VEON Ltd (VEON) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom fourth-quarter 2011 investor and analyst call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn your call over to your host for today, Ms. Alex Tramont of FTI Consulting. Ma'am, you may begin.

Thank you. Good afternoon, ladies and gentlemen, and good morning to those of you connecting from the US, and welcome to VimpelCom's conference call to discuss the Company's fourth-quarter 2011 financial and operating results.

Before getting started, I would like to remind everyone that forward-looking statements made on this conference call involve certain risks and uncertainties. These statements relate in part to, one, the Company's plans to maintain profitable growth in its business units; two, the Company's expected future debt position and refinancing plans; and three, the Company's financial performance objectives.

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 fourth-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, 2011; 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 fourth-quarter 2011 financial and operating results 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. Good afternoon to those in Europe and good morning to our guests from the United States, and welcome to our fourth-quarter earnings presentation.

Let me start by introducing the members of the team here in Amsterdam. We have Henk van Dalen, our Chief Financial Officer, who will be covering the financials in detail, and Gerbrand Nijman, our Head of Investor Relations.

Moving on to our highlights, we're pleased with the positive development and solid operational performance, with an organic increase in revenues and robust subscriber growth in all our markets in the fourth quarter. These results enabled us to achieve strong cash flow. Net income is impacted by non-cash items, and Henk will address this matter later on in the presentation.

We are pleased to report positive developments and resolutions in relation to a number of strategic subjects. As we announced in December, we decided not to exercise the call option to acquire an additional 24.9% stake in Euroset. VimpelCom's partnership with Euroset has been and will continue to be a substantial part of our distribution strategy in the Russian market.

In Algeria, discussions with the government are ongoing. The negotiations are quite sensitive, so we are not today able to say more than what we have already disclosed on this matter.

In February, Telenor withdrew its arbitration claim for preemption rights which it initiated in connection with the acquisition of Wind Telecom. This removes the risk of dilution to our shareholders. At the same time, the shareholders' agreement with Altimo and Telenor terminated and the so-called Section B bylaws came into effect. We believe that these bylaws are in line with common corporate governance standards for a company of our size.

We also successfully completed the integration with Wind Telecom in the quarter, which allows us to fully focus on our operations and on delivering on the value agenda in 2012 and beyond. In February, we completed the spin-off of certain assets of Orascom Telecom to Weather Investments II. The completion of the spin-off fulfills all of VimpelCom's obligations in relation to the VimpelCom merger with Wind Telecom, and hence removes the potential overhang related to the purchase of these assets by VimpelCom, which would have occurred had the spin-off not been completed within the agreed timeframe.

Today, we also announce a final dividend of $0.35, which underscores our commitment to pay dividends of at least $0.80 per common share from 2011 to 2014.

Part of the value agenda of 2012 to '14 is formed by a strategic portfolio analysis. Following a detailed business plan review of our operations in Vietnam and in Cambodia, we have booked an impairment of $527m.

Finally, we have today communicated further details of our financial performance objectives for 2012 to '14, as promised on our Investor Day in November. I will return to our objectives at the end of today's presentation.

Now, moving on to the results of the quarter, our performance and execution gives us confidence in our Group going forward. We achieved solid subscriber growth across all business units, in particular in Africa and Asia, with double-digit growth in mobile subscribers that reached 205m and close to 5m subscribers in fixed line.

The good performance led to a 5% organic growth in revenue year-over-year, reaching $5.9b. Excluding ForEx impact, EBITDA was stable at $2.2b, leading to a margin of 37%.

Net cash from operating activities increased 133% over the previous year, reaching $1.8b. Net income for the full year was $489m (sic - see presentation), having been impacted by non-cash items that Henk will explain in detail upon later.

Moving now on to the performance of our five business units, starting with Russia. The Company met its 2011 target to regain revenue market shares. We are pleased with this achievement and our focus in 2012 is now shifting to maintaining this position. At the same time, we are gearing our market activities towards stimulating usage in order to improve contribution margins.

Our fixed line broadband business also continues to evolve, with a strong growth in subscribers. Going forward, our target is to extract maximum value from our current FTTB coverage in existing areas.

In the fourth quarter, our revenues in Russia increased 10% year-on-year, reaching RUB71b, with mobile revenues up 10% driven by an increase in voice revenues and sale of devices. On the mobile data side, revenues increased by 41% to RUB5.1b. You can expect a continued focus to this important growth area going forward. Fixed broadband revenues grew by 57%, supported by a 46% growth in subscribers.

Despite the solid top line growth, EBITDA was impacted by our marketing activity. The decline was also due to average price per minute reduction, driven by competition, growth in low-margin handset sales and a write-off of obsolete handset inventory, as well as ForEx impact on costs related to calls to the CIS countries. Our operating expenses connected with network rollout are also growing currently at a higher speed than revenues.

As a result, fourth-quarter EBITDA margin was 37.1%. The margin for the full year 2011 was in line with our earlier communicated outlook for the full year 2011.

Looking forward, and in order to take advantage of our improved market position and to reach sustainable profitable growth in the Russian market, we will focus on a few key areas. The first area is really to improve the gross margin. We plan to address this by stimulating on-net traffic; we need to optimize the tariff portfolio and we need to eliminate lower-margin tariff plans.

The second basket is to reduce churn and cost of sales. We need to restructure the dealer commissions to reflect the value and the lifetime of the customers. The Company also plans to improve customer loyalty programs and to increase its efforts on churn management.

And lastly, we need to improve productivity and operations. We have identified and are on track to achieve RUB5b of cost savings in 2012. Currently, we are also addressing improved network efficiency and an optimization of our organizational structure.

Finally, our operational excellence program is aimed at curtailing marketing, technical, IT and general expenses. Capex in 2011 was 22% of revenue. We expect 2012 to come out below that level.

Moving on to our second biggest business unit, Italy, in Italy we continue to outperform the market despite the weak macroeconomic environment and regulatory headwinds. Our operating performance remains strong, with Wind further consolidating its market share in both mobile and fixed line. Total mobile subscribers grew 5% year-over-year to over 21m, driven by the success of bundle offerings and growth in mobile broadband, which saw subscribers increase by 13% year-over-year.

Wind's mobile data offerings continued to deliver strong results in the fourth quarter of '11, with mobile Internet revenues increasing by 43% year-over-year as a result of growing penetration of smartphones, tablets and data dongles. Contrary to the recent trends in other developed markets, Wind continues to display a solid increase in mobile minutes of use, as well as strong growth in traditional messaging revenues.

Our fixed line business delivered good performance with voice subscribers growing 5%, driven by a solid increase in higher-value direct voice subscribers, up 8%. We also recorded an exceptional performance in fixed broadband, where we grew our subscribers by 12% year-over-year while increasing our ARPU by 7%.

Wind's total revenue fell 1.5%, with organic mobile revenue growth of 2% excluding the 26% cut in mobile termination rates from July 2011. The impact of the MTR cut was fully offset by operational excellence cost initiatives and other income items that arise on a recurring basis as part of our ongoing operations, which resulted in a stable EBITDA over the fourth quarter '10, thus delivering a solid overall margin of 37.4%.

The investment made in the LTE frequencies at the end of 2011, coupled with a substantial investment made in our network, will enable Wind to be at the forefront of the data growth story in the Italian market and to compete effectively with the incumbents in this market.

Moving forward, we will continue focusing our efforts on the key growth pillars, leveraging investment in the HSDPA and LTE to further grow our data business, expanding our product portfolio into new segments such as value postpaid subscribers and growing our market share in the small- and medium-sized enterprises market.

Business unit Africa and Asia. In Africa and Asia business unit, the local currency result and operational performance showed significant growth across the board. In the fourth quarter of 2011, net operating revenues in Africa and Asia increased by 3%, impacted by local currency devaluation against the US dollar in the main operating countries of Algeria, Pakistan and Bangladesh, as well as the liquidation of the handset business of Ring. Consequently, the EBITDA showed a decline of 5%, while the consolidated EBITDA margin stood at 35%.

As a result of the Company's focus on driving profitable growth as well as operational excellence and capital efficiency programs, we are seeing EBITDA growth surpassing revenue growth in most operations. Revenue and EBITDA demonstrated an organic growth of 5% and 10%, respectively.

Our operations in Algeria continue to display an impressive resilience. Subscribers increased 10%, as we were able to both control churn and gain new customers. EBITDA increased 18% in local currency. As a result, our EBITDA margin improved by almost 7 percent points to 59.5%.

In Pakistan, Mobilink was able to expand its subscriber base by almost 8% and EBITDA grew 10%, driven by top line growth and declining cost of sales, leading to an EBITDA margin of 41.7%.

In Bangladesh, our subscriber base showed an impressive growth of 23%, driven by a more aggressive acquisition strategy following the SIM Tax reduction in June 2011. Revenue grew 17%, while EBITDA decreased 4%, largely as a result of strong subscriber acquisitions. Capex excluding the license renewal fees in Bangladesh amounted, for this business unit, of 19% of revenues.

Moving on to Ukraine, we continued to delivered healthy top line growth in the fourth quarter and we maintained the leading position in the market. Total revenues were 4% higher, due to growth in both mobile and fixed businesses.

The growth in mobile was largely the result of our ongoing transition towards unit bundled tariff plans, which stimulated a 6% increase in the minutes of use. Mobile data revenue grew 12%, driven by growth in the number of data users and mobile Internet traffic usage. Fixed residential broadband subscribers doubled, leading to a 54% growth in fixed broadband revenues.

EBITDA in the fourth quarter of '11 was impacted by higher advertising costs and seasonal promotions, in addition to a growing share of non-mobile businesses and higher SG&A from increased technical costs due to inflation. Capex was 17% of revenues, in line with last year.

Looking ahead, we strive to continue to deliver profitable revenue and EBITDA growth in segments where we are market leader and to improve market share in segments where we are in the top three, as well as exploring new pockets of growth in Ukraine.

In the CIS business unit, revenue grew by 16% as a result of product quality improvements and efficient sales and marketing efforts. In particular, our ongoing focus on data translated into a doubling of our mobile data revenues. EBITDA margin in the quarter was 41%.

In Kazakhstan, our largest CIS market, we saw subscriber growth of 22% and solid revenue growth of 11% in the fourth quarter. EBITDA remained strong but declined slightly, due to average price per minute reduction as a result of new regulatory requirements, intensified competition, as well as increased sales of devices.

One other market to mention, Uzbekistan. In Uzbekistan, revenue and EBITDA increased by 35% and 54%, respectively, supported by our subscriber growth, regional 3G rollout and data development.

The increase in CapEx was driven by our network expansion to support voice and data traffic growth, in particular in Kazakhstan, Kyrgyzstan and Uzbekistan, the latter having secured also a 4G license.

Going forward, we aim to achieve the optimal balance between capturing market share and maintaining margins, in order to deliver sustainable profitable growth and cash flow also in this business unit.

I will pass the floor to our CFO, Henk van Dalen, who will discuss the Group's financial performance more in detail. Henk.

Thank you, Jo. As a reminder, ladies and gentlemen, 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 a 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 l5, 2011 VimpelCom acquired 100% of Wind Telecom. As a result of the Wind Telecom 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 day. All financing related to the Wind Telecom transaction is assumed to have taken place as per the same day.

Additionally, Group financials are represented 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. On a consolidated level, the required adjustments of IFRS to US GAAP have been performed on the business unit level and the Group level.

As previously announced, the Company intends to publish its full-year 2011 audited financial results under IFRS and the Company plans to do this when it files its annual report on Form 20-F for the year ended December 31, 2011. Going forward, the Company will publish its financial results according to IFRS.

Now turning to a set of the financial highlights. On a pro forma basis, revenues in the fourth quarter grew 4% to $5.9b, driven by 5% organic growth partially offset by unfavorable currency movements in various currencies against the US dollar. Organic growth was driven by an increase in revenues, because most of our business units, led by the CIS have reported organic revenue growth of 16%.

Unfavorable currency movements led to a decline of 3% in EBITDA year-on-year. Excluding these ForEx effects, EBITDA was stable compared to the same period last year. Solid organic EBITDA growth was seen in emerging markets of the business units of CIS and Africa and Asia, which were up 11% and 10%, respectively. In the Europe and North America business unit, EBITDA at constant FX remained stable. And overall growth was partially offset by the year-on-year EBITDA decline in Russia and Ukrainian business units.

EBITDA margin for the Group stood at 37.4%, versus 40.2% reported in the same period last year.

EBIT and net income declined considerably, due to higher depreciation, impairments and purchase price allocation effects. In addition, net income saw the impact of an increase in FX and other expenses in the fourth quarter. Later in the presentation, I will explain that in more detail.

If I look to the full-year pro forma financial performance, total net operating revenues increased by 7% year-on-year, with a strong performance across all business units. Overall organic revenue growth was 4%. EBITDA was stable, resulting from good performance in all business units except Russia, which showed an EBITDA decline in absolute terms of 4% and organically of 7%.

CapEx stood at $5b excluding the effect of licenses, with investments in the further rollout of the mobile networks in Russia, Bangladesh, Pakistan and the CIS leading to CapEx to revenues of 21% for the year.

In Italy, we continue to invest in the rollout of HSDPA and in the backbone capacity to support the growth in data. Including licenses Capex was $6.8b, with investments related to the LTE frequencies in Italy, 2G license renewal in Bangladesh, 3G licenses in Laos and a 4G license in Uzbekistan for a total amount of $1.8b.

EBIT and net income were significantly impacted by the same items as I've mentioned under the Q4 pro forma result.

Then a little bit more into the non-cash items in the fourth quarter of 2011 that impacted our net income, all of which effectively are a result of applying standard discounting practices.

The first element relates to the PPA. The Company further refined its so-called purchase price allocation, that is, the word for PPA, with regard to the acquisition of Wind Telecom. That's a standard requirement under applicable accounting standards. The PPA, the purchase price is allocated to the Wind Telecom assets acquired and liabilities assumed, based on their estimated fair values.

Any difference between the purchase price consideration transfers to the former owners of Wind Telecom, and the estimated net fair values of the assets acquired and liabilities assumed have been recognized as goodwill. The PPA is still subject to further revisions.

With the further update of the purchase price allocation of Wind Telecom and the finalization of the valuation of the acquired Wind Telecom intangible assets, the Company adjusted retroactively the linear amortization model towards a model based on value contribution for the customer relationships. With this change, benefits and costs are better matched. And effectively this means that there will be higher amortization in the earlier years and lower in the later years.

The catch-up effect of this adjustment has, based on the applicable accounting rules, been retroactively adjusted to the second and the third quarter of 2011. In the appendix, we have provided you with the expected impact in 2012/2014, based on our current Q.

The second impact had to do with impairments. The Company booked an impairment of $527m related to its operations in Vietnam and Cambodia, as a detailed business plan review led to significant downward growth perspectives for these businesses, and consequently also to the impairment that was taken.

And the third factor, net income was further impacted by unrealized ForEx losses of $110m, which is mainly attributable to $61m of depreciation of the euro against the US dollar and $34m due to the devaluation of the Bangladesh taka against the US dollar. In addition, $147m in various fair value adjustments, partially related to hedges.

That completes the analysis of these non-cash items. On the next slide, I will give a little bit more the impact. You will also see that impact mentioned in detail in the press release that was distributed this morning.

In net income from continuing operations in actual Q4, there is an impact of minus $672m, impacted by $652m PPA and impairments. So excluding these effects, it would be $20m negative. Net income attributable to VimpelCom is then corrected for non-controlling interests, leading to a plus of $50m excluding the mentioned effects.

For full year actual 2011, PPA and impairment have an impact of almost $1.4b on EBIT. Net result for the full year 2011, excluding this PPA and impairment impact, is around $1.1b compared to $1.7b in actual 2010. However, on a pro forma basis, with PPA assumed for the full year 2010 and 2011 at the same amount, the net income 2011 attributable to VimpelCom is $324m and stable year-on-year, as I have shown earlier.

Then, finally, how does the full year actual financial results look like, because those of course have also the impact of these particular non-cash one-off items. On an actual basis, revenues more than doubled year-on-year and EBITDA increased by 66% year-on-year as a result of the combination with Wind Telecom in April 2011.

Actual net income attributable to VimpelCom declined by 76% (sic - see presentation) over the same period of 2010, mainly due to non-cash items, as explained, and the impact of higher depreciation, lower tax and higher financial income and expense and FX and other expenses, which more than offset the underlying EBIT growth of $1.4b.

Net cash from operating activities at the Group level was $5.9b, due to the strong cash flow generation from operating activities.

Then, taking you to the debt and cash ratios for the Group. As you can see here on this slide, our financial position remains good. Actually, over the last couple of quarters it has been fairly stable. On a consolidated basis, the actual net cash from operating activities in the fourth quarter was $1.8b, 133% higher than the same period a year ago. In the fourth quarter, we invested $3.4b in cash, impacted by license payments for an amount of $1.7b.

Gross debt increased in the fourth quarter, mainly due to the financing of the LTE license in Italy. We finished the quarter with a balance of cash and cash equivalents of $2.3b. Net debt was $24.4b, which led to a net debt to EBITDA ratio of 2.6 at the end of the quarter on a pro forma basis, a slight increase over the previous quarter. Our last 12 months' EBITDA to financial income and expense ratio remains at a comfortable 4.7 on a pro forma basis.

The next slide, because it's always a point that is coming up in these Q&As, is more detail on the financial structure of the Group. You see there the financial structure is split into three blocks.

The first is a ring-fenced block of debt related to Wind Italy. That is the circle that you see on the right. That's about $14.4b of debt at the end of 2011. That block of debt is ring-fenced in the sense that it has no recourse on VimpelCom Limited or any of the other companies in the Group, so it is really on a standalone basis.

The second block of debt is $1.2b in local entities of OTH. These local entities are their position and they do not have recourse on VimpelCom Limited.

And the third block of debt has to do with OJSC VimpelCom and VimpelCom Limited. This is the block you can see on the left-hand side of the slide, totaling to just over $11b of debt, with a portion of the debt attributable to VimpelCom Holdings and a portion to OJSC VimpelCom. From this position, also OTH and Weather Capital SPI are funded with an inter-company loan.

Then turning to the debt composition and the maturity profile. So the gross debt, as said, was at $27b, with an average rate of interest of 8.5%. For the years to come, maturities are roughly 20% to 25% of annual EBITDA. There is a peak in the maturity profile in 2017 caused by the Wind Italy debt, which we plan to refinance this before that date, as already mentioned earlier. However, this will not be completed before the end of 2013 and timing will depend on market circumstances as well, of course.

Our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble, US dollar and other currencies.

And with capital markets being so volatile and complex as they are these days, we secured a revolving credit facility of approximately $500m for VimpelCom Amsterdam BV and a separate revolving credit facility of approximately $475m for OSJC VimpleCom in Russia. These credit facilities are in line with the overall Group strategy as they provide the Company with increased flexibility in managing its cash levels and will be used for general corporate services.

Then it's visible that in 2012 we will have to refinance and repay $2.5b of debt, and in principle that will be going according to the following steps. There will be repayment in Italy of $460m, financed with the cash balances and the free cash flow of the Italian entity. The bridge loan refinancing in Italy for an amount of $650m will be done within the ring fence of Italy.

Local entities of Orascom have to refinance $340m; that mainly of course relates to Pakistan and Bangladesh. And the rest is in block three, which is OJSC VimpelCom and VimpelCom Limited. And that will mainly be focused at ruble bonds, US dollar bonds, certain other loans and most probably also ECA financing.

Overall, the picture is a manageable package for the year 2012, as you will probably have seen from the information provided. We already started with positioning ruble bonds in the Russian market.

Then on the dividend, finally. In line with the stated dividend guideline to pay at least $0.80 per common share in 2011/2014 period, we have announced a final dividend of $0.35 per share in relation to our 2011 results. The final dividend payment will be approximately $570m. That brings the total dividend in relation to the 2011 results to $0.80 per common share, equivalent to $1.3b of dividend.

I will now turn the call back to Jo for his final remarks.

Thank you, Henk. So, wrapping up the presentation with one final slide before we open for Q&A.

As promised on our Investor Day in November, we're now sharing with you further details on our financial performance objectives for 2012 to '14. In the very volatile economic environment, we now aim to deliver average return growth of around mid-single digit for the period 2012 to '14, focusing on our core segments and of course also exploiting the strong growth in data.

The operational excellence initiatives across our operations that we've talked about a number of times will enable us to optimize costs. And our objective is to deliver an average EBITDA growth of around mid-single digit for the period 2012 to 2014. While our current CapEx to revenue, if we exclude licenses, is in the order of 21%, we plan to lower this ratio to below 15% by the end of 2014 through various capital efficiency initiatives.

And we expect that all of these initiatives will enable us to increase the free cash flow and therefore allow us to achieve our leverage objective of below 2 times net debt to EBITDA by the end of 2014.

That was a long presentation, but with that we're ready to open the floor for questions. Operator?

(Operator Instructions). And our first question today comes from the line of JP Davids of Barclays Capital. Your line is open. Please go ahead.

Thank you for the opportunity. Two questions, please. The first question on Russia. And you've mentioned that you would like to do more on-net type tariffs in the market to help your gross margin. Why only now are you pushing on-net tariffs? What has prevented you from being more aggressive in this space before?

The second question is on Italy. Maybe you can just give us a framework for how you looked at consumer spending into 2012 and 2013. What are your thoughts on how the consumer's wallet is going to pan out over the next couple of years and how that impacts your guidance? Thank you.

Thank you for two good questions. Let me first say that when you take one step back and look at today's release, I think two things jump out. The net income jumps out, and I think Henk has explained in detail that the non-cash items, we are very comfortable with that. And if you compare the underlying development of the business, it's robust and resilient and stable. So that part I think people are comfortable with.

The second part I think that jumps out is related to your first question, Russia and performance in Russia and margins in Russia. And I think it's clear for all of us that we need to put together a plan for Russia now, to improve profitability and improve performance. We -- if you look back at Russia, I think we underinvested after the last financial crisis all the way back in 2008.

So if you go back and look at 2009 and '10, you clearly saw VimpelCom underinvesting compared to competitors, and for that reason we started to lose market position, and -- both on the revenue side and subscriber. We felt a need to regain that position by focusing a lot on growth in 2011. And I think we have achieved the objective we set for ourselves to make sure that we remain at a size that we believe is necessary to have a healthy competitive position in Russia.

And then now, moving into 2012, it will be much more focused on profitability and cash flow. And part of this is of course to address service margin, because if you go into the P&L of Russia and look at where we slip, it's not only on the overall cost base, on commissions and the general expenses. It's also clearly on gross margin or service margin. And that is how we combine the tariff plans. That is how we optimize tariff plans. That is how we route traffic, etc.

So I think your question is clearly why didn't you do that before. Well, we didn't, and now we need to look at where is room for improvement. And these are one out of many initiatives that we will put in place for improving performance in Russia. So we clearly see that there are room for improvement. I think we understand what we need to do, and I feel very comfortable with the team in Russia and with the plans that we have now for Russia. It's a big shift.

I told you in November on the earnings -- on the Investors' Day that it will take time, and I think we just need a bit of time to implement these plans. And then I hope during 2012 we will show our plans being effective and we will see margins in Russia improving again. So that's clearly -- there is a long answer to a short question, but I think Russia is clearly something people are concerned about and focused on on today's release.

Going to your second question about Italy, Italy is showing, I think, strong resilience. In fact, historically, GDP is quite decoupled from the telecom market trends. And if you're considering the average spending for telecommunication services in Italy, the amount is more seen as value for money and not material in order to drive a visible monthly saving.

So we are quite optimistic about the ability to build a long-term value play for investors in our Italian operation, and we're really looking forward now to start the LTE rollout a year from now. So, a good team and a good market, even though macro right now is not as favorable as we wished.

Thank you.

Thank you. Our next question comes from the line of Jean Lemardeley from JPMorgan. Your line is open. Please go ahead.

Yes. Hello. Just coming back on the question of costs in Russia, and just to be a bit more specific, general and administrative expenses were up 22% year-over-year in the fourth quarter, so that doesn't appear to be driven by commercial spend or interconnect that dilutes the gross margin. So if you could elaborate a little bit on that and what we should expect going forward.

You also mentioned that you've got this RUB5b OpEx optimization program that you're in the process of implementing. So how much of that was reflected in the fourth-quarter performance, or is it all to come in 2012?

And the last question is, if I may, looking through the Orascom press release, there appears to be a number of one-offs that affect EBITDA at the holding level, it looks like in Algeria as well and in Africa. So could you just explain a little bit that, because that appears to be a material effect?

Very good. Henk will start with the OTH question and then I'll follow up with Russia.

There is of course an Orascom call this afternoon where I think you can better ask the question and get it properly also answered in more detail there. But speaking in very general terms, there is roughly an amount of $30m in our figures related to certain one-offs in Orascom that had to do with all kind of elements related to the integration with -- of Orascom with VimpelCom. And there is an amount of roughly $20m which has to do with certain specific tax contingencies.

That is what I know about the further detail of Orascom, but I think it's probably good to jump into that at four o'clock in the call as well.

On Russia, I think the last quarter of '11 is clearly impacted by again high sales, old agreements, old dealer commissions. And even though we kicked off the $5b (sic) cost saving program and we're on track to implement the different initiatives, I do think that the main part of the effects we will see in 2012. For example, on commissions, I think we have to move away from fixed fees and move in the direction of traffic based fees, reflecting the value of the customers.

And for that reason, I expect 2012 to show a different development than the fourth quarter of 2011. But again, that being said, it's a big shift. There is a lot of -- always a lot of delays in implementing changes in such a big organization, but I think we do understand what is required and we are very determined to execute on our plans.

Maybe in addition to what Jo says on the cost side in Russia, it's good to notice that we have also taken a provision of $20m related to the operational excellence program of RUB5b that was explained by Jo earlier.

So you took a $20m provision in the fourth quarter?

In the fourth quarter, indeed.

But you haven't seen yet the benefits of that -- or have you seen any of the benefits of that RUB5b optimization program?

No, that will typically start to kick in in 2012.

In 2012. And just to clarify, so some of the dealer commissions impacts G&A, but could you give us, for example, commercial expenses which were up less than the overall SG&A. So it was on the G&A side there was a big increase, but you're suggesting the dealer commissions goes into the G&A line.

No, we're not suggesting that. I think Jo was mentioning the various components in the P&L and the movements there. In the G&A line, it's important to notice that the $20m provision is part of it.

Okay. Good. Helpful. Just, sorry, on Italy your cost performance is solid there. Can you outline what the opportunities are? You're going to see pressure from MTRs which will intensify going forwards. Could you just maybe outline the initiatives you have in place in Italy, or the opportunities you have on the cost side?

Yes. I think, as we said, the MTR will impact our revenues and EBITDA in 2012. If you apply the same traffic patterns by Wind in 2011, we expect the revenues to be impacted by approximately EUR250m, and as a result of that EBITDA approximately EUR60m to EUR70m downwards. All this will be hopefully mitigated by cost initiatives, and we see them throughout the whole value chain and we have again a big plan and a big program for addressing this. It goes all the way from power sharing initiatives to outsourcing of network populations to tuning of the cost base in general.

So you think EUR60m, EUR70m impact which you hope to mitigate entirely?

That's the plan.

Yes. Okay. Thank you.

Thank you. Our next question comes from the line of Alex Kazbegi from Renaissance Capital. Your line is open. Please go ahead.

Yes. Hi. Sorry to dwell on the same questions more or less, but just looking in the RUB5b savings in 2012 in Russia, that would imply roughly 2.5 percentage point improvement in the EBITDA margin if, so to say, everything else stays more or less the same. I guess you mentioned now the downward pressure on Italy from the margin side. So I'm just trying to just reconcile -- again, your CAGR outlook for the next three years is essentially EBITDA growth pretty much in line with the revenue, so no real improvement in the margin there.

So how does that compare with a potential good 2.5%, 3% improvement in the margin in Russia? I guess you're going to lose the margin elsewhere, or am I reading this, so to say, right or how do I interpret that?

And secondly, maybe just a bit of a trajectory probably for the CapEx. Again, I understand by 2014 it's going to be -- planned to be below 15%, but currently it's still above 20%. So, again, what is the next, so to say, three years? Again, do you expect gradually to come down? Do you expect the next two years to be, so to say, pretty heavy still and then lower? What is the rough trajectory on that one? Thank you.

Very good, Alex. I think it's difficult to decouple exactly how that EBITDA growth will look like on this growth. But clearly there is an upside in Russia on general cost savings, as you rightfully pointed out, and I think also on gross margin level that does always, of course, help EBITDA to improve and grow in Russia. And then the same growth in Italy is probably more difficult to achieve. And then we need to take all other operations into consideration, Ukraine, CIS, Algeria, Pakistan, Bangladesh being the big operations.

But when we give an objective of an average 5% EBITDA growth the next three years, it's built on an analysis of how we believe the different markets will develop, where we see the upside, and Italy is factored into this average number. So we can potentially go through this more in detail in a face-to-face. It's difficult on this call, I think.

When it comes to CapEx, clearly we will see a gradual decrease of CapEx. You won't see a flat CapEx in two years and then a fall in 2014 then. That's not the plan. We will see a revenue -- a CapEx to revenue gradually decreasing to the level we would like to see that.

Okay. And just can I ask finally, also, I think you were, so to say, given again the impairment losses also in South East Asia and in general your view on potentially reviewing those operations on their fit, so to say, within VimpelCom, any more concrete plans here in terms of are you still happy to continue with them, you will be looking to divest them? What is the current, so to say, thinking?

Alex, I think the main line of thinking is how can we best create value for shareholders and what is the best use of capital inside the Group. And the impairment is typically an analysis of how much do we believe the value of these operations are, compared to what value they have in our books, and analyzing the future and analyzing how much capital we were willing to invest in that market and what we potentially could get out of it. Impairment was clearly something we believe was the right thing to do.

So when we look at Vietnam and Cambodia, we will always compare capital being used there with the capital potentially being used in Russia, Italy, elsewhere, and we will have a pragmatic view on sale or potentially market consolidation as a result again of using capital more efficient and look after interests of shareholders, basically.

Okay. Understood. Okay. Thank you very much.

Thank you, Alex.

Thank you. (Operator Instructions). Our next question comes from the line of Cesar Tiron from Morgan Stanley. Your line is open. Please go ahead.

Yes. I have a question actually on the dealer commissions and the retail strategy. So, first, do you plan to open new stores in Russia in 2012? I think you have an agreement with Euroset to do that, if I'm correct. And if that's the case, how will that impact your P&L? Is that G&A or is that sales and marketing?

And also, on those dealer commissions that are renegotiated, do you expect to see a significant decline in sales and marketing expenses on the back of that, or is it not just pushing the payment to the dealers by a few quarters? Thank you.

On the distribution strategy as such, I think we would very much like to develop a broad distribution network with independence to dealer, and that's why we also decided not to acquire Euroset and use that option. Of course some mobile brand rollout will be necessary to create a balance between our own shops and independent dealers, but we would very much like to work with independent dealers and have a good working relationship with them.

So that's the general thinking around distribution. And of course there will be new distribution channels also coming up now, with all the opportunities we see on the Internet, the Wii application, etc., so you will see Internet channels, etc., etc. But the general picture is to work with a broad set of independent dealers, and Henk can explain how this will be treated accounting wise, I think.

So, accounting wise, you will normally not find it back under the SG&A, but typically under the costs that are directly related to the sales, so variable costs related to the sales.

Thank you.

Thank you. Our next question comes from the line of Herve Drouet from HSBC. Your line is open. Please go ahead.

Yes. Thank you. Good afternoon. My first question is is there any other write-off above EBITDA level? You talk about these optimization programs. I think you mentioned as well some write-off of handset inventories. I was wondering, has as well been impacted Q4 for Russia?

And my follow-up question is again on margins. Just trying to be more specific really with the dealer commissions, can you tell us now if you are currently renegotiating with the dealers the way, basically, you are paying them commissions? Is it like some of your competitors are doing on the life of the users, it's more usage based rather than new SIM cards? And how much of the percentage of the dealers per market share do you think you will be able to renegotiate your commission with? Thank you.

The write-off first.

Yes, the write-off that I mentioned earlier was a provision that is taken in relation to the operational excellence program in Russia. That provision is $20m. And that is something you normally do when there are optimizations of the organization structure to be expected, and that is indeed also the case, as was explained by Jo. So, in that purpose -- to that purpose we have taken that $20m provision.

Okay. And that's all. And so were there -- there were no handset inventories write-off, or it was included in that number?

No, those were not included in the number. There were indeed also handset write-offs. I do not know the exact amount. I think it's in the range of $10m or $5m, but it's not a big amount so it's not major.

Okay. Okay. Thank you.

Thank you. Our next question -- I'm sorry? Our next question comes --

I think actually he asked also about margins and renegotiation of dealer commissions. And the answer there is basically that the process has started. We have started to change the structure and the level with some dealers, but it's an ongoing process. And we would very much like to move in the direction of, as I said a couple of times, traffic based payments with no fixed bonuses anymore.

And the whole mindset I think will have to change in Russia. It's -- the churn level that we're seeing in Russia is unacceptable for such a mature market. So we still live in a little bit of a customer acquisition mindset, and for that reason commissions are paid every new subscriber and costs are growing, instead of working together with the dealers for retaining customers and developing customers, bringing down churn and paying them a fair amount for the job being done, namely attract the right customers and retain them.

So the whole structure and the mindset needs to change. And the answer is basically that some changes have happened, others will happen, and I'm trying to describe what direction we would like to move in. Okay?

Thank you. Our next question comes from the line of Alex Balakhnin from Goldman Sachs. Your line is open. Please go ahead.

Yes. Hi. Good afternoon. I have two questions. First is on your competitive strategy in Italy. We know that you released prices there recently and can you probably just clarify what is your competitive stance in the market? Do you think that despite the MTR trajectory the market is ready for rationalization, effectively? And do you think that your competitors might follow, which can probably help your profitability dynamics there?

And my second question is on the subscriber acquisition and the solution probably in -- on the Russian market. Your churn rates remain quite high and I'm just wondering what are you doing to reduce this churn. And do you think that the churn reduction and overall rationalization with the subscriber acquisitions is possible without negative pressure on the profitability in the very near term? Thank you.

It was really hard to hear you for some reason. It was the noise [of the back]. But I heard the second question. The first one was difficult. To the second question, I think I tried to transfer, just before you asked yours, that churn is too high, and churn is driven by the commission structure. So, for that reason, bringing down churn requires a change in the dealer commission structure.

We're working on that and I think that will be a very healthy development for the market in general, because dealers are then being paid for the actual work they do and the cost level, of course, for the operators will go down. So you get a more balanced value distribution between operators and distributors instead of transferring too much value right now because of very high customer acquisition activities in a market that is highly penetrated. So that I think is what I can say about, again, distribution, commissions and churn. So (multiple speakers).

And my first question --

Yes. The first question was -- you're better now?

My first question was on the Italian market, where you recently raised the prices. And I was just wondering if it is possible that the Italian market is open for higher rationality, and despite the MTR cuts on the market do you think that you will be able to increase prices and your competitors will follow? What do you think about that, if it is possible or not really?

We raise the prices only on certain options, not tariffs, and from April, actually.

But what do you think? Do you think your competitors will follow this, or it is too premature?

I think the trend we see now is very often that competitors are following these initiatives. So I wouldn't exclude that to happen there.

Thank you.

Thank you. Our next question comes from the line of Victor Klimovich from VTB Capital. Your line is open. Please go ahead.

Yes. Good afternoon. Actually, I have two follow-ups of Cesar's questions. First of all, coming back to Italy, so the situation now is that Vodafone is losing market share for some time, and don't you expect that there will be some reaction from Vodafone or -- on your and Telecom Italia's aggressiveness? And I will follow up with a second one later.

Yes, of course. In all markets you have movement. It might be that we will not be able to perform as we do now forever in Italy, and it might also be that we will perform better in Russia eventually. So of course it's not a static situation. But I think we have a great momentum in Italy right now. And I think Vodafone is a very rational player, and I think we don't expect to see them behaving irrationally, anyway. And I think also our behavior in Italy is rational and based on good performance for the right reasons, not aggressiveness with the wrong tools.

But for several years you gained market share at the expense of bigger players, and last year we saw that Telecom Italy started to react quite visibly. So don't you think that Vodafone, which is now losing market share, can try to gain at least partially, like you did in Russia, for example?

My experience with Vodafone is that they're predictable and very rational. And I think also with our re-pricing the market might even see a general improvement in overall profitability. It's very hard for me to speak on behalf of Vodafone and of course there is always business risks about competitors doing things you don't expect. But right now I think we're quite optimistic and have a positive long-term view on Italy.

Thank you. And my follow-up with regard to churn. So currently, as you said, you have very high churn. So what churn level do you target and by how much you think your sales -- gross sales should go down in Russia? Thank you.

Well, first of all, I think the churn level is higher than most markets I've seen and all of our markets we are operating in, so that's a good starting point for improvement, I think. We see churn levels in comparable markets operating around 25%. We see the Russian market still in the 60% and 70%. So of course there is a quite big upside here if it's being done the right way and if we are able to restructure it. But this will not happen overnight.

I think we have together now a three-year plan and we have set certain targets for three years. And we understand where we have challenges and we will try to address them. And one of the things we will do in Russia, in addition to many, many other things, is to address dealer commissions and churn level. So it's hard to say if it's going to be X or Y, three and six months from now, but we would be very disappointed if we don't see a trend shift of churn in Russia over the next couple of years.

Couple of years?

I'm talking about a three-year plan and then I'm saying that -- right. So of course we will see improvement before that, but I'm talking about a trend line. And for that reason I used a couple of years, but we will see improvement before that, yes.

But when you mentioned 25%, is this your long-term target for the Russian business in terms of churn or should it --?

No, no. Because this will also depend on the other players in the market and it's very hard to set such a target without seeing how the total market develops. So it might be that the market will stabilize at a higher level for different reasons, so it is very hard to set such a hard target before you see the trend curve starting to shift. So I used 25% as an example for the level we see in other markets.

And I don't see any reason why Russia shouldn't come down on that. But of course, as I said, it's hard to give a hard number and it's hard to -- it's not right to set such a target right now. We need to also look at what other players in the market are doing, I think.

Okay. Thank you. This is very helpful. Thank you very much.

Thank you. Our next question comes from the line of Dalibor Vavruska from Citigroup. Your line is open. Please go ahead.

Hello. Good afternoon. Just two brief questions. One is rather technical. I know you said that we should be discussing the provisions at Orascom, the one-offs at Orascom, with the Orascom call. But still, I'm just wondering, you have this Orascom holding and other expenses, $65m in the fourth quarter. Did you say that around $30m of this is one-off in your accounts?

I'm just wondering what is -- because this is now a cost for you, as well as for Orascom, so I'm just trying to understand what exactly is this cost, this $65m line. The footnote is saying it's mostly related to contingent liabilities, so I'm just wondering what that cost is as it is I assume in your accounts as well.

And my second question is going back to the discussion on margins. We've seen -- in quite a number of countries we've seen a decline in the margin quarter-over-quarter. That doesn't include Russia only, but the Ukraine, for example, Kazakhstan, and some of the Orascom countries. Can you just say whether there is some trend in decline in this margin, so whether this development -- whether there were some one-offs maybe in some of the numbers?

We know that there's some one-offs in Russia, so whether maybe there's some one-offs in some of these other countries as well, or how do you see these margins? Especially in the countries where they've declined quarter-on-quarter in Q4, developing further. Thank you.

So it is indeed -- on your first question, the amount that we mentioned as -- that I mentioned is a one-off earlier is indeed that $25m to $30m, and that mainly has to do with costs that are related to the integration of Orascom into VimpelCom. There are of course certain costs also related to change of control, of course, that are part of that. So these are all elements that we have counted for in that context.

The other element that for certain we explained, I'm sure, in the call for a quarter has to do with a contingent tax provision for prior years. So that will be detailed out later, but that's of course not part of the impact on EBIT or EBITDA.

Dalibor, let me try to talk about your question about overall trend on margins. You mentioned Ukraine, Kazakhstan and a few -- Orascom as well. I think if you look -- and I think this is not related to VimpelCom, but I think we still see some pressure on average price per minute in a few markets. We're in transition now from voice messaging into data, and data is still good margins but it's not kicking in in the weighted average of the revenue mix yet.

So for that reason I think we have to address the cost base moving forward, and that's why I said also in my value agenda that we have three building blocks. We have the profitable growth that needs to address the gross margin and everything related to that. And then we need to address operational excellence and look at our cost base and how we work more effectively. And then the third one is capital efficiency.

So I think it's -- in order to drive EBITDA growth here, we also need to look at the underlying cost base of all our operations and we are very focused on this. And there are -- I don't think it's necessarily a trend, but it's clearly a situation that requires focus on more than just top line growth, but requires focus on more effective use of resources and overall costs. I think that's the best answer I can give you.

And this is -- this relates to Russia and other operations as well. I think that of course a few of these operations have a very strong underlying profitability, and we're driving also now CapEx down as part of the plan. Cash flows coming out of these operations will be quite substantial. So we think we have a good asset path base to work from. And I think also, as I said, we understand what we need to do in the next three years.

Sorry, if I can just very quickly just add on this, and if I compare the profitability, for example, the trend in Ukraine with your main competitor, I see in the fourth quarter some decline whereas your competitor is stable. So is there anything in addition to the trend or is perhaps MTS applying some of the cost saving measures that you want to apply next year? Or can you possibly comment on that difference?

I don't think there are any one-offs that materially is impacting the picture, because then we would have reported on them. So this is the dynamic in the competitive landscape. And as I said, we will work hard to stabilize and grow profitability going forward. And as I said also, I think, in my (inaudible) intro here, we had quite high advertising costs in the last quarter and there was these typical seasonal promotions. I don't know exactly what MTS did with respect to that in the fourth quarter.

And of course also we have a growing share of non-mobile businesses that influence the overall margin and also, as I said, higher SG&A from increased technical costs and this was driven by inflation. So that's probably the same for MTS, I assume. But again, I don't know exactly how MTS' market activities took place in the fourth quarter, but ours were clearly impacted with advertising costs and seasonal promotions, as said, and then a little bit of the mix of the non-mobile high-margin business.

Okay. Thank you. Appreciate it.

Thank you.

Thank you. Our next question comes from the line of Tibor Bokor from ING Bank. Your line is open. Please go ahead.

Hi. I was wondering if you could give us an update on the build-out of the 3G network in Russia, mainly the CapEx accelerated in Russia. I assume that most of that was directed into the 3G, so if -- into FTTB. So if you just could confirm that. And how far from your target are you, in terms of penetration of the target markets that you highlighted at the priority interims with the 3G build-out?

And separately to this, 4G tender is expected to be launched any time in Russia. Are your -- is your 3G network 4G ready, so the upgrades to potential 4G would be relatively low CapEx? Thank you.

Yes. I think when you look to Russia and 3G, we see MTS as the benchmark for the number of 3G base stations needed to have a high-quality network. And the plan is basically to catch up by the end of this year, and the CapEx levels we've communicated is reflecting that target. And I think that's achievable and, as you said, 3G is clearly now taking into consideration that there will be a 4G play in Russia as well, so that's part of the overall rollout plan.

And when it comes to LTE, we expect that there will be a beauty contest in the lower band probably in the first half of 2012, and we believe we have a good chance of winning one of the four blocks that will be contested.

And a quick technical question on value-added services as a percentage of mobile service revenues in Russia. Can you update us? Basically, the question is you have a very strong growth in the fourth quarter in terms of the mobile service revenue. How much was coming from voice and how much from value-added services?

That one I need to come back to you on, actually, because I don't want to give you the wrong information. But there was no trend shift, so what you saw in the third quarter continued into the fourth as far as I'm concerned. But I need to go back and re-look at that. If you contact Gerbrand after this meeting, we'll give you a straight answer on that one.

Sure.

Yes. Okay.

Thank you very much.

Thank you.

Thank you. Ladies and gentlemen, this does conclude our question and answer period for today. And I would now like to turn the conference back over to Jo Lunder for any closing remarks.

Okay. Thank you so much, everybody, for participating. I hope we were able to explain our numbers.

And as I said in my intro, we are quite optimistic about the future. We have a robust business that grew organically year-over-year, stable EBITDA, a good underlying cash flow, no big immediate refinancing needs, strong market positions in many good markets and good support, I think, from our shareholders as well.

So -- and we look forward. We understand where the challenges are. And I think also we have put together now a three-year plan and a value agenda that everyone is lining up behind, the shareholders, Supervisory Board, top management and the business unit heads. And hopefully we will be able to create value for shareholders going forward.

And with that, I thank you for participating. I thank you for all the questions, and of course we are always available if you either need or have additional questions. Gerbrand will coordinate everything and I think you will find our contact details on the web or in the earnings release today. So thank you very much, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.