VEON Ltd (VEON) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom Ltd. second-quarter 2012 investor and analyst call. At this time all participants are in a listen-only mode. Later will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Miss. Alex Tramont of FTI. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and welcome to WimpelCom's conference call to discuss the Company's second-quarter 2012 financial and operating results.

Before getting started I would like to remind everyone that forward-looking statements made on this 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 and expected future results in Italy and Ukraine; and, two, the Company's expected future debt position and refinancing plans.

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 earnings release and presentation announcing second-quarter 2012 results; two, the Company's annual report on Form 20-F; and, three, other most recent filings made by the Company with the Securities and Exchange Commission.

Certain amounts and percentages that are used here have been subject to rounding adjustments. As a result certain numerical figures shown as totals, including in tables, may not be exactly arithmetic aggregations of the figures that precede or follow them.

If you have not received a copy of the second-quarter 2012 financial and operating results release, please contact Investor Relations at +31 20 7977234, and it will be forwarded to you. In addition, the earnings 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 morning to those in Europe and good morning to our guests from the United States, and welcome to our second-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.

The Group performance led to a 4% organic growth in revenues year on year, reaching $5.7b. Excluding FX impact EBITDA increased 8% compared to the same period last year, leading to a margin of 43.2%.

We are pleased with the continued positive development in Russia, which experienced double-digit EBITDA growth in local currency in the second quarter. Likewise, Africa & Asia and CIS also saw double-digit organic growth in EBITDA.

2012 remains a transition year in Ukraine, as the negative effect from the movement to bundled tariff plans is expected to persist for the remainder of the year. In Italy we are facing a challenging regulatory and economic environment, but our operations there continue to outperform the market and Wind has further strengthened its market share in both Mobile and Fixed.

We also achieved strong subscriber growth in the second quarter, with an increase of 8%, reaching 208m Mobile subscribers. The largest contribution came from Africa & Asia, but the Company also achieved strong growth in Fixed and Mobile Broadband subscribers in Russia, in Italy and Ukraine.

The Company was able to deliver a solid performance in the second quarter despite a considerable negative impact from currency movements. Net income reached $488m, almost a doubling of last year. And we delivered a solid cash flow, with net cash from operating activities at $1.35b.

In relation to the claim by FAS, the Russian Antimonopoly Service, against Telenor and Weather II, we have no material update today. As you know, as a result of the injection by the Russian Court in relation to the FAS claim VimpelCom decided to postpone the final 2011 dividend payment decision. We will, of course, update you if there are any material developments on this topic.

Moving on to the performance of the five business units, starting with Russia, in Russia the Company continued to maintain the positive operating trends seen in the first quarter. The business saw organic revenue growth of 8%, while EBITDA increased 12%, leading to an EBITDA margin of 43.1%, the highest margin we have recorded in the last five quarters. The 8% growth in total revenues were supported by a 35% increase in Mobile Data revenues, as we continued to promote Mobile Data services.

On the operational excellence program we are also making significant progress. In order to improve the effectiveness and efficiency of our distribution we are implementing a full revenue-sharing model with our dealers. This will enable us to reduce subscriber acquisition costs and it also supports our efforts to reduce churn.

Our churn rate decreased from 17% in the first quarter to 15% in the second quarter, but more work is required. We also continued to improve the efficiency of our networks and, to this end, we have already signed agreements with other telecom operators and service providers for joint use, maintenance and development of network infrastructure.

In addition, we are reducing HR costs and rationalizing our regional reporting structure. Lastly, the Company is divesting certain non-core activities in Russia, including a call center and the network construction company. We are ahead of schedule in achieving our target of RUB5b in annualized savings.

Last 12 months' CapEx to revenues stood at 21%, as we continue to invest in building out our 3G network and close the gap to our main competitors. In July VimpelCom was awarded an LTE license, which we expect to enable us to drive the popularity of our Mobile Data services in the future. We expect to launch LTE services in 2013 and we are currently finalizing our plans for the LTE investment rollout. In summary, we are pleased with the progress in Russia and we will continue to execute on strategy in that market.

Moving to Italy, in Italy Wind continued to outperform competitors, and to take market share both in revenues and subscribers, with underlying total revenue growth of 2% excluding the impact of the MTR cuts.

Wind's Mobile Data offerings continue to achieve strong results year on year, with Mobile Internet revenues up 50%; Mobile Messaging revenues up 10% and Fixed Broadband revenues up 4%. Despite the decline in total revenues, an increase in energy-related OpEx and an increase in bad debt in Fixed Line, the Company was able to deliver a stable EBITDA in the second quarter of the previous year, with an increase in EBITDA margin.

Our Mobile subscriber growth remained strong, driven by the success of Wind's summer campaign, where we took over 75% of the net adds achieved by mobile network operators. Mobile Broadband subscribers increased by more than 10% and Fixed Broadband continued to perform strongly, with subscribers increasing 7%.

Looking at the second half of the year, the further cuts in MTRs, effective from July 1, is expected to increase pressure on the top line. The MTR impact is expected to continue to reduce the total market value for the next 18 months. For this reason we are now adjusting our cost base through strong structural OpEx measures in order to protect our margin and our EBITDA level.

We expect our position to be even stronger in 2013, with a continued improvement of our market share. And we remain committed to the Italian market, where we see a long-term value potential.

Moving on to Africa & Asia, in our Africa & Asia business unit reported revenues were flat over the previous year, impacted by local currency devaluation against the US dollar in main operating units.

On an organic basis revenues recorded a growth of 8%, driven by strong subscriber growth and an increase in data and value-added services in our key markets. EBITDA amounted to $466m, with an organic growth of 13%, as a result of good cost control in our major subsidiaries.

In Algeria our subscriber base grew 11%, driven by a substantial churn reduction, coupled with strong subscriber growth. EBITDA increased 6%, supported by continued cost management.

Our performance in Pakistan remained strong, with Mobilink delivering organic revenue growth of 9%. EBITDA increased by 19% in local currency, driven by improved cost control measures and tariff optimization.

In Bangladesh our subscriber base showed impressive growth of 26%, surpassing the 25m subscriber mark. Their revenues grew 24% in local currency, driven by a larger subscriber base in addition to higher level of value-added services and data adoption.

Moving now to our Ukraine business unit, revenues declined 1% year on year, to UAH3.2b, driven by our ongoing transition to bundled tariff plans. The negative impact of the transition is expected to persist for the remainder of 2012, with an improving trend towards the very end of the year.

Mobile revenues declined 2%, mainly as the result, again, of the above-mentioned transition to bundled tariff plans, while our Fixed Line revenues increased by 10% in Ukraine.

EBITDA declined 10%, to UAH1.6b, primarily due to lower Mobile Service revenues and higher Interconnect costs caused by the growth of outgoing off-net mobile traffic. We also see increased operational costs mainly related to network, IT, energy and frequency fees.

We are now taking actions to improve the performance in the coming 12 months. These include pricing initiatives to improve the Mobile Service revenue trend. And we also continue to focus on optimizing our cost base and on increased efficiency.

The Company has been so far this year successfully maintaining its subscriber market position and, this, coupled with the tariff and cost initiatives being implemented, allows us to expect that the operating performance of the Ukrainian business unit will improve again in 2013.

Finally, the CIS business unit. In the CIS business unit we saw continued delivery of strong revenue and subscriber growth in the second quarter, despite an increasingly competitive environment, especially in Kazakhstan. Our revenues grew 10% year on year on an organic basis, driven by increased penetration and strong Mobile Data growth, which more than offset the slowdown in Voice revenues.

Fixed Broadband also remains a key contributor in our organic revenue growth. EBITDA reached $182m, up 11% on organic basis, driven by strong growth in Uzbekistan and Kyrgyzstan. EBITDA margin in the quarter declined marginally, to 44.3%, however, control on operational cost provided evident improvements quarter on quarter. Subscriber growth in Mobile was impressive in this region, with an increase of 17%, to 20.5m.

Addressing two markets here, starting with Kazakhstan. In Kazakhstan, our largest CIS market, we saw organic revenue growth of 4%, [affected] by a competitive environment and a limitation on tariffs introduced by the regulator, which resulted in an average-price-per-minute decline. EBITDA margin declined by 1.8 percentage point, however, EBITDA in local currency grew by 0.3%.

VimpelCom protected its market position in Kazakhstan with improved ARPU trends and increased Data revenues. In Uzbekistan, our second-biggest market in the CIS, revenue increased by 35%, supported by a 121% Mobile Data revenue growth.

EBITDA margin was 50.6%, a sharp increase compared to previous years, as a result of change in tariffs in the market and implementation of our cost-efficiency program. CapEx decreased by 20% in the CIS in the second quarter of 2012, in line with our plans. The Company's main investment projects, focused on continued Data development, are on schedule and network expansion continues to support both traffic and revenue growth.

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

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. The pro-forma information presented reflects what the Company's results of operations would have looked like had the Company's transaction with Wind Telecom occurred on January 1, 2011.

For further details about the adjustments and assumptions of our pro-forma results please refer to VimpelCom's press release issued on August 18, 2011, and May 14, 2012, available on our website. The actual financial results of the second quarter of 2012 are [then] positive.

First to the pro-forma financial performance in the second quarter. Total operating revenues in the quarter decreased by 4% year on year, impacted by the unfavorable currency movement against the dollar. Overall revenue growth on an organic basis was 4%, driven by a strong performance across most business units.

EBITDA increased 2%, also impacted by unfavorable currency movements. Excluding these ForEx effects EBITDA increased 8% compared to the same period last year, driven by double-digit organic EBITDA growth in the business units of Russia, Africa & Asia, and CIS. Overall growth was partly offset by the organic EBITDA decline of 10% in the Ukraine, due to transition to bundled tariff plans, as Jo already mentioned.

EBIT in the quarter increased 21%, positively affected, as reported previously, by the declining amortization pattern applied to intangible assets associated with customer relationships as part of the Wind Telecom acquisition, where the amortization of later periods is lower than the amortization in the year of acquisition.

The profit before tax increased 68% due to the higher EBIT, higher gain from our investment in [Euroset] and the negative fair-value adjustment on the investment in Vietnam recorded in the second quarter of 2011.

In the second-quarter '12 there was a foreign exchange gain of $1m, where in the second-quarter '11 the foreign exchange was $6m. Net income increased 83% as a result of the increase in profit before tax and lower effective tax rate, due to certain met operation losses incurred in the second quarter of '11 which were not recognized for tax purposes.

Then to the actuals, of course, all the actuals are significantly impacted by the Wind Telecom transaction that took place in April 2011. Profit before tax increased 72% due to the increase in EBIT and the negative fair-value adjustment on the investment in Vietnam recorded in the second quarter of '11, which was partly offset by a 16% higher financing cost as a result of the Wind Telecom acquisition.

In the second-quarter '11 the foreign exchange loss was $33m, where in the second-quarter '12 there was the already-mentioned gain of $1m. Net income increased as a result of the increase in profit before tax and a lower effective tax rate due to certain net operating losses incurred in the second-quarter '11, as previously mentioned.

Then to the debt, cash ratios, as we normally do in every quarter. As you can see on this slide, our financial position remains solid. On a consolidated basis the actual net cash from operating activities in the second quarter was $1.35b. Net cash was positively impacted by the higher EBITDA, which was partially offset by higher interest and tax payments.

Our higher tax payments were mainly related to one-off tax payments by OTH of approximately $200m, arising from the sale of Veneziana in 2011. Gross debt decreased in the quarter, from $28.6b to $26.6b, mainly due to ForEx movements and repayments of ruble bank and euro bank loans, partially refinanced by the issuance of Eurobonds.

Net debt decreased to $23.1b, leading to a net debt to last 12 months' EBITDA of 2.4 on a pro-forma basis at the end of the second quarter. So we ended the quarter with a balance of cash, cash equivalents and deposits of $3.5b.

Turning to our debt maturity schedule, this remains well balanced over the coming years. It hasn't in any material way changed in the second quarter. There is a peak in the maturity profile in 2017 caused by the Wind [entity] debt, but we plan to refinance this before that date, as you know. However, that will not be completed before the end of 2013 and time will, of course, also depend on market circumstances. Total gross debt was $26.6b with an average weighted interest rate of 8.6%.

Our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble, the US dollar and other currencies. In Russia we paid -- prepaid a Sberbank loan of $0.3b and in Wind Italy we partly prepaid the bridge loan for an amount of $0.3b as well.

As mentioned previously, during the second quarter Wind issued the tap of the senior secured notes due 2018 for $0.7b to refinance existing debt. And a $2.5b incremented inter-company credit facility from VimpelCom to OTH was also approved by the OTH shareholders' meeting, which has been drawn upon only for a small amount in the quarter.

Furthermore, and as you can see from this slide, we have substantial un-drawn committed revolving credit facilities in place for a total of $1.4b per June 30, 2012.

Then moving to the slide which we also always discuss, to give an update on the financing structure per June 30, 2012, taking you a little bit through the detail. The first is the block of debt related to Wind Italy; that is the circle that you see on the right-hand side. That's about $13.9b of debt as at the end of the second quarter. That block of debt is ring-fenced in the sense that it has no recourse on VimpelCom Ltd. or any of the other companies in the Group. So it is really on a standalone basis.

The second block of debt, amounting to $1.1b, sits in the local subsidiaries of Orascom and has no recourse on the VimpelCom Group as well. And then the third block has to do with OJSC VimpelCom and VimpelCom Ltd. This is the block you can see on the left-hand side of the slide, totaling $11.6b, with a portion of the debt attributed to VimpelCom Holding and a portion to OJSC VimpelCom.

From VimpelCom Group level, also Orascom, OTH, and the Weather Capital SPI are funded with an inter-company loan. Within this block, of course, the Court injunction related to the FAS puts a temporary hold on up-streaming dividends or cash from OJSC VimpelCom to VimpelCom Group level.

Therefore, at Group level and OTH we focus on available cash sources from within these operations and dividend up-streaming from the Ukraine. The cash availabilities in this block of entities are above $1b and this is a solid position for our operating requirements and obligations.

I will turn the call back to Jo for a summary.

Thank you, Henk. Okay, overall I am pleased with the performance in most of our operations in the second quarter and this first half year of the Value Agenda 2012 to 2014. We continue to make progress on our strategic priorities while delivering solid, profitable organic growth, with a strong EBITDA margin of 43.2%.

On our journey to achieve the 2014 objectives we are facing short-term challenges in some of our markets, but I believe we have a clear action plan to mitigate these. Let me address two of them.

Ukraine, in Ukraine we are taking actions to improve our performance in the coming 12 months. Our strong market position, coupled with the tariff and cost initiatives being implemented, allow us to expect performance improvement in the Ukrainian business unit in 2013.

Two, in Italy the further MTR cuts will continue to reduce the total market value over the next 18 months. For this reason we are adjusting our cost base through strong structural OpEx measures in order to protect our margin and EBITDA level. We remain committed to the Italian market and we believe in its long-term value potential.

The summary. We are in the early stage of the implementation of our Value Agenda and we see many areas for improvements in our operations. There is significant upside from the rollout of our programs on operational excellence, capital efficiency and profitable growth that will enable us to reach our main goal, increase cash flows from operations, and, via that, create shareholder value.

With that, I'll open the floor for questions and return back to operator. Operator?

(Operator Instructions). We ask, in the interests of time, that you please limit yourself to two questions. Our first question comes from Cesar Tiron of Morgan Stanley. Please go ahead.

Yes, hi, congratulations for your strong numbers. I have two questions.

So the first one, in Russia you say that you are ahead of schedule to deliver the RUB5b synergy savings. I want to know if you are not -- you don't think you are not able to exceed that, but -- because looking at what's disclosed in the Russian cluster it seems that most of the improvement in the Q2 comes from sales and marketing expenses. But it seems that you haven't done much on the G&A. Is there possible to do anything in the G&A in the next quarters and possibly exceed this RUB5b?

And my second question is also on Russia. What do you think about the possible cancellation of the national roaming? Do you think this is going to happen and, if it's going to happen, how do you think it will impact your business? Thank you.

Okay, let's talk about the operational excellence program first. As you rightfully pointed out, we are ahead of schedule and we expect to reach at least RUB5b this year. We have seen, clearly, cost savings coming out of the [commission] and commercial costs as the result of movement to revenue-based commission schemes, but you should also bear in mind that on G&A there [isn't] underlying inflation in any market also in the Russian market.

So when you look at the G&A base you should also factor that in. And there is clear evidence of also improved performance on the G&A cost as part of the results that we are now presenting today. So I would say we are on track with our target and we might now also see a stage two of that program being launched this fall that could address other cost elements.

And hopefully we will be able to set new targets that, to a larger extent, can also go after the G&A cost base. Still we think that our cost initiatives that can be launched in Russia improve performance further. So that's on the RUB5b program.

On the net roaming, the national roaming question of yours, I think we -- it's hard to speculate exactly what will be the outcome of that initiative. The good news for VimpelCom is that what we've seen so far will not influence our revenue base or earnings in any material way.

And we think this is more a rebalancing of the roaming regime rather than a harsh regulation that will lead to lower revenues and a drop in earnings. So we are quite comfortable with what we've seen so far of the initiative.

Thank you very much.

Our next question comes from JP Davids of Barclays. Please go ahead.

Thank you for the opportunity; two questions. The first one, if the FAS and Telenor reached agreement and dividends could resume out of Russia would you immediately pay out the dividend that is currently suspended, or might you consider some more aggressive de-leveraging in the near term, i.e., shelving that dividend and just waiting for 2012?

The second question is on Russia. You've sustained very strong growth levels in the top line in the first half and, indeed, in the second half of '11. Looking into the second half of '12, are there plans in place to maintain those top-line growth levels or, indeed, accelerate them? Thank you.

Thank you very much. On your first question, related to the dividend, of course I understand this is of big interest. And this is a Supervisory Board decision in VimpelCom and I would not like to speculate on this call today what that decision will be.

I think we have to wait and see and that the Supervisory Board of VimpelCom Ltd. will make a decision whether to pay and the -- the final 2011 dividend or not. And I think also they will set a record date, as appropriate, as part of that decision. So that's the only update I can give on dividends today.

And then, on growth in the second half of '12 in Russia, we remain quite optimistic and we believe we have good momentum in Russia right now. We -- of course, we realize that a strong second half of '11 will make the second half of '12 more challenging to reach, but we still believe in the growth potential in the Russian market. And, as I said earlier on the call, also on our opportunities going forward to further increase and improve our performance there.

Thank you, I appreciate that.

Thank you.

Our next question comes from Herve Drouet of HSBC. Please go ahead.

Yes, hi, I've got two questions as well on my side. The first one is Ukraine. Could you give us a bit of -- share with light with us about some specific action you think you can implement to address the margin pressure we've seen in Q2? And when do you think you can have an inflection point on the margin where you can stabilize it and potentially -- maybe potentially later improve it again?

And the second question is, in Uzbekistan I understand that one of your main competitor there got some quite big pressure from the regulator and some government agencies. Do you expect a risk to happen on VimpelCom side, or do you think it's pretty specific to that competitor? Thank you.

Very good. Let's address Ukraine first. Let me put -- spend a little bit time on this question, because I think it's important that we share a little bit how we view that market and the situation. Because the fourth-term pain that we have decided to take now is really an investment in our long-term market position in that market. MTS moved to bundles back in 2010 and the third player in the market has also done adjustment to that structure.

We continued with pay-as-you-go tariffs probably a little bit too long and were planning to do a transition to bundles in a soft way, and spending time on that. Our judgment now is that in order to make sure that we have that strong market position in Ukraine in the years to come. And in order to keep a brand premium in Ukraine we want to do the transition to bundle faster than what we planned in the beginning of the year.

And that's why you see now revenues affected in this quarter and you will see them affected even more in the next quarter and, probably, melting into the fourth quarter. And then in a period of three quarters we have done the full transition to bundle and we have then protected long-term market position and built a platform for keeping that position. So that's the revenue dynamic and why we have to do this faster and more quickly. We believe it's the best decision for the Company and shareholders.

And then of course, as part of this, we would also very much like to address the cost base. Because we see also in Ukraine some increased costs related to a few things on the network side. On IT we see it related to license fees and a few other things as well. So now we are addressing these things by optimizing headcount.

We are looking at a reduction in network site rental maintenance cost, driven by an integration and reducement (sic) of sites. We are looking at a reduction in electricity costs by implementing power-saving features in the networks. And we are also looking at optimization of media and advertising costs. And all this needs to be balanced out so that we're not under-investing in network and market and, at the same time, transitioning.

So right now in Ukraine, we are balancing all these different activities with the objective to go into '13 with a rebalanced tariff base, a strong subscriber base and with the same strong market position we had in the beginning of this year. So that's the whole dynamic and some of the cost initiatives that will take place and, hopefully, also help us in the second part of the year and, clearly, building a platform for 2013 and beyond.

When it comes to your question on Uzbekistan, of course, we operate in all our market in strict accordance with the local legislation; this includes Uzbekistan. And we see very limited risk from the current case in Uzbekistan for our operations going forward. So we have no information to share or disclose that indicates a high risk related to this specific example that you showed us.

In fact, we think there are opportunities right now in Uzbekistan and we want to build capacity in the network and position ourselves for taking advantage of that.

Thank you very much.

Thank you.

Our next question comes from Tibor Bokor of ING. Please go ahead.

Hi, a quick follow up on Uzbekistan. I understand that the leader of the market network has been shut down, so I would be expecting some exodus of the clients into your network. So if you could tell us a little bit on this. Are you seeing an inflow of the clients? How much of additional clients can your network handle? And if you decide to invest into more network is this going to be cash flow out of the Group, or is it going to be Uzbek-based cash flow? And, lastly, can you pay dividends out of Uzbekistan? Thank you.

Yes, it's clear right now that we are seeing an increase in our subscriber base in Uzbekistan; that's pretty obvious, I think. So the challenge right now is to make sure that we handle the network load.

We are implementing everything of actions right now with respect to network and distribution channels so that we can ensure quality and the increased demand we see in Uzbekistan also. So we expect positive operational development as a result of this unfortunate situation for our friends and competitors in MTS.

When it comes to cash flows and dividend in Uzbekistan, that is still an issue that needs to be resolved. So the positive cash flow generated there will remain inside Uzbekistan until we have more clarity on how we can upstream dividend from Uzbekistan. So that's -- I don't know whether Henk want to add a few words on that.

Yes, there are -- in addition to what Jo said there are a couple of technical points, but they might be manageable. But I think one of the fundamental things is that we have established that the Uzbeki business of the last two, three years has been developing in such a strong way that it is even more effective and then also efficient for the Group in value terms to invest the cash in Uzbekistan, because that has really also significantly added to the strength of the position that we have today.

Thank you, thanks for that. A quick question on Algeria. How long before -- how long your network can sustain a situation where you cannot put more CapEx into the network? We still see more subscriber growth and market growing, but this can't last forever. Can you comment a little bit on that?

First of all, I think complements to our colleagues in both Cairo and in Algeria for being able to handle a growth like this in the circumstances that we operate under in Algeria. And maybe there are some good learnings there as well for the rest of our Group, how we can manage with less CapEx. And maybe the networks have a stronger strength to handle volumes than any of us realized before this happened.

We don't see any immediate problems in Algeria as we speak. We are able to handle volumes. We are able to handle customers in a good way. And of course we understand that clarity on the strategic challenge we have in Algeria is very important for operations.

That being said, we also think that having [headway] in negotiations very often lead to a bad result, so we believe it's in the Company and our shareholders' best interest to take the time necessary to negotiate and sit back and look whether we are satisfied with the ending of those negotiations and then make a decision whether we accept it or not and, at the same time, try to manage operation.

And for that reason we have to be able to manage this without setting a firm deadline for management. And so far they have done well. And my understanding is that also in the next quarter we will handle growth and traffic without severe quality or other network problems.

So we are probably approaching a crossroad where things will start to get difficult. But as of now it looks like we are able to have quality both in operations and quality in negotiations without being in a hurry or rushed. So I'm quite pleased with the way we handle those two processes in parallel.

Thank you very much.

Our next question comes from Alex Balakhnin from Goldman Sachs. Please go ahead.

Yes, good afternoon. I have two questions, both on the Russian operations. First is, are you satisfied with the quality of the network you have in Russia and the overall customer proposition? And where do you think it stands vis a vis your main competitors?

The reason I'm asking is you have a pricing premium, which you had historically, but in the same time you used to under-invest. And my question really is, is it reasonable to draw a parallel between what you do now in the Ukraine and what you might have to do in the next few quarters in Russia, addressing your customer proposition?

My second question is on your excellence program and execution, again, in Russia. And, basically, we noticed that you still experience a pressure on your gross margin and a big chunk of the achievements are coming from SG&A. Can you specify probably the roadmap for improvement of your gross margin?

And also, if you were cutting the headcount, could you probably specify the magnitude of the headcount reduction? And how do you feel whether it impacts your competitiveness or not? Thanks.

Okay. I'll start with the parallel you drew to Ukraine and then Henk can maybe throw some more color on the dynamic on the cost side in Russia, including pressure on the gross margin, as used in example by you.

Let's -- first of all, I think these are two very different topics that you bundled in your question, because Ukraine had already moved -- competitors had already moved to bundles in Ukraine years back and we had a situation where we had to also move to bundles. So it was more a timing issue. And we were late. And right now I think we can all admit that we were too late in doing that adjustment.

In Russia it's very different. The Russian market is already on the move towards bundles, but this is happening much more in sync between the competitors. And we are not late. And we are not early. We are basically moving with the slow and adjusting our tariff structure to that movement to bundles. So it's not an equal example.

The second part of your question, related to price premium and quality of the network, I think if you analyze the average price per minute now the gap from VimpelCom to competitor is much lower than what it used to be. So in a way we have closed that premium gap. And, by the way, average price per minute becomes less and less relevant as well when the transition to bundle happens. So I'm not too concerned about the average price per minute and the perceived price premium either.

The third part of your question is the quality of the network and, here, I think we are very focused right now. We are investing heavily in knowledge, in skills, in making sure that we are spending now our capital the right way. And we see clearly now a window, because we are, as you know, still having a gap on base stations on 3G in Russia.

And that gap I hope we will be able now to close [20-F] over the next 12 to 18 months. And that is, I would say, very good timing with also the plan, the rollout of LTE in Russia. So we are now moving, both performing better in the marketplace quarter on quarter and at the same time we are now using the time from now until mid '13 -- the second part of '13 to close the 3G gap, and at the same time invest in the infrastructure, which means that we will have a good momentum when we start transitioning from 3G to 4G.

So I understand we are having a challenge on network development and quality in Russia compared to both competitors. But we have good hopes that we're well organized and do have a good plan for addressing that over the next 12 to 18 months and at the same time, hopefully, deliver results as we saw today. So we just have to wait and see whether that scenario plays out or not.

Yes, and on the gross margin I think actually Jo, of course, mentioned already a couple of things that are of influence both on the development of the gross margin, but in the fact sheets that we always publish.

You see that the gross margin was at a level of 70%, so seven zero, in the second-quarter 2011. And it is at 69.6% in the second-quarter 2012, which is, in comparison to the first-quarter 2012, only a very small decrease of 0.3%. Partially that is the result also of a little bit different mix. We have a slightly higher percentage of Fixed in the mix than we had in the previous quarters that were mentioned.

So we are basically quite happy with the stabilization. And further improvements over the next couple of quarters also have to come from, let's say, changing the model towards distribution, managing the churn, bringing that to a lower level. And, actually, we made a first step in the second quarter, but further steps will have to follow. And that will over time, of course, also impact the service margin and the gross margin, as is important.

Thank you.

Our next question comes from Dalibor Vavruska of Citigroup London. Please go ahead.

Hello, good afternoon and good evening. Just a few questions, if I may. One is a general question about your balance and your thinking in terms of growth versus sufficiency, both CapEx and OpEx. I know that you've been very successful in terms of driving the efficiency and I think many people are probably pleased with the margin progress in -- on the consolidated level.

But at the same time, when we look at the revenue from all your key businesses, I think the growth rate is slightly lower this quarter than the last year. It's still good. And I'm not talking about the FX rate. I'm talking about the local growth rate.

I'm just wondering if you can share with us the trends. I think that the current levels are maybe satisfactory, but you know how -- what if this deceleration of growth continues, whether -- how are you thinking about the growth as opposed to the efficiency measures in all your key businesses?

And my second question would be on Italy. I understand -- I hope I understand this correct, that you had some price increase but it wasn't followed by competition and, therefore, you reversed the price hike. So I'm just wondering if you can comment on the competitive situation in Italy.

And also on your earlier comment about staying in Italy, I'm wondering if you are -- if you can say that you're going to perform assessments about the equity value of the Company and, [besides], perhaps next year at some point when the decision comes about that on a rational basis, or whether you are making some commitment now upfront about staying in Italy and potentially injecting capital from the holding level into Italy in the next years. Thanks.

Very good, Dalibor. Okay, so, basically, three questions. It's growth, it's the price increase exercise in Italy and then the last one is equity value versus refinancing of the Group.

The first one, let me try to be a little more conceptual there. I think if you look at the growth in the years to come now you will see the whole industry transitioning through, Voice flattening and probably decreasing, Messaging Services decreasing. And then the whole question becomes how much Data growth will we have to compensate for those two first trends.

And I think this is an industry challenge, how do we price Data. Do we price them on speed? Do we price them on volume? Or will competition lead to different pricing models? But, to be a little bit more specific, I think the guidance we gave on mid -- around mid single-digit revenue growth for our operations in '12, '13 and '14, there is no new assessment on our side to that guidance.

And then we also said that we will work very hard to control our cost base and make sure that we also deliver EBITDA growth in the same mid single-digit growth territory. And I think that that's what we've done in the first half of 2012. And we hope that will continue. And this includes the challenges we see now in Ukraine. And it includes also the challenges we see in the Italian market in this period.

Frankly speaking, I think probably, in general for operators, growth is as big issue as maybe delivering profitability. I think there are still a lot of structural changes you can do in your OpEx space and in general how we operate our companies that can secure profitability and earnings going forward. But the revenue growth depends a lot on how the whole Data story will play out in the global telecom universe. So that's question number one.

When it comes to question number two on price reductions, I'm almost tempted to go all the way back to 2005 and remind everybody that back then our competitors in Italy had EUR11 higher ARPU than we had. And today the deviation to one of them is approximately EUR1 compared to the EUR11 and, to the other one, less than EUR4.

So it's pretty clear who's been driving prices in the Italian market. For sure, it's not Wind. The good thing is that Wind has been able during those years to move from a low-price operator to a value-for-money operator. And I think that's why you see also 75% of the net adds in the Italian market this summer ending up with Wind.

So we are very pleased with the team in Italy and their ability to run their business and play the marketing game in Italy. And we increased some prices, that's right, and we did not reverse those prices at all. We implemented some more, what I would say, eye-catching promotions that was very successful during the summer and led to this increase. So this was not the result of lowering tariffs in Italy at all.

And the third question you ask about equity value and the ring fence, and the fact that [it's nearing] EUR14b of debt in Italy, and you might want to analyze what equity value Italy is. I think it's clear for me and for the team [in] Italy and everyone that we will do the next period now an assessment of the optimal funding structure of the Group. And part of that is also clearly to look at what is the underlying equity values of the different funding blocks that Henk referenced in his presentation.

So when I addressed that we believe in the long-term value play in Italy I did not pre-empt the discussion related to the ring fence and a future funding structure and corporate structure of the Group. That discussion remains to be taken and is not yet concluded.

Thank you, Jo. Can I just very briefly follow up on your first question's answer? You mentioned about the -- you talk about the medium-term plan. If you want single-digit -- let's say, mid single-digit growth, let's say, in local currencies you basically are going to have negative growth in Italy for some time now. The Ukraine is now getting -- basically becoming negative as well. The Algerian growth has slowed down to below mid single digit -- to basically single -- low single digit.

So are you expecting -- do you think that these businesses will recover within, let's say, 18 months, or that you can get more growth from the other businesses, or how do you get to this single-digit growth for the Group?

Well, I think what we see now is clearly that the dollar is strengthening considerably to our operating currencies. The good part of that is, of course, the development. You saw net debt -- that net debt was reduced to $1.3b in the quarter as the result, again, of the movement on the dollar. But I think it's very hard to speculate exactly how the dollar will develop against these different currencies, Dalibor.

But even if you look at the average local currency, I think it's now about 4%, but it's going down. But if it's 2% or 3% -- maybe if the trend continues with 2% or 3% for the Group excluding the FX impact, so I'm just wondering if that's -- is that something you'd be happy with, or is it -- ?

I think it's clear, Dalibor -- Henk speaking here -- that, of course, certainly for the next 12 months to 18 months the MTR cut in Italy will have, of course, an impact on the total Group organic growth. On the other hand, if you look at how our Italian business performs excluding that MTR cut, then after that effect has been out of the equation you see a very solid and sound development in that business that is also taking market share in the market.

We're looking at the organic growth rates in Russia, revenue growth rates in Pakistan, in Bangladesh that are -- in Uzbekistan that are considerable. Algeria, even with the restrictions that the Algerian business has it is still showing good organic growth. So if we're able to also resolve some of those restrictions over the period to come, as Jo mentioned, that will certainly be an addition.

And mentioned earlier, the current situation on the Ukraine, we expect to return back to a growth again within the next 12 months. So in that context I think the statement that Jo made and that we made earlier as a Group, around mid single digit, is still a valid statement. And around mid single digit is around 5%, so there can be plus or minus 1% on the 5% on an organic basis.

Thank you very much.

Our next question comes from Igor Semenov of Deutsche Bank. Please go ahead.

Yes, hi. Thank you very much. First, I wanted to follow up on the -- [Sasha] Balakhnin's question about headcount. He was asking about the Russian headcount plans. Can you elaborate a little bit more on that area?

And, secondly, a question on the Russian Fixed Broadband dynamics. It's clear that the net additions have slowed quite considerably. Can you comment whether this is a general market slowing down so significantly, or whether there's something going on with your particular -- with this particular segment as your Company and this is nothing to do with the sector growth? Thank you.

Okay. Okay, Igor, headcount first in Russia. There are basically two baskets here, the first one is when we outsource functions. And I think you will see a trend towards increased outsourcing concepts in Russia, whether it is network operations, or it is customer service, or functions like that. So you might see headcount reduction as the result of streamlining the business processes through outsourcing concepts.

The other one is, of course, the general headcount reduction in the organization when we improve business processes and then ask ourselves whether we are organized the right way. Part of the headcount reduction will also, of course, come out of exercises like that. And I just don't want to quantify or time exactly how this will play out. But we are working along both those dimensions.

And then, when it comes to Fixed Broadband, we believe that this market now has reached a point where investments in further subscriber base growth is not really paying back in a reasonable time. And, for us, a reasonable time is three-year plus. And for this reason we have decided now to concentrate on development of existing subscriber instead of unprofitable acquisitions and unprofitable growth.

And that's why we are growing below market in subscribers. But, as I said, this is part of our main strategy to focus on increasing cash flows and create values instead of satisfying on certain selected KPIs that we don't believe is supporting that [growth].

Okay, thanks very much. And just on the headcount the -- I guess a part of this is network maintenance, or a significant part of this is network maintenance employees. This is presumably without any adverse impact on the network quality.

Well, that --

Still a question, but --

No, no, of course, this is very, very important. And the good thing is that we have a lot of experience from network swaps and the outsourcing of network operations from shareholders, from our own experience. So I think we have a good knowledge base on what to look for and how to organize these outsourcing processes. And we feel very comfortable it's not going to influence long-term quality but, rather, yield higher cash flows.

Thanks very much.

I would now like to turn the conference back over to Mr. Jo Lunder for any closing remarks.

Okay. Thank you very much. Thank you, everybody, for taking the time this afternoon and morning in the US. We are, as I said, pleased with the results and we hope that we will be able to execute on our plans and appreciate your time and all the good questions. And, as always, we have a strong IR team here in Amsterdam and sitting waiting for follow-up questions. And of course, also, I hope to get around and see some of you in the next months to come.

So, with that, I suggest that we close this call and move on. Thank you very much.

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