VEON Ltd (VEON) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom fourth-quarter 2012 investor and analyst conference 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 may be recorded.

I would now like to introduce your host for today's conference, FTI Consulting. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to VimpelCom's conference call to discuss the Company's fourth quarter 2012 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 future dividend payments, the Company's medium-term value agenda objectives and 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 the Company's earnings release and presentation announcing fourth-quarter 2012 results, the Company's annual report on Form 20-F and other recent public filings made by the Company with the SEC.

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 exact arithmetic aggregations of the figures that precede or follow them. Please note that the actual financial results of the fourth quarter of 2012 are unaudited.

If you have not received a copy of the fourth-quarter 2012 financial and operating results released, please contact investor relations at [312-07-97-7234], 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.

Thank you. Good afternoon to those in Europe, and good morning to our guests from the United States, and welcome to our fourth-quarter 2012 earnings presentation. I'm joined here in Amsterdam by Henk van Dalen, our Chief Financial Officer, who will be covering the financials in detail, and Gerbrand Nijman, our Head of Investor Relations.

Our fourth-quarter results reflect continued delivery on our strategic priorities, highlighted by profitable growth and strong cash flow generation. The Group recorded organic revenue growth of 3% year on year, with revenues reaching $6b, with solid performance across our business units. Excluding the impact of the reduction of mobile termination rates in Italy, organic revenue growth would have been 5%.

EBITDA increased 13% over the previous year, leading to an EBITDA margin growth of 3.3 percentage points, to 41.1%. Organic EBITDA was up double digits in Russia, Africa, Asia and the CIS. Operational developments continued to be positive in Russia, and in Italy, we continued to outperform the market. Additionally, we are successfully transitioning our customers to bundled offerings in the Ukraine.

In the fourth quarter, we achieved strong overall subscriber growth, with an increase 5% year over year to 214m mobile subscribers. Africa and Asia delivered especially strong subscriber growth in the quarter.

Despite unfavorable currency movements, our financial performance was strong, with net income increasing substantially to $801m. Net cash from operating activities increased 24% to $2.3b in the quarter.

Moving on to our full-year results, 2012 has been a successful year, with a solid organic performance in all our business units. We achieved a 4% organic growth in revenues, reaching $23.1b, as well as an 8% organic increase in EBITDA to $9.8b. This led us to deliver a 2 percentage point increase in EBITDA margins to 42.4%. Net income grew to $2.1b in the full year.

It is worth highlighting the turnaround we have witnessed in Russia, where in 2012 we realized more than double the initial target of the RUB5b in annualized savings. Our strategy remains centered around increasing cash flows, and our efforts on this objective are clearly visible in the 19% increase in the net cash that we realized in 2012.

Before discussing our business unit performance, I would like to mention some recent important developments. On January 16th, we held our Analyst and Investor Day in London. We presented our Enhanced Value Agenda for '13 through 2015. We also announced our medium-term objectives, which includes a revenue and EBITDA CAGR of around mid-single digits, net debt to EBITDA below 2 times by the end of 2015 and CapEx to revenues, excluding licenses, below 15% in 2015.

We indicated our intention to deliver improvements in annual cash flows compared to 2012 of $2b from operations and of between $600m and $900m from finance optimization by the end of 2015. In February this year, we successfully completed a debt refinancing of $2b equivalent.

We held our annual general meeting on December 21st, in which nine Supervisory Board members were elected, four of Alfa, three of Telenor and two Independent Directors. The Supervisory Board also unanimously elected Alexey Reznikovich as Chairman.

In January 2013, we paid in total $1.3b in dividends. The dividend policy is currently under review, following the announcement of conversion by Altimo. In the second quarter of 2013, we expect the Supervisory Board to make a decision on dividend policy, the final dividend for 2012 and a possible extraordinary dividend related to the proceeds of the conversion. And, finally, we continued to negotiate with the Algerian authorities on finding a mutually beneficial agreement, and discussions are progressing.

Let me then move on to the performance of our business units, starting with Russia. In Russia, our operating performance continued to improve in the fourth quarter, extending the positive development witnessed in the three first quarters of the year. The business saw organic revenue growth of 4%, with an impressive 37% increase in mobile data revenues.

EBITDA increased 15%, leading to an EBITDA margin of 41.3%, up 4.2 percentage points over the previous year. The strong EBITDA growth was in part due to a favorable comparison over the same period last year, which was impacted by high commercial and technical costs and one-offs of RUB800m in total, including a provision for HR costs and inventory write-downs.

However, the performance in the fourth quarter of this year clearly demonstrates execution on our strategy to deliver profitable growth. Our operational excellence program in Russia delivered even stronger results than expected, and we realized more than a double the initial target of RUB5b in annualized savings in 2012.

Improving network quality continues to be our focus in Russia, with the aim to be on par with our peers in the key regions by the end of 2013. We expect CapEx to revenues to increase to 22% in 2013 versus 18% recorded in 2012.

In summary, we are pleased with our progress in Russia in 2012, but there is still improvement potential, and in '13, we will focus on executing the strategy by improving network quality, reducing churn and also improving our customers' excellent offerings.

Moving on to Italy, in Italy, Wind continued to gain market share, outperforming the competition once again. Total revenue grew 2%, if we exclude the impact of mobile termination rate cuts. Our mobile data offerings continued to achieve very strong results, with mobile broadband revenues up 37%.

Our mobile subscriber base increased to 21.6m, with a strong growth in mobile broadband consumers, up 24% year on year. In fact, we achieved over 55% share of net additions in the quarter. On the fixed-line side, we delivered [6%] increase in the more profitable LLU broadband subscriber base.

EBITDA declined 4%, reflecting the impact of mobile termination rate cuts on the top line, which was partially offset by structural cost-savings initiatives implemented during the year. Excluding the impact of the MTR cuts, EBITDA grew 2%. EBITDA margin increased to 37.5%.

In 2012, we were able to substantially offset the MTR impact by implementing operational excellence and capital efficiency initiatives to protect our cash flow. Looking ahead into 2013, we expect continued pressure on top line as a result of further mobile termination rate cuts. The first cut took place in January '13, and a final and last cut is scheduled for July '13, which will bring the MTR below EUR0.01.

In order to preserve our EBITDA and cash flows, we are implementing a cost efficiency program, which includes substantial OpEx and CapEx savings. One example, we have already launched a network transformational project that is aimed at achieving OpEx savings of around EUR40m to EUR45m per annum, starting this year.

Moving on to Africa and Asia, in our Africa and Asia business unit, we achieved organic revenue growth of 11%, driven by strong subscriber growth, an increase in prices in Pakistan and Bangladesh and an acceleration in data and value-added services usage. Reported revenues grew 2%, adversely impacted by the devaluation of local currencies in Algeria and Pakistan against the US dollar.

EBITDA increased to $426m, achieving an organic growth of 36% year on year, partially as a result of the ongoing operational excellence initiatives. The strong increase in Africa and Asia is also driven by the doubling of the EBITDA in Bangladesh as a result of significantly lower commercial OpEx versus last year.

In addition, EBITDA for the fourth quarter '11 was affected by provisions for corporate contingent liabilities and costs associated with the demerger of OTMT. This profitable growth is, however, the result of the combined effect or solid top-line growth and operational excellence initiatives implemented in our businesses.

Touching on the three biggest entities in Asia-Africa, in Algeria, revenues increased to 9% in local currency, with mobile data revenues up 12%. Our subscriber base grew 8%, enabling Djezzy to maintain its leadership position with a 55% market share. EBITDA in Algeria increased 8% in local currency.

Our performance in Pakistan was also strong, despite the impact of several government-imposed shutdowns of all the cellular networks. Mobilink delivered revenue and EBITDA growth of 9% and 12%, respectively, in local currency. The strong performance was driven by subscriber growth of 6% and a 44% increase in mobile data revenues. In the quarter, we also launched our mobile financial services offerings.

And then finally, in Bangladesh, our subscriber base grew 9% and revenue increased 13% in local currency. EBITDA increased 104%, reflecting savings on commercial OpEx, but the growth was in part flattered by a favorable comparison of the same period last year, which saw high customer acquisition costs. The new regulation regarding voice-over-IP usage negatively affected revenues in the fourth quarter, and is expected to have a significant negative impact in 2013.

Moving on to Ukraine, the Ukrainian business unit, we achieved revenue growth of 4% in the fourth quarter. Mobile service revenue returned to growth, up 3% year on year, reflecting the successful transition to bundled tariff plans and a 5% growth in the mobile subscriber base.

At the end of 2012, we have transitioned 75% of our subscribers to bundled tariffs, and by now, we have almost completed the transition. Fixed-line revenues were up 3% as a result of strong FTTB revenue growth. Fixed residential broadband revenues continued to outgrow the market, up 77%, driven by strong growth in subscribers and ARPU.

EBITDA in Ukraine increased 9%, leading to an EBITDA margin improvement of 2.2 percentage points, to 52.5%, driven by the growth in mobile revenues, cost measures and improved revenue mix in the fixed-line business.

Then, the last business unit, CIS -- in CIS, we continued to deliver strong, profitable growth, while competition remains intensive in several markets, especially in Kazakhstan. Revenues grew 21%, and EBITDA grew 45% on an organic basis, but these results were materially positively impacted by the network closure of a competitor by the authorities in Uzbekistan.

EBITDA margin in the quarter increased to 48.1%, up 7.3 percentage points. On a normalized basis, adjusting the growth in the fourth quarter in Uzbekistan to the level of the first half year of 2012, the underlying revenue and EBITDA growth for the CIS would have been 9% and 17%, respectively.

A few words about Kazakhstan, our largest CIS market -- organic revenue growth was 2%, and the mobile data revenue increased 40%. In 2013, we expect an MTR cut of 15%, which will increase the pressure on our top line.

As we successfully did in Ukraine, we are now transitioning our subscriber base to brand-new tariff plans also in Kazakhstan. In the last quarter of the year, EBITDA grew 8%, and EBITDA margin improved 2.6 percentage points to 46.2%, reflecting a positive impact from a number of operational excellence projects.

I'll now pass on to Henk van Dalen, who will discuss the financial performance in more details.

Thank you, Jo. As was the case for the previous three quarters, also our fourth quarter actual reported results were impacted by the appreciation of the US dollar against the local currencies in almost all of our operating units compared to the same period last year. On an actual basis, as a result, revenues increased 1%. However, on an organic basis, overall revenues increased 3% year on year, and excluding the impact of mobile termination rate cuts in Italy, underlying organic revenue growth would have been close to 5%.

EBITDA on an organic basis increased 13% year on year, while the reported EBITDA increased 10%. Excluding the mobile termination rate cuts in Italy, underlying EBITDA would have grown by around 14%, organically. As fourth quarter '11 EBITDA was impacted by certain one-off charges, the year-on-year growth comparison was also helped a little bit by this effect.

EBIT in the fourth quarter '12 grew by 231% year on year to $709m. The comparison was, however, influenced by changes -- by non-cash items, which I will explain further on in the presentation. Excluding these combined effects for the fourth quarter '11 and the fourth quarter '12, EBIT would have grown by 24%.

Profit before tax was $764m, up substantially, primarily due to the higher EBIT and a revaluation related to our investment in Euroset. As a consequence, net income in the fourth quarter increased significantly, to $801m.

Then take you through the full year. As previously mentioned by Jo, our 2012 performance was strong and delivered a 4% organic revenue growth and an 8% EBITDA growth. On a reported basis, however, results were impacted, as said, by the unfavorable ForEx movements.

In Russia, revenues increased by 1% in US dollars and 7% in local currency. In Italy, revenues in US dollars decreased by 10% and decreased in local currency by 3% as a result of the sharp MTR cuts. Excluding MTR effects, net operating revenues improved by 5% underlying.

Africa and Asia reported organic growth of 9% and have stable revenues in US dollar terms while the Ukraine delivered growth of 2% in both US dollar and local currency.

Lastly, CIS continued to achieve strong performance with a revenue increase of 15% organically, primarily as a result of the network closure of a competitor by the Uzbek authorities. In Russia, EBITDA increased by 13% organically, while EBITDA growth in Africa and Asia and CIS were up 15% and 22%, respectively.

In Europe-North America, EBITDA decreased by 10% in US dollar terms and declined by 3% in local currency, mainly due to the impact of the MTR cuts. Ukraine, EBITDA decreased by 1% in local currency and by 2% in US dollar terms.

EBIT increased by 31%, mainly as a result of the growth in EBITDA, coupled with the declining amortization schedule applied to intangible assets as part of the Wind Telecom acquisition. Net income grew almost four times as a result of the increase in EBIT and non-cash items, which I will explain on the next slide.

So this slide, you will see the main items that relate to non-cash effects in EBIT and net income, including also a further clarification on the declining amortization schedule, which is applied to intangible assets as a part of the Wind Telecom amortization. So EBIT was impacted by impairments, and as you know, we do these impairment tests on a regular basis for cash-generating units.

In 2012, we performed a detailed business plan review of our Canadian operations, leading to an impairment of the shareholder loan to Wind Mobile by $328m. In 2011, we recorded an impairment of $527m, following our review of the operations in Vietnam and Cambodia.

EBIT in 2011, as said, was also impacted by a provision for HR costs and inventory write-offs in Russia of $30m in total. Furthermore, the declining amortization schedule applied to certain intangible assets as part of the Wind Telecom acquisition led to a lower D&A in 2012.

Net income was impacted by certain fair-value adjustments, and as a result of the acquisition of the additional 0.1% in Euroset in 2012, IFRS required a positive fair-value adjustment of the previously held interest in Euroset for $606m. In 2011, we recorded negative fair-value adjustments related to the embedded derivative in the Wind Italy debt instruments and other fair-value adjustments for a total of $332m. This gives a little bit a picture of these main items in that overview.

Then I go to the debt and cash ratios and also the comparison for the full year. So you can see here that our financial position remains solid. On a consolidated basis, actual net cash from operating activities in the fourth quarter was $2.3b. Gross debt increased slightly in the quarter to $27b, mainly as a result of foreign exchange movements.

Net debt decreased to $22b, leading to a net debt to the last 12 months EBITDA of 2.2 at the end of the year. We ended the quarter with a very high cash balance, and the positive balance of over $5b, a part of which was used to pay the $1.3b in dividends in early January 2013.

And now finally, a little bit of an update on the debt composition and the maturity profile. There is a peak in the maturity profile in 2017 caused by the Wind Italy debt, but we plan to refinance this before that date. However, this will not be considered before the second half of this year, and timing will, of course, always depend on market circumstances, as well. So the gross debt was $27b at the end of the year, with an average weighted interest rate of 8.5% in the quarter.

The balance of foreign exchange exposures in gross debt remains diversified across various currencies, and during the fourth quarter, we also established a $500m bilateral credit facility with the China Development Bank. The credit facility is earmarked for financing equipment and services of Huawei, has a tenure of eight years and is to date undrawn.

As mentioned previously, in February 2013, VimpelCom completed approximately $2b in debt refinancing by issuing six-year $600m 5.20% guaranteed notes, 10-year $1b 5.95% guaranteed notes and five-year RUB12b 9% guaranteed notes. Proceeds will be used for the repayment of maturing debt in VimpelCom and general corporate purposes.

The coupon on the US dollar notes was the lowest coupon in VimpelCom's history. Additionally, the ruble-denominated Eurobonds represent the first such issuance by a nonfinancial services or non-state-owned company. Following the recent debt refinancing, VimpelCom has secured its refinancing requirements into 2014, and this has also improved our debt maturity profile after these refinancings are done, as you can also see from the blue dotted boxes in the chart that we show here, which shows an element coming in in 2019 where we didn't have maturities, and of course also the $1b of the 10 years in 2023.

That completes the financial part. Jo, over to you.

Thank you, Henk. So, this is the last slide. I think it's been a good year for VimpelCom. With not the best starting position, I think we end the year with improved positions in most of our markets. If you look at the last slide, you see an organic revenue growth for the year '12 of 4%. If we adjust that for the MTR cuts in Italy, we actually had a 6% revenue growth in the year, and if we do the same exercise on EBITDA, you see an 8% EBITDA growth in 2012. And if we adjust again for MTR effects in Italy -- that hopefully this is the last year with adjustments on MTR rates in Italy -- we see an EBITDA growth of 10% and also clearly an improvement on the EBITDA margin.

So I think we have shaped this new Group in a good way. I think we have managed to direct every operating entity in the direction we want, with profitable growth and focus on cash flows. There is still lots of improvement potential, and I think now moving into 2013, we will just keep focusing on executing on our strategy and be disciplined on the medium-term objectives that we announced on the Analyst and Investor Day in January of this year.

So I think that ends our presentation this afternoon and morning, and we are ready to take questions. Back to you, operator.

Thank you. (Operator Instructions). Our first question comes from Haim Israel of Bank of America. Your line is now open.

Hi. Good afternoon, guys, and congratulations about the results. Just one question from my side, about the Canadian operation. We saw some headlines coming that after increasing position in Wind Canada, you will consider to make some acquisitions over there to strengthen the position of the Company. Can you comment a little bit about that? What are the opportunities that you see, how you see the Canadian activity, and so on?

Yes, I'll do that. I know that the reference point as well. Let me try to clarify what at least I tried to say when these comments came out. Stage one is to take control of the entity in Canada, so we're buying out the local partner, and we are now converting nonvoting shares to voting shares, and this required, of course, a regulatory approval in Canada, and that is still pending.

Step one now is to take control of the company, and the reason for doing that is basically to decide our own destiny in the country without having to deal with partners and too many stakeholders. Then, we will just evaluate the options available, and there are multiple options available for us in Canada.

We can decide to exit. We can decide to do an in-market merger and consolidate. We can decide to grow organically in the country. We have a good momentum right now in the postpaid market with a new strategy. So all I said was basically this is a two-step approach. Control is step one. Step two is to create options for ourselves, and then we will select the options that we believe is in the best interest of shareholders, and we will test the different options available.

So it was not meant to be a declaration of our acquisition strategy in Canada, even though maybe was perceived like that.

Okay, thank you very much. And the final question from my side is can you give us any kind of update about the Algerian operation negotiation with the government?

Yes. I start sounding like a broken record, I think, on this topic, but I don't have any news today, but I can repeat what I've said in the past, that we have a good atmosphere. We have momentum. We are making progress. We are communicating on sufficient high level within the Algerian government. We have two project teams that is working together. We have meetings scheduled, we have timetables, and I remain optimistic to resolve and find a good solution for our Company and our shareholders, but we don't have anything outside that to report today.

Okay, great. Thank you very much, guys.

Thank you.

Thank you. Our next question comes from Herve Drouet of HSBC. Your line is now open.

Yes, good afternoon. My question is more regarding the conversions of preference shares into ordinary shares. Can you give us a bit of an idea if this conversion is going to be done at market price, and what will be your expected inflow of cash for the Company? And is there any idea at this stage on what's the portion you may give back through extraordinary dividend to shareholders? Thank you.

Yes, so on page number three of the press release, you will find in a line here which is very specifically going into the financials of this conversion, if it is executed. So you see there that the price there for the conversion is $10.835 for convertible preferred shares, which leads to approximately receiving $1.4b from Altimo for the conversion. And as a result of that, Altimo's voting percentage, of course, will remain to be the same, but its economic interest in the Company will switch to 56.2%.

Right. And in terms of this portion of cash potentially being redistributed, is there any decision in terms of how big this portion could be?

I think that that's a good bridge into what we also said today about dividend. So we remain, of course, committed to the $0.80 per common share, assuming 1.628m outstanding shares, so nothing has changed with respect to that.

What we have decided to do is basically, in the context of the fact that the number of shares are increasing, the Supervisory Board would like to review the dividend policy and discuss if that will lead to a change in the guidelines on the dividend, and in the same context, we will also decide the final dividend for 2012 and also have a discussion on a possible extraordinary dividend related to the proceeds of the conversion. And this decision on the dividend guidelines, final '12 and extraordinary we will make in the second quarter of this year. And it's basically just related to the fact that the Supervisory Board wanted to have enough time to talk through it, so we will announce it, as I said, in the second quarter.

Maybe let me rephrase the question. Is the extraordinary dividend going basically, potentially, to offset the dilution with the number of shares? The $0.80 per dividend is also valid for the new number of shares? What do you mean?

Yes. That's what I described, and that's exactly the discussion that the Supervisory Board needs to take, because, of course, this is a dilution of 8% I think in the total number of shares, which logically could also lead to a subsequent adjustment of the dividend guidelines, reflecting the new number of shares, but that's the discussion the Supervisory Board would like to have. So we haven't decided whether we're going to keep the $0.80 or that we're going to adjust it for the new number of shares, and in that context, we will also decide on the final dividend for '12 and potentially also pay an extraordinary dividend related to the proceeds from the conversion, the $1.4b. And this will be one combined announcement sometime in the second quarter.

All right. Okay, thank you very much.

Thank you.

Thank you. Our next question comes from Alex Balakhnin of Goldman Sachs. Your line is now open.

Yes, good afternoon. I have two questions. One is probably some elaboration on the previous question on the dividend. So, essentially, it's a choice, right, between the deleveraging and the level of dividend? And I'm sure the Board will have the discussions in consultations with the management team, and for you as a management team, what would be the bigger priority, to probably stick to the same number of the dividend with the higher number of shares, or you would prefer to stay on the path of deleveraging, which you had in mind before?

And my second question is can you elaborate on the priorities of the CapEx spend plans in Russia for 2013? What are the key areas? Do you invest more in base stations or in base stations connectivity or backhaul of the network? Any details on the breakdown of capital by projects would be very helpful. Thank you.

I think on the dividend question, I think I tried to express the process there and I think we should, as management, be careful to take a firm position on our opinion here. I think it's a judgment call in the end whether we would like to deleverage using the $1.4b for deleveraging, or whether we would like to use it for an external dividend. I think the most important thing here is basically that the commitment to reduce net debt to EBITDA below 2 by the end of 2015 remains in place. That will be done by cash from operation, and it does not assume any new shares. It does not assume any divestment. It's basically going to come from improved EBITDA and increased cash flows, also including a dividend payment in the period. So that deleveraging target is still valid, regardless of this discussion on guidelines on dividend and what we're going to spend $1.4b for.

And then on Russia, we do -- we're going to do now a catch-up in 2013. And we are behind MTS and MegaFon, even though drive tests and a few other things we're doing is clearly showing improved network quality. On our side we still would like to focus investments clearly to Moscow in 2013. And I think also by the end of '13 we will have done the catch-up in most of the important and prioritized regions and then the rest of the catch-up will probably melt somewhat into 2014.

When it comes to IP optimization of backhaul, I think the percentages we have in 2012 at the end of '12 are approaching 50%. And the target at the end of 2013 is to get to close to 80% to 90%. And of course also part of the investment will have to go into 3G base stations to close the gap we have there to MTS, which has actually increased a little bit in 2012. And again, focus on the key strategic regions and again, as I said, on par with peers in terms of coverage in key regions by the end of '13 and fully probably into the first or second quarter of '14.

And the CapEx-to-revenue guidance we've given for Russia, 22% in 2013, substantially up from the one we had in 2012 is also clearly an indication from the Group that Russia has a clear priority in 2013. A very important market for us, and for that reason we allocate capital to Russia.

And the second country in terms of priorities on CapEx is hopefully Algeria. The minute we have a solution there we will clearly do a catch-up of years without investments there as well. So for that reason '13 will be a little bit of an increase compared to '12 and contradicts a little bit the long-term guidance we've given on CapEx to revenues. But we still remain committed to the 15% CapEx to revenues by the end of '15. So that's the best I can give you.

Thank you so much. Very helpful.

Thank you. Our next question comes from Dalibor Vavruska of Citigroup. Your line is now open.

Hello. Good afternoon. I would like to ask two questions, if I may. One is about market share in Russia. I think overall the Group results we like; they are strong. In Russia they also look strong, but if you're talking about operational excellence, I think it's fair also to say that you keep losing market share. Your voice revenue is falling. Your pricing is still higher than that of competitors, at least in a simple ARPU/MOU yield point of view. And that you increased your EBITDA by 15% but MegaFon increased it by 25%.

So if you compare yourself to your competitors, I think I'd just like to ask where you see the market share on revenue and EBITDA going, and whether you think that your CapEx budget for 2013 for Russia is enough to potentially reverse this because we are hearing some discussions about your competitors potentially increasing, and MTS, for example, increasing CapEx compared to their expectations to even higher numbers that you talk about.

Also on that, if I can -- there is some discussion in the market about potential consolidation, specifically Tele2 assets. So my question would be if, for example, some of your competitors acquiring customers through acquisitions of, for example, Tele2, whether there are certain thresholds of market share where you're not going to be comfortable. And if that's the case, how are you going to respond?

And my second question is very short and technical. When we look at your local numbers, for example for Italy, the revenue and EBITDA, and then we look at the consolidated contribution of revenue and EBITDA, the margin works out slightly different. And I just wanted to see whether there was any discussion re cost allocation that you apply when you do this consolidation which could impact this or what is the reason basically for the difference in the margin? Thank you.

Okay, Dalibor. Thank you very much. Henk will confirm that there is no allocation issues related to the numbers, and I guess you can have a follow-up call if you like after the call. But Henk can give his comments on that.

Sure. Thank you.

Yes, the CFO. But let me kick off with your question on Russia because I think, in a way, you related to market share and competitive performance of, for example, MegaFon. It's a little bit of a broader question you're basically raising.

I think my take on all this is basically that, first of all, that there has clearly been a market [repair] in Russia that we should all be satisfied with. There are now much more focus on revenue market share, on cash flows and on network quality, investments in next generation, investments in customer, etc., instead of buying subscriber market share and value leakage to distribution and other leakage to other players in the value chain. So I'm very pleased with the way the mobile market in Russia has shaped over the last 12 to 18 months.

I think also we should be a little careful to compare directly because of course in VimpelCom we have a fixed operation combined with a mobile operation. I think probably one of the competitors you mentioned, MegaFon, has a cleaner mobile operation and we all know that margins in the mobile segment is higher than in a combined segment. We are not reporting combined margins, but we are quite pleased when we look at our margin in the mobile segment compared to competitors. So I think it's a little bit of a mixed bag and difficult to give a straight comparison on a call like this.

But all that being said, I still think the improvement we've seen in 2012 for VimpelCom we should be very happy about. But we do clearly see that we still need to improve. And the main area of focus next year is network quality, which -- and also 3G coverage to address the data potential. Number two, churn level is too high in Russia still compared to the mature markets. So we would very much like to drive churn down by using distribution contexts and other measures to make that happen. And the last one is really to now invest in customers and make sure that the Beeline brand is representing value for customers and a good customer experience. So those are the three areas of focus next year that hopefully will lead to further progress for our Russian operation.

And when it comes to Tele2, I think any consolidation in any market right now would probably be of benefit. I think dependent on the terms, it could benefit the one doing the consolidation, but it could also benefit, I think, other players in the market.

And I have a general view on consolidation. I think we will see more consolidation in the telecom market going forward. I think there are so big investments required for next-generation LTE, etc., that it's going to be very hard to have six, seven players in the market and also have MVNOs on top of that. So I think you will see in-market consolidations. I think you will see cross-border consolidation. And I think you will see an industry basically consolidating in order to have enough financial capacity to roll out the next generation of mobile broadband networks. And for that reason in general I would be positive to a consolidation also in Russia in that context.

So I hope that answered some of your questions. And then Henk can maybe pick up on the margin and on the consolidation part of the question.

Yes. I cannot give you a very detailed answer there, Dalibor, but the main effect of course that you see is that the one is a statement in euros and the other is in dollars. When you translate from euros to dollars you have euro elements, you have dollar elements, you have sometimes other currencies in it. So there are always FX translation elements in it. And there is an element of rounding in it as well. So we can give you some of those details, but it has nothing to do with additional allocations or something like that.

Okay. Thank you very much, Henk and Jo. If I can just ask one very little follow-up on the market share issue. I remembered about a year, year and a half ago, you basically said that you are comfortable with being a number-three operator in Russia in terms of, say, revenue market share, but you would not be comfortable if the gap between number one and you exceeds a certain level. Is that still the case? And how is that view maybe changed in light of the consolidation possibilities?

Dalibor, I think that's still the case. Revenue market share is the platform for earnings and growth in any market. So it's much more important than subscriber market share. And we had to do certain adjustments during 2012 because the subscriber base was a little inflated by high-growth sales at the end of '11. So we knew that we had to do adjustments in the subscriber base in 2012 in Russia. I think we've done that. So now the subscriber base reflects value customers and a more real -- in a more -- in reality mirroring what we have there. So we don't want revenue market share to now decline any more than what we have now.

So in 2013 we will not be pleased with losing revenue market share. I would actually hope that maybe we could take back a little bit. But I don't think you will see big movements here in the years to come. I think you will see more stable revenue market share development.

Thank you very much.

Thank you.

Thank you. Our next question comes from Olga Bystrova of Credit Suisse. Your line is now open.

Yes. Good afternoon. I wanted to ask two questions, one follow-up from my colleagues. One is that you are now doing a transition to bundled tariffs in Kazakhstan after Ukraine. And you mentioned generally a focus on bundled tariff transition generally as your strategy. Which are the markets where you expect to do next and where you see that most applicable or necessary at this stage?

The second question is on Russian sales and marketing expenses. It doesn't look -- it seems to me that, given the numbers you provided, that sales and marketing expenses in Russia are relatively stable in relative terms. I wanted to ask if you are seeing any positive impact from consolidation of ownership at Euroset, whether you have seen it already or you expect more efficiencies from that, from Euroset ownership changes to come to you in 2013?

And the final question on follow-up on the special one-off dividend, would your -- would Supervisory Board decision on a special divi or the magnitude of the special divi depend on any events such as, let's say, cash inflow because of Algerian resolution, your ability to repay -- to refinance versus repaid debt, more expensive debt in Italy, or let's say your ability to see some consolidation opportunities in your key markets in 2013. Thank you very much.

Thank you. Thank you. Good questions. Let me offer a few reflections on the bundlings in general first and then we can relate them to our markets. I think probably we will see a trend towards bundles in most markets going forward. You would probably technically look to the US, which is the most advanced LTE market currently in the world and you will see a variety of bundled tariff bands there. So that's probably the trend we see now. So voice and SMS becomes application in a bundle and you offer a certain data volume and then when you reach that level, either your speed is being reduced or you pay more for getting more or higher speed. I think that's probably the future of the pricing structure for telecom.

Ukraine has done this successfully already. And as you said, Kazakhstan will follow this year. We see also trends of and signs of this happening in Italy. We see some movements to bundles in Russia. And we don't fully see it yet in less developed markets. But I think it's very often something that comes with data growth and more advanced services and higher penetration. And of course the best would be if you can do a smooth transition into bundles without having big movements and quickly transition, like we had to do in Ukraine.

So this is something we monitor very closely and something we're very receptive to. And I think we have knowledge and experience to understand the timing and when this is the right thing to do.

Then on Euroset, your question on Euroset related to sales and marketing expenses in Russia. I think we are now moving to more revenue-based dealer commissions also for Euroset. We have moved into that with a number of dealers in Russia during 2012 and now entering '13 we will do the same exercise with Euroset. And as you remember, the governance model here in Euroset is six members, three from each shareholder. And we are now a common shareholder with MegaFon that is basically in the same boat and also having the same interest as we have. So for that reason I think Euroset will be receptive to this desired change and we will also, as a shareholder in the company, be able to manage that.

And then to your last question on the discussion that the Supervisory Board will need to have on this extraordinary dividend, I think all the points that you're raising is probably points they would like to discuss because before they make their final decision on the extraordinary dividend then it's very hard for me to reflect and balance those different arguments, whether it's Algeria deal, deleveraging, potential deconsolidation opportunities. I think this is exactly the discussion they would like to have. And then based on all that, we will announce something in the second quarter on the future dividend guidelines final for '12 and also whether we do an extraordinary dividend on the proceeds of the conversion of the preferred shares of Altimo.

Okay. Thank you very much for the detailed answer. Just two quick follow-ups. On bundles, first of all, you are mentioning that you see a one-off or temporary negative impact on your transition into bundles and you mentioned in Ukraine it was a very quick one. When did exactly that happen? Did it happen in the second quarter or the third quarter?

And the second follow-up on Euroset, should we expect some positive impact on your sales and marketing expenses or profitability in January in Russia from Euroset specifically in 2013 or that would be a more general impact of your operational excellence strategy?

No. In Ukraine we did the transition starting late in the second quarter and did basically the whole transition in the third and the fourth quarter of the year, and it continues now into the first quarter. So that's basically a full transition into bundles in less than 12 months. So that's very quickly.

And when it comes to Euroset, we hope that moving to a revenue share model with Euroset will positively impact also margins in 2013.

Okay. Thank you very much.

Our next question comes from Igor Semenov of Deutsche Bank. Your line is now open.

Yes. Hi. Thank you very much. Couple of technical questions. Can you explain the decline in the gross margin? It seems like the service costs went up. Could you explain what was driving that? And at the same time sales and SG&A were down as a percentage of revenues. So is this some sort of reallocation? Can you just explain all that's going on in Q4 relative to previous quarters?

And also on the dividends, I just have to say that the guidelines appear to be quite explicit that you were paying $0.80 and you were aiming to announce the final dividend when you announced the Q4 results. I just -- I don't know, it's a comment, not a question, but I find it very disappointing and I think it's just not -- yes, it's just -- I don't know, it's just not how you do things. I think if you announce something you plan to do and you don't deliver it, it's just not good, I think, in my view. It's just a comment. Thank you.

Yes. Let me pick up on the last point. I wouldn't see it as a disappointment. I would rather see it as an opportunity actually. There will be a good discussion and there will be an announcement in the second quarter and the dividend guidelines, we remain committed to the $0.80, with the 1.628m shares. So the only discussion we're going to have is whether we're going to keep it or whether we're going to reflect the dilution of the shares.

So there is no negative embedded news in that revision that they're going to have. So it's still reflecting and very consistent with what we've said in the past.

And then as a result of that, and the fact that also an extraordinary dividend is an option and is being discussed, we decided to package this into one announcement on the final '12, potential extraordinary and the final guidance of the conversion of the shares. So it's -- I hope that not people are disappointed. I see no reason for being that. There will be an announcement in due course in the second quarter.

And the first question on service margin versus sales and marketing, Henk can maybe pick up that.

Yes. So I assume you were looking at the consolidated statement of income for the Group. So there you see indeed the service costs increasing in dollar terms from the -- in the fourth quarter '11 versus fourth quarter '12. We don't have the exact details of that now, but it seems that there is a significant difference in the cost of content and the whole movement on-net/off-net in the quarter compared to the fourth quarter 2011. But we can certainly come back on that in further detail later on.

In the rest of the operating expenses, as you see, it's all continuing to move in the direction that we have seen before. And in particular also the selling, general and administrative expenses are very much moving in the right direction.

So for example, in 2013 would you say that the gross margin should be in line with the full year 2012 or it should be better or worse?

Well our aim is to certainly increase the service margin on our operations in all of our countries. And that is a mixture of the tariff plans, the bundled tariff plans, the approach we take in the market, of course, and focusing on the growth in data and focusing on the on-net.

Okay?

Thank you. Our next question comes from [Michael Glacken] of VTB. Your line is now open.

Thank you. I actually have two questions. One is again on the whole dividend debate, although since I'm representing the credit, the bond side of the story, I actually just wanted to say that in the past we heard quite unambiguous comments from the IR of VimpelCom saying that the proceeds from pref conversion will be mainly used to deleverage. And therefore now a change of wording and the language is quite upsetting and the fact that you're going to actually to maybe increase even the dividend payout is also. And you're slowing moving away the deleveraging deadline and the whole thing of cash -- effectively cash being locked in Algeria, so your actually adjusted leverage is higher is a bit upsetting. So I would like to hear your comment on that.

And a related question, possibly with -- in regard to Wind bond refinancing. Any additional color you can provide on that, whether timing or other details.

And the second question I have, which you may have covered and I missed, but you had a very material increase in accounts payable in the fourth quarter. I wanted to know whether this is a sustainable increase, where it came from, or whether it will be retained, this cash gain, or it will actually reverse in the months to come. Thank you.

Okay. Just on the first portion, I cannot imagine that the statement you refer to was an explicit statement by our Investor Relations department because I have been very close to any statements related to possible proceeds of conversions. I think what we always said is that in none of our financial targets and none of our objectives with regard to the deleveraging we have ever included any proceeds from a conversion. Also in the target setting the approach is that we discussed on January 16 when we were looking at the 2013/2015 plan, that was even explicitly excluded.

So it is now basically up, of course, to the Supervisory Board that will have to decide on any proceeds of this conversion when they come in. We remain, as Jo mentioned earlier, very much focused on this deleveraging process as well in the context of the strategy that we explained.

The whole approach with regard to Italy, I think I explained and probably you have been able to follow that on January 16, that any step with regard to Italian debt will not be taken before the second half of 2013. That has been a consistent message by us for two years or two and a half years in a row basically. What we also said on -- in that meeting is that we have given the context of how we would like to restructure the Group from a financial perspective. All of the elements were mentioned, including the establishment of an in-house bank.

But what I also I think previously said is that of course we cannot go into any particular roadmap that would lead us to precisely indicate what we're going to do in the market at any moment in time in the next two years. I think that would be an interesting transparency, but probably too much to the negative of VimpelCom shareholders. So we will manage it step by step, but within the context as clearly explained on January 16 this year.

Indeed, we have seen an increase on the -- an improvement in the working capital. Part of that, on the payable side, is sustainable because we have started, as I mentioned as well, a broad working capital project in 2012. Part of it always has to do with year-end phasing, so that will then be paid, of course, in the first quarter 2013. But overall I think we are making very good progress with the working capital project, targeting not only the payables but also the receivables side and focusing on the CapEx payables and the CapEx-related inventories as well. We'll certain give a further update on working capital progress in the next Analyst and Investor Day.

Thank you. And maybe a follow-up. Is the accounts payable, is that entities specific or was Group-wide? And also can you disclose the cash position of the Algerian entity as of the -- one of the recent reporting dates, maybe the last reporting date?

And finally on the Wind refinancing, I think the last results call you -- or one of the results call, the wording has somewhat changed to end of '13, a completion of the refinancing or something like that. So it wasn't exactly totally consistent from one comment to another. Thank you.

Yes. These accounts payable of course are the consolidation of the accounts payable that we have in each entity. So in itself is it managed, of course, as always, working capital is managed on an [MPP] level.

With regard to the Italian debt, I think we have always said not before the second half of 2013. And I mentioned later on that I would not expect any of these steps to be completed before the second half of 2014, which is a logical thing because you're looking at quite a complex exercise. Maybe there indeed was an addition which might have created some questions but then they are clarified now.

Yes, the Algerian cash question, like cash positions in any of the entities, we never go into particular cash positions in entities.

Thank you.

Thank you.

Thank you. Our last question comes from Alex Wright of UBS. Your line is now open.

Yes. Thank you. I had a couple of questions on regulation in Pakistan and Bangladesh, please. First of all, if you can just confirm whether you're still seeing network shutdowns in Pakistan at this time and in the first quarter.

Secondly, your release talks about the impact of the voice-over-IP regulation in Bangladesh. I just wondered if you could help us to quantify in any way the impact of that on revenues and margins in 2013.

And then finally for both markets, if you can update us, please, for your latest understanding of the 3G license process in both of those markets. It looks as though the process is moving ahead in Bangladesh but still facing problems in Pakistan. If you could summarize your thoughts on that, please, that would be helpful.

I'll do that. I think when it comes to these network shutdowns in Pakistan, we have seen that continue into the second quarter -- into the first quarter of '13. So we have had multiple events over this year, so that continues.

When it comes to the 3G processes, I think it's difficult to give good guidance here because every time we hear something it looks like it's changing. The last thing we have on 3G to my knowledge is a plan centered in Bangladesh on June 24 and we have no clarity on when a 3G tender will take place in Pakistan.

And then when it comes to voice over IP and the consequences in Bangladesh, I would like to give a guidance on that, but it's too early to give it. We need to see a little bit how things are playing out in the first quarter and see a little bit more the effects of what this is doing to our business. But clearly it affected the revenues in the last quarter of '12 and it will impact more into '13. And I think during my intro I used the wording expected to have significant negative impact in '13. And that is right now I think the best guidance we can give. And then let's see if we can be slightly more specific when we present the first quarter and then look at the rest of '13.

But we have a good business in Bangladesh and good opportunities and good growth. And the brand is strong there. So I guess these are adjustments we will just have to live with from time to time and take a long-term view instead. So we are interested in a 3G license and we are interested in bringing data to the people in Bangladesh. And we expect this also to help on the future growth there.

So it's never a market without some bad news from time to time. And I think voice over IP in Bangladesh is going to be the negative big thing in '13. And we'll give you a little bit meat on that bone next time we speak, I hope.

Okay. Thanks. Just one quick follow-up on Bangladesh. Are these voice-over-IP revenues would you say typically higher than average margin revenues or lower than average? Is it possible to give some directional quantification in that regard?

Yes. This would typically be high-end users we talk about here.

Okay. Thank you very much.

Okay. Thank you. I think we're done, yes. Gudrun is nodding. So we're done with the Q&A.

So let me just wrap up. First of all, thank you very much for this big audience attending today. We're very happy and pleased that you have interest in VimpelCom and thank you very much for a lot of good questions. We are always here to do follow-ups. We have a team waiting for your questions, and happy to answer any follow-ups you might have.

I'm on my way to the US actually to meet investors tomorrow, so I assume I will meet some of the people also attending on this call. So with that, I suggest we wrap up and end the call. And I wish everybody a continued good day. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.