VEON Ltd (VEON) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom first-quarter investor and analyst conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being be recorded.

I would now like to introduce your host for today's conference, Jennifer Milan. Ma'am, you may begin.

Good afternoon, ladies and gentlemen, and welcome to VimpelCom's conference call to discuss the Company's first-quarter 2013 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 the Company's dividend guidelines, plans to optimize costs in Russia and Italy, and expected future deposition 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 first-quarter 2013 results, the Company's annual report on Form 20-F and other recent public filings made by the Company with the SEC.

Please note that the actual financial results of the fourth quarter of 201e are unaudited.

If you have not received a copy of the first-quarter 2013 earnings release, please contact Investor Relations 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 new VimpelCom website.

At this time, I'd 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 first-quarter 2013 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 first-quarter results reflect continued delivery on our strategic priorities, highlighted by profitable organic growth. The Group recorded revenues growth of $5.6b with an organic growth of 1%. Excluding the impacts of the reduction of mobile termination rates in Italy, VimpelCom's revenue growth would have been 4% organically.

EBITDA increased 3% organically leading to an EBITDA margin growth of 1 percentage point to 42%. Organic EBITDA growth was led by a solid growth in Russia, and CIS. Excluding the impacts of reduction of MTR in Italy, VimpelCom's organic growth would have been 5%.

Operational developments continued to be positive in Russia, and we continue to outperform competitors in Italy.

In the first quarter, we achieved solid overall subscriber growth, with an increase 4% year on year to 215m mobile subscribers. We saw contributions from CIS, from Ukraine, Africa and Asia. Strong growth in fixed and mobile broadband subscribers was achieved in Russia, in Italy and also Ukraine. The Company generated solid cash flows in the first quarter of 2013 and net income increased substantially to $408m.

Before moving onto our performance -- the business unit level, I would like to mention a few recent events. On April 18th, we announced the approval of the final dividend 2012 and also the approval of an extraordinary dividend for a total payment of $2b. At the same time, we also reaffirmed our dividend guidelines.

Then on April 19, we announced the sale of our stake in Cambodia to our local partner there. The disposal of this asset was a result of the ongoing strategic portfolio review earlier announced. And today, OTH, announced the agreement to sell its operations in CAR and in Burundi, of course, subject to closing conditions.

During April, Wind successfully issued EUR575m bonds used to optimize its cash flow and maturity profile in the coming years.

And we also had our Annual General Meeting on April 24 during which all nine supervisory Board members were re-elected, including four nominated by Altimo, three nominated by Telenor and two independent directors. The supervisory Board also unanimously re-elected Alexey Reznikovich as its Chairman.

In relation to Algeria, we continue to negotiate with the local authorities on finding a mutually beneficially agreement but there's no material update to report today.

Moving on to the performance of our business units, starting with Russia. Our operating performance continued to improve in the first quarter extending the positive developments of 2012. The business generated organic revenue growth of 5%, with a 31% increase in mobile data revenues.

EBITDA increased 6%, and EBITDA margin expanded 0.5 percentage points to 41.8%. EBITDA development was mainly driven by the execution of our operational excellence program. The primary contributors were savings in commercial costs, which were mainly driven by the shift to a revenue share mobile with all distributors, as well as savings in HR costs. Overall, other performance in the first quarter demonstrates execution on our strategy to deliver profitable growth.

Quarterly churn decreased by 2% to 15%. We remain focused on further churn reduction in 2013 by increasing the quality of our data network, improving the quality of our subscriber base and by launch of a comprehensive churn reduction program. These initiatives will be further supported by expansion of our mono-brand stores. Improving the quality of our network in Moscow and Russia, remains a priority and we aim to be on par with our peers in the key regions by the end of this year. Last 12 months CapEx to revenues stood at 18% but we expect CapEx to revenues to increase to 22% in 2013, as we continue to invest in improving our network.

In summary, we are pleased with the continued progress we made in Russia during the first quarter and we believe also there is further upside that can be achieved there.

Moving on to Italy, Wind, again outperformed its competitors and gained market share in what remains a challenging environment. Our mobile subscriber base increased 4% to more than 22m now with strong growth in mobile broadband consumers, up 39%. On the fixed-line side, we delivered a 3% increase in the profitable direct broadband subscriber base.

Total revenues grew 1%. If we exclude the impacts of MTR reduction, and our mobile data offerings continue to achieve very strong results with mobile broadband revenues up 29%.

Excluding the impact of the reduction in MTR, EBITDA grew 2%, as a result of cost-saving initiative implemented in the period. As a result, our EBITDA margin improved 1.3 percentage points to 37.5%.

We continue to deploy our operational excellence and capital efficiency initiatives in Italy, which will provide savings in both OpEx and CapEx going forward. And we do this in order to protect our cash flows and offset the impact of the MTR cuts.

If we then move to Asia and Africa, revenues were negatively impacted by regulatory and governmental actions in our main operations in this quarter. Organic -- revenue declined 1%, primarily driven by a slowdown in Bangladesh. Revenues were also negatively impacted by the ongoing restrictions on Djezzy in Algeria and political unrest and macroeconomic issues in Pakistan.

On a reported basis, revenues declined by 7%, primarily due to local currency devaluation against the US dollar, mainly in Algeria but also in Pakistan.

Despite these developments, EBITDA achieved a 2% organic growth, reaching $412m, and EBITDA margin improved 2 percentage points to 47.7%, primarily due to the margin improvement in Bangladesh.

If we then look to the three main markets, starting with Algeria, revenues remain relatively stable in local currency terms with mobile data revenues increasing 49%. Our subscriber base grew 1% to 17.9m customers, enabling Djezzy to maintain its leadership position with a 55% market share. EBITDA decreased 2% in local currency mainly due to higher IT and also some administrative costs.

If we look at Pakistan, our performance there was strong. Despite the challenge operating environment, we had revenues up 5% and we had an EBITDA growth of 5% in local currencies. In the quarter, all mobile networks in major cities were shut down several times by the government for security reasons, and this was impacting performance in Pakistan in the quarter.

In Bangladesh, our subscriber base grew 5%, while revenues decreased 13%. This is due to the new regulation regarding Voice-over-IP usage, as well as the enforced 10-second billing. The country also experienced 19 days of strikes during the first three months. EBITDA increased 5%, primarily reflecting lower subscriber acquisition cost due to fewer gross additions.

The disconnection of suspected Voice-over-IP customers in compliance with the new regulation is expected to have a prolonged negative impact during 2013, as we also highlighted in our earnings release.

And moving on to the next slide, Ukraine. We achieved a 3% revenue growth in the first quarter in Ukraine, reflecting the successful transition to bundled tariff plans and an 11% growth in the mobile subscriber base. Mobile data revenue demonstrated continued growth up 8% year on year.

The completion of our transition to bundled tariff plans also contributed to a reduction of the churn numbers in the quarter. Fixed-line revenues increased 13%, as a result of strong growth of fixed broadband revenues with continued to outperform the market with growth of 64%.

EBITDA decreased 1% and EBITDA margin declined 2.1 percentage points to 49% in the quarter. This is primarily due to higher customer acquisition costs as a result of a strong growth in the mobile subscriber base. This is partly offset saving on the HR costs.

Then, the last business unit, in CIS, we continued to deliver strong, profitable growth in the first quarter positively impacted by the situation in Uzbekistan where the authorities closed the network of a competitor in the third quarter of last year. Revenues grew 20% and EBITDA grew 38% on an organic basis, leading to a 6.4 percentage point increase in the EBITDA margin to 48.8%.

On a normalized basis, if we adjust for growth in Uzbekistan in the first quarter of 2013 to the growth level of the first half of 2012, the underlying revenue and EBITDA growth with CIS would have been approximately 7% and 6% respectively.

In Kazakhstan, our largest CIS market, we delivered organic revenue growth of 1%. As we successfully did in Ukraine, we are now transitioning our subscriber base in Kazakhstan to bundled tariff plans in order to solidify the market position there. This transition is impacting revenues. The pressure on the top line was further increased by the introduction of a limitation on tariffs during the first quarter while the MTR was cut by 15% as we have anticipated.

With that, I'll pass it along to Henk van Dalen, and he will discuss the financial performance more in details. Henk?

Thank you, Jo. Our first-quarter reported results were impacted by the appreciation of the US dollar against the local currencies in most of our operating units compared to the same period last year. On a reported basis, revenues were stable year on year. Om a organic basis, however, overall revenues increased 1% and as said, excluding the impact of the MTR cuts in Italy, organic growth would have been 4%.

EBITDA, on organic basis increased 3% year on year, while reported EBITDA increased 2%, supported by operational excellence initiatives. Excluding the MTR cuts in Italy, EBITDA would have grown by around 5%, organically.

EBIT in the first quarter grew 9% to $1.1b, reflecting the better operational performance and the positive impact of the declining amortization applied to certain intangible assets, as well as lower losses recognized on asset disposals.

Profit before tax was $543m, down 8% from last year, primarily due to a lower foreign exchange gain. However, net income attributable to VimpelCom shareholders in the first quarter increased 28% to $408m as a result of the mentioned higher EBIT, somewhat higher financial expenses and a favorable impact attributable to non-controlling interest mainly related to losses in OTH.

Then, on the debt, cash ratios, as you can see on this slide 13, our financial position remains solid. On a consolidated basis, the actual net cash from operating activities in the first quarter was $1.3b, primarily reflecting the temporary negative impact of changes in working capital, compared to the same period a year and the phasing of tax and interest payments and receivables.

The change in working capital was mainly caused by higher inventories and receivables related to handset sales and yet -- and not yet converted into cash, lower customer advances and deposits on top ups and lower payables as a result of -- in line with the payment terms.

Gross debt increased 6% in the first quarter to $28.6b, mainly due to the completion of approximately $2b in debt refinancing during the quarter. Net debt increased to $22.9b mainly due to the $1.3b in dividend payments in January 2013, leading to a net debt to the last 12-months EBITDA of 2.3 at the end of the first quarter.

We ended the quarter with a balance of cash, cash equivalents and deposits of $5.8b, part of which was used to pay the $2b in dividends in May 2013 and part is reserved to debt repayments at OJSC VimpelCom in 2013 and 2014.

Then turning to the debt maturity schedule, this remains recently well balanced over the coming years. Especially on the short term, it improved due to the various bond issues that we have in the first couple of months. There is a peak in the maturity profile in 2017 and 2018, as you know, 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 2013 and timing will, of course, always also depend on market circumstances, So, the gross debt was $28.6b at the end of the first quarter, with an average weighted interest rate of 8.3% in the quarter.

Our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble, US dollar and other currencies. As mentioned previously in February 2013, we completed approximately $2b in debt refinancing issuing Eurobonds in US dollar, and rubles. This refinancing secured our refinancing requirements into 2014 and improved our debt maturity profile. The proceeds to be used for the repayment of maturing debt in OJSC VimpelCom and certain general corporate purposes.

In April, Wind successfully issued EUR575m senior secured notes in a combination of EUR150m 2019 floating rate notes at three-month EURIBOR plus 575 basis points, and $550m 2020 fixed rate notes at 6.5%. The net proceeds of this offering were used to prepay the 2014 and 2015 loan maturities optimizing WIND's cash flow profile over the coming years.

And, finally, you can see from this slide, we have still substantial undrawn committed revolving credit facilities in place for a total of $1.1b as of March 31, 2013.

Then, the slide on the cash returns to the shareholders, a little bit on the update on the dividend guidelines. Of course, we have quite a solid dividend history. Since 2011 up till today, we paid out the dividends of a total of $4.5b. Of this, $1.4b is related to the recent extraordinary dividend.

It is our intention to continue to pay a dividend that will develop substantially in line with our operational performance. With that in mind, and barring any circumstances, of course, our goal is to pay out a significant part of our annual operating free cash flow in the form of dividends. And the operating free cash flow, as you'll see is here defined as net cash from operating of this minus capital expenditures.

In this context, it is our aim to continue to pay a dividend of at least $0.80 per common share per annum, notwithstanding the recent increase of the number of outstanding shares to 1.757b shares following Altimo's conversion of its preferred shares.

Now, let me turn the call back over to Jo.

Thank you, Henk. So, we'll wrap up here with the last slide before we open for questions. I think the first quarter of 2013, we continued to deliver profitable organic growth with revenues and EBITDA increasing, despite the impact of regulatory and governmental measures. If we exclude this impact of underlying, results show mid-single-digit growth in revenues and in EBITDA. The result demonstrates, I think, our continued focus on profitable growth, as well as our continued focus on operational excellence and cost control.

We are confident in our ability to make further progress. We are committed to implementing our programs focused on capital excellence, capital efficiency and operational excellence designed to deliver against the Value Agenda that we presented back in January on our Analyst and Investor Day.

So, with that, we are ready to open the floor for questions. Back to you Operator.

Thank you. (Operator Instructions). Our first question comes from Cesar Tiron of Morgan Stanley. Your line is now open.

Yes, hi. Jo mentioned that he sees upside to the Russian business in the next quarters. Would that be an acceleration of revenue growth or is it more on the OpEx side? And if it's on the OpEx side, can you please explain to which cost items that would apply?

Last question on Russia, I would like to understand where do you stand in terms of matching your competitors' networks in terms of 3G. I remember for example that Anton committed to double 3G base stations in Moscow at the Investor Day. So, if you could please comment on that. Thank you very much.

Very good, thank you. I think, when I talked about upside in Russia, I think that what we've seen progress during 2012 and also what we saw progress in the first quarter of '13 is that we are building now stone by stone and building ourselves stronger and stronger. I think we clearly admit that we had some difficult years in 2009, 2011. We also see the numbers announced earlier today from MegaFon that we are growing less slowly than them on the top line.

But at the same time, I think also we see some upside potential for improvement. We focus a lot on the network right now and at the end of this year, we will have caught up with our two main competitors in Moscow and all the key regions outside Moscow in Russia. This is the number of 3G base stations and this goes with network quality and capacity. And, of course, this is the core product we deliver and it's going to help us progressing further.

At the same time, we also think that there is still upside to gain on the cost side. And for that reason, we hope to see the trend we see right now with the gradual improvement on the top line, relative to competitors, as a result of improved network and the base product. And at the same time, we will keep working on operational excellence and bring cost down, so that we can also see a margin expansion in Russia.

So, my take on our side is that this is a long-term play, where we need to be patient and allow ourselves time to close the gap. We're doing that this year in term of network and we clearly see that the performance is quite good to many of the markets but not good enough yet relative to competitors, which I have no problems admitting to. And as I said that's why I also believe it's upside.

Thank you very much.

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

I just have one question, just a follow-up on the Russian situation. If I understand correctly, your aim was to stop losing revenue market share this year? I don't know exactly how you define this. But assuming that you're talking about more of a service revenue market share, it seems that you still have some work to do than you look in MegaFon numbers. And I'm just wondering -- assuming that you upgrade your network and that you improve the quality, how are you going to persuade customers to -- what are you going to commercially to start reversing the market share trend? Or you think that will just come itself? Or would -- do you think that you would have take some actions?

Also, I think, if you could comment on this in light of what's happening now in the market, for example. I understand that MegaFon [NT] are now pushing these very low-cost smartphones. If I understand correctly MegaFon now has opened up the 4G network, which they have, to smartphones as well as dongles. Do you think that these things are important? Are you going to respond to some of these things? I just want to get a little bit of clarity on how you want to tackle the market share issue in Russia. Thank you.

Thank you, Dalibor. Good questions. I think we want to stabilize the revenue market share this year and the main drivers for this objective is really the catch-up on the network side. And as I said, we are now and we all told you that in January that we will have a CapEx to revenues this year in Russia at 22%, which is much higher than the last 12 months and the whole catch-up is related to that.

So, the main -- of course, it starts with the basic product. And in addition that, frankly speaking, Beeline is also having a very strong brand. We have a very strong position in Moscow and we have a number of good activities ongoing on the commercial side. We also are growing the number of mono-brands this year from 400 to 1,000 at the end of the year, and the competition of an improved network building on a strong brand and growing the number of mono-brands, we hope is enough to stabilize the revenue market share this year. And then, we will enter into 2014 even stronger than the year started.

And when it comes to 4G, we will also commercially open our LTE network at the end of this year. If you look to other markets, it's not going to happen a lot with 4G, not in Russia either this year. I think we talk probably '15 until LTE will have real commercial impact on the performance in the marketplace. So, we also believe that the plans we have on LTE and 4G is good enough. And for sure, we're not going put ourselves in the position, where we also have to catch up and be late on LTE, compared to what we experienced on 3G, so this is very much a focus area for us. But at the same time, there is no need to spend money too early and too much before it has real impact on return to shareholders.

So, I don't have a better answer than that, Dalibor.

Thank you. Thank you, Jo.

thank you.

Thank you. Our next question comes from Alex Kazbegi of Renaissance Capital. Your line is now open.

Yes, hi. Just wanted to get a bit more details maybe on the sort of the dealer commissions side and just understand again -- because you moved, of course, on the revenue recognition -- revenue-sharing model with the dealers pretty much with all of them, is that all basically already included in the -- benefit of that is included in your Q1 numbers? Do you expect anything -- an improvement going further? Or actually to the opposite side, do you actually recognize already all the costs associated with that as we, so to say, in Q1 because the revenue share presumably is connected with the longevity of the subscriber which stays on the network, so when are these costs recognized?

And the second is just to understand also the general competitive situation maybe in Kazakhstan which, as you mentioned, was fairly tough in the beginning of the year. What's going on now? Do you see any stabilization of the market? Do you see, still, market being very aggressive from the point of view of the Tele2 and the offers, and actually yourself, as well, introducing quite aggressive offers? Where do you see the market moving? Thank you.

Thank you, Alex. On the accounting treatment of the dealer commissions, we will get back to you and give you a more detailed update on that but they are clearly linked to the revenues that you know, so we now pay dealer commissions as we pay -- as revenues are growing so they are matched to the areas. I think it's the first six months but we'll get back to you on the accounting treatment exactly of this but there is no big things that is being pushed forward or any sort of (multiple speakers) on the numbers. But let me be -- instead of speculating on this call, let me be precise and get back to you and have someone call you on exactly how we treat that.

But when it comes to the general question on the overall market sentiment, I think the Russian market is performing quite well, actually. There is an increased now focus on product quality, on innovations, on service offerings, on rolling out mobile broadband. All operators are having focus on profitability and cash flow so that money can be reinvested into the market and continue to grow on the new data services. And I see, at least, that same behavior from all the big players from time to time. You probably also of course have price competition and it should be like that. This is, of course, a competitive market. We saw some Tele2 attempts.

But, in general, I would say that it's a healthy, good competition with focus on profit and cash flow so that we can build the next generation of networks and products to consumers and businesses in Russia, and we feel good about Russia. We feel good about our position and we think we have a good plan to catch up and come back over the next year or two.

Okay, that's fine. Actually, the question was about Kazakhstan as well in terms of the competitive situation there.

The competitive -- in Kazakhstan, sorry (multiple speakers).

No, that's fine.

Kazakhstan is very competitive and in Kazakhstan we try now to move as much as we can over to bundles. And, as you know, we have appointed our Chief Commercial Officer from our Ukrainian operations. A new CEO in Kazakhstan and the whole idea for him to bring with his experience from Ukraine on movement to bundles and the way we developed our Ukrainian business, into Kazakhstan, so there is clearly a strong competition in the marketplace. So we, as I said, we will concentrate on subscriber base growth now and focus on bundles and bucket pricing. And also going to move more into the high ARPU segment right now but Tele2 is clearly a difficult competitor in Kazakhstan.

But was the priority in Kazakhstan still the revenue preservation or rather the margin preservation at the moment?

We would like to stabilize the revenue market share and then secure the base and secure the position, and then after we've done that we would like to move to focus on margins and profitability so, right now, we don't want to slip anymore on the revenue market share.

Okay. Thanks very much, Jo.

Thank you.

Our next question comes from Ivan Kim of VTB Capital. Your line is now open.

Yes, good afternoon. Two questions, please. One on the potential listing. You were talking previously about European a listing. Is there any progress on that? And also now the [MSCI[ seems to have changed its treatment of Russian listing of foreign companies and there is a (inaudible) to an index, from what I understand, so are you thinking in the direction of Russian listing, probably, as well?

And then the second thing on deleveraging, can you -- the higher bundle goal from mid-July, so is there anything probably you started some -- any preparations or anything or you can probably elaborate a bit on the size of the initial debt refinancing? Thank you.

I'll do the first and then I'm sure Henk would like to answer on the deleveraging in the second question. We have put secondary listing and the index on hold right now and it's mainly related to the low free float we have. We are still discussing this with our two main shareholders. We would like to increase the free float to the Company and I think as part of that clearly to look at a secondary listing and also index inclusion would be very logical and good for the Company. So we have not at all abandoned the idea but we have put it on hold until we get more clarity on how the two strategic view the free float of the Company, going forward, so that's basically the answer on the first question.

And then Henk on the second.

Yes. On the deleveraging, I basically can refer to the presentations of January that we did at the Analyst Day. There we have been looking at several elements to optimize the financial structure, including implementing a financing company for the Group, including looking at the total structure of the Group with legal entities as much as possible directly linking to the VimpelCom Holdings Amsterdam level to prevent withholding taxes on dividends, maximizing the upstreaming of cash. All these instruments are being brought in place as we speak. The first funding steps from the financing company has been realized in the meantime so that is, I think, a good signal that the whole process is starting to come on stream and starting to work.

What we also mentioned, I think, during this analyst meeting is that of course we have a range of plans and alternative scenarios in place, which we will pick based on what the best approach for the Group is. But what we will not do is give exact timings and roadmaps on that because that would, of course, not lead to the optimum outcome for VimpelCom. So I cannot be specific on your request and on your question but what I did, of course, is give you the elements of what we are doing and how we will move in the period to come.

Okay. Thank you.

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

Yes, good afternoon. My question is, in fact, regarding more Orascom Telecom and how that has impacted your numbers and how you see that looking forward. It looks like in Asia and Africa there have been some relatively weak numbers being posted, part of it is due to some regulatory change. But if we looked at Pakistan, for example, that was the weakest [add] in subscribers in the past eight quarters. If we looked at Bangladesh, the revenues declined quite significantly. I was wondering if you can share with us how do you see your main subsidiaries of Orascom Telecom reacting to that. And how do you see, in the short term, the Asian and African business progressing? Thank you.

Let's focus on the three big markets, Pakistan, Bangladesh and Algeria. I think all three of them had, as I said, governmental activities and situations in the first quarter that hopefully not is permanent. Algeria, of course, has the ban on importing equipment. That is not very helpful for the Company and that is clearly influencing the revenue numbers right now compared to others.

In Bangladesh, we have a new regulation on voice-over-IP, as I mentioned. We also have this 10-second billing. That is going to affect us all during 2013 because that is a change that will affect the revenue base of our operation in Bangladesh and that's a 12-month perspective on that one.

Pakistan, I think, is probably slightly different. If you look to the first quarter, I think our relative performance to competitors are strong. I think we've had some network shutdowns on a number of days that has affected, of course, revenues and earnings. So I would say Pakistan is clearly something we can expect seeing improvements from in the quarters to come.

Bangladesh will have this new regulation on voice-over-IP affecting them this year. And Algeria is still dependent on how we resolved the conflict with the government there.

And then of course you have the 3G coming up in all three countries; Bangladesh clearly this summer, Pakistan a little bit unclear, and also Algeria on hold for now. But assuming also 3G being issued in these markets it will lead to a good growth, I think, in revenues from data services. Also there we have strong positions in all three markets so we are looking through the short-term challenges and looking at the long-term opportunities in all these three markets. And we're very committed and big believers in all three markets.

Just a follow-up question on Algeria. There were at one stage some news in your first quarter that CapEx restrictions could be lifted in Algeria; I just wanted to get any comments from your side on that. And also there were some piece of news saying that the Algerian government were reviewing the valuation for Djezzy and wanted to get your comments, as well, on how you see that impacted the current negotiations and agreements with the Algerian government on Djezzy.

Yes, there is and there has been also in the past lots of press reports and rumors of different nature on Algeria. All I can say today is that we are still negotiating with the government but we don't have any news. We don't have any updates outside what we've said in the past on the situation there.

Right. And on the CapEx, can you confirm if a lift is happening or is it still constrain of any import of equipment in Algeria?

But there is no changes. The ban is still there. There is no changes. If so, we would have communicated this.

Okay. Thank you very much.

Thank you.

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

Good afternoon. I wanted to ask you to comment on potential news reports on Canadian asset sale, as well as recent reported interest of Mr. Sawiris on Wind in Italy. What do you think about it? Has your strategy changed in any way? Have you progressed on your decision regarding particular Canadian asset but also maybe Wind?

The second one is to follow up on your comment about increase in free float. It's probably a question -- maybe not a very fair question to you but how -- what do you think likely execution on that could be? Do you think one of the shareholders would be sellers or you would be doing a reconciliation, SPO, etc?

And, finally, to follow up on the question on costs in Russia, your sales and marketing costs are tracking basically double of your competitor who just reported today yet subscribers are falling. You have very similar distribution platform so I was just wondering to see where could discrepancy come from and whether we should see some upsides and downside risks to those cost savings, going forward. Thank you.

Okay. Let me take them. There was actually four questions. Let's take Canada first. In Canada, we're still in process of getting the regulatory approval for converting our non-voting stake into voting for the acquisition of the shares from Mr. Tony Lacavera, our partner there. And, of course, when we get that approval we will get to 100% ownership. That approval is not yet given. For that reason, that's the focus right now. And then when we have it we will conclude that we do an organic growth play there or maybe merge with -- try to merge with some of the regional players or that we simply dispose the assets. And we keep our options open in Canada. But, as I said, focusing now on getting this regulatory approval for converting the non-voting stake.

On Italy, if you look at Wind in Italy, it's (technical difficulty) in the first quarter and we grow revenue market share, we grow subscriber market share. We have a very strong brand there. We have a very strong spectrum package for LTE and we have a good team. So we are big believers in Wind and to Italy. We manage now the Company basically for two focuses. Number one, strengthen our relative position. Number two, trying to secure the same absolute cash flow this year, as we had last year. Of course, EBITDA will go down as a result of termination rate cuts but, at the same time, we're also carrying costs and we're also making investments more effective but hopefully we will be able to deliver more or less the same cash flow in absolute terms. If we are able to do that and come through this MTR cut process together with the macro crisis in Italy with the same ability to generate cash, I think we've done a very, very good job. And I haven't spoken to Sawiris about buying Italy and we don't have any plans to sell Wind.

On the third question you had, free float, it's really a question more to shareholders, maybe, than to management but, as I said, as management we see big advantages in increasing the free float for VimpelCom, and we think also doing that in combination with the secondary listing and index inclusion could potentially help the valuation of the Company. For that reason, we are analyzing different ways of doing this but, in the end, this is a shareholder decision and it's very hard for me to speculate in what preferences they might have, going forward, any of them.

And then on Russia I didn't fully capture the double cost base logic you had there but let -- if we revisit my logic on Russia, first of all, remember that VimpelCom is a combined fixed and mobile operator and the fixed margins are lower than the mobile margins so when you compare, for example, MegaFon numbers today to VimpelCom numbers you need also to make sure that you compare apples to apples. And, of course, the mobile margin in VimpelCom is higher than the fixed margin, meaning that the mobile margin is higher than the margin we reported today.

And I think, also, we run a tight ship and our cost base is benchmarking well to any of the other players and there is not a big difference in the margins or the structures of any of these companies if we adjust for fixed and mobile.

So our view on Russia is basically that we have a strong history. We have a strong brand. We are improving, quarter by quarter. This is the fifth quarter in a row we show progress. We are fixing the network now. We have a good LTE package. We have capital that we can invest and we have good plans to catch up and make sure that we make our position in Russia sustainable. And that's the best answer I can give and, frankly speaking, if you look at the performance in absolute numbers compared to many other markets it's still a good performance. But, yes, slightly underperforming relative to competitors and we have been doing that for a while and we are focused on it and we want to fix it.

Okay. Thank you very much. Just maybe a follow-up on this free float issue. What is the timeline -- potential timeline for the decision, you would think?

I don't have a timeline for you, unfortunately. I think this would be good for the Company but I don't have a guidance on any timeline. Sorry about that.

Okay. Thank you very much.

Thank you. Our next question comes from Anna Kurbatova of BCS Financial Group. Your line is now open.

Good afternoon. Thank you very much. My first question is about whether you could provide the numbers for your handset sales and the respective cost of handset sales, because it would be very helpful to continue tracking your performance in, let's say, mobile retail.

And my second question is a follow-up of previous questions. I wonder whether your terms of cooperation with Euroset are absolutely the same with those which MegaFon now has. You are a 50/50 shareholder in Euroset both and whether you have absolutely equivalent terms of cooperation with Euroset or you -- the process is that you deal with Euroset and negotiate with Euroset separately. Because we see some benefits from -- for MegaFon on the entering Euroset capital but still in your results it's not that obvious.

And my third small question is what's your strategy with regard to Russian fixed line broadband assets in light of previous rumors of your potential decisions to dispose those assets? Thank you.

I can do number two and three and then Henk can explain how we report our numbers. The terms of VimpelCom and MegaFon is, to my knowledge, similar. We don't disclose the details, of course, but commercially it's similar terms as far as I know.

On the fixed line in Russia, this has only been market rumors that we're in the market to sell our fixed line operation in Russia. This is an integrated part of VimpelCom. This is an operation we have spent a lot of time to integrate into our offerings and into our operations and I would these market rumors. And we are happy with the way we have organized our business in Russia.

Yes, on the handset sales, I think we included in the press release a couple of remarks that the sales of handsets was somewhat higher in the first quarter this year than in the first quarter last year. We do not provide specific details because we feel it also has a competitive element in it, which we wouldn't like to be in detail in the market available. But, of course, we will also continue to watch our competitors disclosing information and [at a certain] moment that might also lead to certain adjustments from our side.

Yes, that's very clear but still we are not now -- unable to track your mobile service revenue separately from your retail sales. Thank you.

I see the background of your question.

Yes, thank you.

Thank you. Our next question comes from [Vladislav Schilling]. I apologize if I've mispronounced that.

That's okay. Thank you. It's Vladislav Schilling from Deutsche Bank. A question relating to the cash flow. Considering your CapEx plans, I understand that you're going to increase the CapEx to sales ratio to 21%. Also we know the resumption of dividend payments and looking at the operating cycle of the Company, do you expect that considering the debt servicing CapEx and any potential M&A that you have planned, you would have to borrow to breach the gap in your cash flow? Because it looks like the first quarter you had a negative free cash flow if you consider it post-dividends and post-CapEx, which means that your total debt obviously increased, so do you expect the total debt to continue growing this year based on your CapEx projections and so forth? Thank you.

No, we wouldn't expect that to grow. Bear in mind, of course, that the situation per the end of 2012 was relatively advantageous with a relatively high level of cash in the Group related to the fact that we haven't been paying dividends in the year 2012 itself, and those payments were done in the beginning of 2013. The run rate of the net cash from operating activity so if you take that after interest and after taxes paid, you saw that 2012 had about $7.3b. We would expect, with all of the actions that we do, that, in principle, 2013 will end up at a higher level than that. And if you then from that amount start to deduct the CapEx based on the 22% that you mentioned and a normal dividend payment for the year itself -- for the year 2013, then, no, we do not expect that is all [run up].

Wonderful. And just to double-check what I am correct with my calculations here, if we take out Italy from your debt, and obviously we take out Italy's EBITDA, am I right in assuming that the net debt -- net leverage ratio of VimpelCom, excluding Italy, is about 1.5 times?

It's about that, yes.

Okay, wonderful. Thank you so much.

Thank you.

Thank you.

Thank you. Our next question comes from Vivek Khanna of Deutsche Bank. Your line is now open.

Hi, good afternoon. Actually, my question has been asked now so apologies. I'll try to get offline.

Thank you. No problem.

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

Yes, good afternoon. A very quick one, your effective tax rate was declining quite nicely over the last four quarters and in the first quarter this year is climbing up again. Can you clarify why this is happening and probably more generally is this a seasonality thing or some steps to streamline the tax structure of the firm -- of the Group not bearing fruits that soon, and basically where you are with streamlining the tax structure of the firm? Thank you.

What I always have indicated is that in order to look at the tax position, it's better to look at the cash taxes paid. So, the cash taxes paid for the Group are roughly between 9% and 10% of EBITDA per year, and that is with all of the action that I explained in January during the analyst meeting, we would like to bring back to about 8% on EBITDA. That is the aim because, at the end of the day, that is the only thing that really counts in the current structure. We still have a couple of inefficiencies that have to do with non-deductibility of certain interest costs in countries of OTH as well as in Italy.

And there are also elements related to impairments where we can only take the positive tax effect after we have had income to which we can offset the certain tax losses related to the impairment. In particular in this first quarter that was also the case with regard to the impairment related to CAR and Burundi. If you will have taken this tax asset, basically, on the CAR and Burundi impairment actively, then the underlying tax rate would have been around 34% instead of the 39% that we are talking about now. So also that is continuing to move in the right direction where it is quarter to quarter a little bit impacted by these specific elements. So that's why I think for your models and for the models that are used, of course, related to cash, then it's important to have this percentage of EBITDA as a notion for taxes paid.

Thank you.

Thank you. And at this time I'm not showing any further questions. I'd like to turn the call back to management for any closing comments.

All right. Thanks very much and thank you for all these questions and I think also relevant questions for our performance. As I said, we feel good about the quarter and we feel we have good opportunities, going forward. We're committed to the plan that we have explained and told you about. And, with that, I suggest to end this call and, of course, our Investor Relations team is available for any follow-ups you might have. And I also hope to see at least some of you in my future trips planned after this release as well.

And, with that, I wish, everybody, a good day and thank you very much for the interest.

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