VEON Ltd (VEON) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to VimpelCom second-quarter 2014 investor analyst call. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Gerbrand Nijman. Sir, you may begin.

Thank you, Nora. Good afternoon, ladies and gentlemen, and welcome to VimpelCom's analyst and investor conference call to discuss our second-quarter 2014 results.

I'm joined here in Amsterdam by Jo Lunder, our CEO, and Andrew Davies, our CFO. After our presentation, we will be happy to take your questions.

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, anticipated interest cost savings, its 2014 annual targets, its operation and network development plans and anticipated benefits from network investments.

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.

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 Jo Lunder.

Thank you, Gerbrand, and everyone welcome from me as well.

Our results in the second quarter were negatively impacted by four main factors; first, our operational performance in Russia, Ukraine and Pakistan; second, the macroeconomic situation in Russia and Ukraine; third, the rolling effect from the intense price competition in Italy last year; and fourth, Algeria, where our competitors launched 3G some six months earlier than we did.

The impact of these factors on our organic year-over-year results were partially compensated by continued double-digit growth in mobile data revenue across our businesses. However, in the quarter the Group recorded an organic decline in service revenue of 5%, to $4.9b. We added 5m mobile subscribers in the quarter, reaching 221m.

EBITDA decreased organically by 9%, to $2.1b, due to the decline in revenue, together with higher infrastructure and distribution costs as we continue investing in high-quality networks across our operations. Despite these challenges, our EBITDA margin remained at a solid 41%, reflecting our continued focus on operational excellence and cost control.

Finally, we continued to generate resilient cash flows.

Moving on to slide 4, key recent developments. As we already disclosed in April, we achieved a major milestone in Algeria, with the announced agreement with the Algerian National Investment Fund, DFNI. This partnership provides us with a strong and stable shareholder structure in Algeria, on which to build and strengthen our operations. We are on track to close the transaction by the end of this year.

During April and July we successfully refinanced WIND's debt, resulting in substantial interest savings, an improved capital structure and enhanced maturity profile, all of which will facilitate our deleveraging trajectory.

Also in July, we successfully launched 3G services in two of our largest markets, Algeria and Pakistan. This will strengthen our value proposition to our customers in both of these important growth markets and support continued mobile data growth.

We also further strengthened our management team with several notable appointments. Rene Schuster from Telefonica Germany has joined us as our Group Chief Operating Officer, Peter Chernyshov as CEO of Kyivstar in Ukraine. We have also appointed Jeffrey Hedberg, CEO of Mobilink in Pakistan. And I would like to add a fourth appointment, Sergey Rumyantsev, which is going to head all our distribution activities in Russia.

In addition to this, on our shareholder meeting we elected a new supervisory board on July 28 which includes two new members, Sir Julian Horn-Smith and Trond Westlie.

Lastly, today, we confirm our 2014 targets, which Andrew will address in more detail.

Moving on to slide 5, we expect our recent deal in Algeria and the refinancing of WIND's debt to deliver significant interest savings going forward, and this will enhance our earnings profile in the future. We completed the second step of the refinancing of WIND in July, an important transaction that in combination with the refinancing we completed back in April will result in approximately $0.4b in annual interest savings.

In Algeria, once the transaction has been completed, this will generate $4b in net proceeds to VimpelCom. As you know, we intend to use these proceeds to repay existing debt, enabling us to reduce our annual interest expense by approximately $0.3b.

These two actions combined will generate annualized net income accretion of $0.5b from 2015 onwards, and for this year alone the benefit will be more than $200m.

I'll now move on to discussing the business units' performance, starting with Russia on slide 7.

As we expected, our second-quarter operational results in Russia were pressurized on year-over-year basis by actions that we have taken to strengthen the business, in line with our strategy. Mobile service revenue declined 5%, affected by the measures taken to reduce unrequested services from content providers to Beeline customers, which improved long-term customer experience and will be a future benefit to churn. Mobile data revenue growth remained strong, increasing 17% over the year.

EBITDA decreased by 10% due to lower revenue, together with higher network and IT costs as a result of our increased demand-driven investments, as well as an increase in HR costs due to the expansion in owned monobrand stores. Consequently, EBITDA margin declined to 41.4%.

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

Moving to slide 8, we have accelerated the rollout of 3G and 4G networks, and we have now connected almost all our base stations via IP. Today, we offer 4G services in 22 regions, which is above our previously communicated target of 20 regions by the end of the summer.

As a result of the investments in improved quality of our networks, we are now number one or number two in mobile data speed in 75% of the country. And in Moscow we are number one in voice quality and number two in mobile data speed.

In addition to focusing on network quality, we are also focusing on our commercial proposition, with affordable smartphones, attractive and transparent bundles and convenient and innovative data offerings.

And as you can see on slide 9, our actions to improve customer experience in Russia resulted in positive developments in the second quarter compared to the first. So when we compare quarter on quarter, service revenue increased 4% and we added 1.3m customers in the quarter, with a substantially lower proportion of migrants than we had last year.

The gap in that promoter score, which is a measurement for customer satisfaction against competitors, has been reduced, mainly as a result of improved transparency on tariffs, network quality and the services provided. This resulted also in the churn being at its lowest level for more than three years.

And finally, the investments in high-speed data networks and distribution also resulted in an improved market position in mobile data compared to the previous quarters.

As we previously discussed, the Russian business unit is in the second phase of its transformation program. We have to take a long-term view. We are building high-quality networks and a customer-centric organization focused on customer excellence, and I'm confident that we are doing the right thing and that we are on track to implement the necessary changes.

That being said, we expect that the pressure on results on a year-over-year basis will continue for the remainder of the year, but with an improving trend in the fourth quarter of this year.

Now moving to Italy, slide 10. The environment remains weak in Italy, but WIND continued to outperform the market, increasing our market share, focusing on customer excellence instead of pricing.

We are seeing some signs of stabilization in the competitive environment. As a result, gross additions in the market declined materially in the second quarter, leading to a positive reduction in churn to its lowest level in two years.

Service revenues declined 10%, driven by primarily the competitive pricing pressure in 2013 and a further contraction of SMS revenue this quarter. However, mobile data revenue was up 18%. Despite the top-line pressure, EBITDA margin improved to 38%, as a result of strong focus on operational excellence and also good cost management and cost-reduction activities.

In the second quarter, we continued to expand our network capacity and our investment in 4G, and we plan now to reach more than 30% population coverage by the end of this year.

Overall, we expect the market in Italy to remain challenging, but also here with an improving trend in the second half of the year.

On slide 11, the Africa and Asia business unit, the revenues in US dollars decreased 4% organically year over year, driven by a slowdown in Algeria and Pakistan. On the positive side, the mobile customer base grew by 5m, supported by strong additions in Bangladesh and solid growth in Algeria and Pakistan.

EBITDA declined organically 11%, due to the reduction in revenue and increased costs related to significant network investments. However, our EBITDA margin was solid at 44.6%. There is a sharp increase in CapEx, resulting from the rollout of 3G in Algeria, Bangladesh and Pakistan, consistent with our dedication to now upgrading our network to the highest standards.

On slide 12, we can have a brief look at Algeria. Djezzy maintained its leadership position, despite a 6% decrease in revenue in local currencies. As the competitors already launched 3G in January, approximately six months earlier than we did, our customer base grew 4% to 7.5m. EBITDA margin declined but remained strong at 54.5%.

We have been able to roll out 3G in the first half of the year, and consequently we launched services in July in seven main provinces covering 40% of the market. Given our attractive 3G services, to which already more than 100,000 customers subscribed in the first month of launch, we expect to stabilize our leading market position in the second half of this year. We plan to offer 3G in 19 provinces by the end of this year, and to have national coverage at the end of next year.

Despite the difficult environment in which we have been operating for the last years, we have been able to provide good customer service, and we remain the preferred choice for Algerians.

In Bangladesh, slide 13, we have successfully turned the business around and mobile service revenue increased 8% in the second quarter, mostly driven by a strong 10% growth in customers to almost 30m. EBITDA also increased 12%, due to higher revenue and effective cost control.

Following the launch of 3G services in October last year, we now cover all 64 regions. We offer attractive bundles and smartphones and, with smartphone penetration currently at 2%, there is a high growth potential for mobile data in Bangladesh.

We also experience growth from mobile financial services. That includes mobile money transfers and payments. We expect also this to be an important growth driver in the future.

Pakistan, slide 14. Revenues declined 8% in local currency and EBITDA fell 16%, impacted by higher customer acquisition costs as a result of a 4% increase in the customer base to almost 39m.

Although the market remains challenging from a political and macroeconomic point of view, our main problem in Pakistan is our underperformance. This is due to the delay in network modernization, as a result of a reconfiguration following the sharp increase in market demand.

We will continue to invest in our high-speed data network, in addition to completing the network modernization, which should be finished by the first quarter of 2015. This will provide us with sufficient capacity in the network and improve our capability to offer attractive bundles.

We recently appointed Jeffrey Hedberg as CEO of this business unit. He has a very strong operational telecom experience, significantly in emerging markets. We also replaced the CTO in Pakistan earlier in this year.

Slide 15, Ukraine. We continued to execute on our transformation program, in what remains a difficult market. As a consequence of the transformation, with focus on customer experience, we improved our net promoter score and we reduced our churn.

Mobile service revenue declined 4% year on year, mainly due to lower voice and value-added services revenue, caused by a more conservative spending behavior by consumers. Mobile data revenue demonstrated continued growth, with an 11% increase despite the lack of 3G in Ukraine.

EBITDA decreased 12%, primarily due to lower revenue, the doubling of frequency fees and higher utility costs. EBITDA margin remained high at more than 44.5%.

All in all, Ukraine continued to deliver a resilient cash flow, facilitating a regular upstream of dividends to the Group. Considering the environment, we expect the market to remain challenging at least for the remainder of this year.

Now, turning to slide 16 and the solid results of the CIS business units. Revenue and EBITDA both grew 5% on an organic basis, resulting in a strong EBITDA margin of 49.8%. The mobile customer base grew 6% year over year, and CapEx declined substantially.

I'll discuss Kazakhstan separately on the next slide, but first let me say a few words about Uzbekistan.

Mobile service revenue increased 7%, driven by a 2% growth in the subscriber base. As you know, Uzbekistan is currently a two-player market, but we expect that it will return to a three-player market in the last quarter of this year.

On slide 17, you can see Kazakhstan and Beeline's continued successful turnaround and improved market position against its main peers, despite the highly competitive market. The turnaround there is led by our new CEO, an appointment we did 15 months ago, used to be the Chief Commercial Officer of Kyivstar in Ukraine.

This turnaround has been achieved through the introduction of bundled tariff plans with a best value proposition. We have improved the network quality and we have also built a very effective distribution strategy, coupled with a very good cost control of the business. We have also enhanced the 3G coverage and we now cover 60% of the population.

Service revenue increased 8% in the quarter and EBITDA grew 10%, leading to an EBITDA margin of 48.7%. I think probably Kazakhstan is the best-performing unit in our Group in the second quarter.

I'll now pass the floor to Andrew to discuss the Group financial performance.

Thank you, Jo, and welcome to all of you from me as well.

So, on slide 19, almost half of the decline in reported revenue is related to unfavorable movements of the ruble, Ukrainian hryvnia and Kazakh tenge against the US dollar. In organic terms, revenue experienced a 6% year-on-year decline, mainly due to underperformance and market slowdown in Russia, Ukraine and Pakistan, continued market weakness in Italy and the delayed 3G launch in Algeria which Jo has already mentioned.

EBITDA decreased organically by 9% year on year to $2.1b, principally due to higher infrastructure and distribution costs in Russia, increased frequency and utility costs in Ukraine and 3G investments in Algeria, Pakistan and Bangladesh. However, we maintained an industry-leading EBITDA margin of 41%, due to our strong focus on cost control through our various operational excellence programs.

Second-quarter EBIT decreased to $938m, with a revenue-led EBITDA decline being partially mitigated by reduced amortization of intangible assets associated with the WIND Telecom acquisition.

Our high effective tax rate in the quarter was primarily the result of non-deductible interest expenses in Italy and deferred tax costs related to the refinancing of WIND. However, the underlying cash tax rate remains in the mid-30% range and showed a marginal year-on-year improvement, as demonstrated by the lower taxes paid compared to the second quarter of last year.

Cash flow remains resilient. The year-over-year decline in net cash from operating activities is a result of both the EBITDA decline and the cost of the WIND refinancing, partially mitigated by 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 and the acquisition of a 3G license for $300m in Pakistan resulted in an increase year on year in the net cash used in investing activities.

Finally, the increase in net cash from financing activities is the result of the use of credit facilities during the second quarter of this year.

So, moving on to slide 21, our funding and liquidity position remains extremely solid, as a result of the nearly $20b of financing transactions that we have completed so far in 2014.

The maturity profile has substantially improved, due mainly to the refinancing of WIND Italy's debt in April and July. And maturity schedule, as presented here, is pro forma for that second July element of the refinancing. In aggregate, this WIND Italy refinancing will lower annual interest payments by more than $0.4b, and clearly improves the capital structure of the Group.

Consequently, the average cost of debt, which was 7.1% in the second quarter, already down substantially from 8.2% in the first quarter, will decline further to approximately 6.5% once the full benefit of the refinancing flows through.

Total gross debt was $29b at the end of the second quarter, while net debt increased by 4% quarter on quarter to $23.2b. Given that our trailing 12-month EBITDA also reduced partially, our net debt to EBITDA ratio increased marginally to 2.6 times at the end of the second quarter.

Gross debt to EBITDA was 3.3 times at the end of the quarter, but will decline to 2.9 times after the debt repayment from the net proceeds from the Algeria deal. And, as Jo has already noted, this will further reduce our annual interest costs by about $0.3b.

Finally, our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble and US dollar.

Moving on to targets, although the first half of 2014 at constant currency was slightly below our annual targets, we expect, as Jo has already mentioned, more favorable year-on-year comparatives for Russia and Italy in the second half of the year. Consequently, we still expect to be able to achieve our 2014 targets, albeit with EBITDA decline at the higher end of the range.

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

Thank you, Andrew. There's one slide left now, and then we'll move to questions. Let me try to summarize what we've said and the way we see the business.

We knew the second quarter would be challenging, and as you can see in our year-over-year comparisons, operational performance and the macroeconomic environment in Russia, Ukraine and Pakistan has not been easy. We have seen continued market weakness in Italy, and we have a delayed -- or an effect of a delayed 3G launch in Algeria. And these are really the main drivers and that put pressure on our results.

As you know, one of the key focus areas has been improving network quality and, as part of that, customer experience. And I think we are starting to see some encouraging improvements. I think the clearest indication of progress is the improvement of the net promoter score, which is a measurement for how satisfied a customer is, where we see improvements in our net promoter score in Russia, in Ukraine and in Italy.

And we also see a second sign, where churn reduction in the same countries are low. We remember we had the lowest churn number in Russia for three years, the lowest churn number in Italy, I think, for two years. So these are early indicators that some of the investments that we are doing are helpful.

I think we can say that the transformation process in Russia and Ukraine is on track, and that we also, as a result of our actions, have strengthened our positions in Italy, in Kazakhstan, in Bangladesh and in the CIS during the first half of the year.

And also in this quarter, as we've pointed out, we have accomplished two strategic goals with the resolution of Algeria and the refinancing of WIND. The interest savings will clearly enhance our earnings profile going forward.

And on the heels of the resolution in Algeria, we successfully launched 3G in July and we did also the same in Pakistan, both of which are attractive markets, particularly in terms of mobile data potential going forward.

I also want to highlight the fact that we continued to generate strong cash flow from operations. Right now, we are investing a lot of the money into high-speed data network, because we believe this is the right strategy and it will benefit from future mobile data growth.

And I think also the last building block in our transformation program is that we have continued to strengthen our management team by bringing in really senior people, with new leaders in Ukraine and Pakistan, and also Head of Distribution in Russia, as well as a very senior appointment of Rene Schuster as our Group Chief Operating Officer.

And I think we remain very focused. We believe that we are doing the right thing and we believe that what we are doing now is going to yield improved results going forward.

And with that, I suggest to open the floor for questions, and I'll hand back to you, operator.

(Operator Instructions). Olga Bystrova, Credit Suisse.

Hi. Thank you very much for taking my question. I have two. One, on Russia, you've been -- you said you're getting subscribers back. I just was wondering what kind of profile -- what subscriber profile you have on the network now in terms of new subscribers in the second quarter, mainly whether they are temporary low-end users, data users, etc.

And the second question is on the Italian market. Given that the German deal was approved with certain regulatory limits, I was wondering whether -- how you look at the Italian consolidation scenario within that framework, in terms of potential remedies that could be introduced there, and whether it has continued to be an attractive scenario for you. Thank you very much.

Thank you, Olga. I'll try to help you on Russia and then Andrew can give an update on Italy.

I think there is one important aspect of the subscriber growth, quarter-on-quarter basis, that we should be mindful about, and that is that we -- remember that Beeline has always had a strong second quarter, because we have had a strong position in the migrant segment. This year, there are substantially less migrants coming into Russia compared to last year, for example. So it's between 400,000 and 500,000 less migrants this year compared to last year.

So when we look at the subscriber growth we had, we are quite hopeful that this is a trend that is more than just strengthening the position in the migrant segment. It's actually good quality customers; it's data users that are coming back to us and that we win back, but we will see that in future revenue streams. But it's clearly not driven by migrants, as we've seen in earlier years. It's driven by a real dynamic, but I guess it's too early to call it a trend.

And then I think Andrew can talk about Italy.

Yes. Thank you, Jo. So, as we've stated a few times before, we are generally in favor of in-market consolidation, but we've also equally frequently stated that we are not going to comment on speculation or market rumors.

WIND is a strategic asset in our portfolio, as evidenced by all the hard work we've done in the first six months of this year on the refinancing, enabled in part by an equity contribution, etc. The asset continues to deliver strong operational performance in the market, continues to take market share, has a high-quality management team, has good access to spectrum and has got a stable or a stabilizing market environment.

Okay. Well, thank you very much. Can I maybe just ask a quick follow up on Italy, let's say whether you will not be participating in the consolidation? I guess my question was more conceptual, given regulatory requirements that your regulators have imposed within the consolidation scenarios, whether you think these are acceptable for a consolidation scenario in any market, including Italy, or let's say they make consolidation scenarios less attractive or more attractive?

Yes, okay. I'll give a little more color to my previous answer. So, yes, we remain generally in favor of in-market consolidation, and the various remedies that we've seen in the recent approvals should not preclude an in-market consolidation. In-market consolidation would still be worth it, regardless of those particular remedies.

Okay. Thank you very much for your answer. Thank you.

JP Davids, Barclays.

Yes. Hi. Thank you. Good afternoon. Two questions, please, from my side. The first one is on Algeria. Clearly, this asset's in an important phase, launching 3G and so on. Can you talk about the level of support you're giving it from a VimpelCom Group level, i.e. around best practice and so on, to roll out and win the 3G battle?

And then a separate question on networks across the Group. Clearly, Pakistan hasn't gone particularly well in terms of network constraints there, and given your focus on network quality and customer-centric focus, can we assume this is going to be an isolated case across the Group and that the rest of the network assets are running at a good level without congestion? Thank you.

Yes, thank you. Two very good questions, I think. I'll talk a bit about Algeria, and then I think Andrew has studied this situation in Pakistan so thoroughly that he can give a better insight on that.

Clearly, Algeria is important to us, and the timing of the deal was also important because I think, and this is my judgment, I think actually that we were right in time; we were not too late. I think that even though we launched six to seven months after our main competitors in Algeria, we will be in time to stabilize our leading position there and continue to be a very attractive proposition to our customers and, as I said, national coverage by the end of next year and improved coverage by the end of this year. And it was actually people queuing up in July outside our offices to subscribe to the 3G services.

So clearly Djezzy has, for different reasons, a very strong position in Algeria, and that's why I also asked one of our best people, actually, our Group CTO, or previous Group CTO before Yogesh Malik joined us as Group CTO. The previous one, Philip Tohme, that had a long background in old Orascom that joined us during the transaction, he used to be Group CTO here in Amsterdam, left for Algeria and is now the CEO in Algeria. The reason being, of course, that the main focus right now is to get this 3G rollout done the right way, and I think we are in safe hands under his leadership.

And I'll add some more, maybe not more anecdotal comments maybe, but today Rene Schuster is in Algeria. He is there with Mikhail Gerchuk, our Chief Commercial Officer Group, with our Group CTO, Yogesh Malik. And they're having an operational review meeting, together with Vincenzo that is the Chairman and the CEO of GTH.

So there is a very, very close link right now between Amsterdam, Philip, Algeria, with a very high focus on getting this rollout done the right way and making sure that we close the gap as soon as we can and start growing with the market again. So it's a big challenge, but I think we are up to it.

Yes. Thank you, Jo. So, moving on to the second part of the question related to Pakistan, so the short answer would be yes, we are confident that this will be an isolated circumstance. Being candid, what's happened is that the market has become a lot more price competitive in the last 12 to 15 months, and there's a natural amount of high elasticity in terms of usage to price quotient in Pakistan.

And the price competition has been such that it's generated additional traffic that was beyond our initial projections, which is why we're having to in this particular instance slightly reconfigure the network modernization program. But this will be very much an isolated incident.

Thank you.

Herve Drouet, HSBC Bank.

Yes. Good afternoon. Two questions as well on my side. The first one is you've kept your guidance for the full year, so you anticipate some improvements in the second half over the first half, and you mentioned Russia and Italy where you will expect to do -- maybe have some better numbers. On Algeria, I noticed that you did not mention Algeria. Will that mean that you will still expect momentum to come back on Algeria a bit later, maybe more in 2015? Is it related to the finalization as well of the deal with the Algerian government, where you feel there may be still some constraint? So I will be happy if you can shed some light on that.

And my second question is on the margins. We've seen as well some pressure in some countries on margins. And again, compared with the guidance, it looks like where margins may be -- is more under pressure. Again, some of the rebound on the margins in the second half, where do you think there is more room for some rebound, and in which operations? Thank you.

Okay. Thanks, Herve. So I think I'll take both of these questions. So I think when we talk about confirming guidance or targets for the full year, we specifically mentioned Russia and Italy only because they're so much more material to the overall Group results than any other operations that we have. There's nothing particularly special about them, apart from just sheer materiality.

I think Algeria, as Jo has mentioned earlier, we do expect to see stabilizing market share in the second half of the year, and we expect to see relative stabilization compared to the first half of the year in terms of financial performance as well.

And then, as I look across the rest of the Group, in answering the second part of the question, we see the benefits of operational excellence programs feeding through into most of our operations' margin profile. The only one that's probably going to -- I don't want to be overly specific here, but the only operation where I think we will see margin comparatives in the second half of the year being in line if not even slightly worse than the first half of the year is in the Ukraine, where you're going to see a full six-month impact in the second half of the year of the increased license fees and the increased utility costs, etc., whereas we just had a quarter's worth of impact in the first half of the year.

All right. And will that mean you will anticipate some margin improvement in the second half on most of the other operations you're operating?

Broadly speaking, yes.

Okay. All right. Thank you.

Thank you.

Alex Balakhnin, Goldman Sachs.

Yes. Good afternoon. I have two questions. One is on Italy and again on the consolidation. You mentioned previously that your logics and strategy in Italy will be informed by the logics of the shareholder value aspiration. And do you see a scenario in which -- well, you described quite that you love these operations and they are strategic for you. But is there any scenario where you see a better potential for the shareholder value creation through the consolidation? And if so, what is such a scenario?

And my second question is I'm just trying to frame the EBITDA margin dynamics in Russia with the revenue dynamics and your rollout of monobrand in the country. Should we expect a substantial pressure on margins, given the operational leverage, or do you see the potential for some cost cutting? And if so, where are those areas for the further cost cutting, if you could share? Thank you.

Okay. Thanks, Alex. I think I'll take both of these questions again. So as we previously stated, we're not going to comment on market rumor and speculation, and I'm not going to engage in multi-variant hypothesis analysis on an earnings call. We do remain generally in favor of in-market consolidation, and that's where I will leave it for now.

With regard to Russian margins, we have a very well-developed operational excellence program which is focusing very hard on all elements of cost and asset efficiency within the country. I'm deeply involved in that, as the Group CFO. And specifically with regard to monobrand stores, we had basically completed the rollout of monobrand by the end of 2013. So we've not really rolled out any new stores in 2014.

And again, from a year-on-year comparison perspective, that will actually help our margin profile as we get into the second half of the year, because you're going to get a bigger benefit year on year of having more control over direct distribution, which generally tends to be more efficient than indirect distribution.

And may I just quickly follow up on the last point, or the last question, with regard to the margin dynamics? So you mentioned that there are excellence programs and that sort of things, but in which areas do you see there is the greatest potential for the cost optimization as we speak now?

I think there's potential in many areas, candidly. A lot of it will be -- if you wanted a theme, I would talk to you more about process improvements and becoming more efficient in how we serve customers, because -- and that will also help the customer experience. So you will see that impacting different cost components within the P&L, but the overarching theme is one of process streamlining and efficiency.

All right. Okay. Thank you so much.

Thank you.

Alex Kazbegi, Renaissance Capital.

Yes. Hi. Good afternoon. My first question would be on the voice revenue, so to say, trends. If you can maybe just discuss with us what do you see in maybe three key markets? For instance, in Russia, do you see -- you of course focus mostly on the marketing measures to stabilize your position there. Do you see, again, the reason why you would be reverting more to the pricing measures going forward, if you wish?

Second market would be on probably maybe a couple of words on Italy as well, in the same framework.

And lastly, on the voice trend, it's also in Algeria. There you saw also a consistent fall in the usage, and maybe there is another reason for that, of course. But it could be also that, I don't know, maybe you are using the high-end users due to absence of the 3G. And do you see that again stabilizing on the voice revenue side, or do you see again voice more being used as a bait for people to sign up for 3G?

So basically that's a broad question, but what's the strategies on the voice revenue preservation on the tariffs and pricing in these three key markets?

And the second question would be just on the margin side, on Algeria. It was also coming down. Is that due to again increased marketing spend which now you are switching it on and is that new normal level which you expect, or was it some other reasons there as well?

And if you could maybe also just address margin in Ukraine, of course you mentioned about the utility and the taxes, but do they -- they don't fully explain, of course, the 350 basis point year-on-year reduction in the margin, partially also the revenues. But what is the consistent hit on the margin side from those increased fees? Is it 200 basis points? And what should we -- how should we look at that? Thank you.

Okay. So I think that's the last question of the session probably, from the time it's going to take me to answer this lot. Okay. So let's try and take it one by one of the 10-part question.

So, first of all, voice revenue dynamics. Russia, we see average pricing reduce year on year. It's in the high single-digit percentage for the second quarter, reasonably consistent with first quarter. So that is stimulating an uptick in average usage per customer, so it's up roughly 6% to 7% year on year for the quarter.

And the main thing driving that is we had some legacy tariffs or pricing which were at a somewhat unsustainable premium to the market average. So as we've corrected that, we've seen a fall in average pricing, offset by an increase in usage. And we expect to see a little more of that in the second half of the year, maybe not quite to the same extent.

In Italy, so in terms of voice, the headline rates in the market, if anything, have -- they've certainly stabilized since about the September, October time period last year. If anything, headline pricing has actually increased since the start of the year. There is, however, a year-on-year decline still in pricing which is just simply caused by the impact of last year's very intense price competition still feeding through into legacy parts of the customer base.

The one thing I would say about Italy is that bill size, as they call it there, so the monthly ARPU per customer has stabilized quarter on quarter and has actually started growing marginally, when you look at Q2 versus Q1.

And then I think the final question with regard to voice was on Algeria. And there, yes, your hypothesis in your question was pretty accurate. It's the fact that we've lost some high-value customers, caused by the fact that we had this six month or so delay in the rollout of the 3G network, and as a result we've lost a little bit of average MOU. When you look at it by customer cohort, usage is pretty compatible with where it was previously, but it's just we've got a deteriorating cohort mix, if you like, caused by the loss of high-value customers.

When it comes to the margin questions, I think you asked about Algeria and then about Ukraine. I think on a -- with Algeria, the main reason that we are seeing the margin compression year on year is simply to do with the 3G rollout. So we've been rolling out pretty hard in the first half of the year. We just couldn't switch the network on until early July. So that's just caused a year-on-year increase in network costs, and there's also a bit of an impact on license fees.

And then, with regard to Ukraine, literally almost all of the margin compression year on year is due to the increase in the license fees, they have literally doubled year on year, and then the increase in utility costs. And there's a little bit of an impact from foreign exchange, because some of their costs are dollar denominated, and that's obviously cost them a little bit in terms of local currency. So if I were to strip those out, the margins would be almost stable year on year.

Okay. Clear. Can I just follow up, sorry, with not 15 more questions but just one thing on Algeria? So given, again, what happened with the voice there, do you see again -- given again that you are now selling and will be selling aggressively, probably, the data, more pressure coming on the voice tariffs there on your side, as I said, as a kind of a bait for people to entice the new offers?

No. So two things. First of all, we're going to be very rational on pricing. We see -- and not just in Algeria, but we see pricing as being a strategic component and not a tactical thing which you change quarter to quarter. I've certainly had the benefits of, and the scars of, markets where you've done it a bit different, maybe, in the past, in previous roles.

We'd do well to remember that Djezzy is the market leader. It's got clear brand superiority in the marketplace. The 3G launch from July 5 has been extremely successful without us having to resort to either overly aggressive price campaigns or subsidizing of handsets which our competitors engaged in in the second quarter. So we think that we're going to be able to generate great 3G traffic and recapture customers and stabilize market share without being overly aggressive in any kind of commercial proposition.

Okay. Very clear. Thank you very much.

Igor Semenov, Deutsche Bank.

Yes. Hi. Thank you very much. Can you talk a little bit about the competitive dynamics in the Russian fixed line segment? What is your stance? Where are you in the corporate segment?

And also maybe if you could talk a little bit about the -- basically reconcile the voice usage dynamics between yourselves and MegaFon. Clearly MegaFon's voice is not growing. Your voice usage is growing nicely. So maybe, any color you could provide on that, that would be quite interesting. Thank you very much.

Okay. So I think I'll take the second one to start off with. So it's just more of what I said earlier, I think. Our net pricing has reduced a little bit more year on year than maybe MegaFon's has, and that's just stimulating a greater uplift in usage per customer.

Certainly, when you look at our year-on-year growth for the quarter compared to MegaFon's, there's a 10, 11 percentage points divergence between our two trajectories. But there's no rocket science to it. It's just a function of us being a little more competitive and eliminating what was previously a long-term unsupportable price premium.

And on the question on fixed line revenues, I think I'll have Gerbrand from IR get back to you offline.

Okay. Thank you.

Ivan Kim, VTB Capital.

Yes. This will be, by the way, the last question. Thank you, Ivan. Go ahead.

Yes. Good afternoon. Two quick questions on Russia. First, on the churn reduction, which was very material on a quarter-on-quarter basis, do you think it's sustainable and do you think there will be more gains in the second half of the year? And probably you can identify a couple of factors that were key to that reduction, besides like network investments and all those things.

And secondly, talking about the migration of customers from archive tariffs in Russia, do you feel that you have much more to do on that or you're mostly through that process? And probably you can give us an estimate of how longer it will take to migrate customers from archive tariffs. Thank you.

Yes. I think -- generally, I think we should -- and it's actually a good final question, because I think we should be careful to conclude a quarter with the improved net promoter score and historical low churn is necessarily a trend. I think in Russia we just need to be very focused. And I believe in what we're doing, and let's see how the churn number is going to continue to develop.

Generally, the churn level in Russia is very high compared to many other markets, and I think the whole market would benefit from a lower churn level. I certainly hope that we will be able to drive churn down to lower levels, and there is nothing right now that indicates that this is not continuing. But as I said, let's see it as early signs of recovery and improvement on our side, and let's not account for it as a trend yet.

And I think it's basically driven by the holistic approach we've now taken on our business in Russia. You said outside network quality, but of course network quality and network quality perception is and will always be an important part of churn numbers, and we see that improving now. 75% of the whole country, maybe number one or two on data. Speed, for example. Number one on voice in Moscow, etc. So that's one thing.

But also, improved focus on high-quality subscribers. We have, of course, the revenue sharing arrangement with the dealers, so we don't incentivize them or pay them for just the washing machine effect. We pay them for finding the right customers for us.

We also have an improved dealer monitoring program in place. We have the SIM recovery program. We have postpaid optimization and rollout campaigns going. We have customer base management activities ongoing. We have regional pilots on transfer of archive tariff plans to current. So there is a variety, and of course also the communication package around this with simple, convenient for you, where we try now to position ourselves as customer friendly.

We've taken off the push content by SMS, which of course in this quarter represents 40% of the revenue decline, year-on-year basis. These are self-imposed actions that we believe long term is building a high-quality subscriber base.

So I would be extremely disappointed, actually, if churn right now were going up instead of down. So at least there are some logic in everything we do and the operating indicators we see coming out of it. What we don't see yet is the financial improvements, but hopefully that's also going to come. But let's have this as one quarter of early signs. Let's see how the second half of the year evolves before we start talking about trends.

And the migration you asked about, on the archive tariff plans, I think Andrew has studied that so he might give you a good insight on that one.

Yes, sure. Thank you. I'd just like to make one other color comment on the churn question, which is we'd do well to remember our definition of a customer, which is that we use a three-month active basis. So basically, anybody that churned in June, as an example, would have been last active in March. So the fact that we've got good churn performance in the quarter actually reflects things which were already happening in the first quarter.

Coming back to the question on pricing again, so clearly we've closed a lot of the gap with competitors in the second quarter of this year. If you just did a simple comparison on average pricing for the second quarter of last year, you'd have seen our average price per minute being roughly 25% higher than that of MegaFon's. It's reduced this quarter. It's now only 10%. So clearly we've corrected most of the archive tariffs.

The other thing I would say is that in reality I don't think the gap is still really 10%, because MegaFon actually has a slightly different customer definition than we do. In their definition, they actually use a six-month active subscriber base, which in simplistic terms would tend to depress price per minute -- no, sorry, it -- and it would distort both price per minute and average usage compared to us.

So I think we're largely through -- we're certainly though the majority of it. We've still got some to go, which will feed through into the third and fourth quarters. But in terms of the year-on-year trajectory that you can expect to see, that would start to improve in the second half of the year relative to the first half of the year.

Okay. Thank you.

All right. I understand this is the last question. Okay. I thank everybody for taking the time.

I think numbers are not as good as we want them to be, but I think it's more or less as expected, frankly speaking. We have to take a long-term view now on the transition of VimpelCom, and that the building blocks are enough investments in high-quality networks. And I think by the end of this year we will have parity in most markets and a solid platform. We have to have the customer focus as a second building block and make sure that we are attractive and transparent in all our activities and relations to the customers.

And I think also, probably, you will see VimpelCom going quite early on focusing on more digital touch points with customers and transition the business model more into a digital shape going forward, which will drive both, hopefully, the cost curve down and also at the same time increase satisfaction from customers in the way they can interact with us. And hopefully what we're doing now is going to yield results going forward.

But if you have any questions or more questions, please contact Gerbrand and our investor relations team here in Amsterdam. The next earnings call is scheduled for November 12. I think we will see many of you on roadshows and conferences between now and then, and I'm looking forward to that, to discuss what we're doing more in detail. But hopefully we were able to explain some of the thinking behind our actions and strategies today.

And with that, I suggest to close the call and wish everybody a good day.

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