this year, we are probably going to see $2.5 billion or slightly above on – in terms of spend. Also I just like to remind you that we’ve always been saying that our CapEx program is designed in such a way that we could either accelerate or slowdown up to 20% of CapEx volumes and that would be done without any significant disruption to our operating models. So that flexibility we''re still absorbing. And if we go for more drastic measures of course, we will communicate exclusively to the market. And as far as pricing is concerned Jean-Pierre, over to you.

Jean-Pierre Vandromme

As Alexander said earlier the Russian operative have been better far disciplined when it concern pricing. We expect that the discipline -- we at least hope that the discipline will continue and that''s all operators will continue to behave rational. If that is the case, then you can raise prices, raising prices does not only depend on the consumer alone and it also depends on what your competition is doing. So, if that past pattern continues that the operators behave in a responsible way and there should indeed be a possibility to have the rouble rate raise more or less in line with the devaluation of the dollar and I believe that one of our competitors has indicated that he believes that the same thing will happen and he also believes in the rational behavior of his competitors. So, I think that that answers your question.

Operator

All right. Our next question comes from William Kirby of Nevsky Capital.

William Kirby -- Nevsky Capital

Thank you. Two questions, please. Firstly, what impact do you think handset subsidies are likely to have on EBITDA margins? And are you planning to launch subsidies for any other groups of consumers? And then secondly, on your debt hedging is the amount you’ve hedged just the interest payments or principal payments for the next 12 months -- or have you hedged the whole amount, about $100 million debt. Thank you.

Elena Shmatova

No, hedging -- yes of course, it''s principal repayments and interest within 12 months.

Alexander Izosimov

And as far as subsidies is concerned we are not subsidizing the iPhone and we are not planning to subsidize in the future either. So I think that answers the question. We don''t believe that this is a good model. And I don''t see any of our two competitors, main competitors in Russia embarking on the road of subsidies; my feeling is that most European operators, U.S. operators can get out of the subsidy circle that they will gladly step out of it. So I don''t see any reason. While we would get into a circus, if all the others won''t to get out of it.

Operator

All right. Our next question comes from Nadezhda Golubeva, Unicredit.

Nadezhda Golubeva – Unicredit Aton

Good afternoon. First of all I wanted to come back to the theme of rouble devaluation. So if you are going to see sharp and fast rouble devaluation and see down to 35 roubles to dollar by the end of the year you will see February or March. Do you think and do you plan -- I believe you consider such scenario to raise stakes in roubles or you think that this is a pretty unlikely alternative -- is it possible that you will return to see dollar bread prices or some unit prices so whatever, so could you please share your view on the company sales and revenues because I understand that this could be very painful for you in case roubles devalues but (inaudible) stays same or even grows as a response to the more affordable tariffs in dollar. And second question, I wanted to ask what happened to sales of handsets and accessories in the third quarter, the jump sharply compared to the first and second quarter. Thank you.

Alexander Izosimov

This one is easy. We started selling iPhone and also very successfully launched 3G modems, which is part of our broadband strategy development. So that goes into that category. As far as pricing is concerned, it’s a really complex matter. The easy answer is -- can you increase prices? The answer is, yes, we can. But – and rightly, Jean-Pierre points out we do it routinely on our legacy tariffs and so on. However, when there is a sharp dislocation of that magnitude, when the currency devalues so much, and if it’s layered over surging non-employment, then a lot of other factors kick in. And it’s not simple mathematical exercise that the devaluation is this, we would bump up our pricing by that amount. It would be a number of iterations to find actually new price equilibrium on the market. And therefore, to say exactly where it will end up and what relation that new equilibrium will vary to the inflation or devaluation is probably premature. But certainly we will try to protect our margins and the cash flow. That is, I repeat, key focus for the management going forward. We now shifted – before we’ve been driven by our strategic ambitions and had mainly implementing sort of long-term decisions, and that’s what we’ve been discussing on these calls before. Right now, we take much shorter horizon and we actively manage to maximize our cash flow.

Operator

Thank you and if you find your question has been answered, you may remove yourself by pressing the “#” key. Our next question comes from Will Milner, Arete Research.

Will Milner – Arete Research Services LLP

Thanks. Just one – couple of questions actually on the balance sheet. Firstly, on the absolute debt load, which I think -- is that 1.7 times EBITDA now. It’s obviously a very different world. I mean, looking into next year, beyond just meeting the refinancing requirements, what sort of level of debt are you happy with before you think about restarting investments? And second question, what scheduled amounts of committee credit lines that you have available at the moment? Thanks.

Elena Shmatova

So talking about, I would say, kind of more or less the level of comfort with the debt-to-EBITDA ratio, we are always saying that internally we think that we should not cross debt-to-EBITDA above 2. So here we think we will say and we will balance -- our estimate is to be in the range between 1 and 2 in terms of EBITDA. Actual credit lines, we do not have currently any credit line available.

Operator

Our next question comes from Josephine Shea of (inaudible).

Josephine Shea – (Inaudible)

Good morning. Could you perhaps give us some color on what percent of your payables and other working capital liabilities are in foreign currencies? And if there are any foreign currency liabilities, would you consider hedging this exposure as well? And then secondly, do you expect your days receivables to start increasing? Is there a risk there? And maybe you can highlight a little bit more your working capital management strategy. Thank you.

Elena Shmatova

Thank you. So, talking about our accounts payable, actually practically in all the countries, we are trying to balance revenues and costs to be in the same currency. So, for example, in Russia, in our largest operations, most of our costs are also in roubles as well as (inaudible). And so to this extent, dollar payables are in roubles and so there is really kind of no need to hedge because it’s only our kind of bank loans and bonds and certain things stated in US dollars. As for accounts receivable, actually we have previous table, I would say, days sales outstanding ratio and we are managing it in a way that it should more or less match their two ways of accounts payable and accounts receivable. And so that’s why kind of the needs in our working capital are more or less the same, it’s not taking kind of some items sometimes as -- for example, now we are paying what advances for handset purchase of iPhones and so on.

Operator

All right. Our next question comes from Marina Vlasenko, Commerzbank.

Marina Vlasenko – Commerzbank

Hello. I just wanted to briefly get back to the hedging issue, which is already long time on the screen. Excuse me. What was the reason for such a loss on currency depreciation, because I always thought that the telecoms are very sophisticated? Somehow I’m a little bit surprised, that you have any loss at all? Where do you think that your new strategy, your new hedging strategy will be more successful than the previous one, sort of asking that?

Elena Shmatova

Actually we are not changing our hedging strategy and we are always saying that we are hedging only next 12-month payments. Actually it’s pretty hard to find in Russia instruments which are longer than 12 months. And so we will follow the same route. But of course, as long as the total debt versus maturity much longer than 12 months, of course we have that revaluation of debt and that’s what is reflected in the P&L. That’s what you are seeing.

Alexander Izosimov

Balance sheet transaction or cash flow transaction, and that’s why we have it.

Operator

All right. Our next question comes from Victor Klimovich of VTB Capital.

Victor Klimovich - VTB Capital

Hello, good evening. I have a question on your Ukraine operations. Can you please explain the current trends, I mean, ARPU increase and very slow MOU increase? So that is the essence of the question. So why – how did you manage to increase ARPU with such a low traffic increase? Thank you.

Alexander Izosimov

In general, we introduced what we thought – we introduced some special terms for high quality subscriber base. And from this case, for this type, we have some subscription fee and this subscription fee will give us the additional ARPU and they are more exactly what we’ve seen now.

Operator

Our next question comes from Ivan Kim, Renaissance Capital.

Ivan Kim – Renaissance Capital

Hi. Actually a couple of questions. First is regarding the subsidies, I think you announced yesterday that you launched 33% subsidy for handset in Moscow and Moscow region. I am just wondering is that short-term, is kind of promotional campaign? The second question is about your Kazakh operation switch, the MOU has performed there and not kind of -- I’d say one would expect for third quarter. Presumably crisis affects your Kazakh operations earlier than, let’s say, in Russia, probably I could say that Kazakh business can be some kind of proxy for what will happen in Russia afterwards. And probably just a brief one technical, what was the actual amount of your (inaudible) for stock-based compensation? Thank you.

Alexander Izosimov

I’ll take the first one about the handset. Actually what we launched yesterday was a two-month pilot where we will lock post-paid customers in for one year and at the end of that period rebate a portion of their payments over the year. And unfortunately I think the tone of the press release came out to sound like a subsidy that’s really more of a reimbursement of a bonus. And so it doesn’t reflect any shift in our policy. And as we’ve said before, we don’t subsidize handsets.

Elena Shmatova

The amount of reversal of stock-based accruals in this quarter was 43 million.

Jean-Pierre Vandromme

And for Kazakhstan, the crisis started only one year only. And what we’ve seen is that we continued to increase the number of subs. And in reality, the numbers of subs, which were increased, is 30% compared to previous year and the third quarter was really good in terms of new subs. We increased our active base by 10%. And more, it’s continued to be flat, but it trends during full year.

Operator

All right. Our next question comes from Jose Klaxburg [ph] of Black River.

Jose Klaxburg -- Black River Asset Management LLC

Good morning. I wanted basically to ask a question regarding your dividend policy; I think it hasn’t been asked before. What are you forecasting, or what will be the strategy going forward given the current situation?

Alexander Izosimov

Our dividend policy says that we’re supposed to pay minimum 25% of our net income and we do not intend to deviate from that. To that end, we would like to stress that priority for our cash flow allocation would be prepayment of debts, because if we don’t do it, we simply go bankrupt. Then we put dividends and then we put cash flow. That’s how – sorry, CapEx. And that’s how we look at our priorities next year. As far as we feel fairly confident that we’ll meet our debt obligations going into the next year, we intend to recommend the Board to pay the dividends next year as well.

Operator

Our next question comes from Alexander Balakhnin, Goldman Sachs.

Alexander Balakhnin – Goldman Sachs

Hi. I have actually a quick question on the dynamics overall, then ARPU, which is declining for the third sequential quarter. Would you explain the reason for this dynamics? And do you expect some civilization or probably turnaround going forward? And a very quick question on handset and accessories, just wanted to check. I believe you started selling iPhones in the beginning of October. So iPhone sales should not be reflected in the third quarter revenues. Is this some sort of account entry form or something else? Thank you.

Alexander Izosimov

On iPhones, it''s easy; we simply shift iPhones into retailer and therefore recognize good revenue in the quarter – that’s the third quarter. On the ARPUs, the ARPUs between the second and the third quarter actually increased. They went from 16.6 in the first quarter to 16.9 in the second quarter and then dropped to 15.5 in the third quarter, which is exactly the same, what you’ve seen last year. Between Q2 and Q3 last year there was a drop from 16 to 15.2, and then a further increase again in the fourth quarter. So you traditionally see drop in the third quarter because that’s the holiday month in Russia and the way we build for the broadband is on a daily basis. In other words, what happens is if someone goes on holiday, he can put his account on hold. So he will pay 1st or 2nd of August, then put the account on hold, so we don’t recognize the revenue part any more and then reactivate when he comes back on the 26th or something like that. So, it’s the normal seasonal trend that we expected to come back in to normal levels, as we have seen in the fourth quarter of last year.

Operator

All right. Our next question comes from Yaklav Shamin [ph] with UBS.

Yaklav Shamin – UBS

Good afternoon everyone. Two quick questions, please. The total debt that we see on the balance sheet, is this the nominal value or the fair value? And the second question is, talking about your focus on cash generation, what’s your, let’s say, not projections, but view on the repurchase of your debt, especially Euro bonds, because they are trading at much lower levels than the nominal values, and the future M&A activity? Thank you.

Elena Shmatova

In terms of debt, in our situation it’s equal.

Alexander Izosimov

And we have this repurchases of both stock and debt, and decided currently against this for very simply reason, although it looks extremely attractive to buy it back at such a higher discount, which clearly has very little to do probably with the company per se, more with perceived country risk and in general emerging market risk. But on the other hand, when it’s still quite an uncertain situation going forward in terms of availability or financing and so on, that would be a fairly risky proposition for us. As far as M&A is concerned, all of the activity has been suspended in terms of active M&A deal closing. Clearly we will continue to discuss, clearly we will continue to monitor the situation, but we do not expect any major transactions over the next two quarters to be closed.

Operator

Our next question comes from Nick Ivanov, Prudential.

Nick Ivanov – Prudential] Financial]

Hello. Can you please describe the loans granted to your customers? What is the total amount already secured or unsecured? And given the tight liquidity and tight financing, whether in the future you intend to continue granting loans for your customers?

Alexander Izosimov

Could you please clarify your question, because we do not grant any loans explicitly?

Nick Ivanov – Prudential] Financial]

Basically you don’t finance your customer purchases?

Alexander Izosimov

We have – I mean, if you refer to the purchase of the handsets, we are not at all involved in any financing of the hardware. If we are talking about our subscribers, then the bulk of the revenue we received from the prepaid customers, which actually helped a lot our working capital as well, and the post-paid customer represents only 5%. And from that perspective, we have pretty good track record of collecting and therefore it can be considered as unsecured.

Nick Ivanov – Prudential] Financial]

Thank you.

Operator

Our next question comes from Maxim of (inaudible).

Maxim – (Inaudible)

Yes, hello. Congratulations on good third quarter results. I have got a question for you, Elena; I guess again coming back to your hedging strategy. Do I understand correctly that you have several contracts and that they actually have different maturities, they do not all mature in September ’09? So if you could give some more details on what type of maturities are those? And just to make sure I und