VimpelCom Ltd ADR Earnings Call Insights: Orascom Loan, Mobile Data

On Tuesday, VimpelCom Ltd ADR (NYSE:VIP) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Orascom Loan

Cesar Tiron – Morgan Stanley: I have two questions actually. The first question would be to understand this, in Russia you delayed any expenses as part of this new dealer commission structure because surely you haven’t paid for the SIM cards that were activated in Q1 as part of the scheme. So, are we going to see some of those expenses in Q2 or Q3? My second question would be to understand better this loan you made Orascom, and particularly I wonder about the size of this loan because, well, I do understand that most of the Orascom cash is in Algeria and Orascom needs this cash to basically operate its business. Surely the size of the loan is quite significant and even the counting for (possible video) licenses in Pakistan and the fact that the other Orascom businesses on our free cash flow were given, I don’t understand why the loan has been so significant if you can please explain.

Jo Lunder – CEO: Let me kick off with Russia and then Henk can explain the second question. With respect to dealer commissions and cost of sales in Russia, there is a real change in the commission structure and there is a real change in the commission level, and basically it’s moved from upfront payment to value-based payment. The P&L is of course 100% reflecting the reality of that and exactly when the cash are been paid as a result of this has nothing to do with EBITDA margins and the profitability that we show in Russia right now.

Henk van Dalen – CFO: On the Orascom intercompany loan is probably good. I will take you back a little bit to the start of this Company after the WIND Telecom transaction. The moment that WIND Telecom transaction was affected, we also brought all the debt which was at a level of Orascom and that was put into an intercompany loan. There were various reasons for that but the main reason was that that was indeed the best way to secure a continued funding for Orascom going forward. That original level of intercompany loan and credit facility was $2.7 billion and that particular facility has now been fully drawn. While there has been both in various now, now is actually an additional facility of $2.5 billion, which indeed as you already expect is expected to be sufficient for quite some years to come. Whether it prevents us from going to the shareholders meeting, you could say every year to make sure that there is such an intercompany facility in place. So, this effectually from an effective region that we did it and it is completely in line with the structure that was put in place at the moment that we acquired Wind Telecom. The interest rate by the way on this particular facility is 12.5% and this big interest that is going to cause also if the results of the Company allowed that to be paid in cash.

Cesar Tiron – Morgan Stanley: Just a very quick follow-up question on this sales and marketing expenses. Just if you take an example of the subscribers that have become VimpelCom that have been the SIM cards that have been activated in Q1 2012, some of the subscribers will see generated revenue in Q1 2012 but probably you haven’t paid zero commissions because if I understand under the new scheme that you have with the dealers, you only pay for the ARPU generated by those subscribers and only after six months. Am I incorrect?

Jo Lunder – CEO: This is (indiscernible) structure being put in place but of course the recommendations are correctly reflected accounting-wise in terms of the underlying cost of the dealer structure. So, there is no cost being built that hits us later. It’s tied to the value and it’s tied to the revenue base.

Mobile Data

Alexander Kazbegi – Renaissance Capital: The first question is basically just on mobile data just to understand maybe for the two major markets, Russia and Italy. What is the smartphone penetration on your network now and how fast did you see the data so to say growing and what do you see again that is accelerating or what is the trend you are sort of seeing besides what was of course seen through the numbers. Secondly, on the CIS side especially in Kazakhstan your performance was clearly on the ARPU side better than what your competitors have shown, which seem quite substantial decrease in the ARPU levels. So I was just wondering I mean is this something temporary or do you think you sustainably can outperform the others and you don’t see this as a risk in coming quarters that there will be still a quite a significant price erosion coming from over there?

Jo Lunder – CEO: Specifically on smartphone penetration in Russia we are at 13% right now and Italy, we’re at approximately 30%. You saw the data growth in Italy year-on-year on mobile data worth approximately 40% last year and I expect that growth to continue given the fact that we are now making our network in Italy LTE compliant, so that we can start developing this region (indiscernible) into LTE capabilities when we reach the end of ’12 or ’13 because we get to 2,600 spectrum at the end of this year and we get 800 spectrum in Italy at the beginning of (indiscernible). I think you’ll see gradually the bigger cities starting to pick this up in 2013 as (unique) devices being available. But I think the trends you see right now will continue in Italy this year and then hopefully then when LTE is coming next year we will see a further uptake there. And Russia is then I think going to follow some of the same path we have seen in Italy, but of course it’s behind and as you know, the beauty contest that was announced first week of May is concluding mid-July, and realistically, I think we look at if we are being granted the two times 7.5 megahertz block (indiscernible) this for the contest. If we get one of them that we hope and I believe we will, I think probably second half of 2013 is the most likely timing of the commercial launch of LTE and probably (indiscernible) and bigger cities is more than (1 million). So, I think you can sort of look to see still in terms of growth rates, penetration rates where now Russia starts picking back up. On CapEx, Alex, can you clarify what you actually asked on Kazakhstan?

Alexander Kazbegi – Renaissance Capital: Well, I looked at the (indiscernible) – I mean they reported actually quite sort of say bigger decreases in the (indiscernible) say 20% quarter-on-quarter whilst you had I think 13% or so. So the question is there’s quite a big divergence in the impact of the either price erosion or whether it is – so that’s why I was just wondering what is the competitive situation there and how is it going to be panning out from your point of income in coming quarters?

Jo Lunder – CEO: In Kazakhstan, I think what you see there now is basically the site we have compared to theirs is reflecting a little bit of picture and the fact that we also had a regulation on maximum prices on both on net and of net pattern traffic being put in place by the regulators at the end of ’11 or early ’12 is basically affecting our business there. So it’s a combination of competitive pressure from a smaller player together with those regulations that leads to that grossed in – addressed also in the EBITDA margin. That being said, I still think that we’re now starting to move to more bundles and taking advantage of the capacity available in the network and with that and a few other maturities in place we will probably not correct the full 6 percentage points growth incurred at Kazakhstan this year, but I think we will see an improvement in the margin for the remainder of the year.