VEON Ltd (VEON) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the VimpelCom first-quarter 2014 investor and analyst conference call. (Operator Instructions). As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Gerbrand Nijman, Head of Investor Relations. Please go ahead.

Good afternoon, ladies and gentlemen, and welcome to VimpelCom's analyst and investor conference call to discuss our first-quarter 2014 results. As usual, a formal presentation will be given by Jo Lunder, CEO of VimpelCom, and Andrew Davies, our CFO, after which we will have a Q&A session.

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 expectation to close and derive benefits from the Algeria transaction and subsequent development plans in Algeria, its revised 2014 annual targets and its operational and network development plans in Russia.

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 public filings made by the Company with the SEC, including today's earnings release.

The earnings release and 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 our CEO, Jo Lunder.

Thank you, Gerbrand, and welcome to everybody.

Our first-quarter results were mainly impacted by the operational performance in Russia and the continued market weakness in Italy. Regulatory and governmental actions in Asia and Africa as well as unstable macroeconomic situations in Pakistan and Ukraine also impacted our results.

As a result, the Group recorded an organic decline in service revenues of 4% year on year to $4.8b. We continue to enjoy double-digit mobile data revenue growth across our businesses.

EBITDA decreased organically by 6% year on year, mainly as a result of the decline in revenue and higher infrastructure and distribution costs in Russia. Despite this, our focus on operational excellence and cost control allowed us to deliver a solid EBITDA margin of 41.6%.

It is also worth noting that half of the reported decline in revenue and EBITDA was a result of the devaluation of local currencies to the US dollar.

We ended the quarter with solid overall customer growth across most countries. Our mobile base rose 3% year on year to 218m.

Moving on to recent key development, in April we achieved a major milestone in Algeria with the announced agreement to sell 51% interest in Djezzy to the Algerian National Investment Fund for $2.6b. This agreement allows us to solidify our leadership position in Algeria.

Our partnership with FNI provides us with a strong and stable shareholder structure in Algeria, on which to build and strengthen our operations there.

The total dividends and proceeds due to GTH at closing are expected to amount to $4b, and all proceeds will be used to pay down the outstanding shareholder loans provided by VimpelCom to GTH. The proceeds will be used by VimpelCom to repay existing debt, with estimated annual interest savings of approximately $300m.

Also in April, we announced the successful refinancing of WIND's most expensive debt, lowering annual interest payments by approximately another $300m. During the quarter, we also obtained credit facilities of $2.7b, further strengthening our financial position.

In Pakistan, we were awarded a 3G license for $300m. With this, we now have 3G licenses in all our major markets, and with the exception of possible investments in Ukraine, we don't expect any further investments in licenses this year.

Today, we announced the appointment of Vincenzo Nesci, current Chairman of Djezzy, as Head of Africa and Asia business unit and CEO of GTH. I would like to take the opportunity to thank Ahmed Abou Doma for his contributions to the Company and wish him all the best in his future endeavors.

Lastly, as you've probably seen, we have revised our annual 2014 targets to reflect the headwinds we're facing in our markets, and Andrew will discuss this in more detail shortly.

And then moving on to the performance of our business units, our operational results in Russia were weaker than expected. This is largely related to the cleanup of our revenue base, as well as the investment we making in infrastructure and distribution.

Mobile service revenue declined 3% year on year, affected by the measures taken to reduce unrequested services from content providers. On the positive side, mobile data revenue growth remains strong (technical difficulty).

EBITDA decreased by 9%, due to the lower revenue and higher network and IT costs as a result of the increased demand driven investment, as well as an increase in HR costs due to the expansion in owned monobrand stores. Consequently, EBITDA margin declined to 40.1%.

CapEx grew 71%, due to the increased investments in 3G and 4G to capture the growth in mobile data traffic. We will continue to invest more in our high-speed data networks in 2014, and we expect CapEx to revenue at 22% in Russia for the full year.

As we previously discussed, the Russian business unit is in the second phase of its transformation program. Our management team is building a customer-centric organization which focused on customer excellence.

I am confident that we are on the right track, but I still expect that the pressure on results will continue for the remainder of the year. And on the next slide, I'll provide more details of the actions that we're now currently taking.

And here on slide 7, you can see that we have accelerated the rollout of 3G and 4G and we are now connected almost all our base stations via IP. At the end of the first quarter, we offered 4G services in eight cities, including Moscow Oblast and St. Petersburg, and we're well on track to have 4G available in 20 regions by the end of the summer.

In addition, we the only operator in Moscow offering dual-band 4G in 800 and 2,600 megahertz frequencies, allowing for better capacity.

We are currently number one in data speed in 40% of the cities we're operating in. We are number one in voice quality in the Moscow area, and we're number two in data speed in Moscow area with average download speeds of 3.4 megabits per second.

Indeed, this is a big improvement over the last periods, and I think investments in the high-speed data networks and the catch-up have been successfully executed.

We're also working on enhancing our customer experience, and we're doing so by protecting our customers from unwanted SMS and we are providing transparent content subscriptions. Consequently, our top line was under pressure in the first quarter as we continued to clean up our revenue base.

Our spam policy has changed to filter external SMS traffic, and it includes intelligent spam detection methods. This has resulted in substantial reduction of spam SMS per customer, and we aim to further reduce this.

We're also more transparent with our customers on content and associated costs. During the quarter, we made enhancements to clearly notify our customers through SMS on price of content beforehand. We now provide monthly reminders on content subscriptions, and we have limited the duration of content subscriptions to 90 days.

Finally, we're now providing customers free antivirus protection, with virus database updates and free traffic for those database updates. This is supported by a dedicated customer service line for all Beeline subscribers.

Moving on to slide 9, over the last couple of months we've been working to improve our customer value proposition. For example, we recently introduced the most affordable smartphone available in the market. This was done in combination with our newly launched bundled tariff plans.

The new bundles are simpler and include unlimited on-net usage and larger mobile data packages. In addition, we're lowering roaming tariffs. We have also introduced a new brand proposition with the slogan Simple Convenient For You.

The final component is the improvement of our customer service. We have launched a user friendly online service, My Beeline, providing customers with one-click access to their costs in visually appealing charts.

We also upgraded our self service capabilities with a new app for Android and iOS. This new app allows our customers to manage their tariff plans, while also providing personalized offers and promotions. The app has proven a great success and has been downloaded more than 1.1m times by customers since its launch two months ago.

Finally, our initiatives has reduced inbound calls to our call centers by 17%, and the average waiting time has gone down by 16%. Going forward, we will continue to focus on an improved customer experience.

Moving to Italy, slide 11, WIND continued to outperform the market in the first quarter in a weak environment. The market showed signs of stabilization in the first quarter, with certain operators removing their more aggressive promotions. As a result, gross additions in the market declined materially and churn reduced.

We maintained a stable mobile market share, despite the aggressive promotions of one competitor. Mobile service revenue, excluding the impact of mobile termination rates reductions, declined 8% (sic - see slide 11 "11%"), mainly as a result of competitive pricing pressure in 2013, with the melt-over effect, and the material contraction of SMS revenues in the first quarter. However, mobile broadband revenues was up 24%.

EBITDA in the quarter declined by 7%, with a negative impact over 2013 price competition in the mobile market and decline in fixed line voice usage partly compensated by cost efficiency measures. As a result, EBITDA margin remained stable.

In the first quarter, we continued to expand our HSPA+ network capacity and our investments in 4G, in line with our coverage plan.

In Asia and Africa business unit, slide 12, revenue decreased 1% organically, impacted by regulatory and governmental action in several countries as well as the unstable macro environment in Pakistan. In addition, the Pakistani rupee depreciated against the US dollar.

EBITDA declined organically 3%, due to the reduction in revenue and increased costs related to network investments, leading to a slight margin reduction to 47.1%.

We're investing in high-speed data networks in Algeria and Bangladesh, following the award of the 3G licenses. And we are continuing to modernize our network in Pakistan to enhance data and voice services.

In Algeria, Djezzy maintained its leadership position despite a 2% decrease in revenue in local currencies. Our subscriber base grew 6% to 17.6m. The EBITDA margin declined slightly, but remained strong at 57.4%.

In Pakistan, revenue declined 5% in local currency. And the reported EBITDA was partly mitigated by cost efficiencies, particularly in content costs and interconnect costs.

Finally, in Bangladesh, our subscriber base grew 13% and revenue increased 11%, mainly driven by the improved macroeconomic environment that supported normal business activities following the general election that took place in early January. EBITDA was stable year on year in Bangladesh.

A few words on Algeria plans post settlement. As you know, we expect to close the Algeria transaction by the end of 2014. The agreement with the Algerian government will facilitate and enhance procurement procedures and support the ongoing deployment of the 3G network. We also plan to modernize the existing network, including fulfillment of coverage gaps.

Djezzy has, by the way, maintained its high customer loyalty and continues to have the lowest churn in the market. We expect to launch 3G services during the second quarter, and the rollout is progressing according to plan. We expect to have a 3G national coverage by the end of 2015.

In Ukraine, we continued to execute on our transformation program with a change in our commercial strategy from being what I'll call volume based to value based, with a customer centric approach. The transformation is on track, and it's showing initial positive results with an improving quarter-on-quarter performance.

Mobile service revenues declined 6% year on year, primarily due to lower mobile voice revenue following the strategic decision to switch our customers to bundles last year to secure our leading position going forward.

Mobile data revenues demonstrated continued growth with a 15% increase compared to the same period last year. EBITDA decreased 8%, primarily due to lower mobile voice revenue, leading to an EBITDA margin which remained high at more than 48%.

Slide 15, CIS. In the CIS business unit, we continued to deliver solid results in the first quarter, with 3% organic growth in revenues and 4% organic growth in EBITDA, resulting in a strong 49.6% EBITDA margin.

In Kazakhstan, our market position improved and our service revenue increased by 6% in the quarter, driven by a 3% growth in mobile service revenue and a 39% increase in fixed line service revenue. EBITDA grew 9% as a result of efficiencies delivered by the operational excellence program, leading to an EBITDA margin of 47.8% in Kazakhstan.

Our focus in Uzbekistan is on maintaining our quality of service and further improving our network capacity. Although our first-quarter results were negatively affected by electricity outages, Uzbekistan is currently a two-player market. We expect that to change and that we will return to a three-player market in the second half of this year.

With that, I'll pass the floor to Andrew to discuss the financial performance, and then I'll wrap up in the end before we go to Q&A. Andrew?

Okay. Thank you, Jo, and a warm welcome from me as well.

So, on slide 17, as Jo's already mentioned, our revenue decline in the first quarter was mainly due to the weaker than expected operational performance in Russia and continued market weakness in Italy.

EBITDA decreased organically by 6% year on year to $2.1b, primarily reflecting the revenue decline. However, we maintained an industry leading EBITDA margin of 41.6%, due to our strong focus on cost control through our operational excellence program.

EBIT in the first quarter decreased to $925m, with the revenue led EBITDA decline being partially mitigated by reduced amortization of intangible assets associated with the WIND Telecom acquisition.

The foreign exchange losses were mainly due to the continued devaluation of local currencies in Russia, Ukraine, Kazakhstan and Pakistan.

Our high effective tax rate for the quarter is the result of non-deductible interest expense in Italy and the change in geographical profit mix, with less profit coming from countries with a lower nominal tax rate.

On to cash flows, the year-over-year decline in net cash from operating activities is a result of the EBITDA dilution, with partial mitigation from improved working capital movements on a year-on-year basis.

The investments that we are making in our high-speed data networks to enable future revenue growth resulted in an increase in the net cash used in investing activities, while the reduction in net cash flow from investing activities reflects the fact that we issued -- financing activities, sorry, reflects the fact that we issued $2b of bonds in the first quarter of 2013.

Finally, consistent with the announcement at our January 2014 analyst and investor event, we paid no final dividend in respect of the 2013 financial year.

Moving to slide 19, our financial position remains solid and the maturity profile is substantially improved due to the refinancing of WIND Italy's high-yield bonds and PIK notes, through the issuance of EUR3.8b of new senior notes and the EUR500m cash injection by VimpelCom. This will lower annual interest payments by approximately $300m and will further improve the capital structure of the Group.

Consequently, the average cost of debt for the Group, which was 8.2% for the quarter, will decline by approximately 1 percentage points going forward.

Total gross debt was $27.4b at the end of the first quarter, while net debt decreased marginally to $22.4b. However, due to the lower EBITDA, the net debt to EBITDA ratio increased slightly to 2.4 times at the end of the first quarter. Our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble and the US dollar.

On slide 20, we previously indicated our expectation that 2014 would be a challenging year, and the first-quarter results in some of our key markets reflect a more difficult trading environment. Due to this, we've revised our targets for 2014.

On organic basis, we now expect a low to mid-single digit decline of both revenues and EBITDA, and within that we expect EBITDA to decline at a slightly faster rate than revenues will.

Although we expect to reduce net debt, the net debt to EBITDA ratio itself is expected to be slightly higher due to the decline in EBITDA. As a result, we now expect a ratio of around 2.4 times at the end of the year, and we still expect that CapEx will be approximately 21% of revenue.

And with that, I'll now turn the call back over to Jo.

Thank you, Andrew. Let's turn to the last slide, which is a summary of our results.

This quarter, we have accomplished two important strategic goals with the resolution in Algeria and the refinancing of WIND. However, the first quarter was challenging, as results were impacted by operational performance in Russia and a continued market weakness in Italy.

For the remainder of 2014, we will stay very focused on our strategic initiatives undertaken in each of our business units. Our transformation Phase 2 in Russia remains, what I would say, on track as we focus on improving customer experience, and we will continue to modernize and enhance the network through accelerated investments.

In Italy, we will continue to outperform the market despite an expected weak environment. In Ukraine, we focus on executing our initiatives. We're progressing well and we saw early signs of improvement quarter on quarter. We continue to see solid performance in CIS, and also in Africa and Asia business units.

Financially, we maintain an industry leading EBITDA margin, reflecting our focus on cost control and operational efficiencies. While CapEx has increased due to the accelerated investment, we continue to generate solid cash flows also during this quarter.

With that, I suggest that we open the floor for questions and discuss whatever topics you want to talk about. Operator?

(Operator Instructions). Cesar Tiron, Morgan Stanley.

Yes. Hi. I have two questions. My first question would be to understand a bit better this revenue cleanup that you described in Russia, and maybe you can give us an idea of the Russian revenue trajectory without this cleanup.

The second question would be to really try to see if you can give us some details of what's really happening in Russia. Do you think that some of the customers you're losing are high-end spenders, which explains your underperformance versus the other operators? Do you see some cannibalization of revenues when you move subscribers into bundles? These type of comments would be extremely helpful. Thank you so much.

Yes. Hi, Cesar. It's Jo. I'll talk about the last part of the question, and then Andrew can give you a bit of guidance on the bridge when we talk about cleaning up.

I think what's going on is basically that we have had for years a network in Russia that has been probably of lower quality than the two main competitors, and for that reason I think we have been able to maintain the subscriber base. And as you have seen, we have had higher gross sales, we have had higher churn, but we've been able to stick in there.

I think what's been going on in the last part of 2013 was probably that some customers started to move away from VimpelCom to competitors. That could also be some core subscribers in core markets or core regions. And so, in a way, we're just in time, the way I see it, in creating that parity on network, and I think we're in time, actually.

So you see now in the first quarter that we're still losing subscriber. You see that on the subscriber base. Probably some of these subscribers are also high ARPU subscribers. But at the same time, we also see some underlying trends now, given the fact that our main task now is really to change perception and make sure that customers understand that the network is in many regions best, with the highest speeds. We are now also doing a lot of initiatives to be more transparent in the way we work with them.

So I'm very -- that's why I'm saying I'm confident that we're doing the right thing. I think we were probably a little late in closing the gap on the network. We were a little late in reacting to reality. I think we have reacted to reality. I think we have closed. I think we're doing the right thing.

But I think, unfortunately, that we will see a bit of a bumpy road also in 2014, until we have changed perception and shown customers that this is the new Beeline and this is the network that in many regions are on par, in other areas probably even better.

So I think that that's the general dynamic ongoing right now. And frankly speaking, we see some early signs of improvement on net promoter score and on traffic pattern and stuff like that, but that's not details that is being disclosed. So I'll just make that a general comment, instead of a specific one.

And then on the first part of the question, maybe Andrew can talk a bit about what this cleanup means.

Yes. Sure. Thank you, Jo. So, Cesar, this is not a uniquely Russian phenomenon. You see it in most mobile markets, as they develop and mature, and I've certainly seen it elsewhere.

And it basically involves third-party service providers who get access to the customer database, because customer numbers in general are made public. They would send spam type of SMS messages to people with a one-click type of subscription, in order to use whatever kind of service that they are providing. And the customer doesn't realize that, actually, this isn't just a one-time event but they're actually subscribing on a regular, whether it's a weekly or a monthly, basis to this service. And the service provider gets a fairly decent annuity as a result.

Clearly, the disclosures around this by the service provider are not particularly transparent, and it ends up in resulting in quite a significant amount of churn for us. It is a very quantifiable customer dissatisfier for us.

And so we've taken the decision that we're going to put much greater preventative controls within our databases and our systems, so that customers aren't prone to these sorts of offers going forward.

We've pretty much done most of the cleanup that we need to in this regard. Clearly, we need to be vigilant going forward, but I don't think you'll see the impact from this getting worse from here on. But what you will see is a continuation of this as we go through the rest of 2014, until you get to the overlapping impact.

But offsetting that, given that we should be dissatisfying our customers less and less, this should also help to drive some customer growth as we get to the second half of the year.

And, Andrew, can you please say how much this cleanup impacted the Russian revenues, roughly?

In rubles, it's roughly, roughly, RUB1b.

Thank you so much.

Alexei Gogolev, JPMorgan.

Hello. I have two questions related to Italy. Can you please elaborate on why you had a record number of net subscriber losses in the first quarter, which came in despite relatively improved pricing position versus market leader? There was obviously some -- were there any specific one-offs in this quarter? I think, Jo, you've mentioned some SMS, but it would be great to hear more details about it.

And how will this subscriber loses impact your pricing strategy going forward? If I'm not mistaken, your current promotions expire this weekend, right?

And the second -- sorry. I'll just ask the second question quickly. The second question's also about Italy and it's about CapEx. It's down quite significantly. Is there any expectation in your mind of some sort of consolidation in Italy, and what's driving that year-on-year decline in CapEx?

And also, what is your current level of 4G coverage in Italy, and what are your yearend goals, if you have any, for Italy? Thank you.

Okay. It's Jo. Andrew will speak about the CapEx, and then we'll take the 4G coverage at the end. But let's talk about -- your first question was really about dynamics on the subscriber base in the first quarter.

First of all, I think -- let me take one step back, because what you see and what we probably also underestimated in the beginning of the year when it came to the Italian market was actually the melt-over effect from the price war that took place during the summer of 2013.

There was a lot of subscribers moving from normal bundles to the low bundles offered during those summer months, and most of them were still sitting with the operators entering into 2014.

So the estimate that was made in the beginning of the year didn't fully take into account the melt-over effect, as I said, from that price competition. So that's partly why, at least, our estimates on Italy is slightly weaker now for 2014 than it was four, five months ago.

If you look at the first quarter, it's actually -- on our side, we have a stable subscriber base. We entered the quarter more or less on the same level as we left it. We saw also a dynamic in the quarter with less aggressive price competition, that gross additions in the market declined a lot, and also that churn were reduced.

So, in a way, the overall dynamic in the first quarter was quite good, actually, in terms of the quarter isolated, but as I said, total revenues are down as a result of things that happened in 2013.

Andrew can maybe chip in on the Italian CapEx.

I'll take the CapEx, yes. So I think the first-quarter number, I think there's just a little bit of natural oscillation there. It's not reduced year on year, because we've got an eye on anything of a structural nature.

On a full-year basis, we expect CapEx to be stable year on year, and within that we expect that from a 4G/LTE perspective we will cover at least the 17 largest cities by the end of the year and we'll be around about a 20% population coverage.

Thank you.

Dalibor Vavruska, Citigroup.

Hello. Good afternoon. I apologize. I may have missed the part of this previous question. But just on CapEx, you're reducing your guidance in terms of revenue and EBITDA, but you maintaining this 22% for Russia. Does it mean that you're going to spend less than you did before?

And also, when you were giving this guidance in January, I suppose the ruble rate was slightly stronger than it is now. So does it mean that actually you're going to spend less, you're going to invest less on this basis?

And if so, how do you see this in context of competitors who after your Investor Day came out with relatively aggressive CapEx guidance, and some of them are saying that they are not going to reflect the revenue -- the weaker revenue and the CapEx?

In a way, they are saying that their CapEx is -- as a percentage of revenue may go up, actually, compared to these expectations from couple of weeks ago. This is one question.

The second question is I'm just wondering, in terms of the -- how the management incentive works in the regional level. So, for example, when you get a new regional head for a specific country, how long would you give them to actually show some performance turnaround? At which point are you going to get worried if that doesn't come? Thank you.

Dalibor, it?s Jo. I'll take the last part and then Andrew can speak about the guidance on CapEx and our thinking around that.

Well, we have ordinary -- I would say normal incentive systems for senior management. I think you will find them in most companies. It's a base salary. It's an annual bonus based on budget and things we want to achieve in the year. And then you have an LTI, a long-term incentive that normally is based on the next three years in terms of strategic plan and long-term objective.

So it's 100% aligned with shareholder interests, whether they are strategic shareholders or public shareholders. So there is no disconnect between our strategy, our targets, our desire to create value and management incentives.

And specifically on Asia/Africa that we announced today, I think Ahmed has been with us for three years now. He's done a good job. He's built down the headquarter in Cairo from 250 people to 30 people. He's built a very close cooperating model with Amsterdam.

I think for him it was important that we finally were able to sign the Algerian deal. I think he feels that we're now entering into a next stage of development, with focus on 3G rollout in all three markets. We've also made decisions on the smaller assets and probably also clarity on -- that Canada is not a prioritized market for us.

So I think he feels that in a way the job was done and that the next stage now will include other types of challenges, and for that reason he is moving on. And Vincenzo, that is being appointed, knows the Company very well. He's been instrumental in getting the deal in Algeria done, long experience for the telecomm industry, and taking on a role as CEO in GTH with more of a financial holding, with close cooperation with VimpelCom Amsterdam on the operational side.

So I think this appointment was very logical and easy to explain. And when it comes to incentives, I think we're quite standard, actually, and fully aligned with shareholders.

Yes. So, addressing the first part of your question, Dalibor, I think without making this overly complicated, the first thing to remember is the guidance that we gave at the start of the year, and then these revised targets are all on, if you like, an organic basis, so constant currency.

So, with regard to the CapEx to revenue ratio, yes, clearly, if revenues we're now saying are going to be a slight year-on-year decline, clearly that is going to mean that the absolute amount that we spend on CapEx is going to slightly decline by roughly that same ratio as well.

However, we are confident that we can do so and still deliver the same volume and scale of network rollout and investment in high-speed networks as we expected to be able to do at the start of the year, and the reduction in CapEx will come from non-network related investments.

And then, just to again come back to this organic thing, just to remind you that on a reported basis, therefore, if you continue to see currency deterioration throughout the year, you will see the reported CapEx to revenue ratio being slightly higher than the 21%, because a lot -- quite a bit of our CapEx across the Group is still denominated in dollars, regardless of where it gets spent.

Okay. Thank you. I really appreciate it. Thank you.

Thank you.

Alexander Balakhnin, Goldman Sachs.

Yes. Good afternoon. I have two questions, if I may. First is on Russia, and I just wanted to get probably your thoughts on what do you think is the time lag between the improvement in the net promoter score, which you're trying to achieve, and the positive uptick in revenues.

If there is any time lag between those two events, from your industry experience and from what you see, what do you think this time lag may be?

And my second question is on Italy. Well, it's evident that the market was shrinking quite substantially during the first quarter, but in the same time it also seems like industry participants are able to [broaden ] (inaudible) with the cost cutting, so margins for you and your competitors are largely stable year on year.

My question is do you see further scope for the cost cutting in Italy, and don't you think it may suggest the potential for further market contraction? So, your thinking on that may be also very helpful. Thank you.

Hi. On Russia, I think this is not, of course, exact science, and many things might work in our favor and against us. So please see this as more high-level guidance than precise guidance.

But I think personally that you've seen our net promoter score starting to show some better results in Russia, because we see signs of that, as the result of everything we've done with customers and with the network over the last three to four months.

I think first you will see some changes in the subscriber base as a result of that, with less churn and maybe more subscribers coming onto our networks, and then of course that should melt into revenues.

But of course, then again it's the quality of the subscribers, that we are able to keep the high ARPU and not just add low ARPU. But if we also assume that our actions is stimulating high ARPU subscribers to stay with us, given the fact that we have now a good network in Moscow and the big cities, I would think a couple of quarters.

So when you see signs of improvement in the first quarter, you should see revenues being affected in a positive way a couple of quarters later.

So I think that's what I'm saying, that 2014 might be another difficult year for us in Russia, but still I expect to see improved underlying trends that should start translating into better performance eventually at the end of the year.

Okay. So with respect to the second part of your questions on Italy, first of all, I'm not sure I agree with one of the statements you've made. I think we've shown a better ability to take costs out than certain of our other competitors have, and we've increased our EBITDA market share over the last few quarters.

And one of our competitors was yet to report for this quarter, but certainly, based on their last reporting, we had a better margin performance than they did, in spite of the fact that they had significantly more scale.

So I think we're doing better than average on cost control there. Clearly, with any cost control program you go after the low-hanging fruit first, and we've done that, pretty much. But with a degree of science and process reengineering there's probably some more business transformation and therefore cost reduction to achieve yet, but I would also divorce that from pricing.

I think you've seen evidence in the last six months that pricing in the marketplace has been more rational and more disciplined, and I would expect that to continue.

With regards to the overall market, yes, because of what happened doing the pricing last year, you will see an overall market contraction continuing throughout 2014. But we expect to see a lower rate of contraction in the second half of the year than we will do in the first half of the year.

So you don't see that the potential to cut further costs may be reinvested in the pricing by, not necessarily you, and you obviously do a great job with building market share and EBITDA, but by some of your competitors? Do you think that may be the case late in the year?

Well, I'm not going to hypothesize in public here about what my customers -- or my competitors' future reactions are going to be. All I'm saying is the market has achieved a greater degree of pricing rationale being disciplined in the last six months and we expect that to continue.

Okay, move on to the next question, please?

Thank you.

Alex Wright, UBS.

Yes. Thank you. So my first quarter relates to the new tariff plans and the smartphone also that you highlight that have been launched in Russia.

I wondered if you could talk about what you think the impact of the new tariff plans may be on effective pricing, both of voice and data, whether you expect them to have a significant impact and whether you think the overall impact should be improved customer trends in the longer run, as you've explained, but perhaps weaker revenue -- weaker ARPU and weaker revenue per minute trends.

And regarding the smartphones, priced at around $15, can you talk about how the uptake of that is going, what sort of subsidy then is in place there, what sort of impact we may see on the margin from that?

And then my other question is on an unrelated topic, concerning the shareholder loan to Global Telecom, once the Djezzy transaction is closed and the $4b of shareholder loan is paid down.

Can you comment on the interest rate that may be applied to the remaining portion of the shareholder loan, and whether you expect to take that cash interest out of Global Telecom or to roll it up, as has been the case in the past? Thank you.

Okay. So let me take the second question first, on the shareholder loan into GTH. So the situation we're in right now is that the -- we're prepared to extend the shareholder loan once it matures in a few days' time. We need that to be approved at the GTH AGM, which has yet to be organized, and we're going to put the maturity into a standstill period until we get that approval.

When we get to closing the Algeria transaction, the $4b of cash proceeds will be used to repay a substantial portion of that loan. Assuming that the extension of the loan gets approval at the AGM, it will -- the balance on the loan by -- say if we assume an end of September closing, would still be about $1.25b. And it will continue to accrue interest at the new rate, which would be somewhere around 13%. And again, that will continue to be rolled up into the loan.

Okay. Very good. On the first part related to pricing, first of all, let me just confirm that there is no handset subsidies offered in Russia. So there is no message, or hidden message, in what we talked about earlier today.

When you buy a smartphone, you buy it together with a bundle. And what we've done is basically to make the bundle more attractive with [all-net] traffic and data package, etc., that has been welcomed in the market. And we also have some interesting new things coming up over the next couple of months. So this is all related to more user friendly bundles and more attractive bundles.

And I think we have been extremely disciplined in the way we've been working in the market, not aggressively. You've seen the price tool to compensate for a weaker network and other areas we had to catch up, and we don't have plans for doing that going forward either.

We think we can compete very effectively now with a strong network and a good distribution network, with innovative products, bundles, low price, smartphones, etc. So I think we're having the right plans and philosophy related to that.

Thank you.

Thank you.

Vivek Khanna, Deutsche Bank.

Hi. Good afternoon, everyone. Can you hear me okay?

Yes.

Yes.

Okay. Fantastic. Sorry, just a quick question on Italy. Now, I remember at the Investor Day you did tell us to be patient and that over time that you'd be able to create value out of that asset. So congratulations on the refinancing.

I guess my question is more on potential, on how you see that asset fitting within the portfolio going forward. I see that with regard to Canada, which I appreciate clearly is a much smaller operation and of different cash flow profile, you are potentially thinking about taking a smaller stake in a larger entity.

And with regards to Italy, now that the balance sheet is largely taken care of and you have no stress from that perspective, I'm just wondering how you're thinking potentially about creating value. Is there a route to potentially own a minority stake again in a larger entity in Italy, or when you think about creating value you're thinking about either still either owning 100% of the asset or not owning the asset at all? Or is there an in between, in order to create value, please? Thank you.

Okay. Vivek, hi. This is Jo. Thank you. I think our thinking on Italy hasn't changed all that much, actually, because we have a very good company in Italy. We have a very strong management team there. We have outperformed the market and competitors for years, as you all know by now. With the refinancing we did, we also strengthened our position financially, not only operationally.

So what we've done in Italy now is just to make sure that we have a position that is strong enough to stand on our own feet and compete on a standalone basis, if necessary. So that's the starting point. And I think it's really important to go into any types of discussions out of strength.

So everything you've seen that we've been doing in Italy over the last six to 12 months I think has been to create strength. So that's the starting point.

And then we've said many times that our general industry view and our general philosophy is that we are in favor of in-market consolidations. We are in favor of sharing arrangements, whether it's towers, networks, anything. And I think it's going to be very hard for the industry to have four, five, six players in any market to roll out high-speed, high-quality data networks. And for that reason, this is something we're actively working on and actively exploring.

But I think also, at the same time, this is a long-term investment horizon and investors in telecomm understand that. And we don't need to rush into anything. We can take a long-term view and make sure that we protect market positions with values long term.

And for that reason, we have right now a strong company in Italy. We have a strong financial position after the refinancing. We are generally in favor of discussing consolidations and sharing, but we're going to do it out of strength, not out of weakness.

And that's basically where we are right now. And we can't comment really on specific conversations or negotiations, for obvious reasons, but we think there are value to be created in Italy. We are quite certain about that.

Can I just amplify on that as well, Jo? So, as Vivek pointed out, we've strengthened the balance sheet in the last quarter, and we've -- the capital structure is much more stable than it was, but there is an opportunity to potentially strengthen it even further.

We still have secured notes out there which have a cost or a coupon associated with them which are probably higher than current market rates, and so we might look at doing something about that in the near future.

However, there's a judgment call to be made because I think as most people would recognize, those secured notes have a pretty material call premium. So, again, consistent with our long-term view, we've got an opportunity to strengthen the balance sheet even further, but we need to make a judgment call on how long we think these good market conditions will run.

Excellent. Thank you very much for your answers.

Thank you, Vivek.

Ivan Kim, VTB Capital.

Yes. Good afternoon. Two questions, please. One, on Russia, so despite the significant efforts that you were doing, the churn has actually increased over the last two quarters to 17%, 18% per quarter, and there were like more than 3 million net subscriber disconnections.

So what are the potential ways to reduce this fairly efficiently, with no probably harmful effect on the profitability? Because it looks like the measures that you've taken so far didn't really bear fruit, and I understand the perception issue, but still.

And then secondly, on Italy, from what I understand, Hutchison remains -- keeps much lower pricing than the industry. Do you have a view on why it doesn't lead to the market share gain and whether they might do something that would change that? Thank you.

Okay. So I'll take the first part of that question. So with regard to Russia, you're right. We have seen in the last couple of quarters an elevated churn rate compared to prior periods. And there's a number of customer dissatisfiers that we have. I talked about one of them already, with the SMSs that customers get.

But more fundamentally than that, the actions that we've outlined in the presentation about improving the customer experience and more transparent billing practices and things of that nature will improve churn, but there will be a lag between turning around the NPS scores and that reduction in churn actually happening.

We are looking at other things as well, putting our distribution channel on more of a revenue share type base, to incentivize the right churn behaviors, monitoring of dealer performance and various other customer based management activities, all of which, as I said, is designed to reduce churn quite significantly.

So, with that, I'll turn back to Jo, on Italy.

Yes, on Italy. I think on Italy it's -- we see actually that Hutch is gaining market share, so that's clearly a trend and a dynamic that is taking place. It's difficult for me to really report on their behalf, but we think that they're gaining cost conscious subscribers, or low ARPU subscribers.

We also might think that due to their network quality, churn is again high, so even a little bit is gaining market share by churn due to network quality. So maybe it's not the right dynamic. But for the time being, they're clearly gaining market share in the Italian market.

With that, we have time for one more question.

Olga Bystrova, Credit Suisse.

Yes. Good afternoon. I wanted to ask quickly on this Canada issue. You're saying today that you might consider swapping stake into a larger operator. Can you maybe elaborate a little bit on first of all how far forward this idea is, which -- is it limited to Canadian market only or are we looking at developed or maybe even emerging markets here, and what level of control or lack of such you will be willing to accept?

And maybe a follow up, apologies. I didn't expect to be at the last -- at the end of the queue, but a follow up on your guidance. Given your performance in the first quarter and what you're expecting for the full year, suggests to me that you are basically expecting improvement in operations in Russia, Ukraine and Italy, yet saying that Russia and Italy will be challenging through the year and Ukraine, we still don't know what -- how things will develop there.

How confident you are you will be able to actually improve trends in the second half in these key markets? Thank you.

I'll pick up Canada, and then I think Andrew can wrap up with the message on guidance.

So I think let's not read too much into this statement on Canada when it comes to general terms. I don't think this should be interpreted as if we're ready to take minority positions in a variety of markets.

What's going on in Canada I think is very simple. We decided not to participate in the 700 auction early in the year, because there was no clear path to control. At the same time, we have written off $1.5b of investments in Canada over the last couple of years.

And for that reason, it's hard to understand that -- or let me put it differently. We have no intention really to put any more funding into Canada at this point in time, which means that we have an asset there right now with no 700 spectrum but with a customer base, with employees, with a network.

For that reason, we are now having different discussions with different players in that market to either sell it or to combine it with others and take a smaller position in a larger entity. So that basically is the background and the thinking in Canada.

If we could have had a path to control, we might have viewed things different, but that's not the case. And for that reason, we have shaped our position with respect to what we believe is the right thing to do there.

And I don't think this necessarily needs to be used as a general view on other markets when it comes to consolidation of positions.

Okay. Thanks, Jo. And with respect to the guidance question, so I just want to slightly correct one of the statements that you made, first of all.

So, implied within the guidance is the notion that we will have a lower rate of contraction from here on, and in particularly in the second half of the year, than we saw in the first quarter. So it is a, if you like, a relative improvement. When you look at year-on-year dilutions, I wouldn't describe it as a year-on-year improvement in revenue and margins in the second half of the year, which I think you may have implied.

I think if you look at the three large markets, Ukraine, so clearly we're not crystal ball gazing here, and implied within the guidance is that the macro situation there pretty much remains static and doesn't get either materially worse or materially better. We already see good evidence that the reload transformation program in Ukraine is working, and we expect that to continue to develop through the remainder of 2014.

With regard to Italy, in the first quarter we've suffered from the MTR reductions, which clearly won't have as much of an impact on the balance of the year. And also, the impact of the intense price competition, which was particularly acute in the summer and early autumn of 2013, will by its nature have an overlapping impact.

So by the time you get to the back half of 2014, in particular Q4, the year-on-year impact of that will be nowhere near as severe as it's been in first quarter.

And then, with regard to Russia, as we've said, we're taking a lot of customer centric actions to turn around that business in the second phase of the transformation, to build upon the investment in the infrastructure and the distribution that we did in the first phase of the transformation.

And we expect that to start paying dividends in the second half of the year and, again, for that to result in there being a lower year-on-year revenue reduction in particular than we've seen in the first quarter.

Thank you. On guidance, I did mean relative improvement, relative trends, not in absolute terms.

Okay. Good.

Thank you.

Thank you, Olga.

Very good. Thank you, Olga. I think that -- okay, go on, operator.

Thank you. That ends the Q&A session for today. I would now like to turn the call back to Jo Lunder for any further remarks.

Thank you. Sorry to have been a little quick there. First of all, thank you for all the good questions and the interest in VimpelCom and participating on the call.

We've expressed that we're not pleased with some of the performance, and we've also expressed today that we have some markets that is difficult right now. But I think still this is a long-term industry in its investment cycles, and we need now to be very disciplined and focused on what we believe in and not be jumpy.

So we've tried to express our views today. We will continue to focus on the principles we've outlined today.

And if you have any questions, please contact Investor Relations. I am sure I will see some of you over the next months as well. And the next earnings call we going to have is on August 6, and I hope to talk to all of you either before that and on that call.

So with that, I suggest you close the call and I wish everybody a good day. Thank you.

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