VEON Ltd (VEON) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to VimpelCom's Q1 2015 results conference. (Operator Instructions).

I would now like to introduce your host for today's conference, Mr. Gerbrand Nijman. Sir, you may begin.

Thank you, operator. Good afternoon, ladies and gentlemen; and good morning, to our guests from the United States. A warm welcome to VimpelCom's first-quarter results analyst and investor conference call.

Today, I am pleased to be joined by Jean-Yves Charlier, our new Chief Executive Officer, and Andrew Davies, our CFO.

Jean-Yves will first make a few introductory comments, and Andrew will then talk you through the quarter's financial results and operating highlights. Thereafter, we will be ready to take any questions you may have.

Turning to slide 2. 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 anticipated interest cost savings; the 2015 targets; and the anticipated improvements in performance and results of our Capital structure optimization efforts.

Certain factors may cause actual results to differ materially, from those in the forward-looking statements, including the risks detailed in the Company's Annual Report on Form 20F, and other recent public filings made by the Company with the SEC, including today's earnings release.

The earnings release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented today, can be downloaded from the VimpelCom website.

I will now hand over to Jean-Yves, for his introductory comments.

Good morning, good afternoon, and thank you for joining us on this call.

As you know, it is exactly one month ago that I joined VimpelCom, as Group Chief Executive, and I am pleased to share with you my first observations.

VimpelCom's foundation is strong, positioning us for an exciting and bright future. We have an attractive portfolio of market-leading businesses across three continents, and a growing base of over 218 million customers, who we proudly serve with innovative cutting-edge technologies and services.

Our emerging markets focus ability to leverage the knowledge and expertise we have gained through developing advance data services, in our more mature businesses, as well as a stronger emphasis on the transformation of our cost base, means that we are well placed to improve our financial results.

VimpelCom has strong market positions, in its emerging markets' portfolio and is in a unique position to capitalize on the new digital opportunities ahead of us.

The first-quarter results indicate that we are on track to deliver our 2015 targets, despite the currency and geopolitical headwinds that we face.

We are encouraged by the continuing growth in data that we are reporting, and we will continue to invest to support this demand.

We are also encouraged by the NPS ratings many of our businesses have achieved in the quarter.

In Italy, we have completed the final stage of the refinancing and the business continues to outperform in a challenging market with improving trends.

Wind is a strong business, with clear evidence of excellent customer loyalty.

We would also like to confirm today that we are in discussions with Hutchinson, regarding a possible equal joint venture, between 3 Italia and our subsidiary, Wind.

There can be no assurances that an agreement will be signed, and any transaction would be subject to, among other things, achieving satisfactory debt levels, and obtaining all required corporate and regulatory approvals.

In Russia, we saw encouraging signs of the turnaround of the business, with a further reduction in churn, and year-on-year customer growth, as well as strong performance in data revenues.

In our other businesses, Ukraine will be the last of our markets to launch 3G services and Kyivstar has made progress in the first quarter, with year-on-year customer and organic revenue growth; a sharp reduction in churn; and further strong growth in mobile data services, all in spite of difficult market conditions.

And finally, Bangladesh continued to see double-digit growth.

In our industry, rapid change represents challenges, but also opportunities, and this is truer than ever in this digital age.

At VimpelCom, we are ready to seize on these opportunities, as well as to capitalize on our position as the seventh-largest integrated telecoms company in the world. Going forward, it will become increasingly about speed, agility and innovation.

We will update shareholders on our strategy in August. Our immediate focus will continue to be on the delivery of our targets for this year. At the same time, we will conduct our business with the highest standards of corporate governance, and we will continue to embed a strong ethical culture across all our markets.

I look forward to reporting progress at the next set of results.

Following these introduction comments, let us now turn to slide 4, for me to give you a number of strategic highlights. In the first quarter, we have delivered on our promises, both financially and operationally.

Alongside a good operational performance, we have delivered on a series of strategic promises. These include the successful closing of a transaction in Algeria, with net proceeds of $3.8 billion; the repayment of $3.4 billion of external debt; the completion of the sale of a 90% stake in Wind's tower subsidiary to Cellnex; the conclusion of the third and final stage of the Italian refinancing; the acquisition of a 3G license in Ukraine; and the launch of 4G/LTE services in Georgia. We are the first operator to do so and we now have the widest coverage in that country.

Despite the good progress in the first quarter, we expect to continue to see uncertainty and volatility in our markets throughout the rest of the year. However, we are confident that we remain on track to deliver on our 2015 targets.

With that, I would like to hand over to Andrew to comment in more detail on our financial results. Andrew?

Thank you, Jean-Yves; and good afternoon or good morning from me as well. So moving on to slide 5.

Our key financial metrics for the quarter were pretty much as we anticipated when we provided our full-year guidance. Service revenue declined organically by 2% year on year, primarily due to the delayed 3G launch in Algeria and continued market weakness in Italy.

EBITDA decreased organically by 6% year on year, in line with our expectation, mainly due to higher network costs in Russia and externally-influenced costs increases in Ukraine. At 40%, our EBITDA margin remains one of the highest in the industry.

Our customer base continued to see growth in most of our markets reaching 218 million at the end of the quarter, an increase of nearly 5 million compared to the end of March 2014.

Clearly, reported results were significantly impacted by currency headwinds. In particular, the depreciation of the Russian ruble, which deteriorated by 78% against the US dollar versus the first quarter of 2014.

If we move on to the business units and starting with Russia. We maintained the operational improvement that we saw in the second half of 2014. Churn continued to improve, declining 5 percentage points year on year, driven by our focus on customer excellence and the implementation of a cultural shift to a more customer-centric organization.

NPS improved for the fifth quarter in succession. And our revenue market share remained stable, which is more positive than it seems, given that we are more exposed to the migrant segment than our competitors and, therefore, typically see a little market share erosion in both Q4 and Q1.

In local currency, service revenue was broadly flat, with strong 18% mobile data growth. EBITDA decreased 2%, mainly due to the negative impact on costs on the weakening of the ruble. And the EBITDA margin was 39.4%, down 0.7 percentage points on the first quarter of 2014.

However, excluding these currency headwinds on costs, EBITDA would have increased 5% year on year and EBITDA margin would have reached 43%.

The CapEx to revenue ratio for the quarter was 8%, helped in part by the 4G/LTE network-sharing program with NTS, which is expected to reduce construction costs by between 30% and 40%, creating significant accretion in shareholder value.

In Italy, we continued to outperform in what remains a relatively weak and challenging mobile market.

Mobile service revenue declined 3% year on year, which is a 3 percentage point improvement on the year-on-year trend we saw in Q4 of 2014. This is in part driven by strong mobile data revenue growth of 17%, with the mobile data customer base increasing by 16% to almost 11 million.

EBITDA decreased by 5% year on year, again, another improving year-on-year trend with stable margins.

Importantly, we concluded the final stage of our refinancing in Italy and successfully completed the sale of our towers.

As a result of the last 12 months' refinancing activities, we will generate annual interest savings of EUR340 million going forward, and I'll discuss this in more detail later.

On slide 9, we report on Algeria, which is currently undergoing a transformation program following the closing of the transaction on January 30 this year.

Mobile service revenue and EBITDA declined year on year by 11% and 18% respectively. This is primarily due to the 3G rollout gap, as our competitors were able to launch 3G at least half a year ahead of us. We will continue to roll out the 3G network and have already covered 25 regions by the end of the first quarter.

We are strengthening the local management team in Algeria. In recent months, we have appointed almost a completely new management team. We expect to announce a new CEO in the near future, who will bring significant operational knowledge and deep experience of turnaround situations to the team.

We are confident this new team will allow us successful turn round the business, as we have done in other markets. However, this will not happen overnight and we expect results to remain under pressure throughout 2015.

In Pakistan, we are seeing significant improvements in customer perception following both the completion of the 2G network modernization last year and the continued investments in enhancing the mobile data network.

Mobilink already has almost 3 million 3G customers and we'll focus on investing in and driving the take up of 3G data services in the rest of 2015.

Mobilink secured its leading customer market share position in the first quarter of this year and is, therefore, fully able to compete in this interesting growth market.

However, revenue was under pressure during the quarter, decreasing due to the simplified charging for VAS services, as well as by the government-imposed biometric SIM re-verification of all existing customers and the related restriction on SIM sales through our retail channels. We expect the SIM re-verification program to continue to have a negative effect on the customer base and revenue for the rest of the year.

Excluding re-verification costs of approximately PKR0.7 billion, the underlying EBITDA margin would have been 41.5%, a significant year-on-year improvement, supported by material power cost savings.

In Bangladesh, we saw continued customer and revenue market share increases, with double-digit revenue growth, despite the unstable macro environment, highlighted by 48 days of national strikes in the quarter, which impacted both customer acquisition dynamics and customers' ability to recharge.

EBITDA increased 21% year on year, driven by higher revenue and more effective cost control.

In addition to these improvements, Banglalink maintained its leading NPS with continued enhancement in churn strengthening its market position.

Last but not least, we are seeing strong growth in mobile data usage, which has tripled year on year.

Moving onto Ukraine, where performance was solid during the quarter, with a revenue growth of 5% year on year, despite a challenging and volatile environment. Kyivstar remains the clear market leader, with over 26 million customers, a 2% year-on-year increase, driven by ongoing churn improvements and good customer acquisition dynamics.

EBITDA decreased by 11% year on year, primarily due to external factors, including a change in VAT legislation; FX impact on network and IT costs; and a double of frequency fees from the second quarter of last year.

Following the award of the 3G license, which we paid for in April, we continue to invest in our network, to prepare for the launch of 3G and future mobile data growth. We expect to have a full commercial launch of 3G services in the second half of this year.

Moving onto Kazakhstan, which we are disclosing as a separate business unit for the first time. We remain in a strong position in an increasingly competitive market, as a result of our attractive customer proposition, solid network, and well-extended distribution.

Excluding the 30% MTR reduction, service revenue grew 2%, while on a reported basis EBITDA grew by 3%, with margins increasing by 1.7 percentage points year on year to 49.5%. While we are pleased with our strong performance during the quarter, we do not expect a lessening of the competitive intensity in this market for the foreseeable future.

We also saw solid overall growth in our newly-named Eurasia business unit, which covers our operations in Uzbekistan; Armenia; Kyrgyzstan; Tajikistan; Georgia; and Laos. Both mobile service revenue and EBITDA increased by 3% organically year on year, mainly as a result of robust performance in Uzbekistan. However, our reported results were impacted by currency headwinds.

In terms of operational highlights, we launched our 4G/LTE network in Georgia on February 1, which allowed us to take the technology lead in that market.

It is also worth highlighting the increased level of competition in Uzbekistan, where MTS re-launched operations in early December 2014 and Uzmobile, the new mobile business of Uztelecom, launched its operations in April of this year.

Moving on now to the financial highlights for the quarter; I will run through the income statement first. As you can see, reported numbers were significantly impacted by currency headwinds, with the Russian ruble, Ukrainian hryvnia, and the euro depreciated on a -- depreciating on a year-on-year basis versus the dollar by approximately 78%, 138%, and 22%, respectively.

On an organic basis, revenue declined 2% year on year for the quarter, mainly due to delayed commercial launch of 3G in Algeria, and continued market weakness in Italy, partially offset by the growth in Bangladesh, Ukraine and Eurasia. We expect this negative trend to improve during the second half of the year.

EBITDA decreased organically by 6% year on year, to $1.4 billion, due to higher network costs in Russia, the externally-influenced cost increases in the Ukraine, and higher marketing costs in Algeria.

As I've already mentioned, reported EBITDA margin for the quarter was a healthy 39.7%.

Below EBITDA, we reported a substantial reduction in depreciation and amortization, as a result of FX impacts and lower amortization of customer relationships in Italy and Algeria.

In addition, we recorded a $0.5 billion net gain on the sale of the Italian towers, which is partly offset by impairments related to Ukraine and Armenia. Underlying EBIT, excluding the aforementioned one-offs, is just over $0.5 billion.

The refinancing of Italy in 2014 contributed to significantly lower interest expenses in the first quarter of this year, while tax was higher due to the better profitability and some non-deductible expenses relating to the Italian tower sale.

The bottom line is that net income for the quarter was up strongly, at $184 million, equivalent to earnings per share of $0.11.

Moving onto the cash flow statement, we can see that net cash from operating activities was significantly affected by the payment of the Bank of Algeria fine of approximately $1.1 billion, consequent to the closing of the transaction in Algeria, which contributed a total working capital outflow of $1.4 billion.

We had a significant year-on-year reduction of net interest paid, thanks to the refinancing in Italy, and the weakening of ruble and euro against the dollar.

In addition, our income tax payments for the quarter were skewed by approximately $200 million of withholding taxes paid on the Algerian dividends.

As a result, cash from operating activities was a negative $0.8 billion. However, excluding all one-offs associated with the closing of the Algeria deal, the underlying cash from operating activities was a healthy $0.6 billion.

The cash from investing activities increased significantly year on year to a small positive, helped by lower CapEx, together with the net proceeds from the tower sale in Italy of approximately $0.7 billion.

Net cash from financing activities also increased significantly to $1.1 billion, primarily due to $2.3 billion in net proceeds from the closing on the Algeria transaction; offset by ruble bond repayment of $0.6 billion equivalent; the net refinancing in Italy of $0.5 billion; and the repayment of the revolving credit facility of a further $0.5 billion. All of this being partially offset by a drawdown of the loan facility in Algeria of approximately $0.6 billion.

Switching onto the balance sheet, we continue to work hard on optimizing our capital structure to reduce the cost of debt, improve the maturity profile, and enhance the currency mix.

As touched on already, we took some important steps during the quarter to enhance our financial profile.

In Algeria, we closed the Djezzy transaction, the proceeds from which allowed us to repay $35 billion in ruble bonds and buy back another $1.8 billion US dollar bonds.

In Italy, we sold a 90% stake in Galata, our tower business to Cellnex for a total cash consideration of almost EUR700 million, and entered into a 15-year service agreement for the provision of services, to ensure that we keep access to the sites, both current and new.

Wind also completed a third and final stage of its debt refinancing, generating further savings on its annual interest costs, as well as further lengthening the maturity profile and putting in place a more flexible covenant-light senior facility.

Finally, in Russia we have now fully hedged our ruble to dollar exposure for all of 2015, at a rate of approximately RUB61 to $1.

Moving onto slide 18, at the start of 2014 our average cost of debt was as high as 8.3%. But as a result of the all of the refinancing activities we've completed in the last 12 months, our average cost of debt has now been reduced to 6.2%. This includes the benefit of the settling of the US dollar bonds, which happened on April 2, just after the end of the quarter.

Net debt decreased 12% quarter on quarter, primarily as a result of the proceeds from both the Algeria transaction and the Italian tower sale, together with the depreciation of the ruble and the euro against the dollar.

The reduction in net debt has been somewhat offset by adverse currency movements impacting the last 12 months' EBITDA. Therefore, net leverage, excluding Italy, was stable at 1.2 times, while total consolidated net leverage declined slightly from 2.5 times to 2.4 times.

On slide 20, we show a significantly-improved net debt maturity schedule. Not only have we lowered the cost of debt, but we've further lowered the debt repayments in the years to come, as you can see from this slide.

As a consequence, we have no major refinancing obligations until 2020 and no material hard currency maturities for the next several years.

Finally on slide 21, this slide shows the net result of all of the refinancing work we've completed over the last 12 months.

As you'll remember, we announced at our Analyst & Investor Day in January 2014 that we were targeting a potential $400 million of annualized cash flow improvements from these activities.

We've now significantly outperformed that commitment by delivering an impressive $700 million of gross annual interest savings going forward. This is a further improvement from the $670 million figure we showed at the Q4 results, reflecting the incremental savings in this quarter from the third phase of the Wind refinancing in Italy.

Moving onto slide 22 and the annual targets. As a result of our solid financial and operating performance, we can confirm our 2015 targets, which, just to reiterate, are stated on an organic basis, assuming constant currencies as shown in the appendix. And, as you'd expect, these targets also exclude any extraordinary items or one-offs.

Despite a slightly lower run rate this quarter, we are confident that we'll be able to meet our service revenue and EBITDA margin targets for 2015, due to a number of factors.

In many of our operating units, such as Ukraine, Pakistan, and Bangladesh, we expect that the impact of their 3G rollouts and the 4G/LTE deployment in other key markets, such as Italy and Russia, will lead to second-half year-over-year performance being better than we had in the first half of this year, driven by growth in mobile data.

In addition, we expect the rate of year-on-year decline in Italy to continue to moderate, as we see gradual improvements in the competitive intensity and the full impact of cost efficiency measures implemented last year. We also expect to further benefit from transformational effort in other markets, such as Pakistan and Algeria.

In conclusion, we have continued to deliver on our promises, as we have made further broad-based operational improvements; have solved the long-lasting issue in Algeria; paid down debt; sold towers in Italy; and further optimized our capital structure.

We expect the macroeconomic and operating environment to remain challenging throughout the rest of 2015. But we are confident in meeting our financial targets and we will continue to work hard on further optimizing the capital structure.

I look forward to meeting some of you at our Moscow analyst and investor site visit on July 9. And Jean-Yves and I look forward to providing you with a further update on our strategy at the 2015 interim results on August 6.

And with that, I'll now hand back to Gerbrand.

Thank you, Andrew. With that, we will open the floor for the questions now. Operator, can we have the first question, please?

(Operator Instructions). San Dhillon, Royal Bank of Canada.

Two questions, if I may. Firstly, on Italy, some of the commentary from Vodaphone and TI seems to suggest that the price environment has improved quite markedly over the last couple of months. Is that something that you're seeing as well at Wind? And when do you expect this to kind of flow through to the revenue line in Italy?

And a second question for Jean-Yves, if I may. Jean-Yves, how do you compare the scale of the challenge of VimpelCom versus the one you had at SFR, which was in European telco land, at least very large given Iliad's entrance into mobile in January 2012? And what have you learned from that experience that can help you at VimpelCom? Thank you.

All right, let me let Andrew take the first question, we can get it out of the way and then I'll try to give you a first perspective.

Yes, so on pricing in Italy. I think I'd echo some of the sentiments that you expressed, but with a slight caveat.

So, yes, I think that what I would describe as headline pricing that's generally available in retail distribution is moderating and has moderated over the last several quarters.

However, what we do see happening on a tactical, kind of sporadic, basis is still a lot of under-the-radar aggressive price campaigns, mainly of an outbound telesales-type of nature, where people are offering very large data bundles at a pretty discounted price, some 20% off of retail rates.

So, yes, headline pricing is reasonably stable, but we do, now and again, see a little bit of guerilla warfare breaking out.

So let me try to frame my perspectives on VimpelCom and parallels that I've seen in perhaps some of the Western European markets, including obviously France, where I operated for the last three years.

I think that the starting point is that the telecom industry requires profound change. I think that our chairman, Alexey Reznikovich, and I share a common vision that this change is absolutely required at VimpelCom.

What's interesting, I think, about the set of assets that VimpelCom has built is that, in many ways, there are learnings to take from what's happened in certain European countries, including France, and apply those to our markets.

What's also interesting is that we've got a diversified portfolio; a strong customer base of close to 220 million customers; and, ultimately, on sort of a long-term economic cycle, some structural growth remaining in those countries.

Having said that, we need to be able to monetize the promise of the exponential mobile data growth. We have to be able to launch new added-value services.

We need to profoundly change the model in the way that we interact with our customers from mass marketing to a much-more personalized relationship, from leveraging much more the interaction from a web perspective. And all this within a cost space that needs to be profoundly changed.

So these are some of the things that come to mind as I spend my first few weeks within VimpelCom and look to update you on that strategic framework in the August timeframe.

Wonderful. Thank you very much, guys.

Thanks, San.

Roman Arbuzov, UBS.

My questions relate to Jean-Yves' comments about the talks with Hutchison about a potential 50/50 JV in Italy. The fact that you thought it was necessary to mention the ongoing talks may mean we're now closer to the potential deal than we ever were before, and also the potential deal may be announced soon perhaps.

But then also bearing in mind the background to the whole story, the timeline expectations for the potential deal have shifted quite a lot in the past. So, given your commentary today, is there anything you can add on the potential timeline? Is there a particular time when we could find out whether something will happen or if nothing will happen at all?

And secondly, a question on potential stumbling blocks, and what's stopping you from completing the deal currently, please? Thank you very much.

Let me say a few words beyond the statement that I've made. I think, first, and it relates to my experience in the past few years.

I'm a firm believer of in-market consolidation. This comment applies not only to our business in Italy, but applies to all the geographies where we operate today.

The second point is that, in light of the more-intense speculation over the last 24 hours, we felt it was appropriate to come out with the statement that I made in our introductory remarks. But at the same time, I said that there could be no insurances that this agreement will be signed; and that the transaction still needed to be subject, amongst other things, achieving satisfactory debt levels and obviously going through all the required corporate and regulatory approvals.

So I think that certainly signals that there is still some work on this transaction.

Can I ask a follow-up to Andrew, please? If -- given a potential transaction does go through and you often cite your net debt leverage figure, on a pro forma basis without Italy, so if the potential transaction were to go through and your leverage would fall below 2 times, would you consider resuming dividend payment?

Okay, let me address that one. So, as I discussed when we did the Q4 results and stated earlier, we place much greater importance already on the Group's net debt to EBITDA ratio excluding Italy, which is 1.2 times at the end of the quarter and we've guided that it may increase to 1.7 times by the end of the year, assuming the foreign exchange rate situation continues.

The reason for that is that Italy is fully ring-fenced; non-recourse; and, now, as a result of the very successful refinancing activities we've done over the last 12 months, is capable of self-financing itself.

So the leverage ratio we use as our guiding light, if you like, is more the ratio excluding Italy. So from that perspective, my thought processes on dividends are somewhat agnostic to any potential deal in Italy.

However, and there's a big however, as I mentioned again at the Q4 results and at many analysts' conferences since, we need amongst other things a far greater stability in the geopolitical and FX environment, before we, as a management, and the Board would consider a resumption of a more-meaningful dividend payout.

And in particular, as well, some of the things that Jean-Yves alluded to, in terms of the transformational progress of the business, we need to have much greater line of sight to those programs going forward, as well to give us the confidence that a dividend isn't something that we're simply going to reinstate, because our leverage ratio is under control; but is going to be based on sustainable, ongoing, material increases in operating cash flows.

Thank you very much.

Okay, Roman. That answers your question, I think. Can we have the next question please?

Gavin McKeown, Pioneer Investments.

Just a follow-up to Roman's question. Jean-Yves, [I'm struggling] to fully understand your point in relation to, I think you said, that leverage or debt levels will be sustainable in the combined entity. Are you referring to pre or post synergies, assuming that there will be quite a substantial amount of synergies in combining the two businesses?

And if pre-synergies, well, that suggests that there will be a requirement for some kind of injection of capital or shareholder debt into the combined entity.

Look, I think it's too early to answer that type of technical question at this stage. I think there's still, as I said, considerable work to be done.

We've made the statement today about confirming these discussions; I'll leave it there for the time being. Obviously, we will update the markets at the appropriate point in time.

Okay. Thanks. And a follow-up question to Andrew; in relation to hedging, or natural hedging, I'm just wondering have you run a calculation to help us understand where leverage should be today, or even outstanding gross debt would be today, like for like, using first-quarter 2014 exchange rates, and for accounting for the reduction in debt? If not, maybe it's something we can follow up offline.

Yes, we'll take that offline, Gavin. We've got the calculation, but it's far too detailed and granular to get into on this call.

I will call you after the call, Gavin.

Thank you.

All right, [was it] that, Gavin? Thanks. Can we have the next question please?

Alexander Balakhnin, Goldman Sachs.

Just wanted to follow up on the statement made on wind in the opening remarks. If I understood you correctly, you're targeting equal JV with a reasonable level of debt.

Basically, just wanted to get your clarification, when you talk about equal JV, do you mean the equality of the equity stakes, or a more-philosophical meaning of equality?

And my second question is, what is the reasonable debt level, from your standpoint? And are you planning go make any equity injection into Wind to bring this debt level to what you say is a reasonable level? So basically, some clarification here would be very helpful. Thank you.

They're all very, I think, interesting questions. But again, as I said, I think this is too early for us to provide any further detail than what we've provided today. As I said, there is still considerable work to be done with Wind, and I'll stick to that, at this point in time.

Okay. May I ask a question on a different topic? Your Russian CapEx was quite low in the first quarter. Cleary, the first quarter is a weird one, but just wanted to make sure that there is just a seasonality thing in these dynamics, and it's not a base for thinking about the CapEx projections for the rest of the year. So was it just the CapEx recognition, nothing more than that?

I'll take that one. Yes, it's a little more nuance than that.

So first of all, we still hold our CapEx to revenue guidance for the year, which is roughly 20 percentage points, and that's at the Group level. But you can infer from that that Russia is going to be, obviously, as elevated as it was last year.

I think we, generally, get off to a bit of a slow start in the first quarter of the year. That was even more so the case in this particular year. If you recall, in the December/January time period, when we were placing orders, we were facing with a ruble to dollar rate of RUB70 and continuing to deteriorate.

So we just kind of hit the pause button for a little bit, just to take stock of the foreign exchange situation and make sure that we didn't make any moves that we were quickly going to regret.

So now that we're starting to see a little bit more stability on the foreign exchange side of things, it will start to become more business as usual, CapEx to revenue ratios, going forward.

Okay. Thank you so much; that's very helpful.

Thank you. Can we have the next question please?

Dalibor Vavruska, Citigroup.

I just wanted to ask you a question about free cash flows. Obviously, there's a lot of transactions have happened in the last couple of months, and you have significantly improved the shareholder value by refinancing and these transactions.

But if you actually look at the underlying operations, what is your view about the free cash flow generation ability, if you adjust all this? About how much cash the business is actually generating now?

Also, I think the previous question on CapEx was quite relevant, because, in the first quarter, the CapEx was fairly low. So if you adjust the CapEx, to where you think the run rate should be, how much free cash flow you think the business is generating now? And how you think this may improve in the future? Thank you.

Andrew?

Yes, sure, it's a good question, Dalibor. Clearly, first-quarter cash flow statement is significantly distorted by a number of one-offs, mainly the Algeria transaction and the Italian towers transaction.

I think, underlying operating cash flows for the quarter, as we said, would be roughly $600 million, clearly, impacted by the foreign exchange situation. Also, in the first quarter, typically we can have a bit of an outflow, from a working capital perspective, because we tend to carry high payables at the end of the year.

So I would say that, in that underlying first-quarter cash flow number, from an operating perspective, is a little on the low side to project going forward.

Clearly, as Jean-Yves's already mentioned, there is a significant need to transform the business. We're simply not generating enough operating cash flows. Again, at the risk of repeating myself, that again one of the other considerations in being able to resume a full dividend policy. So it's something that we are very, very heavily focused on.

Thank you, Andrew.

Okay, thank you, Dalibor. Can we have the next question please?

[Lytham Charbo], (inaudible).

So I have three questions, actually. First one on Russia. Could you possibly comment just on convertibility and up-streaming of rubles? I was quite surprised to see that -- [I was reading] proceeds were used to pay down [these]. I would have thought ruble cash would have been better off used for repaying some of these bonds that were put. That was my first question. Maybe we start with that and then I can follow up.

Andrew, that's for you too.

Yes, absolutely. So look, it's similar -- we had what, RUB35 billion of ruble bonds mature in March. Some of those were dealt with from local cash flows. So when we talk about use of proceeds and paying down of gross debt, it's all fungible.

But in Russia specifically, a large proportion of the ruble bonds were actually repaid out of ruble cash flows.

I understand, sorry, and thanks for clarifying that.

On a different topic, in Algeria, I was wondering if you could give us just a bit more color on strategy and this kind of transition year and the path that you expect.

Looking at your competitors' numbers, it doesn't seem that their downtick in ARPU in this first quarter was as strong. So I was wondering if this was just more aggressive positioning; or are you re-pricing your base, or what can we see there in the medium term in terms of gross churn and adds and so forth?

Maybe I can frame the perspective I have already on Algeria and then Andrew can put some color to that.

When I look at our business in Algeria, and I've been there already in the first four weeks, I think in many ways, given the focus on closing the transaction with the Algerian Government, this is a business where we need to put more managerial focus on a business that we need to transform in many ways.

The opportunities are very significant, as we know in Algeria; looking at penetration levels; looking at the fact that we're just at the beginning of 3G monetization of mobile data services.

So whilst I continue to be encouraged with the long-term perspectives of the business, there's clearly a number of positioning operational issues that are near term that we need to fundamentally address.

Part of that ARPU decline is a result of re-pricing; a new tariff exercise that we launched at the back end of the fourth quarter. Maybe Andrew you want to give more color to that?

Yes, absolutely. So we launched two new sets of tariffs in Algeria at the end of the fourth quarter. One targeting medium and lower-value customers; and the other targeting the high and ultra-high value customers.

Candidly, what we are seeing is that the tariffs that were aimed at the medium and low-value customers got off to a bit of a slow start, but are gradually picking up momentum, and we're seeing a little bit of ARPU uplift within that customer segment.

Not quite so rosy candidly in the upper-value segments. And what we are seeing there is that we have a number of ultra-high value customers, who remain customers with us, but we can tell from their usage patterns that they've shifted from using Djezzy as their primary SIM to now their secondary SIM.

So we need to re-look at those particular tariffs and see what we can do better to stimulate more usage and adoption of them and transform those customers from being secondary SIM to primary SIM in nature. The good thing, candidly, is that at least we've still got them as customers and they've not churned out completely.

Excellent, thank you for that. I just had one final small question which was on your shareholder loan outstanding to Global Telecom. I was wondering if you've been approached by Global Telecom management or Board about refinancing the rate, which is at 12.5% currently, which seems quite high in this age of plentiful debt.

We've not been formally approached by either the management or the Board.

Yes, I hear what you say; it looks relatively expensive right now. But I would remind you that it got overwhelmingly approved by the shareholders at last year's AGM, and it was for a period of 37 months.

So again, in danger of repeating what I said three months ago, it's something that we will now take a look at; whether we just reduce the rate of that shareholder loan or whether we completely refinance it using external debt.

That was something that I said we'd take a look at a few months ago once we're completed much more meaningful corporate finance activities. So it's something that we are about to take a look at.

Sorry, I understand your perspective. I just think Global Telecom has a different duty in this case, right?

Yes, agreed.

Thank you.

[Our] engagement on the call this afternoon. Thanks. Can we move to the next question please?

Ivan Kim, VTB Capital.

Could you please share the latest thoughts about the free float of Global Telecom; whether you would consider taking it out or you are still not interested in that? Thank you.

I think that's one for you, Andrew.

Okay, thank you. Listen, I'll be careful here, because GTH has traded itself. I think it's something that we have no particular plans to address for now. I think I'd be in grave danger of contravening Stock Exchange regulations if I expanded any further on that.

Okay, thank you.

Thank you, Ivan. Next question please.

Alexander Vengranovich, Otkritie

A couple of questions from my side. First on Russia, just a general question. How do you see your revenue market share evolving this year, do you expect and do you see that your market share will be stable year over year?

And do you see any acceleration of competition on data? This year the competitors have started to move the customers aggressively on the bundle tariff, which impacts your price per megabyte also, and you have to reduce the price? And how this would protect the market?

And the second question is on actually Ukraine. So results are quite good in the first quarter, a little bit surprising for me. How would you commence on your market share in Ukraine? So do you see that you are getting the market share from your main competitor?

And what are the factors which positively impacted your revenue growth in Ukraine and did you have any significant negative impact from the military actions in the eastern part of the country? Thank you.

Andrew, again do you want to take both those more-technical questions?

Yes, I can take those. So first of all, the market share question in Russia. As I mentioned earlier on, we think that we've got at least a stable market share sequentially in the first quarter, which, if that is the case, would be the first time that's ever happened in the first quarter for our Russian business, because we are more exposed to the migrant segment, as I said.

And so we are cautiously optimistic that we are going to see a little bit of market share gain overall on the full-year basis and that reflects all of the hard work that Mikhail Slobodin and his team have done, over the last 12 to 18 months to turn around that business. We see improvements in NPS and churn, etc. so all the leading indicators are there.

With regard to data pricing, we don't really see a major change in the competitive dynamics.

It remains highly competitive.

It remains highly competitive, absolutely, and they're some of the lowest data rates on the planet. We've said clearly that, going forward, we want to improve from our perspective the data rates going forward. But that would be more a function of gradually reducing bundle sizes and data allowances over time as opposed to had there been any upwards pressure on the headline rates.

We made some moves in the quarter. Somewhat perversely our competitors actually went in the opposite direction and, actually, increased their allowances. But it's not caused any major change in the dynamics of what was already a very competitive situation.

On Ukraine, the one word that constantly comes to my mind when I think about the performance of our Ukraine business is resilient. It's not just this quarter, but for the last several quarters, it has just been remarkably resilient. We've got good usage on the network, good footfall in distribution, etc.

I think the market share gains that we are seeing over the last two to three quarters, frankly, are a function of our very strong network position. In a volatile environment such as that, customers clearly have a need to talk and communicate and, therefore, will gravitate towards the network that's best able to serve their requirements.

I think that is even more the case when maybe in certain instances, because of the volatility in this situation, network up-time tends to fluctuate more.

Thank you, Andrew. That's helpful.

Time for one more question, operator.

(inaudible), UBS

Most of my questions have been answered, just probably the last one. What challenges do you see in your Russian business? Thank you.

Look as I look at Russia, I think that obviously the first that comes to mind is the geopolitical and currency headwinds that we face in our business in Russia.

As Andrew indicated and as I look at our business in Russia where I've been already, I'm cautiously optimistic that the plans that our management team have put in place are starting to produce results and we've seen that in the last two quarters.

Having said that, at the same time, my perspective is that there is more work to be done, in terms of our differentiation in the market place; in terms of simplifying our business; in terms of harnessing the web; in terms of transforming our cost structures. All these are topics that would allow us to have a more robust longer-term outlook on the business.

Andrew, I don't know if you want to add to that?

I think you captured everything; it's fine.

Thank you that was then the last question. Thank you your questions and thank you for your participation in today's earnings call and, of course, for your continued interest in VimpelCom.

We hope to see you when we're on the road in the next couple of months or we hope to see you in Moscow on July, 9 when we do our next analysts and investor site visit.

Please do not hesitate to contact me or my team here in Amsterdam if you have any follow-up questions.

And with that, I would like to wish you a good day. Thank you.

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.