Sep 3, 2010
Executives
Alex Tramont – IR, FD Alexander Izosimov – Chief Executive Officer Henk van Dalen – Chief Financial Officer Taras Parkhomenko – Chief Marketing Officer of Kyivstar Elena Shmatova – General Director, Head of Russian Operations Martin Furuseth – Chief Marketing Officer in Russia
Analysts
Haim Israel – Bank of America Elena Mills – Alfa Bank Alexander Balakhnin – Goldman Sachs Alex Kazbegi – Renaissance Capital William Kirby – Nevsky Capital Tibor Bokor – Otkritie Rhys Summerton – Citi Igor Semenov – Deutsche Bank Herve Drouet – HSBC Viktor Klimovich – VTB Capital Alex Wright – UBS Nadezhda Golubeva – UniCredit Ceasar Tarron – Morgan Stanley Anna Kurbatova – Gazprombank Hugh Symes – Goldman Sachs Ivan Kim – Renaissance Capital Stephen Pettyfer – Bank of America-Merrill Lynch Vanchelsis Shimla – Deutsche Bank
Operator
Good day everyone, and welcome to the VimpelCom second quarter 2010 earnings conference call. Today’s call is being recorded.
At this time, I would like to turn the call over to Alex Tramont of FD. Please go ahead.
Alex Tramont
Good morning and welcome to VimpelCom Limited conference call to discuss the company's second quarter 2010 financial and operating results. Before getting started, I would like to remind everyone that except for historical information, statements made on this conference call may constitute forward-looking statements that involve certain risks and uncertainties.
These statements relate in part to; one, expected synergies in our Ukrainian operations; two, the company’s 2010 capital expenditures; three, the company’s future liquidity, revenues, margins, and cost of debt savings; and four, 3G allocation in Ukraine. Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in; one, the company’s press release announcing second quarter 2010 financial and operating results; two, the company’s second quarter 2010 earnings presentation; three, the company’s registration statement on Form F-4 filed with the SEC; four, OJSC VimpelCom’s Annual Report on Form 20-F for the year ended December 31st, 2009; and five, other public filings made by the company with the SEC, each of which are posted on the company's website at www.vimpelcom.com.
In addition, the company’s second quarter 2010 financial and operating results press release and Form F-4 and OJSC VimpelCom’s Form 20-F are posted on the SEC’s Website at www.sec.gov. VimpelCom disclaims any obligation to update developments of these risk factors or to announce publicly any revision to any of the forward-looking statements made on this conference call or to make corrections to reflect future events or developments.
If you have not received a copy of the second quarter 2010 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 Alexander Izosimov, Chief Executive Officer of VimpelCom.
Alexander Izosimov
Thank you very much. Hello everyone.
Thank you for joining all for quarterly conference call today. Let me introduce some people participating in this call.
Here with me in Amsterdam are Henk van Dalen, our newly appointed Chief Financial Officer; Dmitry Kromsky, Head of the CIS Operations; Taras Parkhomenko, Chief Marketing Officer of Kyivstar; and Alexey Subbotin, our Head of Investor Relations. Elena Shmatova, who runs our business in Russia has joined us from Moscow together with Martin Furuseth, our Chief Marketing Officer in Russia.
On this call, we will discuss the operational and financial results for the second quarter of 2010. Overall, during the second quarter, business was up across all key segments.
Our margins stayed high at 48%, with operating cash flow exceeding $1 billion for the quarter and amounting to $1.8 billion for the first six months of the year. The numbers reflect positive market economic trends and industry development and naturally we returned to more normal investment levels shifting essentially from cash preservation to growth.
During the last quarter, we put in place a new logical and straightforward structure with four business segments; Russia, Ukraine, CIS, and South East Asia. We agreed on split of competencies and responsibilities between different management levels and launched Amsterdam headquarters, which we intend to keep very lean.
Recently, Henk van Dalen joined us as the CFO of VimpelCom Limited, while Elena Shmatova took over as the General Manager in Russia. More than ever before I am certain that the full evolution of VimpelCom will depend on our ability to attract and retain the best managers and make sure that they realize their potential in full.
With this, I will pass the floor to Henk who will describe the Group financial performance. Please all welcome our new CFO, Henk van Dalen.
Henk van Dalen
Thank you Alexander, it’s certainly more for me to be here today. VimpelCom is a great company with lots of amazing opportunities, and I am sure that we will be able to capitalize on many of them.
Today, we present the consolidated financial results with Kyivstar’s operations incorporated, starting from 21st of April when the transaction was effectively completed. As you can see on the slide, the quarterly dynamics were strong for revenue and OIBDA.
We improved the consolidated OIBDA margin mainly due to seasonal trends, good performance in Russia and CIS, inclusion of Kyivstar and despite a negative forex effect. In line with seasonal trends, the revenue increased 7% year-on-year for the second quarter on a like-for-like basis to more than $2.6 billion.
We maintained high profitability with high consolidated fixed and mobile OIBDA of close to $1.3 billion and the best-in-class margin of almost 48%. We intend to maintain these levels of profitability and cash generation, which we see as a foundation for further business development and improving shareholder returns.
The Group’s net income this quarter declined to $335 million, due to a year-on-year negative effect of around $450 million on a pretax basis. Although the VimpelCom Limited transaction slightly affected our return on capital employed in the second quarter, going forward we intend to keep this parameter at the target of level of about 20%.
Now I will take you into the Group financial position. As you can see on the chart, our liquidity position is extremely strong.
Consolidation of Kyivstar significantly enhanced our free cash flow yield, and we expect the free cash flow yield to improve further once the integration of our two businesses begins. The total debt to OIBDA ratio also improved substantially, declining to 1.4, while the net debt to OIBDA ratio is even below 0.9.
During the quarter, we substantially stepped up investments to capture reemerging growth opportunities across all markets where we operate. We expect consolidated CapEx for the full year to be in the targeted range of 15% to 20% of revenue.
Financing of the investment program can be easily done from the cash we accumulated on our balance sheet, however we are constantly in touch with the credit markets, exploring various opportunities to optimize funding. So, now let’s look at the consolidated debt position.
As promised, we continue to optimize the debt currency structure in order to align cash flows and outflows, cash inflows and outflows. By the end of the second quarter, the portion of ruble debt increased to 30% compared to the 70% a year ago in the total debt composition.
For the most part, it has been achieved by scheduled repayments of our dollar denominated debt. As of today, we paid more than 88% of our debt due in 2010, bringing the net debt of the company to less than $4 billion.
In July 2010, in order to finance the squeeze out of VimpelCom Limited, raised $470 million as a bridge loan from construction of leading international banks. We plan to repay this debt from our cash flow or refinances facility in the near future.
We have established the consolidated strategy function in Amsterdam to manage our balance sheet and cash flow as more efficiently. Given the size and scale of our operations, we expect to achieve significant cost of debt and liquidity improvements overtime.
I am going to pass the floor back to Alexander again who will present the operational and financial performance in each of our business units starting in Russia.
Alexander Izosimov
Let’s now look at the financial performance in Russia. Our quarterly revenues here amounted to almost 62 billion rubles on the back of continuous market economic recovery and strong seasonal trends.
We can see that the Russian telecom market has resumed its growth as we see encouraging signs like increase in voice and data usage, high penetration of smart phones and growing demand from corporate clients. While sustaining our competitive position in the voice market, we observe that the focus of competition is shifting towards data.
The shift while opening ample opportunities for growth, must be managed properly to create value before we continue with our policy of efficient investments. Our ROIC parameter, return on invested capital, have been steadily improving over the past 18 months to reach 33%.
Going forward, we intend to keep it in Russia about 30%. Now, let’s look into the operations.
Our active subscription base reached almost 51 million. We are sharpening our focus on this quality.
The quarterly increase in MOU follows seasonality and relatively calm competitive dynamics reflected in stable pricing. As a result, quarterly ARPU demonstrated growth of 7%.
We increased our fixed and mobile broadband customer base by 7% and observe continuous increase in demand for data services in both segments. To accommodate this, we substantially stepped up investments in data networks.
However, as I mentioned before, despite the significant growth potential, the proper value of credit pricing model has not been worked out yet. Therefore, we are in a process of assessing all the elements of the data opportunity.
In the fixed segment, we continue to increase our customer base and achieved revenue growth in local terms for the first time in four quarters. The corporate fixed-line market in Russia is undergoing structural changes, with increasing voice data substitution accompanied by significant price adjustments.
During the second quarter, we achieved good progress in the mobile B2B segments, especially in the regions. We continue to cross-sell our services and by now doubled the percentage of our B2B clients who use our mobile and fixed solutions as compared to the previous year.
We maintained a lean position on the wholesale market in Russia as we expand our interaction with voice and data carriers both in Russia and abroad. We also continue to increase our fixed broadband presence.
Currently, more than 8 million households are covered by our DTP networks. We increased the number of residential customers by 34% when compared to the second quarter of 2009.
The fixed broadband revenues were up 24% year-on-year, reaching 1.3 billion rubles. The broadband market in Russia is an active line grabbing phase.
We continue to invest in coverage and engage in aggressive promotion campaigns, which together with seasonality factors temporarily affect our ARPUs. Overall, we believe that the Russian telecom market is approaching a new growth phase and we are on our ground position to capitalize on it.
Let’s move to our new strategic business unit, Ukraine. In Ukraine, the consolidation of Kyivstar financial results is now complete.
This significantly increases scale of our operations there. Beyond the consolidated numbers, our revenues increased almost 8% quarter-on-quarter on a like-for-like basis, driven by the overall macroeconomic rebound in the country, seasonality and less aggressive price competition.
We increased our OIBDA quarter-on-quarter by 18% on a like-for-like basis. As promised, the consolidated OIBDA margin improved to 54%.
Primarily this is a result of seasonal increase in revenue and ongoing cost saving measures. On top of the voice market recovery, we expect the data market in Ukraine to become a major growth opportunity.
Already 230,000 customers in Ukraine use our USB modems for mobile Internet access. We expect the government to proceed with the 3G license allocation in the second half of the year and have been preparing to launch the 3G networks as soon as practically possible.
In Russia, we are stepping up CapEx to accommodate growing demand and investing in a similarly efficient manner with a focus on returns. We will start reporting ROIC for Ukraine after the regulatory situation clarifies.
On the next slide, there is a more detailed view on our operational performance in Ukraine. The focus for the last few quarters was to stabilize our active subscription base, which we have successfully accomplished.
It is now stabilized at about 24 million. The blended ARPU increased almost 9% on the like-for-like basis as a result of seasonal usage increase, arrested price erosion and changes in revenue mix.
We are the fastest growing broadband operator in the country and we continue to invest. By now, our fiber networks have 1.7 million households where we serve more than 160,000 customers.
Fixed broadband ARPU is higher than in the mobile segment. We are ready to capture synergies from integration of our operations in Ukraine.
Detailed analysis confirmed our preliminary estimates of the nature and economic value of synergies. Largely, this can be achieved without full integration of legal entities, but we are awaiting clarity from the anti-monopoly committee.
We recently proposed regulatory changes including MGR price, M&C and some uncertainty to the Ukrainian outlook. However, we feel very positive about the Ukrainian telecom market.
In our new structure, the CIS segment includes operations in six countries; Kazakhstan, Uzbekistan, Kirgizstan, Tajikistan, and Central Asia, and Georgia and Armenia in Trans caucuses. You can see the blanket figures for each country in the attachments to our earnings release, which we published earlier today.
In general, our performance in this market was very good. Particularly, I would like to note substantial growth in revenue, both on year-on-year and quarter-on-quarter basis.
OIBDA margin also improved quarter-on-quarter to exceed 48%. Naturally, the situation is different from country to country, however it is very, very important that the best quarterly performance was observed in Kazakhstan, our largest CIS market where we recorded year-on-year and quarter-on-quarter revenue growth just under 16% and OIBDA growth at around 20%.
The OIBDA margin reached more than 57% in that market. We attribute these results to our prudent marketing policy as well as to economic recovery in Kazakhstan after two years of economic downturn.
Our CapEx in the CIS markets increased substantially in the second quarter to support the 2G and 3G rollout as well as our broadband projects. The relatively low level of ROIC reflect the fact that most of the markets in this segment are in the development stage.
Overall we see great potential for further progress in our operations in the CIS market. Now, to South-East Asia.
Our operations in this area is still in very early stage of development. In Cambodia, after the first year of operations, we have more than 500,000 active customers and are the fastest growing operator in the country.
In Vietnam, we operate in 51 out of 63 provinces and our networks cover approximately 58% of total population. Our active base comprises 800,000.
Unfortunately, we had to temporarily slow down development in Vietnam, while we and our joint venture partner determined the optimal way to further finance our Vietnamese operations, which we hope to resolve shortly. Overall, we continue to be optimistic about the potential of the South-East Asia mobile markets, and continue to enhance our presence in this region.
We stick to our own philosophy of investing as we grow and are taking a cautious approach to our investment decisions here. To summarize, I can say that we are pleased with our second quarter results.
Our revenues grew across all key business segments. OIBDA margins stayed high.
We demonstrated very strong cash flow generation ability and good returns of capital. We completed the combination of VimpelCom and Kyivstar, set up our headquarters in Amsterdam and put in place a new organizational structure.
During the second quarter, we observed a market economic recovery in all of our major markets, which stimulated the resumption of growth in the telecom industry. With our strong financial position and experienced management team, we are well prepared to take advantage of the reemerging growth opportunities.
And now, we are ready to take your questions.
Operator
(Operator instructions) We will go with Haim Israel of Bank of America.
Haim Israel – Bank of America
I am quite sure you were expecting to be asked this question, so I will be the first one to ask it. But can you comment, or give us any kind of color on the recent announcement, or the recent news flow, regarding VimpelCom acquisition of whether Wind or Orascom or anything or any other assets?
Alexander Izosimov
And I guess you could expect the answer that we have no comment on the rumors.
Haim Israel – Bank of America
Okay. Fair enough.
I will leave it. The second question is about the Ukrainian market, can you just give us a little bit of color on where the situation with authorities is regarding the final approval of the consolidation with those two companies?
Alexander Izosimov
No, we haven’t heard any news yet coming from anti-monopoly committee. As we said before, we are absolutely open, we answered all of their questions, passed all the information, but we still haven’t received the final decision from them.
As I said in the presentation, we have analyzed in-depth all the synergies possibilities and we are very comfortable with the assessment which we indicated at the stage of presenting transaction to the market. So, we are talking between $400 million to $500 million NPV of synergies.
And what was even better that most of it can be captured, actually result easily comparing the companies. We, however decided to be prudent and wait for the decision before we embark on this, but we are absolutely ready and on standby.
Haim Israel – Bank of America
Okay. Thank you very much.
Operator
We will go next to Elena Mills of Alfa Bank.
Elena Mills – Alfa Bank
Hi, good afternoon everyone. I have a follow-up question actually on the Ukrainian market.
I am wondering if you could help us out with the ARPU figure for Kyivstar on a standalone basis during the quarter. Because as you haven't yet, as you mentioned, officially consolidated the two companies it would be quite interesting to know how Kyivstar is doing?
And also, generally, please explain your blended ARPU calculation, because I am having difficulty backing into the historical blended ARPU that you report for the second quarter of 2009? Thank you.
Taras Parkhomenko
Taras Parkhomenko, CMO of Kyivstar. The Kyivstar ARPU is about 20% and is showing slight decline compared to last year mostly because of interconnect rates reduction, but had a situation in Ukraine when all players, we are seeing clearly the signal from all players, so therefore we anticipate to have an ability to improve significantly the ARPU, that’s what we are doing, where we are pricing initiatives during whole second quarter.
Alexander Izosimov
(inaudible)
Taras Parkhomenko
Yes, so the level is around 43 [ph] for Kyivstar.
Alexander Izosimov
So, what was the second question?
Elena Mills – Alfa Bank
Yes, the second question was just really on your methodology for calculating blended ARPU for the Ukrainian market, because I can't seem to back into your historical ARPU figures. If I look at the URS business and the Kyivstar legacy business, I can't actually back into the ARPU figure that you have reported for the second quarter of 2009.
So, if you could just explain your methodology for the blended ARPU calculation I think that would be very helpful. Thank you.
Alexander Izosimov
I would ask Elena Shmatova who is acting as the CFO in the second quarter to address this question. Elena, please?
Elena Shmatova
Yes, actually the definition of how we calculate ARPU is given in the attachments of the press release on page 10. So, month leverage revenue per use is calculated by dividing service revenue during the relevant period including roaming revenues and interconnect revenues, but excluding revenue from connection fees, sales of handsets and accessories and other non-service revenue divided by the average number of subscription during the period and dividing by the number of months in that period.
Elena Mills – Alfa Bank
Thank you Elena. I did note your definition of ARPU in the press release.
Maybe if I could just ask the question in another way. I am sorry to persist on this.
What proportion, what sort of weighting is applied to the Kyivstar ARPU, or revenue within that calculation compared to the URS calculation? Again, I am just thinking about the fact that I can't arrive at the historical figure that you report based on that methodology that you have just described.
Elena Shmatova
Well, actually we make pro forma calculation as consolidated revenue of Ukraine and based on this calculated ARPU.
Alexander Izosimov
Why don’t we check and we will come back to you with more specific details how we calculate. I assume that it would be effective eliminations between the companies and interconnect.
Elena Shmatova
Yes, that was essentially what I thought it might be related to, but maybe, if you could provide us with a bit more color on those figures later in the call that would be helpful. Thank you.
Operator
We will go next to Alex Balakhnin with Goldman Sachs.
Alexander Balakhnin – Goldman Sachs
Yes, hi. My question was on your statement on the press release where you say that for you there's still one of the targets to keep, which are capital employed of more than 20%.
And my question basically is related to your strategy in general. My understanding is that maintaining return on capital employed of above 20% is impossible if you do acquisitions, because like every more or less acquisition of a basically big size – or not a very big size dilutes your returns of capital mightily as we saw with the acquisition of Kyivstar.
So, basically saying that 20% return on capital is your target, are you saying that large-scale acquisitions are off the agenda, or you understand the return on capital in a bit different way, or you set acquisition targets with weighted average cost of capital of 20% plus? If you can elaborate on this, it would be really very helpful.
Alexander Izosimov
Yes, this is multifaceted question. Let’s try to peel this onion.
First, we are trying to safeguard our investments, particularly CapEx, investments in terms of its efficiency. And from the operating company perspective, return on invested capital would be the key driver how the company performs.
And there we actually look at those including goodwill and excluding goodwill. Second, when we say the targeted level, we believe that we operate in a certain business model, which provides certain ratios between the revenues, EBITDAs, CapEx per minute, sub and therefore that business model is well defined.
And no surprise that in most of our markets, overtime we arrived to roughly the same return on invested capital, and we believe that whatever operations we will be taking onboard, we will be targeting over a period of time to bring them to that level. However, your question is absolutely correct that if we look on return on capital employed, which is supposed to reflect all of the goodwill and so on, of course it will be affected.
And in that sense, how fast, we will be able to work ourselves out of it will be an important issue and will depend largely on how accretive or dilutive the acquisition is. One of the remedies to this would be actually the element of M&A strategy, which we tried to describe before that we will be looking more favorably towards mergers of equal concepts rather than acquisition at premium.
Mergers of equal will help us to minimize to the extent possible the premium state and therefore will help us to sustain the return. But I am with you that to guarantee that after every acquisition, we will have resulting returns above 20%, we cannot.
But overtime, we will be returning or aiming to return to this type of performance.
Alexander Balakhnin – Goldman Sachs
Thank you for the answer and probably a quick follow-up on this. When you talk about the merger of equals, that's very clear basically what you mean.
But do you think it is appropriate to issue equity at the valuation of basically below four times the EBITDA? And just if you look around VimpelCom is probably the cheapest company.
So, basically, whoever your target is, or whoever this equal is, the valuation will likely be higher than the valuation of VimpelCom. Is this a problem for you or –?
Alexander Izosimov
That of course is a problem. I mean, we cannot say that our currency is the strongest and clearly we cannot claim what Vodafone claims that they brought assets with the front paper.
Going tremendously clearly can do that, but on the other hand, if we approach the evaluations and compare it on the companies on a proper basis, let’s say, this year basis, understanding trying to eliminate the discount fairly or unfairly applied by the market and try to compare a compromise on that basis, it might help. But in general, I wouldn’t deny.
This is of course bit of a barrier, and we need to navigate between Silva [ph] and Heribda [ph] how much of cash we want to involve and therefore involve premium versus equity and speak to the idea of merger of the equals. It's not a trivial question and academically, we can sort of pontificate about it.
But of course, the proof is in the pudding and when and if we have a transaction, then of course, we will be looking at it and then we will probably need to discuss it.
Alexander Balakhnin – Goldman Sachs
And probably the very last one, I am sorry for the third question, but what sort of mandate do you have from the shareholders in terms of the M&A opportunities? Are they prepared to pay a premium in the terms of dilution, basically given that the valuation of VimpelCom is low, or such discussions didn't take place?
Alexander Izosimov
I think the shareholders will look in absolutely. Nobody unnecessarily wants to take dilution actually on the contrary.
People would be reluctant of course to take dilution, because strategic shareholders aren’t different from minority investors. And there is no clear-cut mandate go and make deals at whatever price, naturally every deal will be very, very carefully scrutinized and must bring value and be accretive towards the shareholders.
Alexander Balakhnin – Goldman Sachs
That’s very clear. Thank you.
Operator
(Operator instructions) We will go next to Alex Kazbegi with Renaissance Capital:
Alex Kazbegi – Renaissance Capital
Yes, hi. First of all I think you mentioned today, someone mentioned that you plan to pay dividend twice a year.
I was just wondering whether you generally formulated a formal dividend policy and what will be the payout which you are aiming at, and more detail from that one please. The second question is a philosophical one.
If you had to, do you think strategically, a Western European company would fit into VimpelCom's overall strategy, buying or merging with it, or if it comes as a part of a deal? I am not referring to any deal, I am just asking general question, what would be your view with regards to that kind of assets, whether run it, whether divest it in the future and sell it?
What is your general strategy with this regard? Thank you.
Alexander Izosimov
Let’s start with the dividend question, and I will pass it on to Henk.
Henk van Dalen
Yes, we are basically currently finalizing our discussion of the dividend policy going forward. It will certainly as far as we can see now have a strong relation to cash flow, free cash flow available over the year.
But the final details are not yet ready and it also relates to the fact that we still need to finalize the last legal stretch in the restructuring of the Group structure. And that needs to be done basically in September and October, and if we have the whole package ready, we will also be in a position to publish the dividend policy.
Alex Kazbegi – Renaissance Capital
So, towards the end of the year sometime?
Henk van Dalen
Yes, it will be somewhere, we expect now in November.
Alex Kazbegi – Renaissance Capital
Thank you.
Alexander Izosimov
And as far as Western Europe is concerned, it’s a simple question but unfortunately I have to give you a long and winding answer to that.
Alex Kazbegi – Renaissance Capital
I expected that.
Alexander Izosimov
And the long and winding answer will be related basically to our view on how the industry will be evolving. In general when we think about our strategic buys or assumptions which we are making, we are of a thought that the growing opportunities in voice whether it’s in the emerging markets or the mature markets, basically not fully exhausted by not far off that.
And therefore, to expect a growth which would significantly exceed that of economic growth probably would be too optimistic. However, the next wave of growth in the industry is likely to happen around data, and data can function.
While everybody agrees that there is a massive pent-up demand and all of the operators reporting increases in data traffic threefold, fivefold, tenfold, which confirms that, but everybody equally struggles how to monetize on their growth. And therefore the reason a little bit of a gap, a little bit of a conundrum that we have a massive demand, but not clear monetization strategy for that.
And here, we believe that the industry will figure out, otherwise industry will arrive to a situation where capacity will become scarce and we will experience bottlenecks and then automatically capacity will be repriced and treated differently then. It would take that view that the growth to be captured and the money to be made on data consumption predominantly driven by our computing and video and so on then it’s also very logical to assume that like GSM story, probably we will develop from the West and more developed markets towards emerging markets.
So, the first wave of that growth will come there. Then also you can look at how market currently values the cash flows.
If we look at the industry at large, we will see that telecom industry is the industry with the highest dividend yield among whatever we could find and compare to as well as low SPs. And so, the industry is just general, not valuing any growth, not pricing any growth.
I am not surprised because when the pricing model is virtually absent, it creates huge uncertainty and the market, by the virtue of that becomes fairly short optimistic in its way to pricing. But again, if you look globally, telecom market development and apply what imply in the valuations of the telecom companies, the market is expected to shrink in real terms anywhere between 5% and 7% per year, which is highly illogical given the demand and given the need in the broadband assets and what potential revenues can be generated there.
I am, frankly speaking, not aware of any other industry which would save demand, which is measured in 20-fold, 30-fold even in the next five years and at the same time projecting revenue decline of 5%, 7% in real terms. So, that brings us to a conclusion that probably again we cannot put our head on the block entirely on this, but it's a hypothesis which we incorporate it into our strategic thinking, that probably industry is systematically undervalued at the moment.
And given the fact that industry will to go out have surprised and as soon as that happens and we see actually early moves in the U.S., whether AT&T moving into the pricing and so on, if that happens, then the market will re-rate. Hence, if we take this assumption, we can say that western operators and western operations would be attractive not only from the potential growth perspective, but probably undervalue the cash flows as well.
And in that sense to say that we will dismiss out of hand and say that we will dispose or will put outside of the perimeter western operations, probably would be incorrect. It’s more correct to say that our strategy now is more expanded and probably more open towards inclusion of the operations in the mature countries, in the mature markets.
Alex Kazbegi – Renaissance Capital
Okay. Can I just rephrase it?
As far as I understand, the answer is that you will not specifically look for the let's say developed market operator to buy even though it might be cheap, but if it comes your way, you believe it could be a good investment even for this reason that it might re-rate in a couple of years and you will be able to resell it sometime later on if that would be the strategy, is that correct?
Alexander Izosimov
Absolutely, that’s correct.
Alex Kazbegi – Renaissance Capital
Okay. Thank you very much.
Operator
Our next question comes from William Kirby with Nevsky Capital.
William Kirby – Nevsky Capital
Thank you. Yes, two questions please.
Firstly, what are you seeing in terms of consumer demand for minutes, especially since the end of the second quarter which was a couple of months ago? And then secondly, and I guess it's a related question on the competitive environment.
We saw Megafon through the year has gained subscriber market share and perhaps it's been a bit less successful at gaining revenue market share, but are you still seeing them pushing to get more subs, please?
Alexander Izosimov
Elena?
Elena Shmatova
Okay. So, talking about the development of the minutes of use, we are quite happy with the development which we saw in the second quarter.
So, increase in minutes of use of subscriber increased 7%, and so that is of course on one hand connected to the seasonality and on another hand, we can say that our subscriber base have pretty solid quality I would say. And so that brings maybe the – on to you second question about the subscriber market share.
So, we are looking not for subscriber market share as such, but of course we are looking more on revenue market share and to this extent, we are happy with the development of the last quarter, because we managed to maintain prices on the same level and that’s all increase in minutes of use. So, it’s converted to increase in ARPU.
William Kirby – Nevsky Capital
Okay. thank you.
And coming back to the first question, have you seen consumer demand for minutes continue to accelerate I guess in the last couple of months since the quarter finished?
Elena Shmatova
Actually, we are not kind of giving the statements about the not close quarters, but generally speaking the overall environment continues to be pretty good.
William Kirby – Nevsky Capital
Okay. Great, thank you.
Operator
We will go next to Tibor Bokor with Otkritie.
Tibor Bokor – Otkritie
Hi, two questions if I may. Can you please give us a bit more color on CapEx guidance?
15% to 20% of the sales looks bit wide range given we are already in September. Can you be more specific on the CapEx guidance this year?
Alexander Izosimov
Let’s just answer in general, as we said that we see now markets coming back to growth and therefore we are stepping up our CapEx. And 15% to 20% was general Group level, which we communicated consistently sort of how we think about CapEx.
The problem to provide with the specific, more specific numbers is that it’s unclear in Ukraine how we will be optimizing our CapEx depending on AMCO or the anti-monopoly committee position. So, that’s the uncertainty.
That’s why we cannot give you specific number as we used to do before. But I think it will be fair to say that we can probably give you a little bit more specificity in Russia.
Elena?
Elena Shmatova
Well, actually in Russia, you saw in the presentation that we really started investing more into the network development and numbers for the second quarter, they are much higher than the first quarter. And on last 12 months basis, our current ratio, CapEx to revenue is 10% in Russia.
As long as we are planning to continue to invest, we think that maybe this year, we will come to the high end of that range in Russia specifically, but it also depends on certain question on how quickly the vendors will deliver us equipment and that’s the point. So, generally speaking, we think that in Russia in general, we will continue to invest and you will see that in the future quarters.
Tibor Bokor – Otkritie
Higher end of the 15% to 20% range for Russia for the second half or for the full year?
Elena Shmatova
For the full year.
Tibor Bokor – Otkritie
For the full year. Thank you.
And a quick second question on synergies in Ukraine. I think you mentioned a number earlier on the call, can you please repeat that number, between fixed line and mobile in Ukraine?
Alexander Izosimov
No, we are not providing such a detailed breakdown. The number which we communicated $400 million to $500 million NPV over five years.
Tibor Bokor – Otkritie
Okay, that’s it. Thank you.
Operator
We will go next to Rhys Summerton with Citi.
Rhys Summerton – Citi
Hi. Good afternoon.
I think a lot of the questions have been answered. But I noticed in this presentation you put quite a bit of emphasis on debt.
And I would just like to get a bit of an indication from you, or a bit more color from you on the preferential currency split of your debt going forward, and also the kind of targets, or the maximum debt to OIBDA ratio that you would feel comfortable with in VimpelCom?
Henk van Dalen
Well, we would certainly like to have a higher percentage of rubles in the total package of debt. But we haven’t been precise on what the exact percentages will be, because it will also of course depend on what we are able to realizing the market, but it would certainly not be betting if it grows from the current level of 30% to the level of around 50% to 60% of total debt given the mix that we have.
So, we continue to look on that as a very important target going forward, and as a general notion, you should take that debt to OIBDA of 2 and below 2 is a reasonable range, continue to look or stay below that level.
Rhys Summerton – Citi
Okay. And if you went above 2, your cost of debt, can you give us some indication of what kind of increase you would see in your cost of debt?
Henk van Dalen
Well, that’s very difficult to say of course, because it will very much depend on what the exact market circumstances in the debt capital market has. So, I would like to stay away from that.
I think given the strength of the cash flow of the Group, we will be very fast, able to reduce any of such an issue within a very short period of time.
Rhys Summerton – Citi
All right. Thanks very much.
Henk van Dalen
Yes.
Operator
We will go to Igor Semenov with Deutsche Bank.
Igor Semenov – Deutsche Bank
Yes, hi. Alexander, first of all, it would be interesting whether you are planning to make a proper strategy update and when?
And more specifically, on the results, can you talk a little bit about the data market in Russia in mobile? Can you provide a bit more guidance on where, a bit more color on where the data ARPU are right now and what the margins are in the non-voice business?
And MTS were recently saying that in data, it's about 60% to 70%. In constant, it's about 40%.
Can you confirm that the same figures for your business and what the trends have been over the last 12 months? Thank you.
Alexander Izosimov
Thank you. As far as strategy is concerned, I was explaining to the journalists early on today that the trading process unfortunately doesn’t get its point well with the quarterly release table.
So, we are working on this strategy and we have general outlines and general principles, which I mentioned before. So, we view for example that the voice story is pretty much mature and we will treat the voice element as financing element, while we are cash cow, on the word go, and the growth will be coming from data.
But in data, we need to be very careful how we invest and also how we try. And therefore, we put a lot of emphasis on developing our pricing capabilities and we already started that process, just clearly step up sophistication on how we work with our prices as well as how we invest, because if before, any investment was almost guaranteed to make a return, it’s not at all the case with data, and I would argue that our approach as before is that as we grow served us well during the development of our voice network.
It will probably serve us even better with the data network. As long as we have stayed with the reasonable gap and not allow competition to move too far away, and so, we would be able to bridge a gap within 12 to 18 months.
I would argue that we are reasonably safe and probably more likely to generate better returns to our shareholders, otherwise the strategy of upfront very heavy investments I would consider it probably very risky one. Also, notwithstanding actually price erosion on the equipment which we can observe.
So, that’s another kind of big element of the strategy taking voice as a financing model, taking data as the source of growth. I have talked already how we can divide and probably one more important element would be the retail.
Retail we believe is the crucial part of in-marketplace, and the role of retail is not diminishing, it’s probably increasing, and want to improve the quality of sales, improve the quality of channels which we are engaging, and to that end, we will continue to invest in both partially controlled and fully controlled presence in retail. Of course, when you have this general outline and you have your key choices which have to be made, defined in a very rough scale, then the real work on strategy starts where you start detailing it and breaking down and converting these strategic statements into what you would put actually in operating plant and you put actually in the budget.
And we are currently going exactly through that process. So, I hope that we will be able in our next quarter to talk more about the strategy in a more structured way, but the outlines would be similar to what effect.
And now, as far as data is concerned and specific information, that’s over to you, Martin.
Martin Furuseth
Okay. And of course, in Russia, all the three operators are in the middle of rolling out the 3G networks as quickly as we can.
To your question regarding ARPU, specifically measured on the USB users. We see an ARPU level of around 250 rubles.
And this is right now measured by a criteria that we are trying to give away. That’s little traffic as possible.
So, we are forwarding at bit more conservative pricing on at least one of our competitors in order to be able to maintain good service levels for all the users of our network.
Igor Semenov – Deutsche Bank
Can you say in your Russian service – mobile service revenues, can you say what percentage is non-voice, and what the margins are between data content and various other non-voice services please and the trends?
Elena Shmatova
Well, actually, the margins maybe, I would like to sum up. We are not really kind of sleeping in our reporting all that things, but generally speaking, when we look at it on a gross margin level, data is more profitable than voice just because in data, there is no interconnect.
So, to this extent, yes, what MTS said as we mentioned that margins in data are higher. Yes, we fully agree with it.
Martin Furuseth
If you look at the total value-added service including content services and others, the share of revenue is around 20%, and in the content business, we are the leader among the three with a revenue of above 3 billion rubles in the second quarter.
Igor Semenov – Deutsche Bank
Thank you very much.
Operator
We will go to Herve Drouet with HSBC Bank.
Herve Drouet – HSBC
Yes, thank you. Two questions as well on my side.
The first one is regarding broadband and data. I mean, in the second quarter, it looks like there has been a bit of pressure on margin, as well on ARPU, especially coming from residential.
Just want to see if you can give us some color on that? Were there any specific events that may explain that?
Do you think it's competition which may drive that or it's just some one-offs? And any view on the trend will be helpful.
And my follow-up question will be regarding disclosure of data. In the past, you were used to disclose qualitative data regarding, at that time, Golden Telecom, in terms of own path by fiber, on broadband, to charge conversion rates such as churn.
I was wondering if you can give some of those data, either during that call or later, if you can provide those data to us? Thank you.
Martin Furuseth
Okay, first on the development of ARPU, you are right. It’s gone down from about 360 in rubles in Q1 to around 340 as I said in Q2.
And this is attributable almost 100% to increase competition. All players have launched a large number of new tariffs, partly very aggressive, unlimited tariffs across Russia and this is the major driver behind that decrease in ARPU.
Elena Shmatova
Well, talking about the disclosure, which we used to provide previously on FTTB as far as and from data sequestration, so at the end of second quarter, the household starts increased up to 8.2 million households, and the take-up rate for the last two quarters were approximately 14%.
Herve Drouet – HSBC
Okay, thank you. And just maybe a follow-up question on maybe the trend.
I mean, you said competition are launching unlimited offer. With your fiber to the building, compared with other technology, you should have some advantage on speed.
And is it something you think you can regain and maybe ask a pricing premium for that, or you think it would be difficult in the coming quarters?
Martin Furuseth
No, we are working on bundled offers, and as you say, we have used our assets in both fixed and mobile. We have a very good situation for doing that.
So, towards the end of the year, you might see the first effects of that policy, but I don’t think in Q3, you will see it.
Herve Drouet – HSBC
All right. Thank you for your answer.
Operator
Viktor Klimovich – VTB Capital
Yes. Alexander, may we return back to your long answer to Alex Kazbegi regarding your strategy with Western Europe?
I have a particular question regarding data pricing and potential in data revenues. This is not a new industry, actually and we see some trends so far.
And we see this trend in Russia. Of course, it's too early to say about further growth in Russia probably here at this point, but we see this trend in Western Europe.
Do you see that in the future there will be a huge growth starting from, as you said, from Western Europe and then maybe in emerging markets as well, in these data revenues and how much can this growth be?
Alexander Izosimov
Well, the answer here is do we see the growth in consumption, that’s the first question. And the answer is yes, and there are few sources, which generated those reports, and one of the most widely referred to report is Morgan Stanley which indicated in 2008, 64 [ph] 60 fold increase over five years in data consumption over mobile networks.
The report has been supported by a number of houses as well and Cisco came with a massive piece of work this year where they indicated starting not with 2008, but from 2010 going one with 39-fold increase. Interestingly enough, last two year’s projections of that path have been confirmed.
So, in that sense, underlying growth is undoubtedly there, and it has generated mainly by video, as I said, by video moves on to the net and that becomes absolutely dominating feature of all media discussions by the future of media industry. And second would be cloud computing, which will require much more intensive exchange between the clouds and the terminals in the enterprise world.
So, those two would be the biggest drivers. The issue therefore is not the demand as such, and how much it would be consumed, but how it will be priced and how sensitive that demand is to what pricing will be applied.
Clearly, launch of iPhone and iPad brought down to a halt basically networks of AT&T, because they haven’t anticipated, and that was the biggest learning they had, how much video would be consumed over the handsets, is handsets appropriately designed for them? So, iPhone was the first regulation, and I am sure with the whole slew of like devices coming, the Android-based or IO-based will see this trend just increasing not decreasing.
And the risk here is mis-pricing will stimulate demand and will create unsustainable investments into that infrastructure. And that’s where we are a little bit more careful as saying what would be the revenue.
So, that immense demand what sort of revenue that will generate for the operator depend heavily on what pricing will be applied, and how much of throttling will be applied to that data traffic. In that sense to answer the second part of your question that what sort of revenues and what sort of growth we can anticipate is much, much more difficult.
And that’s a struggle, not Russian or Ukrainian, that’s a worldwide struggle. The industry basically doesn’t know yet how much revenues will be coming out of that data traffic growth.
Viktor Klimovich – VTB Capital
But basically, you are saying that you expect higher risk here at this point because you cannot predict revenues. So, don't you think, or don't your shareholders think, that it's much safer to be in markets with quite stable regulation, I mean Russia at least, and to kind of develop relationship with your customers, around your customers, and so on and so forth?
Alexander Izosimov
I don’t see how one exclude the other. We are discussing when we talk about data, the underlying nature of the development of the industry and it’s not dependent yet on which market it is happening or not.
Meanwhile, that’s exactly the cornerstone of our strategy to say that of course we will be staying in Russia, developing relationships with our customers and protecting our customer base and it’s cash generating capability. To that end, we actually are saying that we are not going to engage into competing and increasing the market share.
We will try to outcompete our colleagues based on voice products and invest heavily into the voice infrastructure, because that game is probably over whatever way it passes, whether it will be through a regulation, whether it will be through substitution, whether in any other way. And therefore, it’s more of a cash flow preservation in the mature markets and careful investing into the infrastructure or opportunities geographically where we can develop data capability.
So, I don’t see how you link whether to be in Russia or elsewhere to the data strategy.
Viktor Klimovich – VTB Capital
Yes, but well, I'm probably – I'm talking about the ideas that in Russia probably you will have more stable cash flows within, I mean, VimpelCom because you have this structure what my colleagues discussed previously with you. You have quite low valuation in Russia right now.
So, probably if you will go to some other markets, to let's say even Western Europe, and you will eventually pay some premium because of VimpelCom's current low valuation and you will – but in the end, you will play just a very risky game. So, this is a question; why don't you stay in Russia with your current business, not going somewhere else, taking even more risk there?
Alexander Izosimov
Well, I am not sure what else can I say. It’s simply if you take, if you therefore decompose data-driven growth and voice on the free cash flows then the argument was which I was making in my discussion with Alex Kazbegi that the cash flows current generated in Western Europe are undervalued.
And they are value like they will dissipate in the near future. And that’s probably not going to happen.
So, in that sense, how risky is the data game? It will be risky both in other geographies and in Russia, how attractive or not attractive the voice game is, it depends how we view, either you go after steady cash flows or you go after growth.
So, clearly the balance between risk and value or in the case valuation, which is attached to any assets will be essential. So, there is no clear-cut answer here unless we put very specific situation on the table.
Viktor Klimovich – VTB Capital
I see. Thank you very much.
Operator
(Operator instructions) We will go next to Alex Wright with UBS.
Alex Wright – UBS
Yes, thank you. Just have one quick question remaining and also, just wanted to follow up on the return on capital questions earlier.
The new question if you like was on the income from associates. If you could provide some breakdown there if possible, please, between Eurosat and Vietnam, and would you agree perhaps that Vietnam is more profitable or less loss-making than it would normally be if you were still investing for growth there?
And then, just returning to the return on capital questions earlier on, Alexander, I think you – I think I understood correctly that you believe that you will arrive at a similar return on invested capital in all of your markets eventually. So, should we understand that to mean that you expect the operations in Ukraine and the CIS to reach a return on invested capital level similar to Russia?
And if that is the case, is your target of Group return on capital of 20% not over-conservative would you say? Thank you.
Alexander Izosimov
Well, let me tackle the second question first. To be honest, we are still wrapping our analytical capabilities around all the markets and see how fast and where are going and so on.
Of course, if by some stroke of magic, we would bring all of our markets to the Russian level, I mean it would be of course much higher return on capital. But pricing structure for example in Uzbekistan are three times lower than in Russia, and the core driver for the capital in that sense is minute, which we generate there.
So, I think that some of the markets will have inherited a lower return on invested capital structure and some of the markets like Uzbekistan – sorry, like Kazakhstan clearly will progress towards more normalized Russia–like performance. And I think that Ukraine is a little bit of a question mark now, because Ukraine is in transition between two worlds.
One world is European, basically pay per consumption typo of pricing, and the other world is more American where you have bucket pricing plans, and Ukraine can gradually move in towards American model, but now all the players are very actively paddling back and trying to retain the pricing power, not just giving away to traffic. So, whether the market will acquire equilibrium soon will clearly affect where the return on capital will end up in that market.
So, in that sense, the ingredients are clear, and we will try where possible in most of the markets, we don’t see any major hurdles to achieve the same business model and the same structure of the occurrences in Russia. But some notably Ukraine might be operating on a slightly lower level.
As far as goodwill amortization is concerned, we are trying to put as much as possible into elements which can be amortized. For example, license and so on, not put everything into goodwill and that would overtime improve our asset structure after we acquire the company.
So, that was general sort of where we are. And your first question was on –?
Alex Wright – UBS
Well actually, sorry, just before going back to the first question, if I could just follow up – ask a quick follow-up question on that one. As you discussed earlier, it sounds as though you were a bit prepared, through some sort of M&A activity, potentially for your returns to be diluted below the 20% level temporarily.
If so, could you perhaps explain for how long you think that may be acceptable to you and the core shareholders and if there is a sort of absolute lower level that you will be prepared to go down to?
Alexander Izosimov
We haven’t discussed it, frankly speaking, in the charts, but any acquisition if we were to consider it, will involve in-depth analysis of the earnings dilution and that essentially would be a proxy what you have on your return on capital employed dilution. And so far, we haven’t arrived to a definitive answer, but a normal program will normally, more normalized answer would be two, three years to accept dilution on earnings, but probably have accretion almost instantaneously on cash earnings.
And that's how we are very skeptical, and Henk here sighted with me when we discussed that we were very skeptical of net income as a measure, because net income is hugely volatile and subject to so many adjustments. So, it’s a very difficult measure to deal with and therefore if you take and we argue that actually during our Kyivstar acquisition, if you take cash earnings, you deal with something much more tangible and clearly linked to value accretion.
And in that sense, we would be reluctant to sustain longer periods of dilution here. So, it should be cash accretive.
But unfortunately, I cannot answer your question on return on capital employed, because we haven’t discussed it yet in those terms.
Alex Wright – UBS
Okay. That's helpful.
Thanks.
Henk van Dalen
On the minorities, I can – first I will comment on Vietnam and then I will say something on the other assets [ph]. Vietnam is virtually non-existent, so by that virtue being more profitable, it could be, but essentially we don’t have – we have very, very little operation there.
It’s only 800,000 subscribers, and it’s running on still probably negative margins. So, I am not sure how it ended up positively contributing to our earnings.
Elena, please clarify.
Elena Shmatova
I don’t quite understand the question, sorry. What was the question?
Alex Wright – UBS
So the question was, first of all, whether you can break down the contribution from your share of associates?
Elena Shmatova
Yes. Let me see.
Henk van Dalen
Alex, maybe it’s better if we come back to you on this one. It’s predominantly on (inaudible) sort of I presume.
So, we will provide you with the details.
Alex Wright – UBS
Okay.
Henk van Dalen
We will come back. Thanks.
Alex Wright – UBS
Okay. Thanks.
Operator
We will go next to Nadezhda Golubeva with UniCredit.
Nadezhda Golubeva – UniCredit
Hello. Could you please talk a bit about the margin development in Russia?
In the second quarter, we saw a slight margin decrease, which is not like – which contradicts normal seasonality. So, what was the reason behind the cellular OIBDA margin decrease in Russia in second quarter compared to the first quarter?
Was it about gross margin, or was it about marketing? And if you could possibly talk about what are the key risks that you see to the margin in the remainder of the year?
And what's going on in the retail business? Do you see more competition with MTS setting up its own retail?
And secondly, I wanted to possibly ask you to give the exact portion of non-voice revenue as a percentage of ARPU in second quarter.
Elena Shmatova
Okay, let’s start with the margins. So, for Russia, the impact of margins in mobile was two-fold I would say, yes on one hand, there were certain decline in gross margin but mainly connected with the sales of handsets, which is low margin of products.
And the second item which influenced OIBDA margin was our sales and marketing expenses and here we can say that yes, we increased our investments into the marketing in order to, again as we discussed there already to improve our position versus the quality of subscriber base.
Nadezhda Golubeva – UniCredit
And about competition, if you could give some color?
Henk van Dalen
One comment maybe on the Marcon [ph] expenses, which also increased considerably and we have talked to you the fact that the management decided in view of what seems to be a recovering economy, also they invest more in Marcon, which gave us a lead share of voice in Q2 with more than 40%. So, the increase was also made on national television and out of home to reach that share of voice, which we expect will also be carrying forward into Q3, when it comes to the effects of it.
Nadezhda Golubeva – UniCredit
And what was the increase, compared to the first quarter, like roughly?
Elena Shmatova
Actually, there is the tables, which I attached, and there you can see the exact numbers on the country level.
Nadezhda Golubeva – UniCredit
Well, but it didn't give a breakdown for fixed and mobile. Would you say about how much was the or how big was the increase of your advertising margins in the second quarter number to first quarter like for cellular business in Russia?
Elena Shmatova
Well actually, for mobile, this is – this increase actually was not very, very huge. So, it was taking –
Nadezhda Golubeva – UniCredit
Okay, if you can give this number, not to hold other people, I would appreciate it, okay. And –
Elena Shmatova
That’s actually – if we are talking just on mobile only, the OIBDA margin change was not very substantial quarter-on-quarter. So, OIBDA margin in mobile this quarter was 51%, last quarter it’s 51.2%.
Nadezhda Golubeva – UniCredit
Yes, but normally we see margin increase in the second quarter compared to first quarter. That's why I asked.
And also another question which I had, could you please remind us on the shareholders' agreement regarding the potential entrance of VimpelCom to the market where Telenor is already present.
Alexander Izosimov
There is non-compete as such, but there is a provision which said that if anti-monopoly authorities, will require some of a remedy, one of us would have to leave, then the rule locked in for ourselves will apply. So, that applies to also Telenor and VimpelCom.
So, in that sense if –
Nadezhda Golubeva – UniCredit
Okay. Thank you very much.
And what about VAS as percentage of ARPU? The exact number, is it possible to give now?
Elena Shmatova
It’s around 18%, right.
Henk van Dalen
Yes, it’s about 18.5% of revenue the total VAS area.
Nadezhda Golubeva – UniCredit
Okay, thank you.
Operator
We will go to Ceasar Tarron with Morgan Stanley.
Ceasar Tarron – Morgan Stanley
I have two questions, please. So, first, can you see – can you speak about any recovery you see in the corporate segment, and say when you think you will be able to renegotiate the contracts, please?
Elena Shmatova
Well, yes, we do see certain recovery in the business segments. And we will think that we need to renegotiate any contract, because it looks like the development is going in the right direction, so.
Ceasar Tarron – Morgan Stanley
Okay. And on the – I just want to come back to this question that was asked previously on the sales and marketing costs.
Can you please say roughly what was the increase in dealer commissions that you pay in Russia on a year-on-year basis, roughly?
Elena Shmatova
All right. Yes, again, I can refer to the table which we have attached.
So, total sales and marketing expenses in Russia in dollar terms was 185 million in the second quarter versus 166 million in the first quarter. And it includes portion of advertising, but –
Ceasar Tarron – Morgan Stanley
Yes, but if I understand correctly, this number includes the fixed line as well, and I'm just – my question is just on the dealer commissions for the mobile. I think it would be extremely useful if you could give at least some hint on what was the run rate on this number this quarter.
Alexander Izosimov
I would just allow myself, this is Alexander. I would allow myself one observation that we moved year-and-a-half ago to a single brand.
Therefore, most of the advertising expense as such is happening on the basis of single brand. And so, the weights, which will are both on the CD, the contract to the agency, and so advertising is very difficult to separate.
In terms of – I am talking about Russia naturally, in terms of things we pay to deal with the measures and so on, as well, some of the retail is now working with fixed products and trying to sell all those to a lesser extent, but those numbers would be – that separation would be very notional, in that sense that most of the dealer commissions probably can be attributed to the mobile and advertising, unfortunately it’s very difficult to split, you need to consider it as one.
Elena Shmatova
I can say on that, our total spending on sales and marketing in fixed in Russia was around $8 million. So, you can subtract it from the numbers which we have in the table.
Ceasar Tarron – Morgan Stanley
Okay, that's very useful. Just a very, very last question, can you please say again what's your target leverage that you said previously, if you don't mind?
Henk van Dalen
As said previously, the debt to OIBDA below 2.
Ceasar Tarron – Morgan Stanley
Below 2, thank you very much.
Operator
We will go to Anna Kurbatova with Gazprombank.
Anna Kurbatova – Gazprombank
Yes, good afternoon. My question is about the developments in the Russian fixed line segment.
Well, we see that with the revenues in the business segment continue declining year-on-year, although at a slower pace than in the previous quarters, but still, and OIBDA margin trends are also not very encouraging. So, can you tell us the reasons why this segment delivers pretty weakly and where do you see the bottom of this negative trends, or where do you see the bottom of the demand, or what's going on in the corporate segment, particularly with the competitive pressure which you mentioned in the press release?
Thank you.
Elena Shmatova
Well, definitely competitive pressure in business segment is pretty high, but frankly speaking, we don’t consider that the performance of our business segment is bad. On the contrary, we see kind of the size of recovery and thus we see the improvement in topline practically in all our lines of the activities in fixed line, in business segment, in wholesale and residential.
Well, talking about the margins, actually we think that margin on the level of 27% to 28% is pretty strong for fixed business. The question is that last year in the second quarter, our margin was exceptionally high, because of the exchange rate fluctuations and part of our revenues in fixed business segments is going through US dollars and if you remember that in the second quarter of ’09, the exchange rates of dollar to ruble was extremely high.
That’s why we got additional – kind of additional revenues. So, to this extent, we think that we are moving in the right direction.
Anna Kurbatova – Gazprombank
So, that represent some clear it up, about the competitive pressure. Where do you see it higher in the cities like Moscow and St.
Petersburg and the large cities or in the regional client base? And as well if you can explain from what type of competitors, like (inaudible) like Komstar – MTS Komstar or companies.
Thanks.
Elena Shmatova
Well, definitely competition in Moscow and St. Petersburg and in the other regions.
And of course yes, the competitive mainly business companies and all commercial – strong commercial companies, such as Komstar, yes, we compete with.
Anna Kurbatova – Gazprombank
Well, the question is where or who of your main competitors began more aggressively developing that impact that's your business so dramatically? So, that's the question.
Elena Shmatova
So, well actually, we cannot say that somebody is much more aggressive than the other. So, it’s more or less the same picture as we saw before.
So, of course everybody wants to have that part of that pie and the competitive situation was always quite strong and it continues to be so.
Operator
We will go next to Hugh Symes with Goldman Sachs.
Hugh Symes – Goldman Sachs
Thank you. Most of my questions have been answered.
So, I wanted to focus a little bit about your organic Russian revenue growth OIBDA margin guidance. I missed some of the call, so maybe you talked about this.
But can you just briefly repeat, for this year and next year, your view of the Russian revenue growth in rubles and your expectations of how OIBDA margins will evolve? Thank you very much.
Elena Shmatova
Well, actually we are not giving guidance in revenue and margins. The only guidance which we were mentioning that on the consolidated level was that margin will stay in high 40s.
Hugh Symes – Goldman Sachs
High 40s. Okay.
Thank you very much.
Operator
We will go next to Ivan Kim with Renaissance Capital.
Ivan Kim – Renaissance Capital
Yes, a couple of questions please. The first one is what is the worst-case scenario of antimonopoly decision in Ukraine?
Would it be like loss of frequencies or loss of licenses? And what kind of financial implications it might have.
And the second one is on the dividend. Irrespective of your dividend policy, do you plan to distribute a dividend this year as you did last year, or only next year?
Thanks a lot.
Alexander Izosimov
Let me start on Ukraine. It’s hard to say because normally one would expect that once the agency issues, the decision it stick by, but okay, assume that the decision will be revised.
Again, if you look at the European approach, European anti-monopoly committee would say that okay, we would refuse combination of the businesses and we will insist on disposing a part or something. AMCO indicated, in the early part of the discussion, that frequency or rather the issue raised by (inaudible) was the concentration of the spectrum in single company was too high, and that was the initial subject of investigation.
So, I can imagine that it would be or could be some sort of the distribution of spectrum and so on. And in that sense, it will affect us fairly from the synergy perspective, but we hope that it’s not going to come to that.
If the decision is more dramatic, I am saying that we need to dispose off the assets, then we will analyze it and say that, okay, what can we sell. But if the most straightforward answer would consider selling, what used to be your URSB line business, I think that we can fetch for the business a price which would be probably closed to programmed synergies in that time.
Ivan Kim – Renaissance Capital
Thank you.
Henk van Dalen
With regard to the dividends, question on dividends, yes. So, we certainly aimed to pay this year an interim dividend.
As I said earlier, it’s important that we finalize all of the legal such that will enable us to do that in the optimal way.
Operator
At this time, we have three remaining questions in the queue. We will go next to Stephen Pettyfer with Merrill Lynch.
Stephen Pettyfer – Bank of America-Merrill Lynch
Thanks for taking my question. As a follow-on from your comments about how you look at expansion opportunities, could you please share with us your thinking on the need or desire to control assets as opposed to owning minority stakes?
Thanks.
Alexander Izosimov
We still operate as an operator. So, from that perspective, we are viewing ourselves as an industrial investor where we want to pool together our both industrial knowledge and industrial scale which actually probably will become more important going forward, because there is a clear consolidation of the other elements of the ecosystem.
Industry-wide – so to view with that on a consolidated level is certainly easier. And would we rule out entirely minority stake?
Probably not. If there is a path to control and there is a path to extract additional value for the shareholders, as such to make a financial investment into a minority stake however would be not our cup of tea.
Stephen Pettyfer – Bank of America-Merrill Lynch
Thank you, very clear. Thank you.
Operator
We will go next to Elena with Alfa Bank.
Elena Mills – Alfa Bank
Thank you. I have a question on your working capital.
Can you please provide us with your movements in working capital in the second quarter of this year and the second quarter of last year, please? Just the change in working capital, thank you.
Henk van Dalen
Second quarter in this year, the change that we are talking about the changes in operating assets on liability, so you could take total working capital of minus 45. And in the second quarter last year, it was plus 80.
We are talking millions.
Alexander Izosimov
Of dollars.
Operator
We will go next to Vanchelsis Shimla with Deutsche Bank.
Vanchelsis Shimla – Deutsche Bank
Good afternoon everyone. One question and another follow-up.
The question, about the short-term debt that you show in the presentation amounting $1.5 billion. Can you please tell us how much of it due in the remainder of 2010 and whether you plan to refinance or to repay this portion?
Henk van Dalen
I think it’s only a relative small portion of this left for 2010, and we haven’t made a decision yet on refinancing.
Vanchelsis Shimla – Deutsche Bank
And would you be able to tell us what this insignificant portion is?
Alexander Izosimov
250 million.
Henk van Dalen
Something like that. I don’t have the exact figure.
Alexander Izosimov
It’s 250 million of the scheduled debt, which will show, and I know there’s a 470 million bridge facility which we went through when we were doing squeeze out of OJSC VimpelCom. And scheduled debt naturally we will repay in the Q4 and bridge facility, as Henk said, we are yet to decide what we do with it.
Henk van Dalen
So, you are looking – 88% of our debt due in 2010 we already repaid. You can see in the overview, what the total debt maturity schedule is, so there is only (inaudible).
Vanchelsis Shimla – Deutsche Bank
Okay. And the clarifying question, you mentioned earlier on that you see a debt to OIBDA ratio of 2 times as the sort of mid-term target.
Does it mean that –?
Henk van Dalen
I didn’t mention it as the target, I mentioned this as what we would like to stay below.
Vanchelsis Shimla – Deutsche Bank
Okay. So if you can answer my question, does it mean that – can I rephrase it and say that in any potential development where you have to either incur debt or assume debt you would not or you would simply try not to exceed this 2 times' level?
Henk van Dalen
I already gave the answer earlier as well. Even if it would be slightly above that level, the capability in the cash flow of the Group is such that you will be reducing to below debt to OIBDA to in a very short timeframe.
Vanchelsis Shimla – Deutsche Bank
Okay, thank you.
Operator
We will go next to Igor Semenov with Deutsche Bank.
Igor Semenov – Deutsche Bank
Yes, thank you. I just wanted to follow up on the synergies amount.
I think, if I am not mistaken, in the previous calls or this was in the media somewhere, the synergies in Ukraine were estimated about $500 million to $600 million. Now you are talking about $400 million to $500 million.
And inside, I think, in the prospectus, the figure was more like $1 billion. So, can you maybe talk a little bit about this?
And a question to Henk. At T&T, it seems to me that you used to give fairly straightforward guidance of the Group level.
I think only 2008, 2009 were kind of difficult in terms of the revenue outlook. So, do you feel like maybe it would be a good practice to establish giving revenue guidance, EBITDA margin guidance at VimpelCom, so we have a better idea of where you are going to, or aim to go to?
Henk van Dalen All I can tell you that in T&T in 2008 and 2009, we set the way from the industry size. So, I would like to continue that habit.
Igor Semenov – Deutsche Bank
I think it was understandable given the situation globally. But I mean, it seems like we are out of the woods, don't you think?
Henk van Dalen
Alexander Izosimov
Quite different perspectives.
Igor Semenov – Deutsche Bank
Okay.
Alexander Izosimov
And as far as strategy is concerned, it’s – I don’t remember, $1 billion, it’s always been discussed, indeed you are right, between $500 million and $600 million, but as I have explained during the transaction that, that assumed much slower FTTB development. That was assuming basically elimination of a large portion of investments in VTB.
Igor Semenov – Deutsche Bank
Okay.
Alexander Izosimov
And we brought it back in.
Igor Semenov – Deutsche Bank
Okay, understood. Thank you very much.
Alexander Izosimov
Thank you very much.
Operator
And it appears there are no further questions at this time. Mr.
Alexander Izosimov, I would like to turn the conference back over to you for any additional or closing remarks.
Alexander Izosimov
Thank you and thank you all for participating our call and as usual, if you have more questions, please contact our Investor Relationship department, and we clearly look for on those questions which remain unanswered in terms of providing specific stated numbers. And with this, have a nice day and good-bye.
Operator
That concludes today’s conference. Thank you for your participation.