Vimpel Q4 2009 Earnings Call Transcript

123jump.com Staff
30 Mar, 2010
New York City

Revenues fell 11.5% to $2.3 billion and net income was $283 million.Consolidated margins improved to more than 49%. OIBDA margin in the 4t qtr was 47.1% which is a substantial improvement compared to 44% OIBDA margin that in the fourth qtr of 2008. Net debt fell by 22% compared to December 2008.

Vimpel-Communications ((VIP))
Q4 2009 Earnings Call Transcript
March 18, 2010 11:30 a.m. ET

Executives

Alexey Subbotin – Investor Relations
Boris Nemsic – Chief Executive Officer
Elena A. Shmatova – Executive Vice President and Chief Financial Officer
Andrey Patoka – Head of B2B Russia

Analysts

Igor Semenov – Deutsche Bank
Stephen Pettyfer – Bank of America/Merrill Lynch
Olga Bystrova – Credit Suisse
William Kirby – Nevsky Capital
Evgeny Golossnoy – Troika Dialog
Ivan Kim – Renaissance Capital
Viktor Klimovich – VTB Capital
Wallace Loonley – Sparrow Limited
Pavel Mamai – Goldman Sachs
Tatiana Boroditskaya – UBS
Herve Drouet – HSBC
Ari Matrimov – Goldman Sachs
Sean Gardiner – Morgan Stanley
Anna Kurbatova – Gazprombank
Nadezhda Golubeva – Unicredit

Presentation

Operator

Good day, everyone and welcome to the VimpelCom Fourth Quarter 2009 Earnings Conference Call. Today''s call is being recorded. At this time, I would like to turn the call over to Alexey Subbotin. Please go ahead.

Alexey Subbotin

Good morning and welcome to VimpelCom''s conference call to discuss the company''s fourth quarter and full year 2009 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 the proposed combination with Kyivstar and its benefits; the company''s 2010 capital expenditures and 3G rollout; the company''s future revenues, margins, pricing, capacity and competitive position; predictions on future market and economic conditions; the company''s development plans in Cambodia and Vietnam and the ability of the company to repay its debts in the future.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in the company''s press release announcing fourth quarter and full year 2009 financial and operating results, the company''s earnings presentation entitled 4Q09 and FY2009 Financial and Operating Results; the company''s annual report on Form 20-F for the year ended December 31, 2008 and other public filings made by the company with the United States Securities and Exchange Commission, each of which are posted on the Company''s website at www.vimpelcom.com.

In addition, the company''s fourth quarter and full year 2009 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 fourth quarter and full year 2009 financial and operating results press release, please contact FD at 212-850-5600 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call, can be downloaded from the VimpelCom website.

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

Boris Nemsic

Thank you very much. Hello, everyone and thank you for joining our conference call today.

Let me introduce the team participating in this call. Here with me are Alexander Torbakhov, General Director; Elena Shmatova, Chief Financial Officer; Dmitry Pleskonos, Head of B2C Russia; Andrey Patoka, Head of B2B Russia; Dmitry Kromsky, Head of CIS Business; Martin Furuseth, Chief Marketing Officer; and Alexey Subbotin, Director of Investor Relations.

On this call, we will discuss our operational and financial results for the fourth quarter and full year 2009. To start with, in 2009 we delivered an excellent set of results, as you can see on the slide. It''s even more remarkable if one remembers the situation just about a year ago.

Indeed, if you look at VimpelCom at the end of 2008, beginning of 2009, the situation was pretty challenging, uncertainty of demand in a volatile macroeconomic environment, sharp ruble devaluation caused by huge ForEx losses, forthcoming integration of fixed line business and major management changes.

To tackle these challenges, we decided to focus on cash generation, cost control and streamlining integration. Today, we see that the situation has definitely improved and the picture looks much better.

Firstly, the demand for our services proved to be robust, with revenues up in all major markets. We see increasing demand for our new products such as mobile and fixed broadband. In general, competitive situation remained challenging but mostly rational.

The new management team contributed substantially to successfully navigating VimpelCom through all challenges at the time of macroeconomic uncertainty. By now, the fixed line business has been successfully integrated. In line with integration, we have restructured our organization and focused on the customer rather than on technology.

Consolidated margins improved to more than 49%. Overall, our focus on cash yielded a record $3.5 billion of operational cash flow and allowed us to substantially decrease debt, maintain sustainable liquidity levels, buy back bonds and pay a dividend. Finally, Telenor and Altimo agreed on the formation of VimpelCom Limited, a move that is consistent with our commitment to maximum shareholder returns.

It was a challenging year and I''m proud of what we have achieved. Let me now pass the floor to Elena, who will present the financial results and describe our financial positions in greater detail.

Elena A. Shmatova

Thank you, Boris. Let me start with explanation why you see our consolidated result in U.S. dollars, while we have switched to rubles in our reports only in the beginning of 2009. As you know, our two strategic shareholders announced plans to combine their holdings into a new company, VimpelCom Limited, which will consolidate VimpelCom and Kyivstar, the largest mobile operator in Ukraine.

In connection with the regulatory filings related to this transaction, we decided to change our reporting currency to U.S. dollars. Nevertheless, in order to show operational performance without exchange rate impact, we will continue to report financial results on country level in local currency, for example, rubles in Russia, tenge in Kazakhstan and so on.

For the full year, in U.S. dollars, we see a 14% decline in consolidated revenues and 12% decline in absolute terms in OIBDA, as a result of exchange rate fluctuation. In 2009, we saw substantial depreciation of local currencies compared to U.S. dollars in all our geographies.

For example, average ruble/dollar exchange rate for the year weakened by 28% compared to 2008. But even with this impact, we managed to improve our consolidated OIBDA margin by 1.1 percentage points, which allowed us to show very strong operational cash flow, the most important parameter in the crisis environment. This improvement came as a result of strong management focus on operational efficiency in all areas.

In the fourth quarter, our performance in U.S. dollars on a consolidated level was solid, with revenue increasing quarter on quarter despite being seasonally affected. OIBDA margin in the fourth quarter was 47.1%, which is a substantial improvement compared to 44% OIBDA margin that we had in the fourth quarter of 2008.

Such results came from our conscious efforts to improve the cost structure through negotiations of better prices, of cost reductions through improvement of business processes and headcount optimization. Net income in the fourth quarter was less than in the third quarter as OIBDA slightly declined but it was much better than the lows we recognized a year ago, as this year impact of exchange rate fluctuations was minimal, while last year we reported over $1 billion FX loss just for the fourth quarter.

Based on improvements in profitability and control our CapEx spending, we managed to maximize our free cash flow and enhance our liquidity position. This was even more impressive when we consider that approximately 86% of the Group OIBDA is generated in Russia and the ruble dropped on average, year over year by more than 28%, as I mentioned before.

We generated U.S. $2.7 billion in free cash flow, which allowed us to comfortably repay the debt due in 2009 and partly repurchase our bonds due in 2011 and ''13. As a result, our net debt decreased by 22% compared to December 2008.

During last year, we reduced our net debt position and improved the currency structure of our debt portfolio. The ruble portion of our total debt increased by 11 percentage points, from 15% to 26%, which makes us less exposed to future currency fluctuations.

Another positive result of 2009 was our ability to build a high cash balance of $1.4 billion at the end of the year, which allowed us to repay in the beginning of this year close to 50% of the total debt due in 2010. Consequently, we are still very comfortable with our debt repayment schedule going forward.

Now, back to Boris.

Boris Nemsic

Thank you, Elena.

In Russia, our core market, the full year 2009 consolidated fixed and mobile revenues increased in ruble terms by almost 10%. The quarterly revenue was down by 4%, affected by seasonality and adverse currency effects in the corporate segment of our fixed line business.

We continue to watch for improvement in macroeconomic indicators, such as unemployment, inflation expectations, level of disposable income and availability of consumer credit, which we believe will trigger growth in demand for our services in both consumer and corporate segments. I am especially proud that we managed to improve efficiency with a full year consolidated fixed and mobile OIBDA margin of 49.3%, well above last year''s level.

After significantly adjusting our capital expenditures in 2009, we plan 15% to 20% CapEx to revenue ratio for 2010, which we believe is the level required to ensure sustainable development of our business in the medium term. In 2010, in Russia, we will invest in 3G rollout, especially Moscow, fixed line broadband and transport infrastructure.

We are investing efficiently and we are confident that we have enough capacity to accommodate the current demand and maintain the high quality of our service. Looking forward, our growth strategy is to increase the share of the high value subscribers, stimulate usage of value-added services and improve subscriber loyalty.

We see voice traffic and increasing demand for value-added services as the key near-term revenue drivers. Development of our broadband business, where we already serve more than two million customers, both in fixed and mobile segments, will start contributing more to the top line. We are confident that our scale and integrated telecom business model give us significant competitive advantage.

Despite the crisis, we managed to substantially increase our mobile subscriber base through 2009. Overall, we added 3.2 million new active subscribers. The quarterly dynamics were affected by seasonality, with less roaming revenues and more aggressive price competition from regional operators in the second half of 2009.

Overall, we maintained our market position in the mobile segment throughout the year and our full year mobile revenues in Russia were up 7% on ruble basis, a very good result for such a turbulent year. In the last quarter of 2009, the VAS revenues in Russia continued to grow and amounted to 29 billion rubles or 17.8% of our total service revenues, compared to 14.6% reported a year ago.

We continue to develop a range of data and content-related services and expect further growth in this area. I want to highlight again that we maintained high mobile OIBDA margin, which was at around 52% over the year. We are confident that our integrated model and rational approach to distribution will help us to maintain a high mobile OIBDA margin going forward.

In the fixed line segment, our revenues in 2009 in ruble terms grew by 50% as compared to 2008 on pro forma basis. The quarterly fixed line revenue increased by 13% year on year reflecting the sustainability of our diverse revenue base. Overall, a slowdown in economic activity and cost-cutting measures taken by our customers negatively affected the business segment revenues. These segment revenues were further impacted by ruble appreciation in the fourth quarter, as part of our contracted business customers are paying to foreign currency.

We continued to show excellent performance in the low margin wholesale segment, resulting from the increasing number of business partners and from transport network integration, while maintaining healthy overall profit margins. We continue to be client focused and managed to retain our corporate client base across all geographies of our operations, where we successfully cross-sell our converted services.

We also aim at being competitive in the small and medium segment, providing a whole range of telecommunication solutions at competitive prices. In the residential segment, our fixed line revenues increased by about 50% year on year, reflecting continued growth of the broadband services and seasonal increase in all legacy products.

The overall fixed line OIBDA margin, although slightly down from the previous quarter, increased on a full year basis from 24.1% to 27.9%. In ruble terms, the full year fixed line OIBDA reached 14.9 billion rubles, a 73.2% increase year on year.

Now, let''s look at our broadband business in greater detail. During the fourth quarter, we continued to add broadband subscribers in both fixed and mobile segments. The total number of our residential broadband customers in Russia reached more than 2.1 million by the end of 2009. By November, we launched our 3G networks in all regions of Russia, as required by our license terms. We received the long awaited permission to launch 3G service in Moscow and are in the process of rolling out the network.

In the fixed line broadband segment, we achieved very good results. The take-up rate increased by almost three percentage points to 12.4%. Our broadband subscribers market share in Russia is 9% and 19% in Moscow. Quarterly revenues increased by 48% year on year, with ruble ARPU up 7% to 425 rubles.

In Moscow, more than 30,000 households have already signed up for our IPTV service. We introduced this product in St. Petersburg in December 2009. Overall, our full year residential broadband revenues increased 151% when compared to 2008.

We see these services becoming one of the key revenue growth drivers in the short and medium term. Now, let''s look at the results of our operations outside of Russia, first Kazakhstan. During the fourth quarter, we continued to observe signs of economic recovery and the resulting positive effect on our quarterly revenues, which increased 8% year on year.

The full year consolidation -- consolidated fixed and mobile revenues amounted to 96.5 billion tenge, almost an 8% increase compared to 2008. By the year-end, we served 6.1m active mobile customers in Kazakhstan. The decrease in our subscriber base in Kazakhstan by 700,000 customers in the fourth quarter of 2009 was primarily due to technical clean-up of the subscriber database, aimed at releasing numbering capacity and optimizing billing maintenance costs.

Consequently, ARPU in local currency terms increased by 3% quarter on quarter, with usage up by 4%. We continue to focus on operational efficiency and cost control, which allowed us to maintain our OIBDA margin well above 50%.

Let''s move to Ukraine. We see some improvement in the Ukrainian economy, as highlighted in the recent report by Standard & Poor''s. With the metal industry returning to the pre-crisis levels and the relative political stability after the recent presidential elections, conditions are in place for an economic recovery in Ukraine. The consolidated full year OIBDA in local currency increased by 118% year on year.

We continue to develop our fixed line business in Ukraine, with quarterly revenues up 37% when compared to the last quarter 2008. We considerably increased our active subscriber base in residential broadband to about 110,000, 56% more than the previous quarter, while year-on-year growth comprised more than 350%.

Let''s look now at our Armenian operation. In Armenia, in the fourth quarter of 2009, we increased our mobile subscriber base by 9% quarter on quarter, despite the increasing competitive pressure.

Our focus on cost control and operational efficiencies increased our full year consolidated OIBDA margin by 1.8 percentage points, to 50.4% in 2009, compared to 2008. During the fourth quarter of 2009, we continued to add broadband subscribers to our base that increased by almost 45% quarter on quarter.

In Uzbekistan, our quarterly operational results reflect aggressive price competition, beginning from the first half of the year. We responded by launching more competitive tariffs. Comparing full year results in 2008, our active subscriber base remained essentially flat, usage increased by 9.1% and ARPU declined by 27% in U.S. dollar terms, which is our operational currency there.

The competitive situation in Uzbekistan remains challenging. We are working on new initiatives to improve our operational performance.

Our operations in Tajikistan, Georgia, remain on track, demonstrating strong positive dynamics. In Tajikistan, we delivered strong annual OIBDA growth of 61%. In Georgia, we continued to expand our active subscriber base, which increased by 17% quarter on quarter. Our full year local currency revenues were up 106% when compared to the previous year.

Overall, our CIS operations continued to deliver good results in the current macroeconomic environment. Now, let''s look at our newly launched operation in South East Asia. In Cambodia, we successfully continue development of our operations. We achieved natural coverage of more than 70% of the population, with our services available in the 18 largest provinces of the country.

During the fourth quarter of 2009, we made good progress in enhancing the gross margin in Cambodia, which reached positive territory. Overall, the business development in Cambodia is on schedule and we are satisfied with the progress we achieved to date.

In our Vietnamese joint venture, we are actively expanding our operations. Six months after the network launch in Vietnam, our networks cover approximately 32% of the population, with presence in 40 provinces. We have expanded our sales network to over 20,000 outlets.

Our brand is warmly welcomed by subscribers and in Vietnam our advertising continues to collect awards. Our marketing campaign was nominated for awards in seven categories of the Golden Bell awards and won two of them.

We expect that increased network coverage, coupled with our proactive marketing activities and further development of distribution channels, will help us to expand the customer base in 2010. To sum it up, 2009 was a good year for us. We proved once again that we can manage our business in an extremely volatile and uncertain environment and achieve good results.

We weathered the storm well and now are moving forward. Strategically, all the puzzle pieces are in place. VimpelCom was the first Russian telecom operator that started to transform itself from a pure mobile into integrated player and expanded beyond its home market of Russian and CIS.

We see VimpelCom is ahead of its competitors in terms of building a robust integrated player. We are well positioned to take advantage of the changes in the telecom landscape and we''ll benefit from the increased level of macroeconomic stability. Presently, VimpelCom''s position is very strong and I sincerely believe that the combination of our operations with Kyivstar will take us to the next level and create a true emerging market leader.

Thank you for your attention and now let me open the floor for questions.

Question-and-Answer Session

Operator

A question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. We will proceed in the order you signal and take as many questions as time permits. Once again, please press star one on your touchtone telephone at this time and we’ll pause for just a moment to assemble the queue. And we''ll take our first question today from Igor Semenov with Deutsche Bank.

Igor Semenov – Deutsche Bank

Thank you. I have a question. Can you comment, please, on the competitive dynamics? Clearly, in the fourth quarter the decline in the average price per minute was reasonably substantial, was down 6% quarter on quarter. We saw the same trend at MegaFon. So could you comment on the competitive dynamics, what is driving this decline in the average price per minute and what should we assume -- what are you seeing for the beginning of this year? Thank you very much.

Boris Nemsic

Thank you, Igor. The fourth quarter APPM is, as you said, declined 6%, but definitely you have also to take in account the call mix. The fourth quarter traditionally has no roaming and much less long distance calls, so the national roaming also is much lower. So it''s seasonally normal that the APPM in this period goes down. We expect that the APPM in the first quarter of this year will be either stabilized or slightly going up.

Igor Semenov – Deutsche Bank

Okay. Thanks.

Operator

Next we''ll go to Stephen Pettyfer, with Banc of America.

Stephen Pettyfer – Bank of America/Merrill Lynch

Yes. Thanks. I''m wondering if you could please give us an update on the merger approval. Thank you.

Boris Nemsic

Yes. It is fresh news, crossed the wires today. We welcome this approval. Frankly speaking, we do not want to comment the details of it, which will be worked out in the next days. But definitely one of the major boxes is ticked positively, so we are really happy that this approval in Ukraine took place now.

Stephen Pettyfer – Bank of America/Merrill Lynch

Okay. If I could ask a follow-up, please, just on your Russian cost structure. You kept advertising and marketing as a much lower percentage of sales compared to last year, although you have seen that -- the pick-up in Q4, as usual. I just wonder if you could give us some thoughts about how you see that progressing into 2010.

Unidentified Speaker

Yes. As you will have seen, we have had a reduction in our marketing spending from 2008 to 2009. On the other hand, we consider ourselves to be among the most efficient media buyers in the Russian market. And that, combined with a general deflation of the media market of more than 10%, has led to that we have maintained our share of voice in this period, not only in the national and local television but also in out-of-home and in the Internet. We see our spending stable throughout 2010. But if you look at the prognosed deflation going into 2010, we think we can increase our share of voice, not only in local and national television but also in the Internet and our strategy will try to keep our out-of-home on a constant level.

Stephen Pettyfer – Bank of America/Merrill Lynch

So less than 2% of sales going forward?

Unidentified Speaker

Excuse me?

Stephen Pettyfer – Bank of America/Merrill Lynch

Sorry. So was that -- just to be clear, so that going forward that to me came out at --

Unidentified Speaker

Yes. You will see the spending level continuing into 2010, yes.

Stephen Pettyfer – Bank of America/Merrill Lynch

Thank you.

Operator

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

Olga Bystrova – Credit Suisse

Yes. Good afternoon. In your opening speech, you mentioned that you hope for macro improvements to boost -- to improve demand for services, et cetera. Can you comment on this, when the slide end, in light of the fourth quarter revenues in Russia being basically flat year on year? What do you see -- what recovery do you see happening so far into the first quarter and into 2010? Thank you very much.

Boris Nemsic

Yes. Thank you. This is one of the important questions. There are two views on this. On one side there are little signs of true recovery but good news, we definitely do not see any deterioration of the economy any more. On the second part, there is a notice that the Ministry of Economic Development forecast 3% to 4% GDP growth in 2010. And on other side, we all know that telecoms are using, let''s say, this as a basis for the growth, but they are outperforming this growth on regular terms. The main point of the growth is the timing of recovery, will this happen the second quarter or third quarter and this is actually what is defining our growth outlook. But we are very positive that this growth will come.

Olga Bystrova – Credit Suisse

But basically, given what you''re saying, it looks like maybe first quarter recovery is not that evident yet. Is that the correct understanding of the situation?

Boris Nemsic

There is a year-over-year growth which is okay, definitely, but the wanted big recovery I do not place it in the first quarter. We''ll more wait for it for the second or third quarter.

Olga Bystrova – Credit Suisse

Okay. Thank you very much.

Operator

And we''ll take our next question from William Kirby with Nevsky Capital.

William Kirby – Nevsky Capital

Thank you. Yes. Just on the associate income line or associate losses, could we get a breakdown between how that splits between Euroset and the Vietnamese operation, please?

Elena A. Shmatova

Well, actually, Euroset in the fourth quarter generated gain, income and Vietnam of course at the start of operations generated more. So in Euroset, we see approximately 5 million gain, of our portion of this and on Vietnam approximately 15 million loss.

William Kirby – Nevsky Capital

Okay. Great. Thanks very much.

Operator

And next we''ll go to Evgeny Golossnoy with Troika.

Evgeny Golossnoy – Troika Dialog

Yes, good evening. My first question is really on roaming. What is the percentage of roaming of total revenues in 2009? What''s roughly the margin -- EBITDA margin on this service? And potentially, if Anti-Monopoly Ministry orders you to decrease international roaming charges, what could be the magnitude of this decrease for you and possibly the implications for the margin? And then the second question is really on, there was some reports in the press that Telecom Ministry has started some sort of investigation or started to look at how the company complies with different telecom laws in the different regions. Do you see that being the regular check and how often this is conducted or it''s -- and what could be actually the reason for it and the outcome?

Unidentified Speaker

Let''s start from the second part of the question, actually. It can be seen from the market but we are in the permanent communication with the Ministry and regulations all over the country and this is just the permanent process. And actually, regulation is checking all those permissions for frequencies and so on and so forth. So we can''t say that there is a significant increase this year. So actually it''s absolutely work in process, I would say, routine, day to day routine.

Evgeny Golossnoy – Troika Dialog

Okay. Thanks.

Operator

And we''ll take our next question from Ivan Kim from Renaissance.

Boris Nemsic

We have part of the first question here to answer.

Evgeny Golossnoy – Troika Dialog

Yes, roaming, yes.

Andrey Patoka

Good evening, morning. This is Andrey Patoka. Coming next to the question about the possible effects of -- the possible changes in the roaming rates. Well, first of all, we don''t see these changes as inevitable and see it as imminent because we are now discussing with the Anti-Monopoly Administration for all the regions how these prices are structured.

On the other hand, actually, with the current (inaudible) issues of the roaming services, they''re approximately three times lower than what we have with the regular service. After that (inaudible) the overall interest from the revenues are going to be substantial, since the older roaming services constitute less than 10% of the overall revenues that we have.

Evgeny Golossnoy – Troika Dialog

Okay. Thanks.

Operator

Next we''ll go to Ivan Kim with Renaissance Capital.

Ivan Kim – Renaissance Capital

Yes, hi. A couple of questions for you, if I may. So the first one, could you please update us on the Ukrainian markets and what''s happening there, what''s happening with URS specifically? So we''ve seen a 28% ARPU decline quarter on quarter, in dollar terms, for the year, so versus, for instance, the major competitor Astelit increasing its ARPU by 5%. So what was the reason for this performance? So, on the second one, you mentioned that the regional players in Russia in the mobile sector are aggressive on pricing -- were aggressive on pricing in the second half of 2009. So I''m just wondering whether it continued into 2010 and what kind of pricing strategy do you expect from regional players this year. Thank you.

Unidentified Speaker

About the Ukrainian market, in this year we just spotted all operators, practically all operators, actually MTS and us, made some zero tariffs on that tariff. And there''s some game of course to make some influence on APPM and the dynamic of APPM and ARPU. Your question is about the decline in ARPU in our operation in the fourth quarter. The explanation is that the various ARPU in URS is very seasonal affected. And in the first quarter, where we have a substantial part of roaming revenues, we have a much higher ARPU in the first quarter than in the fourth quarter. That''s (inaudible).

Ivan Kim – Renaissance Capital

But basically your major competitor Astelit should have the same seasonality, I guess, but they increased their ARPU by 5%.

Unidentified Speaker

No, we''re talking that exactly the seasonal is summer seasonal, because where like the line operators there and a lot of Russian people coming to Ukraine and using our SIM card and long distance calls, it gives really positive effect to ARPU exactly in the second and the third quarters, is what we see. And again, one additional comment here. ForEx there and decline of local currency was much bigger than in many other countries.

Unidentified Speaker

One comment, there was a question about the regional players and of course our APPM is an average across all -- more than 80 branches in Russia, where the competitive situation is different. And of course our tariff portfolio on sale in these branches is also different, to match this competitive situation. So in the regions where we have aggressive entrants we have the tariffs on sale but that counter that and in other more mature regions we have another portfolio. And we don''t see the mix of this changing dramatically in 2010. And overall the market is disciplined and we continue to exercise a pricing policy aimed at revenue, market share and profitability and we think we will be successful at that in 2010 as well.

Ivan Kim – Renaissance Capital

Okay. Thank you.

Operator

And our next question today comes from Viktor Klimovich with VTB Capital.

Viktor Klimovich – VTB Capital

Good evening. I have one question and one follow-up question, if I may. First of all, probably you know that MegaFon they stated that their CapEx will be at the same level as 2009, so it''s around 52 billion rubles. My calculation of your guidance, 15% to 20%, I don''t have exact figures with me, but it looks much lower than this, especially if I take just a part of this CapEx for Russian mobile business. Can you please elaborate on that? And I will have a follow-up question then. Thank you.

Boris Nemsic

Yes. Thank you. Firstly, we have a pretty broad span between 15% and 20% which we announced, which can be adapted on underneath. Secondly, we cannot comment what is the driving force for our competition. We think that we have, especially this year, more than enough money to invest and we will invest efficiently. But really, on the back of the envelope, I don''t see big difference between their numbers and our numbers.

Viktor Klimovich – VTB Capital

Well, but anyway, if you spend, let''s say -- if it''s let''s say even 20%, then roughly, I mean, you don''t have guidance for revenues, but roughly it may be up to $ 2 billion or something like that. You have fixed line business, you need to roll out your fixed line operations. You have other countries, including South East Asia but they spend nearly the same amount of cash just in Russia. And probably you know that they stated that -- officially that most of this CapEx will go to 3G network. So maybe you can comment on what are your plans in 3G network rollout in Russia.

Boris Nemsic

Yeah, I understand your question. First, there is a big difference between these two operators. We are already integrated operator with a very strong transport network which is our own. You remember, two years ago we paid some amount for this. And we have a really good transport network which other operators have to catch up, either through rollouts, which I suppose is the case you are referring to, or buying other fixed line operators. So we already did this by acquisition. On the 3G rollout, we have actually a rollout. We have been the first Russian operator who covers all the regions. We have, of course, different operators have different rollout strategies, but we are definitely positive that we will invest on the right place in the right moment. We''re already, as I said, in all 82 regions. So that''s why I think that from the pure radio part on 3G we are definitely similar. We have already advantage on the transport and core network.

Viktor Klimovich – VTB Capital
But if -- maybe I''m not correct, but the last figure I had in my mind on your network was around 15,000 kilometers. Is it correct figure or not?

Andrey Patoka

This is Andrey Patoka. The total length of our transport network is 70,000 kilometers, including the long distance intercity channels, global and local connections.

Viktor Klimovich – VTB Capital

17 or --?

Andrey Patoka

Seven-zero.

Viktor Klimovich – VTB Capital

Seven-zero, 70,000 kilometers.

Andrey Patoka

Yes.

Viktor Klimovich – VTB Capital

Okay. I see. Yes, that makes a difference.

Andrey Patoka

It''s substantial.

Viktor Klimovich – VTB Capital

Yeah, sure. No question then here. And my follow-up question regarding pricing. So there were already two questions regarding that but can you please specify, do you intend -- in 2010 do you intend to have some pricing adjustment -- upward adjustments, which you had in the beginning of 2009, for example? Do you see this as possible for the market?

Unidentified Speaker

Yeah. We think it might be possible for the market because the market has exercised some very good pricing discipline throughout the year. We actually saw from the three big ones some price increase for the first time in 2009 and we think that might be possible in 2010.

Viktor Klimovich – VTB Capital

And how do you see the potential for this price increase?

Unidentified Speaker

I would rather not make any forecasts on that.

Viktor Klimovich – VTB Capital

Okay. Okay, fair enough. Thank you.

Operator

And next we''ll go to Wallace Loonley [ph] with Sparrow Limited [ph].

Wallace Loonley – Sparrow Limited

Hello. Thank you for your presentation. My question is related to the corporate transaction of the conversion of the ADS to DR. What will be the operational, administration and financial implications of that transaction?

Boris Nemsic

Sorry. It seems it was acoustically very, very difficult to understand. Can you repeat, please, what kind of transaction you exactly describe?

Wallace Loonley – Sparrow Limited

Yes. My question was related to the operational, financial and market implications of the company converting from ADR to DR. Can you hear me?

Boris Nemsic

If we understood correctly, that you''re asking about the transaction between joining the VimpelCom JSC as of today with Kyivstar, forming VimpelCom Limited. Is it correct?

Wallace Loonley – Sparrow Limited

Yes. And it''s also converting the ADR into DR.

Boris Nemsic

If I''m correct that I understood what you mean, there is a special website which is www.vimpelcomlimited.com where you can find the most up to date information about the technicalities which have to be done in this case.

Wallace Loonley – Sparrow Limited

All right. Thank you.

Boris Nemsic

Thanks.

Operator

And our next question today comes from Pavel Mamai with Goldman Sachs. Pavel Mamai with Goldman Sachs, your line is open.

Pavel Mamai – Goldman Sachs

I''m sorry. Hey, hello, good evening. I wanted to ask a question about the possible implications for VimpelCom''s debt level from the merger. I mean, it''s a bit far fetched, but there is a chance that VimpelCom Ltd. will have to make a cash offer to minority shareholders of VimpelCom and would mean a reasonably large cash amount. Would you anticipate any impact on VimpelCom''s debt level if this cash offer will have to be made?

Boris Nemsic

Sorry, but we are not commenting on this. We are going to a road show with VimpelCom Limited management the next two weeks, so we''ll place this question to them.

Pavel Mamai – Goldman Sachs

Thank you very much. Then, can I do a follow-up question which is unrelated in this case?

Boris Nemsic

Of course, because we did not answer the first one.

Pavel Mamai – Goldman Sachs

In the cash flow statement, there is an item in the financing of $489 million, which reads as investments in deposits. I wasn''t really able to reconcile it with any line of the balance sheet. Could you comment what this is?

Elena A. Shmatova

Yes. This is included into other current assets in the balance sheet because from that point of view deposits are treated as current assets.

Pavel Mamai – Goldman Sachs

But the other current assets just increased by $260 million something.

Elena A. Shmatova

Yes, because there was other lines. Of course, the other (inaudible) expenses since it''s not only of this but also advances to suppliers, to pay tax and so on. So that was the full explanation.

Pavel Mamai – Goldman Sachs

Thank you. So those are bank deposits, basically, long and short-term bank deposits?

Elena A. Shmatova

Yes.

Pavel Mamai – Goldman Sachs

Thank you very much.

Operator

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

Tatiana Boroditskaya – UBS

Good evening. Thank you very much for your presentation. Can you please comment on churn levels for 2009 and on any plans for Eurobond issuance? Thank you.

Unidentified Speaker

In which country?

Tatiana Boroditskaya – UBS

Churn level on the consolidated level.

Unidentified Speaker

On the consolidated level, our churn -- quarter churn is 15%, consolidated. And what we assume is that in general we haven''t seen any progress in terms of the churn will decrease dramatically, because the competitive situations show that a lot of spinners moving from one operator to another operator.

Boris Nemsic

To be clear, it''s not 15% of the stable customer base. This churn figure is generated most by spinners who are changing the SIM card either between the same operator or different operators within a short period of time, meaning three months or more, three months or four months. So that''s how this huge number comes up.

Tatiana Boroditskaya – UBS

And then on Eurobond issuance?

Boris Nemsic

What''s the question on Eurobonds?

Tatiana Boroditskaya – UBS

Yes. Can you please comment on your plans to raise debt in international markets such as Eurobonds?

Elena A. Shmatova

Well, actually, we''re always saying that if we need additional funding then we''re looking on any possible terms of how we can do it more efficiently, but we do not have specific plans to do this or that. It will all depend on the conditions, how much cash, for example, we will need, if needed at all and then what is the most efficient instrument we will go for.

Tatiana Boroditskaya – UBS

So would that mean you do not plan to issue anything, say, in 2010 or it''s still not clear?

Elena A. Shmatova

No. It doesn''t mean. So we are flexible in this regard. So I can tell you that, for example, we -- currently we registered a ruble bond issuance for 20 billion ruble, so that''s what we have currently on our table.

Tatiana Boroditskaya – UBS

All right. Thank you.

Operator

And we''ll take our next question from Herve Drouet with HSBC Bank.

Herve Drouet – HSBC

Yes. Good afternoon. I''ve got two questions. My first question is on CapEx again. I was wondering if you can give us a breakup where you would like to spend CapEx in 2010. You mentioned 3G rollout, you mentioned fixed line broadband, you mentioned transportation and backbone. I don''t know, percentage breakdown will be helpful and also maybe some comments on what for you, is the most critical in terms of CapEx investment. That would be the first question. The second question is related indirectly to VimpelCom Limited. Firstly, I was wondering if you can give us a bit more detail on the management that will be at VimpelCom Limited. And also, if you can also tell us from the Ukrainian regulator which give his approval, is there any condition on the spectrum, i.e. would you need to give back some frequency to the regulator in Ukraine? So that would be very helpful. Thank you.

Boris Nemsic

Thank you. About the Ukrainian regulator, as I said, we got the general terms but we do not see any specific signs for some limitations. So we cannot say more on that again because it''s actually today. About VimpelCom Limited management structure, the CEO is clear. It''s Alexander Izosimov. And I think that the rest he will announce in a due time. On CapEx, we do not give a breakup on the kind of CapEx or amount of CapEx in particular lines of business. Your question about most critical CapEx, actually, critical is timing in some areas, but I would focus mostly on long-term investments like transport networks.

Transport networks are definitely the key for the success of all data services equally, is it on 3G wireless based or FTTB or also for data, large data networks, regional data networks for operations in Russia or for transit through the CIS countries and further down to China. So we are definitely judging project by project, but the long-term investments are mostly focused on the transport network side. On FTTB, we are planning to enter also new markets, new cities, roughly 1.5 million households which we want to access this year.

But again, it''s not only about accessing the households, reaching the building; it''s much more about accessing the customer, so coming into his flat. And it''s so that we are focused very much on the take-up rate. And to achieve this take-up rate, of course you need some CapEx for ducts and all other things. The 3G CapEx is a, I would say, pretty classical case.

We are all aware that Russia is very late with 3G. Actually, the rollout started 2001. It''s just nine years ago. So there is enough experience and fortunately enough also much better prices than nine years ago, so this is not a critical part.

Herve Drouet – HSBC

And in term of, let''s say, percentage wise, you would say what, two-thirds backbone, transportation, maybe and then let''s say 15% each for FTTB, broadband and 3G? Is it…

Boris Nemsic

No, no, we are not putting goals into there. It''s just fiber. No, this is not the case. Firstly, of course you have some kind of maintenance CapEx on 2G, which you have to maintain. We have roughly 24,000 sites already deployed, which have a large maintenance CapEx, having more than 950 [ph] node -- core nodes in the network. So this is a part that you have to cover also. But it''s far away from the percentage you mention. But we are not breaking it out.

Herve Drouet – HSBC

Okay. All right. And any -- you don''t have any more information on Ukraine, if you have to give back your license or any frequencies that go with it?

Boris Nemsic

Our assumption is that it''s not the case, but I cannot confirm it 100% now.

Herve Drouet – HSBC

Okay. Thank you very much.

Boris Nemsic

Thank you.

Operator

And our next question today comes from Ari Matrimov [ph] with Goldman Sachs.

Ari Matrimov – Goldman Sachs

Hello. I think most of my questions have been answered earlier but I have one particularly relating to the debt composition by currency. You''ve mentioned that the ruble component has increased to 26% in the fourth quarter. What is your long-term target of U.S. dollars versus euro versus ruble debt? That''s the first question.

Elena A. Shmatova

Well, actually, our intention is to balance our debt portfolio to the ability of the company to generate cash in certain currencies. And of course, if we are generating majority of our cash in rubles, that means that majority of the debt should be linked to rubles, so not to have that unfortunate FX exposure which we saw in the past.

Now, we do not have kind of any specific targets like 100% or 70%, but definitely we are moving in the direction to make the debt structure more balanced to the cash flow structure in terms of currency.

Ari Matrimov – Goldman Sachs

Okay. Thank you very much. And then the second question is that we''ve noticed that the inventory has come down from $143 million to $62 million. It''s a relatively small item, but I''m just curious in terms of what happened throughout the year that your inventory is so much lower.

Elena A. Shmatova

Well, actually, end of 2008 we have a pretty high balance of inventory of iPhones and so now it became more normal.

Ari Matrimov – Goldman Sachs

Thank you very much.

Operator

And our next question comes from Sean Gardiner with Morgan Stanley.

Sean Gardiner – Morgan Stanley

Hi. Yes, thank you. I was wondering, you talked earlier about the low cost inflation on advertising and marketing. Can you talk just about some of the other cost inflation for 2010, whether it be on your rental or your employee side? Thanks.

Unidentified Speaker

Actually, regarding the cost inflation, our estimate is very modest. We don''t expect a significant inflation for any of our cost units. Actually, Martin already commented on the actually negative inflation in advertising. And for the rest of the lines in our cost structure, actually these figures are negligible, I would say.

Sean Gardiner – Morgan Stanley

Okay. And then, maybe just on churn, which you mentioned earlier, what sort of proactive steps do you think the industry can take this year to get this number down? I think there''s been talk of 100 million SIMs a year going into the market. Do you think that is something that the industry can work on or is this a longer-term project in Russia?

Boris Nemsic

That''s a very good question. Russia is to 95%, 97% a prepaid market and this is a clear consequence of this. On the long term, I think definitely the structure of prepaid to postpaid will change, but really this is middle to long term, I would say more long term, task. Of course, it''s always -- you have always some kind of opportunity seekers, which are using these opportunities.

On other side, last year, due to the economic crisis, a lot of people traveling around in the big country of Russia, instead of using their home phone making roaming calls they bought a local card and used it during the two, three weeks being away from their home town. So this is a cost optimization which is normal but this is technically the same churn.

Sean Gardiner – Morgan Stanley

Do you think that you haven''t actually achieved some of the synergies you could have got from Euroset or is just the -- because you would think that controlling some of the distribution channel you would be able to reduce this churn?

Boris Nemsic

This is an ongoing task, which we of course are performing. And we can improve this, definitely.

Sean Gardiner – Morgan Stanley

Thank you.

Operator

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

Anna Kurbatova – Gazprombank

Good evening. My first question is about Kazakhstan. Do you see any change in the competitive situation since Tele2 acquired the local operator, the number three operator? And my second question is around MSI and that I understand that it should be addressed to VimpelCom Ltd. management but nevertheless, are there any possibilities for the company to address the issue and remain within MSI because probably it could be possible to make some technical listing or something? Any comments on this, please?

Unidentified Speaker

For Kazakhstan, now there are two big operators and the third small operator which was acquired by Tele2. And this information we''ve got, the deal is over yesterday. Of course, we expect some more aggressive competitive situation in terms of pricing in Kazakhstan, but we are well prepared to meet Tele2 in Kazakhstan.

Boris Nemsic

Concerning the index issues, actually the announcement was yesterday but this was a very well known factor, if this will happen that we can found VimpelCom Ltd. and it will be listed, that it will be out of MSI index. But it will be in some other indices, so I think this is just a normal transformation process which everybody expected.

Anna Kurbatova – Gazprombank

Thank you.

Operator

And we will now take our last three questions. We''ll go next to Igor Semenov with Deutsche Bank.

Igor Semenov – Deutsche Bank

Yes, hi. Thank you very much. I just wanted to ask a question about the estimates published in the prospectus about a month ago. The revenue for 2010 assumed about 10% growth year on year, about $9.6 billion, whereas CapEx is about $2.1 billion, so a 22% CapEx to sales ratio. I guess you''re pretty clearly saying that CapEx should be between 15% to 20%, but would you say that 10% growth should be reasonable to expect in 2010? Thank you.

Boris Nemsic

The business plans used for the fairness opinion are documents designed for business planning and budgeting purposes, so it is not intended for public disclosure. But -- so it should be not confused with the guidance documents. But on other side, definitely, people doing this looked very carefully what is the potential of the market. So again, we are trying to distinguish these two approaches although it''s really your judgment how to match these two.

Igor Semenov – Deutsche Bank

So you would not be -- you could not say that your guidance will be 10% growth this year?

Boris Nemsic

We are not giving this kind of guidance but it''s definitely something which we also know. And so it''s very difficult to explain some documents like this, because again it''s -- these are two things which down the road have to match.

Igor Semenov – Deutsche Bank

Right. Okay. Thank you.

Operator

Next, we''ll go to Ivan Kim with Renaissance Capital.

Ivan Kim – Renaissance Capital

Just a quick follow-up on the Asian operations. So what kind of trends are we seeing there, because the subscriber base increased but the revenues didn''t? So what was happening to the ARPU there? Thank you.

Unidentified Speaker

Speaking about Cambodia, we increased the subscriber figures, so we now feel comfortable to report the three months active, which is our classic definition. But of course, everybody''s aware that in Asia, especially in these booming countries, there is a high volatility on -- based on promotions and so on. But we feel that this will go forward. Of course, we had in the previous quarters a very high amount of initial loads and charges on the SIM cards, due to the market entry. What we have now is a much more stable situation, much more healthy revenues and revenues which are based on ARPUs who are increasing. So we have really to distinguish the first and the second quarter of operation, where we had really to invest a lot into coming into the market and now we are really going into real operation and the real revenues, real ARPUs going up.

Ivan Kim – Renaissance Capital

Okay. Thank you.

Operator

Next, we''ll go to Nadezhda Golubeva with Unicredit.

Nadezhda Golubeva – Unicredit

Good afternoon. Could you please comment on what''s shown as redeemable non-controlling interest on your balance sheet in the liability part? So I didn''t see it before. And what''s like the difference between the non-controlling interest of just $2 million? Thanks.

Elena A. Shmatova

Well, redeemable non-controlling interest is kind of a new classification of the proportion which we have with the partner in Kazakhstan. So that''s the line which appeared this time. And Nadezhda, what was your next question?

Nadezhda Golubeva – Unicredit

No, I think I''ll be satisfied with this one but I have a follow-up. So I do understand it correctly that you have a liability under this put option, yes, it''s like a strike price, yes?

Elena A. Shmatova

It''s not liability (inaudible).

Nadezhda Golubeva – Unicredit

Obligation, yes?

Elena A. Shmatova

No, the equity line.

Nadezhda Golubeva – Unicredit

Excuse me. I didn''t hear it very well. Do I understand it correctly that this is the strike price of the option which the minority party in Kazakhstan holds?

Elena A. Shmatova

Yes. We are increasing to that fair value.

Nadezhda Golubeva – Unicredit

Okay. And the non-controlling interest of $2 million, this is the rest, yes?

Elena A. Shmatova

No. Non-controlling interest has a different composition and I can send you it by email.

Nadezhda Golubeva – Unicredit

Okay. Thank you very much.

Operator

And that will conclude our question and answer session. I will now turn the call back over to Boris Nemsic for any additional or closing remarks.

Boris Nemsic

Thank you very much for participating in this call. If you have more questions, please contact our Investor Relations Department and we''re happy to provide you with additional information. Have a nice day. Goodbye.

Operator

And that does conclude today''s conference call. Thank you, everyone, for your participation. You may now disconnect.