Mar 18, 2010
Executives
Mateo Millett – FD Ashton Partners Boris Nemsic – CEO Elena Shmatova – CFO Andrey Patoka – Head, B2B Russia
Analyst
Igor Semenov – Deutsche Bank Steven Pettyfer – Bank of America Olga Bystrova – Credit Suisse William Kirby – Nevsky Capital Yevgeny Golossnoi – Troika Ivan Kim – Renaissance Capital Victor Klimovich – VTB Capital Wallace Wormley – OSPARA Limited Pavel Momine (ph) – Goldman Sachs Tatiana Boroditskaya – UBS Herve Drouet – HSBC Bank Darima Tumur – Goldman Sachs Sean Gardiner – Morgan Stanley Anna Carvatoba (ph) – (inaudible) Bank Nadia Golubeva – Unicredit
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 Alex (inaudible). Please go ahead.
Unidentified Company Representative
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 31st, 2008, 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 fourth quarter and full-year 2008 financial and operating results press release and Form 20-F are posted on the Securities and Exchange Commission’s website at 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 contract FD at 212-850-5600 and it will be forwarded to you. In addition, the press release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented on this conference call, can be downloaded from the VimpelCom website.
At this time, I would like to turn the call over to 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 of 2009. To start with, in 2009, we delivered an excellent set of results as you can on the slide.
It’s even more remarkable if one remembers the situation just about a year-ago. In these, if you look at VimpelCom at the end of 2008, beginning of 2009, the situation was pretty challenging.
The 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 prove 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 remains 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 structured our organization and focus on the customer rather than on technology. Consolidated margin improved to more than 49%.
Overall, our focus on cash yielded a record $3.5 billion of operational cash flow and allows us to substantially decrease debt, maintain sustainable equity levels, buy back bonds and pay a dividend. Finally, Telenor and Altimo agreed on the formation of the VimpelCom Limited, a move that is consistent with our commitment to maximum shareholder returns.
It was a challenging year and I am 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 Shmatova
Thank you, Boris. Let me start with explanation why you will see our consolidated results in US dollars while we have reached the Rubles in our reports only in the beginning of 2009.
As we now our (inaudible) shareholders announced the plan to combine a holding into new company VimpelCom Limited, which will consolidate VimpelCom and Kyivstar, the largest mobile operator in Ukraine in connection with the (regular group) filings related to the transaction, we decided to change our reporting (inaudible). Nevertheless, in order to show operational performance without exchange rate impact, we will continue to report financial results on country levels in local currency.
For example, Rubles in Russia, Tenge in Kazakhstan and so on. For the full-year, in US 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 US dollars in all of our geography. 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 US dollars on a consolidated level was fullest with revenue increasing quarter-on-quarter despite being seasonally affected. OIBDA margin in the fourth quarter was 47.1% which is a potential 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 on better prices or cost reductions to improvements of business processes and headcount optimization. Net income in the fourth quarter was less than the third quarter as OIBDA slightly declined, but it was much better than the loss 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 over CapEx spendings, we managed to maximize our free cash flow and intense our liquidity position. This was the only one impresses when we consider that approximately 86% of the group IOBDA is generated in Russia and the Ruble dropped on average year-over-year by more than 28% as I mentioned before.
We generated $2.7 billion US dollars in free cash flow which allowed us to comfortably repay the debt due in 2009 and partly repurchase our bonds due in 2011 and 2015. 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 the future currency fluctuation.
Another positive result of 2009 was our ability to deal 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 share deal 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 the 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 continued to watch for improvement in market economic indicators such as unemployment, inflation expectations, the level of disposable income, and the 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 the 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 in 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, accumulate users of value-added services and improve subscriber loyalty. We see voice traffic and increase in demand for value-added services as the key near-term revenue (divers).
Development of our broadband business where we already serve more than 2 million customers both in fixed and mobile segments will start contributing more to the top line. We are confident that our scale in the integrated telephone business model give us a significant competitive advantage.
Despite the crisis, we managed to substantially increase our mobile subscriber base to 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 the Ruble basis, a very good result for such a turbulent year.
In the last quarter of 2009, the vast 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 consolidated 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 rationale approach to distribution will help us to maintain a high mobile OIBDA margin going forward.
In the fixed line segments, our revenues in 2009 in Rubles 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 the economic activity and cost-cutting measures taken by our customers negatively affected the business segment’s revenue. This segment’s revenues are further impacted by Ruble appreciation in the fourth quarter as part of our contracted business customers affected to foreign currency.
We continue to show excellent performance in the lower margin of wholesale segment this 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 manage to retain our corporate client base across all geographies of our operations and we successfully cross sell our convergence services.
We also aim as being competitive in the small and medium segment providing the whole range of telecommunication solutions at competitive prices. In the residential segment, our fixed line revenues increased by about 50% year-on-year, reflecting continuous 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 the Ruble terms, the full-year fixed line OIBDA reached 14.9% below 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 now 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 3 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 Ruble. 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 operations outside of Russia. First Kazakhstan.
During the fourth quarter, we continued to observe signs of economic recovery and the resulting positive effects 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 6.1 million 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 cleanup of the subscriber database aimed at releasing numbering capacity and optimizing billing maintenance costs.
Consequently, ARPU and local currency terms increased by 3% quarter-on-quarter with usage up by 4%. We continued to focus on operational efficiency and cost control which allows us to maintain our OIBDA margin well above 50%.
Let’s move to Ukraine. We see some improvements in the Ukrainian economy as highlighted in the recent report by Standard & Poor’s.
With the metro 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 broadbands to about 110,000, 56% more than the previous quarter, while year-on-year growth comprised more than 350%.
Let’s look now to our Armenian operation. In Armenia, in the fourth quarter of 2009, we increased our mobile subscriber base by 9% quarter-on-quarter, despite the increase in 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 which increased by almost 45% quarter-on-quarter.
In Uzbekistan, our quarter 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 US 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 and 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 Southeast Asia. In Cambodia, we successfully continued development of our operations.
We achieved network 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 a positive territory.
Overall, the business development in Cambodia is on schedule and we are satisfied with the progress we achieve today. In (otherwise), Vietnamese joint venture, we are rapidly 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 continued to collect the awards. Our marketing campaign was nominated for awards in seven categories of the Golden Bell Awards and won two of them.
We expect that the increased network coverage coupled with our proactive marketing activities and further development of distribution centers 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 extremely volatile and uncertain environments 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 poor mobile into integrated player and expanded beyond its whole market of Russia 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 our telecom landscape as we will benefit from the increased level of macroeconomic stability.
Presently, VimpelCom’s position is very strong and I sincerely believe that 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.
Operator
The question-and-answer session will be conducted electronically. (Operator Instructions).
And we will 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? And clearly in the fourth quarter the decline in the average price per minute was reasonable, substantially it 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 of 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 that declined 6%, but definitely you have also to take that in account of 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 will go to Steven Pettyfer with Bank of America.
Steven Pettyfer – Bank of America
Yes, thanks. I am wondering if you could please give us an update on the merger approval.
Thank you.
Boris Nemsic
Yes, and that’s 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 fixed positively, so we are really happy that this approval in Ukraine took place now.
Steven Pettyfer – Bank of America
Okay, if I can ask you a follow-up, please, just on your Russian cost structure. You kept advertising and marketing as a – as there was a much lower percentage of sales compared to last year, although you have seen that to pick up in Q4 as usual.
I am just wondering if you could give us some thoughts about how you see that progressing into 2010.
Unidentified Company Representative
Yes. As you have all 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 markets and that’s combined with a general deflation of the media market over 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 (foremost) 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, we will try to keep our out-of-home on a constant level.
Steven Pettyfer – Bank of America
So less than 2% of sales going forward?
Unidentified Company Representative
Excuse me.
Steven Pettyfer – Bank of America
Sorry, so was that – just to be clear, so that going forward does (inaudible).
Unidentified Company Representative
(Inaudible) spending level continuing into 2010, yes.
Steven Pettyfer – Bank of America
Thank you.
Operator
And next we will go to Olga Bystrova with Credit Suisse.
Olga Bystrova – Credit Suisse
Yes, good afternoon. In your opening speech you mentioned that you hope for market improvements to boost – sort of to improve demand for services, et cetera.
Can you comment on this, sort of when this light – and in light of the fourth quarter revenues in Russia being basically flat to year-on-year, what do you see – which – what recovery do you see of happening so far into the first quarter and into 2010? Thank you very much.
Boris Nemsic
Thank you. This is one of the important questions.
There is 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 economy anymore. On the second part, that is noted that Ministry of Economic Development forecast 3% to 4% GDP growth in 2010.
And on other side we all know that telecom’s using, let’s see 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.
If this (inaudible) happened in 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 are saying, it looks like maybe first quarter recovery is not that evident yet. Is that the correct understanding of the situation?
Boris Nemsic
That is a year-over-year growth which is okay, definitely but the wanted big recovery although will not place us in the first quarter will more way so if it was second and third quarter.
Olga Bystrova – Credit Suisse
Okay, thank you very much.
Operator
And we will 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 AFRISAT and the Vietnamese operation, please?
Elena Shmatova
Well, actually, (USA) in the fourth quarter generated gain, income and Vietnam, of course, this part of operation generated loss. So – in (USA), we see approximately 5 million gain of a portion of this and on Vietnam, approximately 15 million loss.
William Kirby – Nevsky Capital
Okay, great. Thanks very much.
Operator
And next we will go Yevgeny Golossnoi with Troika.
Yevgeny Golossnoi – Troika
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, the EBITDA margin in the service?
And potentially, if (inaudible) Ministry orders to decrease international roaming charges, what could be the magnitude of the decrease for you and possibly the implications for the margin? And then the second question is really on – there were some reports in the press that Telecom Ministry has started to – some sort of investigation or have started to look at and how the company complies to what’s like different telecom laws in different regions.
Do you see that being the regular check and how often it is conducted or it’s – and what could be actually the reason for it and the outcome?
Boris Nemsic
Okay, 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 regulation that’s all over the country and this is just the permanent process.
And actually regulation is checking the – all those permissions and consequences and so on, so on. So we can’t say that there is kind of a significant increase this year.
So actually it’s absolutely work in process, I would say, a routine, a day-to-day routine.
Yevgeny Golossnoi – Troika
Okay, thanks.
Operator
And we will take our next question from Ivan Kim –
Boris Nemsic
Andrey Patoka, part of the first question, he has to answer.
Yevgeny Golossnoi – Troika
Yes, roaming, yes.
Andrey Patoka
Good evening. Good morning, this is Andrey Patoka.
(Inaudible) question about the (inaudible) effect of the reportable changes in roaming rates. First of all, we don’t see these changes as – can have a (inaudible) because we are now discussing with the anti-monopoly (inaudible) usage of this type of a structure.
On the other hand, actually what we (inaudible) that we have with the regular service. And without (inaudible) the overall (inaudible) and revenues are growing to these substantial since almost all the services (inaudible) that we have.
Yevgeny Golossnoi – Troika
Okay, thanks.
Operator
And next we will go to Ivan Kim with Renaissance Capital.
Ivan Kim – Renaissance Capital
Yes, hi, a couple of questions please if I may. So the first one, could you please update us on the Ukrainian markets and what’s happening with the (inaudible).
So we have seen a 28% OIBDA decline “in dollar terms” for the year, so where is this, for instance, the major competitors are up to it, increasing each ARPU by 5%. So what was the reason for based on the performance?
So on the second one you mentioned that the regional players in Russia in the mobile sector are aggressive on pricing and were aggressive on pricing in the second half. And so I am just wondering whether it will continues into 2010 and what kind of pricing strategy do you expect from regional players this year?
Thank you.
Andrey Patoka
Speaking about the Ukraine market in this year, we just – for the – all operators, practically all operators had to leave, (MARKETS) and that’s made some sense, (inaudible) of course will make some influence on APPM and the dynamic of APPM and the ARPU. If we speak about the (inaudible) ARPU in our operations and growth in the first quarter, the explanation is that it’s very – the ARPU (inaudible) is a very seasonally affected.
And in the first quarter where we have substantial potential part of roaming revenue, which has a much higher ARPU in the first quarter than in the fourth quarter. And so, that’s okay.
Ivan Kim – Renaissance Capital
But basically your major competitor Absolute should have the same seasonality I guess, but they increased the ARPU by 5%.
Unidentified Company Representative
No, what we can set, exactly in this seasonal and some are seasonal, because where like (inaudible) operator there and there a lot of Russian people common to Ukraine and use them with SIM card and long-distance calls. It gives really positive effect to ARPU exactly in the second and the third quarter is what they see.
And again, one additional comment here, FOREX there and decline of local currency was much bigger than in many other country.
Boris Nemsic
And one comment, there was a question about the regional players. And, of course, our APPM is – our average (inaudible) 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. And so we – in the regions where we have aggressive entrants, we have a tariff some time that counter that.
I mean they are more mature regions. We have another portfolio and we don’t see the mix of this changing (inaudible) to a degree in 2010.
And overall, the market is disciplined and we continue to exercise a pricing policy aimed at more a 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 Victor Klimovich with VTB Capital.
Victor Klimovich – VTB Capital
Good evening. I have one question, 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 50% to 20%, I don’t have the 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 follow-up question then. Thank you.
Boris Nemsic
Yes, thank you. Firstly, we have a – which is a broad stand between 50% and 20% which we announced, which can be adopted on the needs.
Secondly, we cannot comment what was – 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 maybe on the back on the envelope I don’t see big difference between their numbers and our numbers.
Victor 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 might 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 Southeast Asia, but they spend really the same amount of cash just in Russia. And so, and probably you know that they stated that officially that the most of this CapEx will go to 3G network.
So what maybe you can comment on what are your plans in 3G network – network rollout in Russia?
Boris Nemsic
Yes, 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. If you remember two years ago, we based our 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 rollouts, we have been the first Russian operator who covers all the regions.
We have, of course, different operators have different rollouts, that’s (adjacent), but we are definitely positive that we will invest on the right place, in the right moment. We already as I said in the all 82 regions, so that’s why I think from the poor radio part on 3G, we are definitely similar.
We have already advantage on the transport and core network.
Victor Klimovich – VTB Capital
But, if – maybe I am 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 in through city channels, zonal and local connections.
Victor Klimovich – VTB Capital
17 or –
Andrey Patoka
70.
Victor Klimovich – VTB Capital
70,000 kilometers.
Andrey Patoka
Yes.
Victor Klimovich – VTB Capital
Okay. I see.
Yes, that’s – that makes difference.
Boris Nemsic
That’s substantial.
Klimovich – VTB Capital
And – yes, yes, 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?
Boris Nemsic
Yes, we think it might be possible for the market, because the market has exercised a very good pricing discipline throughout the area. Actually it’s all from the three big ones, some price increase for the first time in 2009.
And we think that might be possible in 2010.
Victor Klimovich – VTB Capital
And how do you see the potentials for this price increase?
Boris Nemsic
Well, I would rather not make any forecasts on that.
Victor Klimovich – VTB Capital
Okay, okay, fair enough. Thank you.
Operator
And next we will go to Wallace Wormley with OSPARA Limited.
Wallace Wormley – OSPARA Limited
Well, thank you for your presentation. My question is related to the corporate transactions of the conversion of the (ADX) 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 described?
Wallace Wormley – OSPARA 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 are asking about the transaction between joining the VimpelCom GSC as of today with Kyivstar forming VimpelCom Limited, is it correct?
Wallace Wormley – OSPARA Limited
Yes. And it is also converting the ADR into DR?
Boris Nemsic
If I am correct that I understood what you mean, there is a special website which is www.vimpellimited.com where you can find the most up-to-date information about the technicalities which have to be done in this case.
Wallace Wormley – OSPARA Limited
All right, thank you.
Boris Nemsic
Thanks.
Operator
And our next question today comes from Pavel Momine (ph) with Goldman Sachs. Pavel Momine (ph) with Goldman Sachs, your line is open.
Pavel Momine – Goldman Sachs
I am sorry. Hi, hello, good evening.
I wanted to ask a question about the possible implication for VimpelCom’s debt level from the merger. I mean it’s farfetched but there is a chance that VimpelCom Ltd will have to make a cash offer to minority shareholders of VimpelCom and which means a reasonably large cash amounts.
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 for the next two weeks, so we (operate discretion) to them.
Pavel Momine – Goldman Sachs
Thank you very much. Then can I do a follow-up question which is unrelated under this case?
Boris Nemsic
Of course, because we did not answer the first one.
Pavel Momine – Goldman Sachs
In the cash flow statement there is an item in the financing of $489 million, which reads us investment under deposits. I wasn’t really able to reconcile it with any line of the balance sheet.
Could you comment what it is?
Elena Shmatova
Yes, this is included into other current assets in the balance sheet, because from GAAP points of new deposits are treated as the current assets.
Pavel Momine – Goldman Sachs
But the other current asset just increased by 260 million something.
Elena Shmatova
Yes, because there was other lines of – of course, our current assets consist not only of this, but also advances to suppliers, to repay tax and so on. So that was the fluctuation.
Pavel Momine – Goldman Sachs
Thank you. So – and those bank deposits basically, long and short-term bank deposits?
Elena Shmatova
Yes.
Pavel Momine – Goldman Sachs
Thank you very much.
Operator
And we will go next to Tatiana Boroditskaya with UBS.
Tatiana Boroditskaya – UBS
Good evening and thank you very much for the presentation. Can you please comment on churn level for 2009, and on any plans for Eurobond issue.
Thank you.
Unidentified Company Representative
In which country?
Tatiana Boroditskaya – UBS
Churn level on the – on the consolidated level.
Unidentified Company Representative
On the consolidated level, our churn – quarter churn is 15% – a quarter, (what that is). And what we assume that in general, we have not seen any progress in terms of the churn will decrease dramatically, because that competitive situations shows 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 issues?
Boris Nemsic
Was the question on Eurobond?
Tatiana Boroditskaya – UBS
Yes, can you please comment on the advance to each – to raise debt in international markets such as Eurobonds?
Elena Shmatova
Well, actually we are always saying that if we need additional funding then we are looking on any possible terms of how we can do it more efficiently. But we do not have kind of 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 – does that mean so you do not plan to issue anything say in 2010 or it’s still not –
Elena Shmatova
(Inaudible). And so we are flexible in this regard.
So I can tell you that for example, we – currently we registered Ruble bond issuance for 20 billion Rubles. So that’s what we have currently on our table.
Tatiana Boroditskaya – UBS
All right, thank you.
Operator
And we will take our next question from Herve Drouet with HSBC Bank.
Herve Drouet – HSBC Bank
Yes, good afternoon. There are 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, and you mentioned transportation and backbone. I don’t know a percentage breakdown will be helpful and also maybe some comments on where – what for you is the most critical in term of CapEx investment.
That will be the first question. The second question is related and directly to VimpelCom Limited.
Firstly, I was wondering if you can give us a bit more detail on the management that will be of VimpelCom Limited. And also if you can also tell us from the Ukrainian regulator which gave its approval even in a 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 go to the general terms, but we do not see any specifics times for some limitations.
So we cannot say more and that’s again we have got this actually today. About VimpelCom Limited management structure, the CEO is Alexander Izosimov.
Other things that he will announce in a new 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 data – large data networks, virtual data networks for corporations 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 market, 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 more – much more about assessing the customer, so coming into his flat and so that we are focused very much on this take-up rate and to achieve this take up rate, of course you need some CapEx for that and all other things. The 3G CapEx is I would say pretty classical case.
We are all aware that Russia is very late with 3G. Actually the rollout started in 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 Bank
And in term of let’s say a non-percentage wise will say what two-thirds backbone transportation maybe and then fits in let’s say 15% each for FTTB broadband and 3G.
Boris Nemsic
No, no, we are not putting goals into this. But it’s just fiber.
No, this is not a case. Firstly, of course, you had 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 150 core nodes in the network. So this is the passage we have to cover also.
But it’s far away from the percentage you mentioned. But we are not breaking it down.
Herve Drouet – HSBC Bank
Okay, all right. And any – and you don’t have any more information on Ukraine if you have to give back your license or any of the countries that they will look?
Boris Nemsic
Our assumption is that is not the case. But I cannot confirm it 100% now.
Herve Drouet – HSBC Bank
Okay, thank you very much.
Operator
And our next question today comes from Darima Tumur with Goldman Sachs.
Darima Tumur – 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 mentioned the Ruble component has increased to 26% in the fourth quarter. What is your long-term target of US dollars versus Euro versus Ruble that – that’s the first question?
Elena Shmatova
Well, actually the – our intention is to balance our debt portfolio to the ability of the company to generate cash in certain currencies. And, of course, we have – 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. 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 towards the cash flow structure in terms of currency.
Darima Tumur – Goldman Sachs
Okay, thank you very much. And then the second question is we have noticed that the inventory has come down from 143 million US dollars to 62 million US dollars.
I mean it’s a relative small item, but I am just curious in terms of what happens throughout the year that your inventory is so much lower?
Elena Shmatova
Well, actually at end of 2008, we have pretty high balance of inventory of iPhones and so now it became more normal.
Darima Tumur – Goldman Sachs
Thank you very much.
Operator
And our next question comes from Sean Gardiner with Morgan Stanley
Sean Gardiner – Morgan Stanley
Yes, thank you. I was wondering, you talked on your – about the lower cost inflation on the advertising and marketing.
Can you talk just about some of other cost inflation for 2010, whether it be on your rental or your employee side? Thanks.
Boris Nemsic
Actually regarding the cost inflation, our estimate is very modest. We don’t expect an inflation for any of our – 4Q is actually much already commented on the actually negative inflation in advertising.
And for the rest of the lines in our cost structure actually the – the (inaudible) on our neglibility.
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 done.
I think there has been talk of this 100 million SIMs a year is 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% prepaid market and this is a clear consequence of this.
On the long term seeing definitely the structure of prepaid to postpaid it will change, but maybe this middle to long term, I would say more long term task. Of course, it’s always – we have always some kind of opportunity seekers, which are using these opportunities on other side last year due to the economic crisis, lot of people traveling around in the big country of Russia instead of using their home phone making roaming calls, they by both a local cards and used it during the two, three weeks being away from the 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 the – some of the synergies you could have got from Euroset or is it just a – because you had think that controlling some of its distribution channel you would be able to reduce this churn.
Boris Nemsic
This is ongoing – ongoing task which we of course are performing and we can improve this definitely.
Sean Gardiner – Morgan Stanley
Thank you.
Operator
And next we will go to Anna Carvatoba (ph) with (inaudible) Bank.
Anna Carvatoba
Good evening. My first question is about Kazakhstan.
Do you see any change in the competitive situation, since (Teliasonera) required to have local operator, is it number three operator? And my second question is evolved in the same that I understand that they should adjust the VimpelCom Ltd management, but nevertheless are there any possibilities for company to address reissue and remain within MSI, because probably is it possible to make some technical restatement or something.
Any comments on this please?
Andrey Patoka
For Kazakhstan, now there are two big operators and first, (inaudible) which was acquired by (Teliasonera). This information we have got – the deal was – is over yesterday.
Of course, we expect some more aggressive competitive situation in terms of pricings in Kazakhstan, but we are well preparing to (inaudible) 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’s it’s that 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 Carvatoba
Thank you.
Operator
And now we will take our last three questions. We will go next to Igor Semenov with Deutsche Bank.
Igor Semenov – Deutsche Bank
Yes, hi, thank you very much. Yes, I just wanted to ask a question about the estimates published in the prospectus about a month ago, the revenue for 2010, assuming that 10% growth year-on-year, about $9.6 billion whereas CapEx is about $2.1 billion, so 22% CapEx (inaudible).
I guess you are pretty clearly saying that CapEx should be between 15% to 20%, but would you say that a 10% growth should be reasonable to expect in 2010? Thank you.
Boris Nemsic
The business plans used for the fairness opinion, our document designed for business planning and budgeting purposes, so this is not intended for public disclosure. But – so it not should be not confused with the guidance documents.
But on the other side, there are definitely people doing this, look very carefully what is the potential of the market. So again we are trying to distinguish these two approaches, although it’s really your judgments how to match these two.
Igor Semenov – Deutsche Bank
So you would not be – you could not say that your guidance would be -- 10% growth this year?
Boris Nemsic
We are not giving this kind of guidance.
Igor Semenov – Deutsche Bank
Right.
Boris Nemsic
But it is definitely something which we also know and so it’s very, very difficult to explain some document 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
And next we will go to Ivan Kim with Renaissance Capital.
Ivan Kim – Renaissance Capital
Yes, just a quick follow-up on the Asian operations. So what kind of transfer we are seeing there, because the subscriber base increased, but the revenues didn’t.
So what’s happening through the ARPU there? Thank you.
Boris Nemsic
Speaking about Cambodia, we increased the subscriber figures, so we now feel comfortable to report the three months activity, which is our classic definition. But of course, everybody is 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 the revenues which are based on ARPUs who are increasing. So we have to really to distinguish the first and the second quarter of the operation, where we had to really to invest a lot into coming into the markets, and now we are really going into the – into real operation and the real revenues, real ARPUs going up.
Ivan Kim – Renaissance Capital
Okay, thank you.
Operator
And next we will go to Nadia Golubeva with Unicredit.
Nadia 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 other non-controlling interest of just to $2 million?
Thanks.
Elena Shmatova
Well, redeemable non-controlling interest is kind of a new (closification) of the (boot) option which we have with the partner in Kazakhstan. And so that’s the lines which be at this time.
And, Nadia, what was your last – next question?
Nadia Golubeva – Unicredit
On, no, I think I am satisfied with this one but I have follow-up. So I do understand it correctly that you have a liability under this (boot) option, yes?
It’s like a track price, yes.
Elena Shmatova
It’s –
Nadia Golubeva – Unicredit
Obligation, yes.
Elena Shmatova
(Inaudible) line.
Nadia Golubeva – Unicredit
Excuse me, I didn’t hear it very well. Do I understand it correctly that this is the strike parts of the option, which the minority part in Kazakhstan holds?
Elena Shmatova
Yes, we are increasing to that fair value.
Nadia Golubeva – Unicredit
Okay. And non-controlling interest of $2 million, this is the rest, yes?
Elena Shmatova
No, non-controlling interest has this on composition and I can send you it by email.
Nadia 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 are happy to provide you with additional information.
Have a nice day. Good-bye.
Operator
And that conclude today’s conference call. Thank you everyone for your participation.
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