VEON Ltd (VEON) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom Ltd third quarter 2013 investor and analyst conference call. (Operator Instructions). I will now introduce your host for today's conference, Katie Pyra. You may begin.

Hi, good afternoon, ladies and gentlemen, and welcome to VimpelCom's conference call to discuss the Company's third-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 expected capital expenditure, network developments in Russia, Italy's future operating cash flow position, the grant of a 3G license to Orascom Telecom Algerie, the timing in amount of future payments of dividends by the Company and the Company's ability to realize its strategic initiative. 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 annual report on Form 20-F and other recent public filings made by the Company with the SEC, including the accompanying earnings release.

Also note that 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 proceed or follow them. Additionally, the actual financial results of the third quarter 2013 are unaudited.

If you have not received a copy of the third-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 would like to turn the call over to Jo Lunder, Chief Executive Officer of VimpelCom.

Thank you. Good afternoon to those in Europe and good morning to our guests from the United States and welcome to our third 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 stable third quarter results were negatively impacted by regulatory and governmental measures, as well as market slowdown in most of our markets. As a result, the Group reported an organic revenue decline of 1% year on year to $5.7b. Excluding the ongoing impact of the reduction of the mobile termination rate in Italy, VimpelCom's organic revenue growth would have remained stable.

We continue experiencing strong mobile data revenue growth across our business units. EBITDA decreased 2% organically, but we continued to demonstrate strong cost efficiency delivering an EBITDA margin of 43.5%. Excluding the impact of the reduction of the mobile termination rate in Italy and excluding one-off charges we had in the quarter, EBITDA would have been stable organically.

In the third quarter we achieved strong overall subscriber growth, with an increase of 5% year to year to 218m mobile subscribers supported by growth in all business units. Net income was $255m, down from last year mainly as a result of some specific charges in this quarter that we will address and explain later on the call. Finally, cash flows for the quarter were solid at $1.7b.

Them, moving on to some other key developments, we switched our listing to NASDAQ on September 10. Since then we achieved another major milestone with our inclusion in the NASDAQ-100 Index last week. As you know, inclusion in this index was one of the reasons for the switch.

We remain committed to returning value to shareholders. The Supervisory Board has authorized the payment of an interim 2013 dividend of $791m or $0.45 per common share. This is in line with our stated dividend guideline, under which we aim to pay out at least $0.80 per share per year.

We also achieved two other major milestones in our market, having been granted a 3G license in Bangladesh in September and one of the three provisional 3G licenses in Algeria in October. We also received conditional approval in Algeria to make foreign payments to acquire equipment exclusively dedicated to 3G. This approval is a conditional exemption to the currency ban on foreign payments.

On the management front, I am pleased to announce that Andrew Davies will start as our Group CFO tomorrow and we're happy to have such an experienced finance and industry professional joining our team. Andrew succeeds Henk van Dalen, who has made substantial contributions to VimpelCom and we wish him the very best in his future endeavors.

We also promoted Anton Kudryashov to the Group Executive Board as Chief Group Business Development and Portfolio Officer, with Mikhail Slobodin taking over as Head of Russia business unit. Mikhail will continue to the important work done over the recent years by Anton and his team to improve our performance in Russia.

Finally, we will host our next analyst and investor conference on January 28 and 29, 2014 in London, where we will provide an update on our strategy, the value agenda. I hope that many of you will be able to attend this important annual update from our full management team.

Moving on to the performance of our business units, starting with Russia. In Russia our operating performance continued to improve in the third quarter, extending the positive trend seen in the previous quarters, although at a slower pace. The business recorded a 3% growth in mobile service revenues, supported by a 30% increase in mobile data revenues.

EBITDA remains stable as savings from the operational excellence program were invested in the mobile data network and expansion of owned mono-brand stores. I will return to those points on a couple of later slides. The EBITDA margin remains strong at 43.6%. Last 12 months CapEx to revenues stood at 19% and we expect it to increase up to 22% for the full-year 2013, as we continue to invest in network quality and capacity to support growth of mobile data.

Let me then update you on our progress in expanding our mobile data networks in Russia. Improving the quality of our network in Russia remains a key priority for our Company. We are fully on track to achieve the goal of being on par with our peers by the end of 2013 in our key regions, which generate the majority of our revenues in Russia.

As you can see on this slide, we have significantly expanded the number of 3G base stations this year, connecting more base stations via IP and upgrading our network to HSPA+. We are on track to reach our targets for this year. In particular, in Moscow already 93% of our base stations are IP connected and 90% are offering HSPA+ and we aim to reach 100% by the end of this year. In fact, we have tripled the number of 3G base stations in Moscow by the end of this year.

We are pleased with our network development in Russia today, but of course it will take more time to align the market perception with improved quality of our networks.

We're also focused on expanding LTE coverage in Russia. The LTE rollout continued during the third quarter and we launched the first commercial LTE network in two regions in October. We expect to commercially launch LTE also in Moscow and three other regions in the next two months. Looking ahead, we plan to accelerate the LTE rollout by launching services in 12 cities with more than 1m inhabitants; these include St. Petersburg, Ekaterinburg, Novosibirsk and Nizhny Nogorod in the first half of next year.

The next phase will be the format of LTE in more regions in the second half of 2014 and we will closely, of course, monitor the penetration of 4G devices and demand for LTE services to adjust our rollout plans accordingly. The way it looks right now, we expect to cover half of the Russian population with LTE at first by the end of 2015 and, as you probably saw, we also started official sales of iPhone 5s and 5c in Russia last month.

In Russia we continue to invest in the roll out of mono-brand stores to offer better customer service, improve our product offering and, consequently, reduce churn. This year, as you can see on this slide, we will triple the number of mono-brand stores to 1,240 in total. As a result, the percentage of sales from mono-brand stores has increased, by now half of our sales are done through Euroset and mono-brand stores.

I would say, in summary, we have stabilized our operations in Russia, where we continue to invest in 3G and 4G networks and the rollout of more mono-brand stores. With the new management team in place, we are now entering into the next phase of transition of our business in Russia and we have hopes for the future.

Moving to Italy, WIND continued to outperform the market in the third quarter in a highly competitive environment, delivering a strong relative performance. Our mobile subscriber base increased 4% to well over EUR23m, driven by the success of all inclusive bundles, which continue to attract customers due to the simplicity and the transparency of the offerings.

Total revenues, excluding the impact of mobile termination rate cuts, were down 1%, mainly as a result of competitive pricing pressure. However, mobile internet revenues were up 44% and fixed line broadband was up 8% as a result of new strategic focus on unbundling, which has a direct positive effect on profitability of our fixed line business.

EBITDA in the third quarter declined by 6%, mainly due to the price competition in the mobile market and, again, MTR cuts. Reported EBITDA margin increased to 40.6%, driven by the ongoing cost efficiency measures. If we look to the fourth quarter of this year, we expect continued pressure of the top line for mobile termination rates to continue, although to a lesser extent than in the first half of 2013. That said, we continue to focus on offsetting the impact from the MTR reductions and protecting our cash flow through implementation of our operational and capital efficiency initiatives.

In Africa and Asia business unit, revenues decreased 1% organically, impacted by regulatory and governmental actions in several countries. On a reported basis, revenues declined by 4%, primarily due to local currency devaluation against the US dollar in Pakistan. Consequently, EBITDA declined 1% organically, also impacted by $7m in one-offs related to rebranding in Pakistan and restructuring. EBITDA, excluding one-offs, was stable on an organic basis. EBITDA margin was strong, close to 48%.

In Algeria revenues were stable in local currency, with mobile data delivering an impressive 80% growth. Despite the ongoing limitations imposed on Djezzy, our subscriber base grew 2% to 17m, enabling Djezzy to maintain its market leadership position. EBITDA margin remained strong at 57%.

Our performance in Pakistan was solid, with revenues and EBITDA both up 5%, despite the challenging operating environment and other disruptions, including harsh weather conditions and power outages.

In Bangladesh our subscriber base grew 5%, while revenues decreased 15%. The revenue decline was mainly due to the low usage per subscriber resulting from the earlier mentioned deactivation of suspected voice-over-IP customers in compliance with regulation, as well as the negative impact of 15 days of national strikes during the quarter.

Excluding the impact of voice over IP, our revenue growth would have been positive. These declines were partially offset by higher interconnection and value-added services revenues. We continue to expect the deactivation of suspected voice-over-IP customers to have a prolonged negative impact for the rest of the year, as previously communicated. EBITDA increased 5% in Bangladesh, supported by cost savings and also a lower SIM tax subsidy.

In Ukraine our results were under significant pressure, but we continued to deliver strong margins. Revenues decreased 7%, reflecting a decline in mobile. This was primarily due to customers switching to lower price bundle tariff plans and the difficulty of up-selling existing customers to higher priced bundles. Our mobile subscriber base increased by 6%, resulting from an improved market offering and regional sales efforts; on a positive note the mobile data revenues demonstrated continued growth at 11% year on year.

Fixed line revenues increased 9% as a result of strong growth of broadband, which continues to outperform the market. This increase was driven by growth in the fixed broadband subscriber base and growth of the fixed broadband ARPU of 11%. EBITDA in Ukraine decreased 10%, primarily due to the higher commercial costs, or the sales, as well as increases in network, IT and G&A costs. EBITDA margin remained high at more than 49%.

The transition of our business in Ukraine is clearly taking longer than we anticipated. However, we are taking significant measures to strengthen our performance in the market by improving the value proposition to customers and a clear focus on the customer excellence. I'm sure we're going to return to this one during the Q&A.

The CIS business unit continued to deliver strong results in the first quarter, delivering a 9% revenue growth and an EBITDA growth of 6%, resulting in a healthy 48% EBITDA margin.

In Kazakhstan we are pleased that the Company's competitive market position improved as a result of its attractive value proposition and subscriber transition to bundled tariff plans is progressing according to plan. Revenues in Kazakhstan increased by 4% in the quarter, driven by a 53% increase in fixed line revenues, while mobile revenues grew by 1%. If you exclude some one-offs, EBITDA growth would have been 12% in Kazakhstan.

I will now pass the floor to Henk van Dalen to discuss the Group financial performance in a bit more detail. Henk.

Thank you Jo. Our revenues in the third quarter were negatively impacted by regulatory and governmental actions in the business unit in Africa & Asia as well as MTR cuts in Italy. Notably, excluding the reduction of MTR in Italy, the Group revenues would have remained stable organically.

EBITDA on both an organic and reported basis decreased by 2%, reflecting the reduction of MTR in Italy, the voice-over-IP effect in Bangladesh and approximately $27m of certain one-offs related to restructuring, rebranding in Pakistan and an adjustment in Kazakhstan related to USB dongles, revenue recognition and certain M&A related costs. Excluding the MTR cuts and one-offs, EBITDA would have been stable organically year-on-year in the third quarter.

EBIT decreased 2% to $1.2b, mainly due to the negative EBITDA movement and the impairment of certain equipment and Laos goodwill. Overall, the net income attributable to VimpelCom shareholders in the third quarter decreased 53% to $255m as a result of negative non-cash FX effect of $54m; $31m higher finance costs, which are mainly related due to the Eurobonds that were issued in the first quarter of this year for repayment of maturing debt in 2013 and 2014; and a $165m charge due to deferred tax provision for revolving tax related to planned intra-group dividends.

Then the next slide gives you an overview of debt, cash and value ratios. On a consolidated basis actual net cash from operating activities decreased 16% year on year in the third quarter to $1.7b. This was explained by a lower interest received compared to the third quarter 2012, when income from a derivatives settlement was included.

Gross debt increased 1% quarter on quarter to $27.6b, primarily due to unfavorable FX movements. Net debt decreased 1% quarter on quarter to $22.5b, leading to a net debt to the last 12 months EBITDA ratio of 2.3 at the end of the third quarter. The decline in net debt in the third quarter primarily reflects cash flow generated from operations. At the end of the quarter, we had a balance of cash, cash equivalents and deposits of $5.1b.

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, as you know, caused by the Wind Italy debt, but we plan to refinance this before its maturity depending on market conditions.

So the gross debt was $27.6b at the end of the third quarter, with an average weighted interest rate of 8.3% in the quarter. And finally, as you can see from this slide, we have substantial under committed revolving credit facilities in place for the total of $1.3b as of September 30, 2013.

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

Thank you, Henk. This is the last slide before we open for Q&A. So the conclusion is that overall operational performance in the quarter was impacted by regulatory measures and also a market slowdown. However, we continued to see strong mobile data revenue and subscriber growth in our markets.

We are driving improvements in our operations in Russia; we delivered organic mobile service revenue growth of 3% and a strong mobile data revenue growth of 30%, underpinning our strategy to win in mobile data. And in Italy we continued to outperform the market, while retaining a strong EBITDA margin.

Overall, VimpelCom continues to deliver on one of the highest EBITDA margins in the industry and we also have a solid cash flow from our operations, which enable us to invest in our businesses. We have also confirmed our commitment to our dividend guidelines of paying $0.80 per annum per share and we have declared a payment of an interim 2013 dividend of $0.45 per common share today.

The results are solid in the context of the competitive and regulatory pressure and the market slowdown, in my view. I remain confident in our strategy and I invite all of you to join us for our annual analyst and investor conference, in London on January 28 and 29, as we plan to update you on our progress against our strategy the value agenda. And with that I suggest that we open the floor for questions and I hand the call back to you, operator.

Thank you. (Operator Instructions). Cesar Tiron, Morgan Stanley.

Yes, hi, two questions please. First, on Russia, you have delivered on network improvement as you said you would, but we are still to see the impact on service revenue growth. For example, I would expect MTS and MegaFon to grow by 6% this quarter in service revenues and you only grew by 2%. Can you say exactly what you think you need to change in customer perception to accelerate your revenue growth in Russia and how long you think it's going to take and whether it is possible to see a similar situation, as in the Ukraine, where your network is on par with the competition but you underperform on revenues?

And my second question would be to understand if you are still exploring refinancing options of the PIK notes and the higher bonds at Wind and what's preventing you from delivering on this at this stage? Thank you.

Thank you, Cesar, good questions. I think let's -- I want to comment on a couple of things you basically stated as facts in your questions. First, if we look at revenue market share development from the first to the second quarter, we actually saw a small growth in our favor. Now, from the second to the third quarter, you might be right that we've lost a bit of what we gained in the last quarter. Our service revenue growth in this quarter is 3%, I haven't seen the actual numbers of MTS and MegaFon and I don't know whether they will be at 6% or lower than that, but it might be that we saw a little bit of a setback again in this quarter.

But I think that when we look at this, Cesar and everybody, it is basically that look at the number of 3G base stations in the beginning of the year in Russia and on the slide I showed you, around 18,000, we're going to end the year with 27,000. We have basically built 9,000 3G base stations and we have also upgraded with IP connections on a high percentage of them. So what we -- we spent years building 18,000, we basically built 9,000 in a year.

Look at Moscow, we have tripled the number of base stations in Moscow this year and, when we measure network performance now, we see very good results on our end and I think we are about, now, to catch up in key regions and gradually in the country as a whole and, for that reason, we have now as of today announced that we will accelerate LTD rollout and, by the end of 2015, we plan to cover 50% of the Russian population with LTE network. So we take now this network quality for real and we will make sure that we don't lag behind competitors on the next generation and mobile broadband.

And then, of course, the question is why we're not growing as quickly as MTS and MegaFon and I think you have to just recognize that we underinvested in the networks for a long time; now we have finally been able to organize ourselves so that we can catch up. There is still a perception out there that our network is performing less than the two others, but I think as long as the reality shows par, there is just a matter of time before the perception again will change.

And we look at this in a long-term perspective, LTE will last in Russia for the next 10 years and, of course, we would like to see more rapid improvement in revenue market share on service revenues, but we also have to look a little longer than just one or two quarters at a time. And I expect that we will see a shift during 2014 in terms of service revenue performance against competitors and I think Ukraine example you used is a different one of nature, because in Ukraine we basically had to reset, in a way, the price premium we had by moving to bundles, and that move to bundles was clearly the right thing to do.

And then, when we did that, the cannibalization started, because it was basically a correction of the price premium. That led to a pressure on the top line. Now, we realize that we need more time to digest the cost base in order to balance Ukraine, but it's a different situation from the Russian one, because in Russia we are more or less with competitors in terms of the movement to bundles. I think we basically doubled the number of bundles in the last 12 months, but I think there are two different examples. So that is a long question, but I think it's probably two or three key opening questions for the whole performance side. So that's all we can say.

When it comes to refinancing, this is a very big and important question for VimpelCom Italy. The debt in Italy is ring-fenced, we have announced that a number of times on these calls and it's a very serious and important decision for us whether we are going to refinance and break that ring-fence or not. And we said we would take a decision in the second half of this year, we haven't taken that decision yet and there is no real update we can give on the refinancing question today, but of course we will return to you immediately when a decision has been made and we cannot provide a timetable for the next steps either.

Thank you very much. Just a very quick follow-up question, just on this perception of the network, do you have any plan maybe on the marketing side to communicate the improvement that you made on the network for the subscribers to understand that that has happened, especially the Russian subscribers that are not in your network?

Absolutely, Cesar, so we now see that we have a core product that benchmarks well and, of course, we need actively to communicate this. And of the types of actions is, of course, the fact that we've also now agreed with Apple to start selling iPhones in the Russian market again and this will also help the take-up on smartphones and hopefully also improve the user experience of improved networks that we have right now. But of course communications and addressing perception is key, otherwise the fixing of the basic makes no sense, right.

Thank you very much.

Thank you.

Thank you. Ivan Kim, VTB Capital.

Yes, good afternoon, two questions please. The first one, sorry to dwell on that Russian growth, but the network investments in this has been significant and I'm just wondering probably there are issues elsewhere, and one thing that I remember was the case that there are still quite a large number of subscribers on the old archived tariffs. Do you see that these people have started probably to switch to the new ones or pricing to bundles? And probably you are doing that yourself and that, I guess, could be the reason for slower revenue growth?

And then, secondly, in Russia you incurred some startup costs related to mono-brand rollouts, from what I understand. If you strip those costs out what the EBITDA margin would have been? Thank you.

Of course part of market activities is to reach out to old tariff plan holders and offer new and more customer-friendly tariff plans, also this is an important part of the whole transition we're doing in Russia right now. But I think perhaps we have to be a little patient on Russia and realize that now we have parity on the core products and now we are doing the clean-up in the tariff base and we have reduced the price premium and we now move more and more to bundles and more relevant tariff plans. But still there is an element of perception here and we know also that changing perceptions and big shifts like (inaudible) Russia is, just takes time. But we remain very focused on the long-term opportunity and we are also convinced that we are moving this in the right direction.

And then we're not providing the split regarding the start-up costs on mono-brands when we give the EBITDA margin, because we think this is basically -- it should be seen as part of the operating model and the savings that we've had now on other areas really in what we believe is the right activities in the market. So for that reason, we decided not to give that split. So I'm sorry about that.

Thank you.

Thank you.

Thank you. JP Davids, Barclays.

Yes, hi, good afternoon, everyone. First question is also on Russia. You cite in your release a little bit of pressure on voice revenues with more allocation within bundles to data. Just if you could unpack that a little bit more for us and, specifically, are you seeing customers at all that are starting to try rationalize their spend by using bundles or are you still seeing an up-selling opportunity from bundles? That's the first question.

The second question, for Henk, just around the deferred tax and the future intercompany dividends, could you provide a little bit more color around that and, specifically, is that related to the in-house bank and what savings there are from doing this that we could expect in the future?

I think, when we look at analyzing what's going on in Russia, I think it's basically what we believe the situation is really, a perception issue. It's of course adjusting the pricing in the market by the movement of bundles and new tariff plans.  So, in a way, we are doing multiple things at the same time. And hopefully are now moving this into a situation where we will be on par, on network, having -- the right price level compared to competitors reflected in bundles and elsewhere. And the main competition will really be about customer service and customer satisfaction.

So, that being said, I think also probably we need to expect a little bit of a slowdown in Russia. I think we've seen also GDP estimates now for 2014 that is lower than what we maybe hoped for a while ago. So we remain very committed and positive, of course, on the long-term upside in Russia, but I think right now we probably also see an element of a slowdown as a result of the macro environment as well.

Do you want to talk about --?

Yes, certainly. On the this particular portion on the withholding tax, what is a normal situation is that when you have a plan to distribute earnings in the company, then you need to take a provision for deferred taxes. So typically in this context it is the withholding tax. We have now planned to distribute over a period of a couple of years about $3b in dividends. Of course a large portion of that dividend block will indeed end up in the financing company. A portion might also end up in normal dividend payments to the shareholders. But the larger portion, indeed, will be the financing companies.

You could typically take as a basis if this amount is being reinvested in terms of an inter-company loan, then on such an inter-company loan you will take, on average, between 8% to 10% interest, depending of course a little bit on the area. That interest income is then tax deductible in the country in which the interest has been paid. And is non-taxed at the place where it is received, because they can be offset against the significant amount of tax losses that we have accumulated in our financing company.

Thanks to both of you.

Haim Israel, Bank of America.

Good afternoon, guys. Two questions on my side, if we can. We discussed about Italy, but if you can just share with us your views on the market. You've written in you press release that you are seeing signs of stability in this market, which used to be quite a [jump] in your performance in the last couple of quarters. Can you just share with us what we are seeing right now, what are the packages, consolidations, their outlook and stuff like that? And really what is the outlook for this market?

The second one is going back to Ukraine. I know, Mr. Lunder, you already spoke about that, but now, if I understand correctly, we have seen the impact of the bundling on top-line and EBITDA margins. And you suggested that it is going to take time to adjust the cost base after this change. Should we, however -- if this market is becoming a little bit more competitive and eventually the competition will act on that. Wouldn't we -- would it be fair to assume it's going to be tougher to adjust numbers and adjust the cost base in this kind of environment and this market is actually going to a more challenging performance in the short run?

Okay, very good. Yes, let's start with Italy. I think -- we are -- as I said, we -- on a relative basis we are absolutely doing excellent in Italy and we have a very strong team in place there. And I believe that when you see reports from other operators you will also see that we took revenue market share in Italy, again, in this quarter.

Summer was quite harsh when it came to competition; there was a lot of discounts in the market. At the beginning of September the three main operators did not renew summer promotions, which could maybe be seen as a sign of a more stable fall and also a more stable market going forward. The fourth mobile operator in the market is still very aggressive and the discount that is being used is massive compared to the three others.

I think also the market needs to find a better way to price data going forward. I think the Italian market has seen a substantial decline over the last couple of years, and I think also when we look at 2014 you might expect to see a further decline, as a result of -- or [post-effect] basically of termination rate cuts, and also a lower price level as a result of the competition that's been going on 2013.

So I think it's not an easy market. We are doing well, relative to competitors. And I think that we have to be strong in our beliefs and on a -- whether this will lead to an in-market consolidation or not, I think it's difficult to discuss and be certain about. We have a general view that in-market consolidations are positive and maybe even necessary in certain markets, because the demand for data is so big that you basically need strong operators that can reinvest cash flows in accommodating for the data growth. Whether this will take place in Italy or not is really hard to predict. So it's a challenging market, with signs of stability maybe right now, but clearly a market decline is also expected in 2014.

Ukraine, well, Ukraine I think is -- let me try to put this into context one more time. I think we were late with our movement to bundles. The decision to move quickly to bundles clearly was the right one. Because it was necessary to secure the leading position and secure Kyivstar as the leading brand, and secure a high market share in that market. So the movement was clearly correct.

The problem was of course that it turned out to be difficult to upsell from the new bundles and it became a correction of the price level, and then it took off some of the price premiums that we had in the market. So when we saw upselling turned out to be difficult, we saw -- challenge number 2 being the cost side and cost side is now being addressed. We optimized service costs on content; we look at interconnect and transit. we look at dealer commission we are addressing equipment cost. We are delaying the regional structure in the Company, to make it easier and less bureaucratic.

We are looking at -- we will reduce IT spending. We are discussing when there's more support to do some of these changes. So there is a big, big program now of activities going on, which is led by our CEO in Ukraine, Igor, but also heavily supported by our Deputy CEO, Jan Edvard Thygesen, from Amsterdam. And I remain very confident that we will turn the corner in 2014, but I think we have a couple of difficult quarters ahead of us before we see the actual result of the work that is being done now.

And the important thing is, of course, that this is still a business that generates close to 50% EBITDA margins, and it's also a market with not a very high level of CapEx to revenue. So when you look at cash flow generation of Kyivstar it's probably top 10%, 20% in the whole telecom universe in terms of cash flow levels.

And that's why we look at this as a very valuable asset that we would like now to just take the time and put in place the necessary actions, to make sure that we secure this valuable asset for many, many years to come, instead of being too toxic and too driven by quarter to quarter to look better. I think we are now basically taking a long-term view, we're are resetting everything and we are building for the future, and taking the short-term hit.

Good. Thank you very much.

Thank you.

Alex Kazbegi, Renaissance Capital.

Yes, good afternoon. The first question is on Russia again. Given your focus on the investments and your -- again, the more accelerated, if you wish, outlook for the LTE deployment, what is the outlook for the CapEx for the next year, or maybe even two, either in absolute or the relative terms, how do we -- how should we think about it, if you -- that would be the first one?

Secondly, on Italy as well, I just noticed that usually after the MTR cuts, sequentially you are witnessing quite a big decline in the mobile revenues, for Q3 vis-a-vis Q2, for instance, or Q1 vis-a-vis Q4. It didn't happen this time. Was there a one-off? What is the nature of that? Should we, so to say, extrapolate these numbers in the future, or anything we need to be aware of there, please?

And then last, also just maybe just a general overview of the Kazakhstan business, because they are -- again you are, if you wish, rebalancing the tariffs. You have been catching up also with the newcomer. Supposedly you've achieved what you wanted to achieve, but what is the outlook in your view there? Where the ARPUs are, do you think there's more stability in the market in general, and also vis-a-vis the EBITDA margin, especially the nature of the provision which you had there? What happened with this, so to say, dongles, and what will be the outlook again for the margins going forward? Thank you very much.

Thank you, Alex. Well, I'll try to address them without being too long. CapEx to revenues in Russia this year is estimated to come in around 22%, 20% for the Group. We haven't given an outlook for next year and we plan to do that on the Analyst Investor Day in London, in late January. But I do think that the accelerated LTE and the fact that we now have done a lot of the 3G catch up this year. I don't expect a massive shift in the CapEx level next year, in Russia. But we'll give you a better and more precise numbers late January. But I don't think you need to expect a massive shift in the overall CapEx level for Russia next year.

By shift you mean either way?

Shift, either way, from this year, yes.

Yes. Yes, okay.

Yes. Because we do want now to finish the job and not start being too short-term focused again on delivering the short-term cash flow. We really now want to make sure that the core product is at par and equal to competitors.

Then on Italy, I think that the point here is basically that the MTR cuts this summer is lower than what we had earlier. So when you model this you probably see that the first reduction was much higher, and then the second reduction is less than -- so I think that's why also you see a less decline in the third quarter versus the second quarter, and against versus the first quarter. I think that's just reflecting the actual cut in MTR rates.

Then Henk can probably better than me explain the provision in Kazakhstan that's related to a revenue recognition on dongles. So that's quite easy, I think, to -- and Henk can do that.

And when it comes to the outlook for Kazakhstan I think right now we have quite good momentum. We are taking a little bit of revenue market share from competitors and we have no reason to believe that this is not possible to do going forward. So we have a quite positive outlook for Kazakhstan next year.

I think you may have seen (multiple speakers).

Yes?

No, I just want to say that's not to the detriment of the overall revenues. You are not say again, it's not the very low pricing which makes you take the subscribers away, it's just --

No, it's not. It's -- this is -- we try now to build [for] sustainable growth and build for the future. So this is really much more about the value proposition than a big discount.

Yes.

Yes.

Yes, the correction in Kazakhstan just basically had to do with a double count, which was incorrectly represented in the revenues, so then we had to basically turn it back to the original position. And then take it over a longer period related to the usual (inaudible).

Oh, so it's a reversal basically?

Yes.

Yes.

Yes, okay. Okay, thank you very much.

Okay, Alex.

Torsten Achtmann, JPMorgan.

Good afternoon, thank you. You focused quite a lot in Russia on cost cutting and, given your change of perception a bit more on LTE rollover which has some OpEx, do you think you can continue to offset the increasing costs of that with the cost cutting you've done in the business so i.e. can you keep the margin stable, or can you keep the cost stable?

Secondly, on Italy, you mentioned you believe in in-market consolidation. But can you give some more details? Would you be willing to participate in any in-market consolidation if I can say, or could that also mean that (technical difficulty) Italy? Any more clarity would be helpful, as far as you can. Thank you.

Yes, I think in Russia, of course, there's the growth in mobile data. Traffic will be very high and the cost related to IT and overall operations to handle that growth will naturally put pressure on our cost base. And then of course while we're rolling out actively now mono-brands, is probably also going to grow costs related to these fully-owned mono-brands.

The offsetting is then clearly more data and higher margins on data that will partly offset, of course, cost. And then probably also moderate commissions, as a result of more distribution through the mono-brand stores. So it is really -- meant from the voice to the data-centric model, with data network and more mono-brands being offset then with higher traffic -- higher-margin traffic and hopefully less commissions and investments in independent dealers.

Exactly how this will play out in the next year and the years to come, it's difficult to give precise guidance on. I think on from this call we'll try to throw some more light on this late January when we meet. But in general I think mobile operations, besides, should deliver EBITDA margins around the levels we see now that we're on operation in a normal competitive market, we should probably be able to operate around those levels.

And then in Italy it's really hard to be more precise. I think it's -- the first decision we need to make now is related to the refinancing and the ring-fence and, as I said, we have not yet made that decision. So still that is ring-fenced with high returns I think to bond holders. We are analyzing and looking into the different aspects with the refinancing but, as I said, have not yet made a decision.

And then in-market consolidation we would generally entertain possibilities like that, but there is no -- nothing to report really strongly for the [investor] right now. We are quite pleased with the performance and we -- as I said, we grow revenue market share now. And there is nothing to report on any market consolidation activities ongoing.

Thank you.

Thank you.

Igor Semenov, Deutsche Bank.

Yes, hi, thank you. I just wanted to drill again on Russia a little bit more on the revenue growth rate. Can you maybe first off quantify the decline in the voice revenues?

And secondly, do you think maybe you are not doing enough maybe, or you are not doing to the same extent that your competitors are doing in terms of sales of other non-voice services, like content or SMS, or some other things? Do you think this could be the reason for slower growth rate for VimpelCom versus your competition?

And I have just a couple of questions on Egypt -- sorry, Algeria and Canada. Can you give us an update on what's happening with -- in Canada? What are your plans there?

And then in terms of Algeria, where do you stand with the talks with the government? And I'm not quite sure I understand the approval for the equipment, is it exceptional news, it's only related to 3G? Or basically all your equipment is -- basically it's going to be 3G, so basically we can assume that this is -- you're good to go to go ahead and upgrade and modernize your network.

Yes, I think, on Russia again, I don't think we are doing anything different from the two main competitors when it comes to the way we bundle, the way we work with the valid services, the way we address data in our bundles. So I don't think we should assume that they are doing things different or smarter than we do. So I think -- first of all, when you analyze the revenue market share on mobile service revenues this year, the declining in our market share is less than what we've seen in the past, we are about to stabilize this now.

And I think the main explanation are the two factors I've been addressing a lot on this call; network quality perception and distribution reach through our mono-brands. And I expect then when we -- now we first of all resolve factually and actually, we need to start working on the perceptions and hopefully we will also see then a further improvement in revenue market share against the two main competitors.

So I -- we strongly believe that we are on a good path and trend in Russia but, again, it's probably taking more time than we'd like. So maybe that's a learning point for all of us that you need to be precise and on-time with your investment and your quality of your base and core product in order to avoid a situation where you need to catch up and change teams at a later stage, to create momentum, is always important in business I think.

If you allow me, I can move to Algeria. Algeria, let's first talk about -- before we go to the 3G license, there is no real new update on Algeria today. But I remind you that we have a two-track plan there, where our priority is to reach an agreement with the Government, and reach a settlement with them, keep Djezzy and develop 3G and the business. So that -- and we are still negotiating, but there is no update today on the status of negotiations.

And then we have also, as I said many times, a plan B, a fallback plan, which is all about litigation. And the way this looks now is that the first hearing will take place in the first half of 2014, and we expect a final decision on that hearing announced by the end of 2014. So if we can't come to an agreement, we will take this to arbitration with the timetable I just described now since we have the fallback. And we think we have a strong legal case in that situation but, again we are still discussing, still negotiating, but no update as of today.

And then I think reading into the 3G licenses, is a provisional license that was granted on October 14. But the final license with relevant coverage obligations will be granted after we pay some fees, and we satisfy conditions in the tender documents, etc., etc. And we expect now the license costs to be approximately $40m. It's going to be valid for 15 years.

And then we have received -- and this is your question -- an exceptional approval from the Bank of Algeria, where we allow -- where we are allowed to make now foreign payments to acquire equipment. So this is exclusively dedicated to 3G technology and, frankly speaking, 3G will be the focus in Algeria as well. Because the minute we start rolling out 3G we can also move, of course, 2G traffic into 3G. So even if we can't import 2G equipment right now, I think this is still good news for the Company.

And then the last question was Canada. In Canada we have entered into the auction process. And we -- that process will come to an end in the middle of January. So right now we are still analyzing that we would like to buy spectrum, how much we would be willing to pay for spectrum and, if we have those options available, everything from still exiting the market, or whether we should take a longer-term view on Canada and try to build a sustainable business there.

So I'm sorry not to be able to be more precise, but we are basically just evaluating these different options against one another, and trying to make a good decision that is in the interests of shareholders. So I think there are good options still available in Canada.

Okay, thank you.

Thank you.

Alexander Balakhnin, Goldman Sachs.

Yes, good afternoon. It's Alex Balakhnin, from Goldman. I have two questions, if I may first. First, can you please update us on what were the KPIs or the tasks you outlined for the new CEO of Russia, and how different they are versus what the previous CEO of Russia had?

And my second question is on cost dynamics, and in your presentation you mentioned that you are reinvesting some cost savings on the Russian market. And my question is would you reckon your cost cutting in the country went a little bit too far? Or you still think that there is reasonable room for the cost cutting in the medium term? Thank you.

Alex, I think, without going into specific KPIs, let's talk more directional on Russia. I asked Anton to really reset the cost base, change the commission structure, get the programs on mono-brand going, upgrade the quality of the technical division, and start catching up on 3G. That was basically what we call fixing the basics. I think he executed that very well and that's why we decided now this fall to take Anton here to take advantage of his qualities in some other projects that we are looking at right now. And then we brought Slobodin in in September.

The marching order for Slobodin is basically that we are pleased with the current -- the revenue market share and subscriber market-share position we have in Russia. So we are not going to chase marginal market-share growth, because what we want to do is really now to take advantage of the catch up of the network quality and make sure now that we have a very, very strong core product that's very -- of highest quality compared to -- equal quality compared to competitors.

And that we want now to move much more our focus on customer experience, customer service, customer quality, meaning that the core product is there and the business now is much more about retaining customers, having the right customer programs for the right segments and make sure that we give them the good data experience that 3G and 4G in Russia, together with smartphones, can offer. And that we get our value proposition and go-to-market concept right, so that's to me now the next stage and the direction for Slobodin. And of course there is s full buy-in from him on this.

When it comes to costs, I think of course we are doing cost exercises all the time. We are looking at operational improvement projects on an ongoing basis. But I think it's difficult to see serious cost cutting on the current base. I think we have to assume that what we gain, probably, will be reinvested in exactly what I described as a high-quality core product, the network and customer programs and new products, and customer offerings. So I wouldn't expect the cost base in Russia to take a further downturn compared to today's level.

Thank you.

Thank you.

That does end our Q&A session. I'd like to turn the call over to Mr. Lunder for any further remarks.

So I -- for me it's just to thank everybody for the continued interest and support of VimpelCom and also, of course, for the participation today in the third-quarter conference call.

I hope really that you can come and be with us on the Analyst and Investor Conference in London at the end of January, and then we hope that we can give you an update and also a view on how we are going to keep developing VimpelCom in the best interests of shareholders and stakeholders.

So with that I wish you all a very good day and, again, thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. [You can] all disconnect. Everyone, have a great day.