VEON Ltd (VEON) 2011 Q2 法說會逐字稿

Good morning, and welcome to VimpelCom's conference call to discuss the Company's second-quarter 2011 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, the benefits of the Wind Telecom transaction including expected synergies; two, expected future debt position, dividends and capital expenditures; and three, the Company's value agenda strategy. 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 2011 financial and operating results and the related presentation; two, the Company's annual report on Form 20-F for the year ended December 31, 2010; and three, other public filings made by the Company with the SEC, each of which are posted on the Company's website at www.VimpelCom.com and on the SEC's website at www.sec.gov.

If you have not received a copy of the second quarter 2011 financial and operating results press release, please contact Investor Relations at +31 20 79 77 234 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 Jo Lunder, Chief Executive Officer of VimpelCom. Please go ahead.

Thank you, and good morning, everyone. Welcome to our second-quarter earnings presentation.

I'm look forward to discussing with you our first sets of earnings results following the closing of our transformational transaction with Wind Telecom on April 15, reflecting the combined Company. As many of you know, I have been involved with VimpelCom for over 10 years, previously serving as CEO, Board member and Chairman of the Board. I'm very excited to be rejoining the management team of the Company, and I'm optimistic about our outlook for the future.

We are pleased with the positive trends in revenue and subscriber base that we saw across all our business units. At the same time, we had stable EBITDA performance in the quarter as we continued to make investments that allowed us to improve our mobile service revenues market share position in Russia. In Italy, our second largest market, we saw relative outperformance of the market, and our emerging markets growth engines continued to deliver profitable growth. The integration of Kyivstar continues ahead of plan, and our integration with Wind Telecom remains on track.

We have started to develop the Value Agenda for 2012 to 2014 for our new enlarged Group. I will provide you with some initial highlights today, and we will follow up with an Investor Day in November, in which we will walk you through further details of our strategy going forward.

Let me start though by introducing you to the members of the team here in Amsterdam who are with us today. We have Khaled Bichara, our President and Chief Operating Officer. Khaled will present the operational performance of our five business units. We have Henk van Dalen, our Chief Financial Officer. Henk will be covering the financials in detail. And finally, Gerbrand Nijman, our Head of Investor Relations.

We have the pleasure of reporting on our progress. But it goes without saying that our performance is due to the efforts of our 70,000 employees of VimpelCom across 21 countries.

We have organized our Group into the following five business units; one, Russia; two, Europe and North America; three, Africa and Asia; four, Ukraine; and five, CIS. Each of our five business units has impressive leadership. And it is a testament to their efforts that our Company delivered solid results in this quarter. As I mentioned before, I believe that we have a strong telecommunications team, each leader with extensive experience in their area of expertise in order to drive this Company forward.

Now I'll turn to some of the highlights of the quarter. Our performance and execution in the quarter confirms the confidence in our Group going forward. We achieved solid revenue and subscriber growth across all business units, and importantly in both our mobile and fixed line offerings. Our revenue increased 9% year over year, driven by growth in all business units.

We also delivered stable EBITDA performance, the lower EBITDA in local currency in Russia was compensated by growth in our emerging markets business units. In Italy, our second largest market, we saw relative out-performance versus the market.

We made significant progress in a number of key areas. First and foremost, we successfully launched the integration of our operations with Wind Telecom and reorganized our structure into five business units reporting to headquarters in Amsterdam. And finally, we ended the quarter with long-term financing for the combination with Wind Telecom secured.

I'd also like to share with you that we have been working on our value agenda for 2012 until 2014. I know many of you had questions about our strategy. And later in this call I will provide some initial components.

Now I'll pass the floor to our CFO, Henk van Dalen, who will discuss the Group's financials. Henk?

Thank you, Jo. As a reminder, we are presenting our results today on a pro forma basis, unless otherwise noted. We believe pro forma financials provide the most meaningful comparison of financial performance for the quarter. Accordingly, the financial information presented here reflects what the Company's results of operations would have looked like had the Company's transactions with Wind Telecom and Kyivstar occurred on January 1, 2010.

As reference, the combination of OJSC VimpelCom and Kyivstar, which resulted in the formation of VimpelCom Limited, occurred on April 21, 2010, and then on April 15, 2011, VimpelCom acquired 100% of Wind Telecom. As a result of the Wind Telecom transaction and acquisition, the Company owns indirectly 51.7% of Orascom Telecom, and 100% of Wind Italy.

The pro forma financial information also assumes that all spin-offs that are part of the transaction consideration for Wind Telecom would have happened on January 1, 2010, and that the sale of Orascom Telecom Tunisia also happened on that date. At the same time all financing related to the Wind Telecom transaction is assumed to have taken place as per the same date.

Additionally, Group financials are presented on a US GAAP basis. However, our Europe and North America business unit as well as the Africa and Asia business unit, excluding our operations in South East Asia, are IFRS-based. And on the consolidated level the required adjustments of IFRS to US GAAP have been performed on the business unit level and the Group level. The results per business unit presented later by Khaled are expressed in their local currencies without such adjustments.

Let me touch briefly on the actual results for the Group first. Actuals in the second quarter 2011 are influenced by Kyivstar, which is now in for the full quarter, and Wind Telecom as of April 15 in the quarter.

Second quarter 2010 was still only the old VimpelCom with Kyivstar included as of April 21. As you can see, revenues increased over 100% to $5.5b demonstrating the substantially increased scale and scope of our business. EBITDA increased by 73% to $2.2b, which represents a substantial additional gross cash flow to our business. Net income declined by 29%, mainly due to higher interest expenses resulting from higher gross debt after the acquisition of Wind Telecom and in addition net income was also negatively impacted by higher depreciation and amortization charges associated with the Wind Telecom transaction. The net cash from our operating activities increased by 23% to $1.2b.

Now turning to the financial highlights on a pro forma basis, revenues in the second quarter grew 9% to $6b, driven by 3% organic growth and favorable currency movements. Organic growth was driven by revenue growth across almost all of our business units.

EBITDA was stable at $2.4b. Our business units Africa and Asia, Ukraine and CIS delivered high single-digit organic growth. EBITDA from our business units Russia and Europe and North America was more or less stable in US dollars. In local currency, Russia declined, as expected, year on year primarily due to lower mobile margins as a result of our investments in that market. And we will discuss that further in the presentation.

EBITDA margin for the Group stood at 39.5% versus 43.1% reported in the same period last year. This is due to a mix of higher margins in the business units Ukraine, and Africa/Asia, and lower margins in the other business units, and mainly in Russia. Net income increased by 42% year on year as a result of favorable currency movements partly offset by increased depreciation and tax expenses. The increase in our tax expenses is mainly attributable to certain net operating losses not recognized.

On the basis of our first quarter 2011 pro forma net results, you might have expected a net result of around $550m. There are however some important differences between the first quarter and the second quarter 2011, as you can see from Attachment C in the press release. And the difference are, for instance, $200m net FX loss, again delta between the first and the second quarter, a somewhat higher level of tax expense and a significant delta of $40m in loss and income attributable to the non-controlling interests.

By the way, EBITDA as well as operating income in the second quarter 2011 were higher than in the first quarter 2011 with 5% and 2.5% respectively.

CapEx increased 41% to $1b and this is within our expected 21% of revenue range for the year, and mainly reflects slow phasing of investments in Russia and the CIS last year. On a last 12-months basis the second quarter is broadly in line with full year 2010, the CapEx to revenue is at a level of roughly 20%.

Then to the debt, cash and ratios, as you can see here, our financial position is in line with what we already presented at the pro forma first quarter '11 figures provided in June. On a consolidated basis in the first half of 2011, net operating cash flow was $2.2b, and the actual net cash from operating activities in the second quarter was $1.2b, being 23% higher than a year ago. This was --- then funded our CapEx investments which totaled $1.5b on a cash basis. We already paid cash dividends of $500m this year relating to the 2010 financial results.

Gross debt at the end of the second quarter stood at $27.4b and this is in line with our expectations for preliminary pro forma gross debt, which we shared with you at the end of the first quarter. We finished the quarter with a balance of cash and cash equivalents of almost $3.3b (sic -- see presentation). The resulting net debt was $24.1b, which led to a net debt to EBITDA ratio of 2.6 at the end of the quarter on a pro forma basis.

Turning to our debt maturity schedule and the debt composition, as you can see, we do not have near-term refinancing obligations of any sizeable amount. The total gross debt, as said, stood at $27b, with an average rate of interest rate of 8%. There is a peak in 2017 caused by the Wind Italy debt, but we clearly plan to refinance this before that date. However, this will not be completed before the end of 2013.

Our balance of foreign exchange exposures in gross debt is more diversified across the euro, ruble, US dollar and other currencies now, if you compare that to the mainly US dollar and Russian ruble at the end of the first quarter 2011, when we did not yet have the combination with Wind Telecom.

The full financing and refinancing package for the Wind Telecom transaction is now finalized. Orascom Telecom Holding external debt has been fully refinanced through an intercompany loan from VimpelCom and a bridge loan of $2.2b was taken out by successful placement of $2.2b bond in the Eurobond market achieving the lowest coupon ever attained by VimpelCom.

Then to the interim dividend. As announced yesterday, we will pay an interim dividend for 2011 of $0.45 per common share in the fourth quarter. In total this represents approximately $733m. And it reflects a payout of 33% of our first-half 2011 net cash from operating activities. This interim dividend is in line with the dividend guidelines as presented last quarter. Following this 2011 interim dividend, a final dividend for 2011 will be proposed in the first half of 2012 to our Board.

With that, I would now like to turn the floor over to Khaled to discuss the performance of our five business units.

Thank you, Henk. Let's go to the performance of our five business units. Let me start with Russia. As you can see on the slide, our revenue in Russia increased 6% year over year and amounted to RUB65b, driven by growth in both fixed and mobile revenues. On the mobile side, data revenues increased 38% year over year to RUB4.1b, and the total number of mobile broadband subscribers increased 82%. Fixed broadband revenue was nearly RUB1.9b, growing by 45%, supported by strong growth in subscriber which were up 39% and positive ARPU performance.

Quarterly EBITDA margin in Russia was 41.5%, reflecting our intensified network development and increases in marketing expenses as part of our plan to strengthen our market position. We're extremely pleased with the growth of subscribers in Russia. On the back of the positive momentum we are seeing in the market we will continue to develop our network and marketing activities to further stimulate usage.

At the same time to strengthen our stability, we are taking measures with our Business Excellence program. This program will focus on an increased efficiency of operation and target reduction in network maintenance expenses, rental costs, commission and other G&A expenses. CapEx was 19% of revenue, in line with our plan.

As I mentioned, we continued to execute on the plan that we adopted a year ago, which was aimed at enhancing our market position. We are pleased to report that we are seeing very positive results. For two quarters in a row we have now achieved the highest net adds in Russia. In this quarter we accelerated subscriber growth to more than 2m net additions.

We reached 55.2m subscribers in the quarter, up 9% from last year, including 630,000 subscribers acquired through the acquisition of NTC. As we announced, NTC is a leading mobile operator in the Far East of Russia that provides voice data services through wide range of wireless, fixed and broadband solution, as well as IPTV and IP telephony. This bolt-on acquisition substantially strengthens our position in the Far East region. Additionally, we've also received four 2G licenses in the Far East region.

Mobile broadband subscribers increased by 82%. Our fixed line broadband business also continues to evolve with a strong growth in both subscription and ARPU. We also launched IPTV in eight new markets, bringing the total number of cities where this service is available to 32 out of 94 cities, where we provide IPTV service.

Overall we're pleased with developments in Russia this quarter, and we intend to maintain this momentum going forward, supported by improved customer confidence. At the same time, we will focus on improving profitability in this market.

Moving to Italy, we continued to outperform the Italian market. Our total revenue in the second quarter were up almost 1% on an organic basis while on a reported basis the revenue and margin is down as a result of non-organic items in Q2 2010. Cuts in mobile and fixed termination rates are having a visible impact on our income and revenue when compared to the same period of last year. EBITDA was stable on the previous year on an organic basis while reported EBITDA was negatively impacted by non-organic items.

EBITDA was also impacted by an increase in monthly access fees paid to the incumbent and by an increase in bad debt in our fixed line business. That said, margin remains very solid at 37.6%, with Wind delivering a mobile EBITDA margin of 44.2%, the highest among Western European [third] mobile networks.

In the second quarter of 2011 we continued to invest in growing our business, with a particular focus on three areas; one, increasing our coverage of 3G and HSDPA footprint and increasing our capacity of the mobile network; two, expanding our LLU fixed line coverage; and three, increasing the capacity and quality of Wind's backbone which serves both the fixed and the mobile business.

Also as most of you surely are aware, we are currently in the middle of the 4G spectrum auction in Italy, which officially kicked off on August 30. Wind is actively participating along with the other three mobile operators in the country. The spectrum that is being auctioned includes 800m, 1800m, 2000m and 2600m.

In Italy, our performance in Q2 remains strong, despite competitive and aggressive pressure, and challenging macroeconomic environment. Our mobile subscribers increased by almost 7% over the previous year, as a combined result -- as a result, sorry, of our simple and transparent offering, our market leading customer care and the quality of our network. In the second quarter we continued to focus on our core strategic pillars; one, maintaining our focus on key segments; two, capturing opportunities in the high value post-paid mobile segment; and three, exploiting the mobile data growth.

ARPU in the quarter declined over the previous year, mainly as a result of the cut in mobile termination rates, and as a result of the increased proportion of data-only SIM cards, which do not generate any voice revenue.

Our fixed line business also continued to perform strongly, with voice subscribers growing almost 8% to 3.1m subscribers, the vast majority of which are higher-value direct voice subscriber connected to our own network. We also continued to deliver exceptional performance in fixed broadband, where we grew our subscribers by 18% while maintaining a growing ARPU, as we've done in Russia.

Turning now to Africa and Asia business unit where we saw strong improvement in performance, driven primarily by increased usage of voice traffic and by focus on cost optimization. Net operating revenue increased by 5%, driven by a 12% subscriber growth across our countries. EBITDA increases by 8% as a result of management's continued focus on cost optimization, leading to a strong EBITDA margin of 42.9%.

To elaborate, on main country-specific performance, our operation in Algeria has displayed resilience and the current operating limitations have forced us to put in place a very tight management cost control initiative that led us to reach an EBITDA of 59.2%. That said, we do not think it's a sustainable situation in the midterm, and we intend to do our best to find a balanced way forward acceptable to all stakeholders.

In Pakistan, Mobilink now counts over 33m subscribers, and maintains its market leadership position, despite heightened competitor pressure in the Pakistani telecom market.

In Bangladesh, strong subscriber acquisition over the first half of the year and reduced SIM tax subsidies have had a positive effect on our EBITDA which increased 85% in comparison to same period of last year.

We believe that the second quarter is testament to the stability and strength of the Company and promises to deliver results looking forward with growing into the emerging markets.

Let us move now to the next business unit, Ukraine. Here we continue to deliver solid results in the second quarter driven by healthy revenue growth, improved operating margin and realized synergies from the integration. Total revenue increased by 7%, mainly driven by growth in mobile revenues as our subscriber base increased 3% to 24.7m and our ARPU increased by 3%. This growth was largely due to our continuing transition towards new bundled tariff plans, stimulating an 11% increase in MOUs. Mobile data revenue grew by 48%, driven by increased data usage services and USB modem offer within the new bundled tariff plans.

Fixed residential broadband continued to show strong growth as well. Fixed broadband revenue increased by 87% year over year, driven by a 174% increase in subscribers, which reached 297,000 for this quarter. We continue to be the fastest growing alternative broadband provider in the country, and are driving towards becoming the number one alternative broadband operator in the Ukraine.

EBITDA margin improved to 54.8% on back of the higher revenues, higher mobile gross margin due to lower mobile termination rates, realized synergies ahead of plan and effective cost control.

The synergies from the integrations of VimpelCom business with Kyivstar continued to deliver positive results ahead of plan and our expectations, with synergies of NPV $120m realized since inception.

We also continued to invest in our network to accommodate the growing voice and data traffic. Overall we are very pleased with the trends we are seeing in both the mobile and fixed line businesses in Ukraine, and the success of our synergy program and margin performance. We will continue to focus on actively managing our market position, sustaining operating margin and cash flows through synergy realization and cost control, and aggressively building our fixed broadband business as the year progresses.

Now let's turn to CIS business unit. Overall, the CIS business continues to demonstrate strong operational and financial results. Despite intensified competition in key CIS countries, revenues are growing at double-digit rates year over year in nearly all CIS markets as a result of improving product quality and efficiencies in marketing efforts.

We remain focused on growing voice and data traffic and our comprehensive data strategy resulted in record revenue growth of 83% year over year in data services. Despite continued and intensified competition in key markets, we also remain solidly focused on enhancing market positions. Our sales and marketing efforts are paying off, and resulted in 27% increase in subscribers this quarter.

Of note, in our largest CIS market, Kazakhstan, we achieved continued subscriber growth of 24% and solid revenue growth of over 9% in the second quarter.

EBITDA increased 9% but EBITDA margin declined by 3% to 45%, primarily due to intensified competition in Kazakhstan, increased volume of customer equipment sales and higher sales and marketing expenses.

EBITDA margin was also impacted by per second rounding and the mandatory cancelling of call setup fees in Kazakhstan introduced by the national regulator in Feb 2011. In Uzbekistan and Armenia, intensified competition is also affecting margin, together with active expansion of data services and distribution of customer devices.

We continue to successfully accelerate the rollout of 2G and 3G networks in the CIS market. In the quarter, we substantially increased CapEx related to continued mobile and fixed network expansion in order to support growth in the CIS market going forward.

Overall, we're pleased with our position and focus on continuing to grow our business in this market.

Thank you very much. Now I'll turn back to Jo.

Thank you, Khaled. I will now spend a few minutes providing you with an initial overview of the Value Agenda for 2012 till 2014.

VimpelCom today is a truly global telecom company, designed to deliver sustainable, profitable growth going forward. We have a well-diversified revenue base, with balanced exposure across attractive markets, including in rapidly growing emerging markets. We are a more balanced and less volatile business than many regional and local peers.

Our emerging markets exposure covers 0.75b people. This gives us an extensive opportunity for growth going forward. We also have strong positioning across both mobile and fixed broadband businesses, which provide another platform for growth, as these continue to develop across our markets.

Importantly we are in a good starting position to capture the shift from voice to data, which today already exceeds 10% our total revenues. Finally, we have an attractive financial profile, with revenues per share of $14 and a free cash flow per share at almost 25% thereof.

Turning now to one key element of our integration. Following the closing of the transaction of Wind Telecom, we launched a comprehensive integration program to capture the strategic benefits of the combination and to achieve the expected synergies from the enlarged Group. The first results from the program are very promising with early savings in procurement already achieved through harmonization of the best current price levels across the Company.

We continue to believe that we can achieve total synergies on a net present value basis of at least $2.5b as promised. In fact, current initiatives have already secured synergies in the amount of $1.6b on a net present value basis. In the next phase, we will continue implementing best practices in terms of vendor rationalization and redistribution on a Group level and will target additional categories at the local level. We are progressing on track and look forward to reporting continued progress to you in the coming quarters.

I'd now like to give you the basis starting point for our Value Agenda. We view the Company as a well-diversified balanced mix of businesses, in essence comprising three strategic clusters, each with its own strategic approach to drive growth at their different stages of development.

The first cluster consists of our larger and more mature markets, Italy and Russia, where we are focused on increasing profits and cash flow generation. These markets have strong potential for broadband growth in both fixed and mobile. Here we will remain actively focused on maintaining our solid market position and sustained cash flow generation.

Cluster two is our growth engine, comprising of Ukraine, CIS, Bangladesh, Pakistan and Algeria. These markets have in common that they are large potential addressable markets with high revenue growth, a relatively low penetration, and an untapped growth potential for mobile data.

The third cluster is focused on new opportunities for growth. This last group is comprised of early stage operations that require investments to reach their full potential. However, they also need to be realigned and refocused within the new VimpelCom.

Emerging markets, where the Company has its largest exposure, will follow the developed markets in their development. Therefore, VimpelCom has a clear advantage. We can utilize the knowledge and the experience in Italy and in Russia in our growth engine markets. In other parts of the Group there will be experience and knowledge-sharing and product transfer, enhancing our local competitive position.

This brings me to how we will translate our strategy into shareholder value. We start with driving profitable growth, growth at higher margin that generate cash. We are now refocusing the business units to accomplish this goal. This is the first pillar of our value agenda.

Next, it is cost leadership. We will launch corporate cost efficiency programs as well as continue to deliver on our synergy programs.

And the final pillar in our value agenda is capital efficiency. Investment is a part of the nature of the telecommunications business and it always will be. A cutting edge network is after all our life blood. However, we can be more efficient with our capital and we are focused on being better stewards going forward. Capital efficiency and cost optimization are closely linked. And our philosophy is that it starts with capital efficiency, followed by cost efficiency and then eventually increased cash generation.

So as you can see, generating cash flow growth is our priority number one. In this way, we will drive even better returns for our shareholders including an attractive dividend.

For each strategic cluster and entities therein we are defining the optimum operational strategy. And in addition, we will at group level, define our view on listings, portfolio strategies, leverage, and return on capital.

I think this is more than a goal; it is something that we are driving into our culture. We are developing a clear and unified organization aligned around performance. Everyone, top to bottom, is accountable based on solid governance and effective business steering.

Let me bring this all back together. Our results this second quarter are just the beginning of what we believe will be a rewarding journey. We are a growing global telecom company with attractive markets and prospects. We are focused on leveraging our new strengths to deliver business excellence and synergies, and we are ahead of plan.

We will provide a further level of detail at an Investor Day in the second half of November. And you will have the opportunity to meet the team that will deliver on the strategy, both those at group level as well as business unit leaders. We certainly hope you will join us.

With that I thank you all for taking the time this morning, especially the people participating in the US. And, of course, we are now happy to take any questions you might have. And operator I think you can now instruct and explain the audience on how to put forward their questions.

Thank you. (Operator Instructions). Our first question comes from Jonathan Lee from Hermes Fund Management.

Hi, I actually dialed in late. Just have one question, on the last call you stated your intention to refinance Wind's capital structure in 2013 with a bond [recallable]. Can you confirm that intention remains in place? And can -- and confirm that's the case for PIK -- P -- sorry, PIK.

Sorry?

The first one I think we captured that was refinancing in 2013 but the -- sorry didn't capture the second part of your question.

Sorry. I said can you confirm that is the case for the PIK?

Oh, okay, okay the PIK yes. No, certainly this -- we are certainly contemplating to do the same as we already gave earlier in our principles around financing.

And I think I repeated it also when I was pointing at the maturity schedule, which was part of the presentation where you see in the maturity schedule quite a peak of local refinancing in 2017. That mainly has to do with the debt structure of Wind.

So it is clear that we will take our appropriate steps before that moment and go for a full approach in that respect in the years before that. So in the 2013 more towards the end of 2013 will then be the first moment to do that.

Also in a way, particularly with regard to what the -- to what you call the PIK where it is reasonably in price, because if we do it earlier then it will be too pricy to do it.

Perfect, thank you very much.

Thank you.

Thank you. Our next question comes from Mikhail Galkin from VTB Capital.

Good afternoon, and thank you for the presentation. I'm coming from the bond side of the capital markets and my questions are around the evolution of your Group's leverage, and in conjunction with that your asset acquisition and disposal plans. So if you could maybe shed some light? Earlier today you've been commenting on your asset disposal saying that the Algerian unit you want to keep. And -- there remains uncertainty over OTH spinoff plan, and it's -- whether it will be executed before the end of this year.

But, if you could talk more about the -- which acquisitions you may do over the next 12 to 18 months whether in Italy or in other regions. And what's going to be -- what your CapEx might be for the Group this year. And if you have any figure for gross or net debt towards how it -- what the figure would be at the end of this year, and if you plan any new bond issuance. Thanks.

I think probably I'll start and then Henk can pick up the questions more directly related to the funding as such. I think we need to put everything a little bit into a historical perspective here.

We have, both Wind and VimpelCom, has over the last two to three years had a quite active M&A agenda. And I think that's been driven with a strong believe in scale and size, and also with a strong belief in data as a future revenue stream for these kind of companies.

I think that what we have said now that with the transaction from April we have reached the scale we would like to have, and now we move into a phase with much more focus on operations, integration, synergy, and as part of that setting now cash flow generation and growth of cash flow as top priority of our activities over the next 18 to 24 months.

And I think I said on the call earlier today that a company our size is very difficult to make a pledge that we will be completely out of the M&A arena for the next 24 months.

So from that aspect I said that securing spectrum allocation for our operations is a priority, because that's going to build the data story. So, for example, auction in Italy ongoing. It would be very easy for the company to not participate there and have stronger cash flows for the next couple of years, but it's going to hurt the business three or four years from now. So that's an example where we invest in the future because we believe in data. We will do the same thing in Russia. And we will do the same thing in Ukraine, as examples.

And then we also said that there might be opportunities coming up for in-market consolidations and we might look at them. And not always you can decide on the timing of these things, because we believe in-market consolidations are great and value accretive for shareholders given the right valuations of course. But being in the market with a large transformational transaction now the next 18 to 24 months is very unlikely I would say.

All this being said, of course, we need also to manage our cash very carefully, and the message that we sent from the time of the transaction that we have a willingness and a target to deleverage the company is still in place. Exactly how that deleveraging is going to play out over the next years to come will be a little dependant on how the different 4G auctions are coming and as well as how Algeria plays out and how the spinoff plays out.

So there are a few things here a little bit outside our control. But I can tell you for sure that cash flow generation is priority number one, deleveraging is clearly a pledge we have and we would very much like to prioritize that as well. That's sort of the general picture and sort of the order of priorities.

Yes, more on the details, because I think Jo clearly gave the principals that deleveraging over the period to come is an important factor. And maintaining our BB credit rating is important and all the time, indeed also for strengthening is important.

But at the end of this year we might be somewhat higher of course than the current level of $27.4b of gross debt, because that then will relate to what at the end of the day if we are successful in the 4G auction in Italy what we are then indeed are required to pay.

So in relation to that, of course, combined also with the announced dividend, we expect that the gross debt will go up a little bit but overall still within the parameters that are relevant to maintain.

And as you know from earlier discussions the deleveraging effectively only will start in 2012 and then towards 2013 and beginning '14. So we never, of course, promised deleveraging in 2011, which will also be very difficult to obtain given the fact that we are just there in the combination. But I think the principles and I just gave a little bit more details to what Jo said, the principles are very clear.

And if I may -- thank you, and if I may a follow up here, the CapEx number for this year for the group should be -- it was quite light in the first half. It's going to be skewed towards the second half, right? And also the license you're talking about how much -- what kind of price tag are we talking about in Italy's case? Thank you.

I think CapEx, first of all I think it's very important here to divide the acquisition of spectrum and CapEx for growing and maintaining the business, so let's do the spectrum part first.

We can not disclose any details, of course, from the auction that is ongoing there. That would be hurting the company and the shareholders. So we are actively now involved in the auction. It started a short week ago and it's ongoing. And we have different scenarios and a very, very detailed and good plan I think for that auction but we can not disclose any numbers for these reasons.

When it comes to 4G in Russia, 3G in Ukraine, 3G in Algeria I think it's too early to also put a price tag on those. But if you look at -- at least the numbers circulating in the market, it looks like Italy is higher expense than the other mentioned, so that's sort of acquisition of spectrum.

And then when it comes to CapEx I think here we have one thing that is a challenge right now for the group as such and that is the catch up we are doing in Russia right now. We had a couple of years after the financial crisis in 2008 where we underinvested a lot in Russia, and slipped also our market position. We are now regaining that market position driven by a willingness to invest. And so that will continue until we believe we have the right network in place in Russia.

And then if we move this into overall CapEx level, I think we have an ability to drive down, for example, our CapEx to revenue as a KPI compared to many of our peers. I think right now that number for VimpelCom is too high and I would very much like to see that number at a lower level a year two and three from now.

And here we are now with Khaled, with the business unit leaders, with people from the technology in -- here in headquarters very, very thoroughly looking into how to manage to drive that number down. And that's what I was talking about as a building block for the value agenda as well as capital efficiency.

Sorry on the new issuance please any comments, I guess Russia VimpelCom might do local bonds from the information available in the public so far.

No, there is no further information to be given there. We have a position that we could bring local bonds, but of course that will only be done when there is a necessity to do so in the total refinancing of our financial structure in OJSC VimpelCom, so in itself nothing to mention at the moment.

Okay. Next question please.

Thank you. (Operator Instruction). Our next question comes from Stella Cridge from Barclays Capital.

Good afternoon. I was just wondering if you could tell me whether you expect to be cash flow positive this year after CapEx, interest, dividends and tax at the group level.

Well, if you take -- I don't know exactly what kind of definition you would apply, but if you take the definition of net cash from operating activities minus CapEx, in net cash from operating activities there is indeed also the taxes and interest paid, and before any payment for a license in 4G or any other license, the answer is yes.

Okay, that's great, thank you. Could you give us a rough idea of how much you think that would be, a rough area?

Well, we could do it but we are not doing it.

Okay. Thanks.

Okay.

Thank you.

Thank you. Our next question comes from Jean-Yves Guibert from BNP Paribas.

Yes, actually good -- I mean good morning to you if you are in the US. Two follow-up questions actually, first one on -- with respect to the 2017 bond maturity within Wind Italy so [they] are not on the peak. If I understand you correctly you say that you do not intend to refinance them prior to the first call date, which will be in the second half of 2013, but certainly that you will refinance them before their maturity.

But as a following question I get the impression that you were looking to refinance them as early as the end of 2013. Does that mean that you don't keep the option to -- depending on macro condition to keep those bonds outstanding for -- I mean a bit longer than end of 2013, or do you have already in mind the idea to refinance them as soon as they are callable i.e. July '13. This is my first question.

Second question is on a follow up again on M&A so you do not exclude possible in-market consolidation opportunities. If I refer to Italy, we know that Wind Italy itself is self-funding the possible acquisition of spectrum. I think [get it] has committed up to [EUR800m] bridge loan.

If there were any in consolidation opportunities, and given that. for instance, the funding of any acquisition of spectrum I think Wind will have little financial headroom to increase its indebtedness by itself. Does that mean that to seize any opportunity you could step in to provide the required funding to Wind and to acquire or to be active in the type of -- in attractive in-consolidation? Thank you very much.

Yes. I think the first point that you mention of course on keeping full visibility on what the market does and where the momentum will be I think that is absolutely something we will always take in to account.

As Jo said a very simple example when we did the refinancing of the bond in June, we exactly took the day just after the Greek Parliament voted for all of the packages to save in their total governmental accounts, and that was more or less the only moment in that month and the month thereafter that was a successful moment to place bonds.

So we will always of course look at market conditions. And if the end of 2013 or beginning 2014 will not be the best time, of course, we are not going to do things that are against any rationality in that sense.

The second point that you mention I think that very much ties into the answer that Jo Lunder already gave earlier. There might be from time to time coming these opportunities, we will look at them on a case by case basis but always bearing in mind that we keep a healthy financial structure.

Okay, but shall we -- if we compare today your implied cost of funding -- cost of debt --?

If I may -- because the problem in these questions from time to time is that we are going to extensively go into what if, and what if this and what if that. I think it's better to look at it when and ever it would occur then we look at it at the moment that it occurs and then you will see the full picture including how we make sure that we keep a healthy financial structure.

I got you. And just if I may, a last housekeeping question with respect to Wind Italy results, as you indicated Q2 2010 benefited from exceptional items which in a certain way inflated revenue and EBITDA. If I just do simple calculation taking the ARPU and multiplying the ARPU by the average customer number, in Q2 2011 I am doing the same exercise in Q2 2010, in Q2 '11 I've got mobile revenue of EUR880m which is quite comparable with your reported figure of EUR982m for the period.

If I do the same exercise in Q2 '10 I've got EUR883m as opposed to a figure of EUR146m. But if -- so that means that the differential around EUR60m is what we could consider as this unusual exceptional type of items impacting revenue?

No, we -- it's not that number. But I think if you want to go to that level we think it's better to send an IR -- an email and (multiple speakers).

(Multiple speakers).

Yes.

Okay, terrific, thank you very much.

Yes. We have time for one last question.

Thank you. Our next question comes from Howard Goldberg from Credit Agricole.

Thank you, and good afternoon, and thanks for taking all the questions about Wind. First, I just wanted to confirm that Wind will be filing separate financial statements, is that the case?

Yes.

Okay.

Confirmed.

And thank you for that. And in comparison to the net debt to pro forma EBITDA of 2.6 times, Wind's leverage is -- has been significantly higher and would presumably go up further if the company is successful in buying spectrum. Can you share with us what your parameters would be in terms of your comfort level with Wind's leverage on a standalone basis?

No, I think we are not going too much into the detail of the -- of each entity. But the level as it is currently I think is a level which has already been managed by Wind very successfully for a very long period of time, based on solid cash flows and I would say excellent operational management. And we will absolutely make sure that those parameters will remain in place.

Okay, thank you.

Thank you. That is all the time we have for questions. I would now like to turn the conference over to the speakers for any additional remarks.

Yes, okay, thank you again very much for taking the time and listen to us this morning. We have a very good Investor Relations team sitting here in Amsterdam that is ready to have a dialogue over the next days if you have any questions.

And as said a couple of times during my speech today we are now also planning an Investor Day in November where we would like to take the Value Agenda with focus on cash one step further, and develop this into operational plans for the different business units and also set this into a more group perspective.

So that's something that is now being developed and planned to be communicated in November. We certainly hope to see you all there. And with that I wish you all a good day and goodbye for now. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect and have a wonderful day.