VEON Ltd (VEON) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom Second Quarter 2013 Investor and Analyst Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jennifer Milan, ma'am you may begin.

Good afternoon, ladies and gentlemen, and welcome to VimpelCom's conference call to discuss the Company's second quarter 2013 financial and operating results. Before getting started, I'd like to remind everyone that certain forward-looking statements made on this conference call involve certain risks and uncertainties. These statements relate in part to the Company's anticipated performance, expected capital expenditures and network developments, the ability to realize the benefits of transferring its listing to the NASDAQ and its ability to realize its strategic initiatives in the various countries of operation.

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 second quarter 2013 results, the Company's Annual Report on Form 20F 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 second quarter of 2013 are unaudited. If you have not received a copy of the second quarter 2013 financial and operating results 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 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 second-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.

The Group recorded organic revenue growth of 1% year-on-year reaching $5.7b with a solid performance across most business units. Excluding the impact of the reduction of mobile termination rates in Italy, VimpelCom's organic revenue growth would have been 4%. There is also a high growth in our mobile data revenues.

EBITDA decreased 1% organically with an EBITDA margin of 42.4%. Excluding the impact of the reduction of the mobile termination rates in Italy, VimpelCom's organic EBITDA growth would have been 1% and excluding one-off charges and the impact of voice-over-IP issues in Bangladesh, organic EBITDA growth would have been 3%.

This performance was led by strong growth of 4% in Russia and 34% in CIS. We continue to deliver strong operational cash flow, the EBITDA minus CapEx, which increased 12% year-on-year to $1.6b. Operational cash flow yield generated in the last 12 months was 26% of revenues. Developments continued to be positive in Russia and in Italy we continue to outperform our competitors in what remains a highly competitive market.

In the second quarter we achieved strong overall subscriber growth with an increase of 5% year-on-year to 215m mobile subscribers with the largest absolute contribution coming from CIS. Net income increased 17% year-on-year to $573m.

Moving onto our latest developments, I'm very pleased to announce that we have appointed Andrew Davies as Group CFO and member of the Group Executive Board succeeding Henk van Dalen. Andrew currently holds the position of CFO of Verizon Wireless and he will be joining us as of January 1, 2014. We have agreed with Henk that he will stay on till Andrew takes over ensuring a seamless handover of responsibilities. I have also agreed to extend my contract as CEO to April 2016.

Today, we have also announced that we have decided to move our listing from the New York Stock Exchange to NASDAQ. Cost savings, listing among other leading international TNT companies and potential inclusion in additional indices have been the main reasons for this decision.

In May, VimpelCom launched LTE in the 800 megahertz frequency band in Moscow. By utilizing this frequency band VimpelCom is able to invest more efficiently in LTE.

The process of establishing the final strategic position for the Canadian investment is ongoing including the possibility of disposing of our business. As part of this process, we decided to withdraw our application for the approval for gaining control of Wind Mobile. However, we might reapply in the future.

Also, we have joined the United Nations Global Compact, the largest voluntary corporate responsibility initiative in the world, with over 10,000 corporations and other stakeholders from 130 countries, confirming our strong commitment to improve an open and transparent framework to develop corporate sustainability strategies.

Then moving on to the performance of our business units, starting with Russia. In Russia our operating performance continued to improve in the second quarter further extending the recent positive development trend. The business generated organic revenue growth of 5% mainly as a result of growth in mobile revenues.

Mobile data revenues growth remained very strong, up 37% driven by a sharp improvement in small screen data revenues. EBITDA increased by 4% as we continue to make good progress on our operational excellence program, generating improvement in HR costs, commercial and G&A costs. These improvements were partly offset by increasing network and IT costs.

The EBITDA margin declined slightly to 42.7% mainly due to the ongoing shift in revenue mix to equipment and accessories during recent quarters. Improving the quality of our network in Russia remains a priority and we confirm our goal of being on par with our peers in key regions by the end of 2013.

Last-12-months CapEx to revenues stood at 18% and we expect it to increase to 22% for the full year of 2013 as we continue to invest in network quality to support the growth of mobile data. In this regard, we're proud and excited to have launched LTE in Moscow in May using the 800 megahertz frequency band. LTE is an integrated part of our strategy to grow mobile data revenues.

Quarterly mobile churn decreased to 14%, among others supported by the improvements in our network quality and will be further benefitted by the expansion of own mono-brand store as we will be able to offer better customer service and improved product offerings going forward.

In summary, we continued to make good progress in Russia during the quarter and delivering a solid financial performance. As we look to the remainder of 2013 we believe there is still room for further improvements and we will continue to focus on service revenue growth supported by quality enhancements of the network, increasing the number of own mono-brand stores and further reducing churn.

Moving to Italy, Wind continued to outperform its competitors in the second quarter delivering strong commercial performance despite ongoing competitive pressure and regulatory headwinds. Our mobile subscriber base increased 5% to well over 22m with strong growth delivered in mobile broadband customers. Total revenues excluding the impact of mobile termination rate cuts grew 2% driven by our mobile data offerings which continued to achieve very strong results with mobile internet revenues up 37%.

In fixed line we delivered 9% increase in broadband revenues as a result of our new strategy focused on unbundling which is also increasing our profitability in this segment. EBITDA in the second quarter of 2013 declined mainly as a result of the pressure on the top line. The comparison over second quarter 2012 was also unfavorably impacted by certain non-recurring items recorded last year, mainly settlements with other operators. Net of this effect, the second quarter EBITDA trend is substantially in line with the first quarter 2013 performance.

Excluding the impact of MTR cuts and the mentioned non-recurring items, EBITDA was stable year on year in Italy. The reported EBITDA margin decreased slightly to 37.5%. The strong relative performance in EBITDA development versus competitors is not only driven by top-line performance but also by several major structural cost saving initiatives.

Looking to the remainder of 2013, we expect continued pressure on the top line from the mobile termination rate cuts to continue although to a lesser extent in the second half of 2013. That said, we continue to focus on offsetting the impact from the MTR reductions and protecting our cash flows in Italy through implementing our operational and capital efficiency initiatives which include substantial OpEx and CapEx savings.

Moving then to Africa and Asia business unit, their revenues continued to be negatively impacted by regulatory and governmental actions in several countries. Revenues were stable organically impacted by a slowdown in Bangladesh due to the ongoing deactivation of voice-over-IP customers due to regulation. Revenues were also negatively impacted by major power blackouts and regulatory interventions in Pakistan as well as, of course, the ongoing limitations imposed on Djezzy in Algeria.

On a reported basis, revenue declined 5%, primarily due to the local currency devaluation against the US dollar, mainly in Algeria and also in Pakistan. Excluding the impact of the one-offs in the total of $12m, EBITDA achieved 2% organic growth. EBITDA margin was strong and well above 48% in Asia & Africa.

A few words on the individual countries. In Algeria, revenues increased 3% in local currency with mobile data delivering an impressive 57% growth. Our customer base adjusted for the technical issue that overstated Djezzy's active subscriber base stood at 16.8m enabling Djezzy to maintain its market leadership position. EBITDA increased 2% in local currency primarily driven by top-line growth.

Pakistan, despite the challenging operating environment and other disruptions in the country, including a severe power blackout, our performance was strong with revenues up 5% and EBITDA declined slightly in local currencies due to a fine and higher power utility expenses. During the second quarter all mobile networks in the major cities were shut down several times by the government for security reasons although shutdowns appeared at a slower rate than in previous quarters.

And then Bangladesh, our subscriber base grew 6% while the revenues decreased 14% and EBITDA decreased 16% in local currencies. The declines were mainly due to lower usage per subscriber resulting from the mentioned deactivation of suspected voice-over-IP customers. The country also [experienced] 14 days of strike during the second quarter that negatively impacted revenues.

These declines were partly offset by higher interconnection and value-added services revenues. We continue to expect the deactivation of suspected voice-over-IP customers in compliance with regulations to have a prolonged negative impact in 2013 as previously discussed.

Moving on to our Ukrainian business unit, you see here on the slide that the revenues decreased 1% reflecting a decline in mobile. Our mobile subscriber base increased by 6% resulting from an improved market offering and regional sales -- regionalized sales effort, but this performance was offset by a decline in ARPU due to increased competition in the market and the related switch by subscribers to bundled tariff plans. Mobile data revenues demonstrated continued growth up 10% year-on-year.

Fixed line revenues increased 7% as a result of strong growth of broadband which continued to outperform the market. This increase was driven by growth in fixed broadband subscriber base and growth of fixed broadband ARPU of 10%. EBITDA decreased 6% and EBITDA margin declined to 48% primarily due to higher commercial costs associated with the increased sales and increases in network, IT and G&A costs related to higher frequency fees and inflation, partly offset by savings in HR costs.

We are taking now further measures to improve mobile service revenues and EBITDA. These initiatives are focused on implementing enhanced mobile pricing models. We work on reducing the churn, better leverage of the strong Kyivstar brand. We're looking at growing mobile data revenues and also further optimization of the cost base. In addition of course to these measures that we're taking, we will continue to focus on maximizing and protecting the operating cash flows in Ukraine.

The last business unit is the CIS; CIS continued to deliver profitable growth in the second quarter, positively impacted by the closure of a competitor's network in Uzbekistan by the local authorities in the third quarter of last year. In CIS we continue to face strong competition in Kazakhstan as well as Armenia and Kyrgyzstan. However, revenue grew 19% and EBITDA grew 34% on an organic basis leading to an increase in EBITDA margin to 50%.

On a normalized basis, if we adjust for growth in Uzbekistan in the second quarter of 2013 to the growth of the first half of 2012 before the shutdown, the underlying revenue and EBITDA growth for CIS would have been approximately 8% and 10% respectively, still very strong performance.

In Kazakhstan, the largest CIS market, organic revenue growth was 2%. In order to solidify the market position, we continue the transition of subscriber base to bundled tariff plans also in Kazakhstan which right now is impacting revenues. However, EBITDA grew 4% and EBITDA margin came in at 48% supported by the ongoing operational excellence program and the reduction in the mobile termination rate that we saw in Kazakhstan this year.

With this, I will pass the floor to Henk to discuss the Group financial performance in some more detail

Thank you, Jo. Our second 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. Overall revenues on an organic basis, however, increased 1%. As said, excluding the impact of MTR cuts in Italy, organic growth would have been 4%.

EBITDA on an organic basis decreased 1%. Reported EBITDA decreased 2% reflecting unfavorable foreign currency movements. The 72% reduction of MTR in Italy, the deactivation of voice-over-IP customers in Bangladesh and approximately $43m of certain one-offs relating to a settlement, restructuring charge, fine in Pakistan and certain M&A related costs. Excluding all of these effects, EBITDA would have grown by about 3% organically year on year.

EBIT in the second quarter '13 grew 3% to $1.2b primarily attributable to the positive impact of a declining amortization pattern applied to intangible assets.

Profit before tax increased 5% to $762m primarily due to the increase in EBIT, whereby the increase in interest costs were fully offset by ForEx gains.

Overall net income attributable to VimpelCom in the second quarter increased 17% to $573m as a result of higher profit before tax and lower tax expenses. The lower tax expenses are due to restructuring that reduced withholding tax rates on dividend distributions and a deferred tax asset booked on unutilized losses as we were able to offset these tax losses against taxable income as a result of the implementation of the in-house bank structure and the successful completion of the physical merger of the VimpelCom's entities in the Ukraine.

As you can see on slide number 13, our financial position remains solid. On a consolidated basis, actual net cash from operating activities increased 3% year on year in the second quarter to $1.4b, primarily reflecting the timing and phasing of tax and interest payments, partly offset by a negative increase in working capital year-on-year.

Gross debt decreased 4% quarter on quarter to $27.4b primarily due to the planned Russian debt repayments during the quarter. Net debt decreased 1% quarter on quarter to $22.6b leading to a net debt to the last-12-months EBITDA ratio of 2.3 at the end of the second quarter. The decline in net debt in the second quarter primarily reflected cash flow generated from operations and an advantageous ForEx effect. We ended the quarter with a balance of cash, cash equivalents and deposits of $4.8b.

Then turning to our debt maturity schedule, this remains reasonably well balanced over the coming years. 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 with timing of course dependent on market circumstances. So the gross debt was $27.4b as said at the end of the second 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. And finally, as you can see from this slide we have substantial undrawn committed revolving credit facilities in place for a total of $1.3b as of June 30, 2013.

And with that I will turn the call back over to Jo.

Thank you, Henk. To conclude, before we open for questions, I think overall we've delivered another solid operational performance in both businesses in the second quarter although results were clearly negatively impacted by a number of issues that we have mentioned during the call. Top line grew 1% organically driven by strong performance in Russia and CIS. If we exclude, as earlier said, the impact of MTR in Italy the revenues would have been growing 4% organically.

Mobile data revenue growth has also been strong in the quarter, increasing 37% both in Russia and Italy underpinning our strategy to win in mobile data. The underlying EBITDA growth excluding one-offs and other items was 3%, resulting in a strong EBITDA margin of 42.4%.

I think it's also worthwhile mentioning that operational cash flow increased 12% year on year as we continue to focus on growing the cash flows as an integrated part of the value agenda. And at the same time we are right now expecting to spend more in CapEx than last year reaching 20% of our revenues and that reflecting the big focus we have right now on the catch-up in Russia and making sure that we close the gap there. And we are also, again confirming our commitment to our dividend guidelines of paying $0.80 per annum per share.

I think these are solid results in the context of increasing competition and regulatory pressures in several of our markets. We remain confident that we will be able to deliver on strategic objectives as a result of the continued focus on operational excellence, on cost control and in the customer excellence. And with that I suggest that we open the floor for questions. Back to you, operator.

Thank you. (Operator Instructions). Our first question is from Cesar Tiron of Morgan Stanley, you may begin.

Yes, hi, I have two questions actually. First, can you tell us if the measures that you have taken on network improvement in Russia, but also this move to bundles in the Ukraine will at some point allow you to grow in line with the market in both of those countries? And, if yes, can you please say when do you think this will happen?

My second question is on the Russia margins. You experienced the first decline since Q1 2013 if we look at the margin year on year and you mentioned the change in revenue mix as an explanation. But I also wonder if this isn't also because most of the OpEx efficiencies that you had have been realized? And if this is the case I'm wondering if margins will not further decline in H2 as you roll out more stores? Thank you very much.

Thank you, Cesar, two good questions. We -- of course we haven't seen the reports yet from the two big competitors in Russia. I think one of them is reporting tomorrow and the other one later in the month, so it is hard for me to guide exactly on the performance in the second quarter. But I would not be surprised if you see our revenue market share in Russia being stable in the second quarter.

I think we already now will see first sign of improvement on a relative basis. But again I haven't seen the numbers so it's hard for me to give a more precise guidance than that. And I think also all the things we're doing now on network quality and the plan that we have been executed on is the right one and a good one. And for that reason I expect the relative performance in Russia to stabilize first and then I expect, frankly speaking, that we will be able to also in quarters see a relative growth to competitors in the years we have ahead of us.

In Ukraine, I think we -- this is Russia, in Ukraine some problem a little bit different dynamic because for sure we did the right thing by quickly moving to bundles last year. And I think we to some extent believe that we were through the transition when the movement to bundles was done and then we experienced that high ARPU customers are being cannibalized as a result of coming in on lower ARPU bundles than what they used to have before.

So I think this is a pain that we need now to work our way through and we are now putting together a plan for Ukraine to address both top line and also cost structures and I think we will see now a couple of quarters where we need to see a stabilization and a rebound in Ukraine before we see again growth relative in Ukraine.

On the Russia margins I understand what you're saying about rolling out the mono-brands and potential pressure on the cost level there. But the plan is clearly to maintain margins and I think also growth in data revenues clearly will be helpful in terms of margins going forward. So without giving precise guidance on the margins in Russia, I think cost control is under control and as I said gross margins from data services should help overall on that picture.

Very clear, thank you very much.

Thank you.

Thank you. Our next question is from JP Davids of Barclays, you may begin.

Hi, good afternoon, gentlemen, three questions please. First one on Russian LTE, your deployment there, can you talk a little bit about what you've seen, whether it's been new subscribers you've attracted or a bit of ARPU uplift from that? And also talk a little bit about the customer experience on 800 versus 2.6.

The second one, just following -- picking up on a point Henk made around the in-house bank, if you can just give a little bit of an update on progress around that.

And then finally and hopefully a quick question on Canada, if you do end up disposing of that investment will it just simply be a reduction of net debt at the VimpelCom Group level? So proceeds come in and reduce net debt at the Group level, or is there anything else we need to bear in mind? Thank you.

Excellent, I'll address the first one and then I think Henk can give an update on in-house and how the Canadian situation looks.

Listen, on LTE there is very few really commercial experiences yet to report on LTE. But what we see in Russia right now that is important probably to pay attention to is the fact that all three operators are now increasingly focusing on LTE rollout. So the minute a market starts more aggressive rollout of LTE you will also see a faster uptake of smart phones and the related services.

So we are now very focused in our Company on making sure that we are doing this and making sure that we don't create competitive disadvantage for ourselves with respect to next generation network and making sure that we are on par when LTE becomes commercially interesting in Russia. So I still think we're at least a year away from this being relevant from a commercial point of view. And I expect LTE in Russia to behave more or less in line with other markets that we see LTE experience from in other countries.

So -- and that we have now started on the 800 band in Moscow is of course being done because of capital efficiency and it's much better to build LTE on the 800 frequency band as a basis instead of starting in the 2,600 band. So this is purely a more effective way of planning and going ahead with the LTE rollout.

But coming back to your specific question on ARPU and commercial results, I think it's too early to report.

Yes, on the in-house bank we can basically say that in-house bank is now in place. The structure is in place in Luxembourg and as I mentioned before there is about the $6b of tax losses in US dollar terms that we will be able to offset over time with gains that are being made in the in-house bank.

In the meantime, there is about $500m to $700m of inter-company loans already structured via the in-house bank and that of course then leads to inter-company interest coming into the bank, and that is also having an impact on taking a deferred tax asset on losses that are there. Effectively that then leads to a positive result of course in the P&L. And in a couple of years and months to come there is also a cash effect, of course, that is positive. So we are making I think good progress. And as I explained it earlier it will be a step-by-step process, it's not something that you do in one big movement, so we will build it up over the next couple of quarters.

When there would be the sale of the Canadian assets then there will of course be net cash proceeds coming out of that sale. So after all costs are being deducted, after loans of vendors are being repaid. And these cash proceeds are coming partially directly to VimpelCom and partially they will go to Orascom and via Orascom they will be then used to a large extent as a first repayment on the inter-company loan that we have towards Orascom. So indeed you can say that the net cash proceeds will also lead to the same impact on the reduction of net debt of the Group.

Thank you very much.

Thank you. Our next question is from Alex Kazbegi of Renaissance Capital, you may begin.

Yes, hi, good afternoon, a couple of questions if I may. First of all on the Ukraine I still wanted to drill a bit on this, so to say, margin situation there, because if you look of course -- or the two years since the second quarter of 2011 about 700 basis points of the margin has been eroded and while, so to say, not generally like to compare your performance to anybody else, your competitor has been actually improving the margins. So clearly there should be some fundamental reasons why there is such a steady drain on the margin side. So if you could maybe spend a couple of minutes to see -- to tell us where and how do you see this stabilizing? When and which levels if you wish as well.

Secondly on the NASDAQ move, that clearly as you say as well is aimed to address the issue of being part of an index and presumably those indices will be more specific so to say either telecom index or whatever, NASDAQ composite or something like this. Would that sort of satisfy your aspiration for index seeking or do you think that that's just the beginning and you will still try to find, let's say a country index or something else which possibly gives you a better possibility to attract more relevance at the investor base? What's your take and -- of the move to NASDAQ as well?

And lastly, I clearly understand that it's probably difficult to answer this question about the refinancing in general. But again given that a couple of outstanding bonds in Italy are callable already and will be more and the interest rates are moving, so to say, northwards, do you feel that you would be rather inclined to do refinancing sooner? Should we expect anything? As much as you can probably tell us on the subject would be much appreciated. Thank you.

Very good, Alex. Let me talk a bit about Ukraine and reflect on our stock, and then Henk will talk about refinancing. Alex, first of all, if you look at the EBITDA margin, in Ukraine, clearly, we saw a decline, as you said, from '11 into '12, when the movement to bundles were being done. And then, in the second half of '12, we saw a pickup again in the margins, coming in at, I think, 52.5% in the last quarter last year.

Correct.

And then a decline again in the first and the second quarter of this year, and this is what I tried to explain. I think we probably we saw movement to bundle was very important to protect our market position, and it was necessary to keep on an even level with the main competitor in Ukraine. The consequences of that move to bundle, the way it plays out right now, is a cannibalization of high-ARPU customers that basically move from being high ARPU into for them more effective bundles, but at a lower ARPU. And then you get that effect on your top line, and of course, when you do that movement on the top line, you probably secure customers, but at the same time, you take out effect on the top line, and that affects immediately the margins, assuming the same cost picture.

And then, at the same time you saw for the growth in subscribers, we had in this quarter driving also subscriber acquisition costs in that quarter, and then the combination of all this is a margin that is declining. So our judgment is that we did the right thing strategically, moving to bundles. We did probably also the right thing, trying to grow the customer base as we did.

But we think right now that, given the fact that the top line is structured different as a result of the changes, we have to go in and take a second look at the cost structures and the cost base we have in Ukraine, and that's the plan I referenced, and without being too specific, we will do a same fresh look right now at Ukraine as we did in Russia 18 months ago and ask ourselves whether we need to restructure the way we work and operate.

And the objective will clearly be to bring EBITDA margin back to around 50%. We think this is a 50% margin business we have in Ukraine and we are, frankly speaking, also -- when you compare Ukraine in absolute terms, when you look at EBITDA margins, when you look at CapEx levels, when you look at EBITDA minus CapEx to revenues target, this is a very cash-positive operation, and we are still the largest operator in the country. So it's important that we make sure now that we adjust the cost base to the new reality on the top line, and this will be done through the measures I mentioned, and we would like to bring EBITDA margin back to around 50% in Ukraine.

I think this can be done over the next couple of quarters, and that we will see results already entering into 2014, but we also admit that relative performance to MTS in Ukraine has been a challenge in the last one to two years. So that's kind of the guidance I can give on Ukraine.

On our stock, I agree with your reflection. I think, of course, the main driver here is the potential inclusion in indexes, clearly NASDAQ-100 is a target. If you look at our market cap, we should qualify for that index. That's a decision being made by NASDAQ and not VimpelCom, of course, but we hope that the next review of that list, that we will be considered. And, as you said, NASDAQ Telecom Index, NASDAQ Composite Index, are all three very relevant indexes, indices that we would have a potential to qualify for. That's clearly a driver for doing this switch alongside with serious cost savings and also for TMT companies, being at NASDAQ, I think it's more natural for VimpelCom to be identified with.

When it comes to the next steps, that's not yet been decided. I think a secondary listing in Europe is still something we're debating, but I think it's a very strong and good sign that shareholders in VimpelCom could agree to these terms and support such a decision. That is why this was held up in the past was partly due to these things, and now we have agreed to do the change, and we are very glad and hopeful for the outcome of that transfer.

And then I think if Henk could talk a bit about the refinancing, was the last question you had.

Yes. On the refinancing, I think it is very clear that what we explained in the beginning of the year is that there are a range of steps that we are taking. In one of the previous questions, we were talking about the impact of the in-house bank, and there will be several moments in the next couple of quarters at which we will further explain the impact of that in-house bank on results and on cash flow, so that is moving ahead.

This quarter, you saw also the steps in the structure of the organization leading to structurally lower resulting tax on dividends, and of course, there is also you could say the bigger screen of looking at the total financial structure of the Group, the various debt portions that are in it and the level of interest that is related to those portions. So we are, of course, developing our plans, but as I mentioned earlier already, we will not disclose anything like a road map on that or any specifics. So the moment that we will have an action, that will of course be published at the moment that it is for real, and then you can also at that time see the potential impact.

But our primary focus, of course, when we look at the structure of the Group is what is the best structure in terms of value creation for our shareholders and what is at the same time the best structure in terms of improvement of the cash position and the cash flows of the Company. And that has been very strongly in the center of the value agenda, and we will of course continue to focus on that.

Okay, very clear. Thank you very much.

Thank you, Alex.

Thank you. Our next question is from Ivan Kim of VTB Capital. You may begin.

Yes, hi. Two questions, please, both on Russia. So in Russia, you had decent subscriber, decent net additions, so could you please elaborate on what was the major driver behind that and also probably how quickly the transition of customers from (inaudible) happens and when do you expect this process to finish?

And then, secondly, on the competitive front, Rostelecom has recently launched the mobile operations in St. Pete's, and they came up with fairly aggressive pricing on that, RUB0.09 per minute and then, on the mobile Internet, as well. So how do you expect the situation there to develop and whether you see any implications for the general competitive environment in Russia?

Thank you. If I understood the first question, it was about the improvement in net adds, and I think it's quite simple, actually. I think it's a result of improved network quality. It's improved overall quality of services, and as a result of that, lower churn, and of course, also, we start seeing effect of increased number of mono-brands and the plans that we are putting in place.

So there was quite a bit of a cleanup in the subscriber base necessary when entering last year, and I think now we have washed out some of the subscribers that should be washed out, and then also, as I said, increased quality is now leading to a healthier subscriber -- net add subscriber development for the Russian operations.

When it comes to the overall competitive environment, I see no real new big effects right now that we haven't discussed in the past on these calls. It's a three-player market, with, of course, Tele2 being present in part of the country. Still a few regional operators and local operators, less than -- clearly, the big strategic question is what's going to happen to Tele2. Is it ending up with Rostelecom or with someone else?

We are still very interested in acquiring Tele2, and we also announced that interest with MTS in the past. We're still interested, and there is no clarity on the final outcome of that process, and Rostelecom's plans in St. Petersburg, I think very limited effects will affect our overall performance and earnings in the Russian markets. I wouldn't be too concerned about that one.

Thank you, Jo. Can I just follow up on that subscriber additions question? So, basically, if we talk about the gross additions, is it right to assume that those mostly came on the smartphones, so to say, and could you probably [reiterate] what happened to the smartphone penetration during the quarter? Thank you.

Yes. There is the trend that you've seen in earlier quarters on smartphone growth and smartphone penetration continued into this quarter, and as I said, I think also now the increased focus on LTE allowed a willingness to allocate capital for LTE networks from all big three operators, could even accelerate development on mobile data and smartphone penetration in Russia. So we're still sort of climbing the curve, but it could potentially move slightly faster than maybe what we discussed at the beginning of this year. So it will quite soon be commercially relevant in Russia, and I think we're in good shape to position ourselves for that reality.

Okay, thank you.

Thank you. Our next question comes from Herve Drouet of HSBC. You may begin.

Yes, good afternoon. My first question is regarding Algeria. I don't know if you can give us any update there. Also, if you anticipate any possible solution with the Algerian government before the 3G registration in September happens, and if it is not the case, will you still consider registering and bidding for the 3G license in Algeria?

The second question is regarding tax and your lower tax. With your in-house bank and restructuring in place, do you believe the tax and the loss carry-forwards you booked this quarter could be repeated in the next coming quarters?

And finally, again, on Ukraine, I was wondering if there is a bit more -- things specific in terms of where you think there is more room to improve on the cost side. Is there any particular item where you think you can do better on the cost side in Ukraine to help to go back to historical EBITDA margins we've seen? Thank you.

Thank you. I'll take Algeria and then revisit Ukraine one more time, and then Henk can explain the tax question. Basically, on Algeria, there is no update today. Not much has happened, frankly speaking, since the last time we talked. We've also had Ramadan. That has delayed the process to some extent in the meanwhile, but we expect to continue conversations and negotiations in the next couple of weeks, so we are still discussing a solution in Algeria with the government. And that you rightfully pointed out on July 31st, the regulator in Algeria announced the tender for sale of three 3G licenses for national operators.

We can participate, or Djezzy can participate, in that tendering process, being the market leader. And then, as far as we understand now, terms and conditions of this tender will be known after August 11th, and we are of course now doing everything we can to prepare ourselves for winning a 3G license in Algeria and make sure that we are able to be on par with competitors when the 3G services in Algeria will be launched.

This is clearly something we need to do in parallel with negotiations, and hopefully we will come to a solution on all of this. And then, as I said many times in the past, the fall-back solution is still litigation, which is the second track that we're developing, and there is no news to report there, except that everything is running according to the schedule. That's all we can say I think on Algeria, as of today.

On Ukraine, I think I am -- I mentioned, I think we need to work on all the lines in the P&L, basically, in Ukraine. We need to have the activities on selling up services and increase ARPUs within the bundles. We need to compete effectively in the market on new customers, so it starts really with the top line, and then we just have to look at the different cost items line by line and address customer acquisition costs. We need to address network IT costs, general G&A costs, HR costs and, as a result of all this, I think also structural things on the distribution network and the way we have organized our company will be looked into.

As I said, I still think Ukraine is a business that should be able to generate in the 50% range of EBITDA margins, and it's clearly a priority for our Company to make sure this is happening, so I'm starting to repeat myself, but that's on Ukraine. Maybe Henk would like to explain a bit more on taxes.

Yes, on the in-house bank, I think a couple of questions ago I mentioned that every quarter, there might be an impact from in-house bank activities, but of course, it depends on what kind of particular activity we take. So what you will see is that the impact on the cash, the positive impact on the cash, will be there every quarter, but DTAs that are taken as a result of implementation of a certain program, that doesn't have to be every quarter. But very likely, we will see it quite regularly in the quarters coming forward that we have these tax impacts of in-house bank restructurings.

All right, thank you. Very clear, thank you.

Thank you. Our next question is from Torsten Achtmann of JP Morgan. You may begin.

Good afternoon. It seems in the second quarter, price competition in Italy has significantly increased again. Is that most likely continuing the second half, or do you see any changes where that could start to ease off during the rest of 2013? Thank you.

I think for some reasons, price competition in Italy continues, I mean, if you look at this on a historical perspective, seven, eight years ago, the ARPU gap between Telecom Italia and Wind were EUR11. In the last quarter, it's less than EUR1, so clearly there have been very hard price competition in this market.

Looking forward, I think, as promotions are now easing in the fall, September month, probably, you would probably return to more rational behavior than what you've seen during the summer months, so our expectation is that maybe the second half will ease a bit compared to what we've seen in this quarter and early in the year. But we will protect our interest and look after ourselves. We are performing very well compared to competitors in Italy, and we'll continue to target that.

Thank you.

Thank you. Our next question is from Dalibor Vavruska of Citigroup. You may begin.

Oh, hello. This is Dalibor from Citi. Just two or three questions, if I may. One is on growth. I think you have a medium-term guidance talking about mid-single-digit numbers for revenue and EBITDA. You're organically around 1% and your margin is slightly down. I know that you have this operational excellence agenda and you are doing very well on the tax front and some of the cost sides, but I'm just wondering whether the Company -- how are you doing compared to your internal plans, if you can just give us some feel for this year in terms of growth and perhaps whether you're not thinking of changing the priorities or perhaps focusing -- putting growth a little bit higher on the priority list, especially if you compare yourself to some other emerging market peer companies?

And my second question is on Djezzy. I think if I'm not mistaken, you're talking about very healthy, I think 57%, growth in data revenue. Is it still the case that you're not importing any equipment? And I'm just wondering, how is it possible to grow data revenue on a network which is basically impossible to update -- upgrade, from a technology point of view?

And if I can have a third question, it will be about LTE and the frequencies that you have in Russia, in Moscow, in particular. I'm just wondering if there are any differences between you and competitors in terms of the not only available spectrum, but also the way that it's cleaned and whether you may have some advantages or disadvantages in terms of how the spectrum is readily usable for 3G. Thank you.

Okay, Dalibor, thank you for the questions. I think when we looked at the top-line growth in the VimpelCom Group in '13, '14, '15, we tried to make our best judgment on how this would play out, and we saw we had strong underlying potential in, for example, data services in a number of the markets. We saw MTR, of course, being a big problem in Italy in 2013 and then is not. We saw LTE in the period coming in Russia. So we saw a lot of potential growth in basically all the markets, and then Italy hurting in the beginning of the period and then to a less extent in the second part of the period. And that's why we also said organic mid-single revenue growth as a target.

I see no reason as of today to revise that target. I still think we should be ambitious on the top line, and we should believe that this is possible, and we need to look at this as a CAGR in a three-year perspective. So I think it's far too early to revise and change a three-year objective that we set for ourselves only six months ago.

But, clearly, the top-line growth in that context in the second quarter of 2013 was not supporting the overall story. But let's wait and see before we revise it.

Djezzy, I think you need to recognize that data growth is, of course, percentage-wise coming from a very low base. This is all EDGE-related services. That is the reference, and as you rightfully pointed out, the equipment ban is still in place for Djezzy, so we are not importing equipment. We're not allowed to import equipment, and we don't expect that ban to be lifted until we reach a settlement. So, for example, on 3G, the planning we do now is mainly we do a tender and we plan the network, but we can't import and start building and implementing until either the ban is lifted or a solution is reached.

And then on LTE, I think you said Moscow, with respect to the spectrum package. Yes, there are differences in the spectrum package for the three main operators. I think it's too complicated to take on this call, frankly speaking. We're happy to sit with you and show you how the different blocks look for the different operators, but we feel good about the spectrum package in general that we have in Moscow and in Russia in general for LTE deployment. And clearly, as you said, there is cleanup necessary on a number of these frequencies that have been used by other actors in the Russian markets in the past, and some of the costs or investment we will do is also to clean up and make them ready to use for our services. So happy to sit, Dalibor, and look at how the different blocks are sitting.

Thank you. Thank you very much. Can I have one quick follow up?

Yes.

Just in terms of how do you measure growth in market share, I'm just wondering, obviously, in Russia now, there's lots of handset sales. As you said, things are speeding up. When you say that you want to equalize, that you don't want to lose market share anymore in Russia, what number exactly do you -- do you exclude the fixed-line revenue? Do you exclude the handsets, or do you look at just the total revenue in Russia?

Yes, I was referencing service revenues in Russia, and we clean that number for handset sales, so that we measure service revenues, and then we look at the development, and this we can do on an apple-by-apple comparison, and as I said, I hope that we have stabilized revenue market share in the second quarter compared to MTS and MegaFon, but it's too early to tell, because they're reporting tomorrow, I think, and in a couple weeks' time.

Sure, because if I may, just one thing. I did a brief calculation, just taking the ARPUs on every subscriber from your Excel file that you're publishing, and the service revenue growth based on those numbers is something like 2.6%. I think, unless MTS and MegaFon slowed down very dramatically, they must be reasonably above that level, I think. At least, that's what the market is expecting right now. So I was slightly surprised about the stabilization in the second quarter on that basis.

Yes. Let's wait and see, Dalibor. I think also your number is too low, frankly speaking, but we're not publishing service revenues right now, but I think also the number you have is lower than reality.

Okay, thank you.

Thank you.

Thank you, Jo.

Thank you. Our next question is from Alex Wright of UBS. You may begin.

Yes, thank you very much. So a couple of questions, please. The first one is on the Group CapEx expectation for 2013. I think it's been revised down very slightly from 21% down to around 20%, and your CapEx trend for Russia is unchanged. So I just wondered if that small downward revision in the Group number is due to a delay in recovery spending in Algeria, or whether there are any other markets where you are reducing or delaying your CapEx spending?

And the second question is on sub-Saharan Africa. Could you tell us what your current thoughts are on those businesses? You can see that Orascom or their subsidiary has paid $137m for renewal of the license in Zimbabwe, and I just wondered if that business is potentially still considered for disposal or what your thoughts are on those assets at the moment? Thanks.

Very good. On CapEx, you're spot on. The revision is basically the delay we're facing in Algeria. The rest is running according to plan, a little delayed, but for the year as a whole, I expect it to be on plan. That's the right conclusion.

Sub-Sahara, as you saw earlier, we entered into a sales agreement on CAR and Burundi. We have received $25m already from the buyer, and we are right now in the final closing of that transaction, and we expect it to close according to plan, so an exit of CAR and Burundi is likely to take place. And then, on Zimbabwe, it's correct that Orascom announced today that they have reached an agreement with the government and represented, I think, by the Minister of Finance, Transportation, Telecommunications and also Infrastructure Development to renew the 2G, 3G license in Zimbabwe for 20 years, actually, and the license renewal fee is $137.5m.

I think that's good news for the Company, for Orascom, and also VimpelCom as a shareholder in Orascom. I think there is a delayed payment schedule on this license renewal that will be handled within the cash flow generated by the Company in Zimbabwe, so I don't expect any funding requirements from shareholders related to these renewals. I think this is all good news and makes the future more [pretty] to go for these assets, and there is no ongoing activities right now in terms of disposals of these assets.

Okay, great. Thank you.

Thank you.

Thank you. Our next question is from Igor Semenov of Deutsche Bank. You may begin.

Yes, hi. Thank you. Actually, I just wanted to follow up on Russia. Just curious, obviously, we'll see tomorrow, but what gives you confidence that you're almost in line with competitors? Do you think it's subscriber growth, or do you think it's the ARPU? Because you can give -- your subscriber numbers picked up the pace, and churn was lower, so it was good developments, but I was just curious to see your thoughts.

Igor, we try to of course follow this very close, and we follow traffic in HLRs. We follow subscriber growth and development in growth, and we try to interpret the numbers, and we have lost revenue market share in the previous quarters, and our expectation now for this quarter is that we see a flattening trend from the first quarter to the second quarter. I'm not referring year on year, but I'm simply comparing revenue market share numbers for the first quarter of '13 to the second quarter of '13. And I think it's driven by the factors that we mentioned, or the factors that you saw, and I think also the fact that is [guest arbiter] segment, that answers especially Moscow this time of the year gives us certain advantages given our portfolio of companies and tariff structure. So that can also potentially help us in correcting the trend.

I think it's hard to give a very specific reason for why this trend could kick in, and again, let me be humble and say that we need to see numbers from both of them before we can conclude. But these are purely estimates and expectations.

Okay, and can I just ask on Italy, where do you stand with LTE deployment in Italy?

LTE in Italy is on plan. We received everything we were supposed to receive from the government in the beginning of the year, so there was no delay on the spectrum that we acquired, so that's in our possession now, and we have started the planning. We have started the initial rollout and we will see growing activities in the second half of this year, and we'll do it basically as an expansion of the current 3G network. So this will just grow in presence and importance as we move forward, and we will make sure that we have a fast-forward approach in Italy, and making sure that we will adjust basically our rollout speed to the biggest players in the market, Telecom Italia and Vodafone and focus very much on what is needed of speeds for customers rather than only following the map and count the number of base station points or kilometers covered.

We will have a very customer-centric approach in our rollout, and as I said, a fast-forward approach, but there is nothing in Italy that indicates we're not on plan, and this is under control.

Okay, thank you very much.

Thank you, Igor.

Thank you. This concludes the Q&A session. I would now like to turn the call over to Jo Lunder for closing remarks

Okay, thank you very much. We had also today a lot of people on the call. I'm sorry if not all questions were being answered. I know there is a big queue every time, so feel free to contact investor relations by phone or e-mail, and we'll try to answer all the questions, and I expect also to meet all of you on the future plans in investor relation activities we have for this fall. So, with that, I wish everybody a good day and a continued good summer. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.