VEON Ltd (VEON) 2015 Q2 法說會逐字稿

Good afternoon, here in London. Thank you for coming to this place where we have been also half a year ago. Also warm welcome to our audience on the webcast.

We started five minutes late because we wanted to be able to share with you the good news of today. We did announce today a transformative transaction in Italy. Today we also will talk about the strategic update and clearly about the earnings of the second quarter.

I'm here on stage joined by Jean-Yves Charlier, our Chief Executive Officer, and Andrew Davies, our Chief Financial Officer. And may I ask the audience here in the room really put your phone on mute.

And of course, as you are used of me I would like to draw your attention to the disclaimer.

As forward-looking statements made on this presentation involve certain risks and uncertainties. These statements relate in part the anticipated benefits from the Italy transaction, the ability to complete Italy transaction, the Company's strategy to generate sustainable annualized cash flow improvements in the next three years and the ability to realize our 2015 target.

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 the 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 include reconciliations of non-GAAP financial measures presented today can be downloaded from our website.

Our program of today, it is in three parts; we will highlight the transformative transaction for Italy and VimpelCom. We give you a strategy update and the second quarter earnings release. And then of course we have ample time for your questions.

With that I would like to handover to Jean-Yves Charlier, our Chief Executive Officer.

Thank you, Gerbrand. And obviously delighted to be here with you today to talk obviously about our strategic review and present with Andrew our Q2 results that show another quarter-on-quarter improvement and are in line with our expectations.

During the first quarter analyst and investor conference call we announced we were in advanced discussions with Hutchinson to merge our operations in Italy. Today I'm pleased to announce that we've just released on the wires I think just a few minutes ago in fact that we are merging our operations in Italy through a joint venture 50-50 owned by Hutchinson and VimpelCom.

This transaction obviously first and for most will mark a new era for telecoms in Italy, because in fact the merger of 3 Italia and Wind will see a leading convergent operator in the fourth largest telecom marketplace in Europe. We intend to offer innovative mobile services to both consumers and enterprises alike but we also intend to offer significant and strong fixed broadband services to this marketplace.

Obviously, as we'll see, the combined entity will have a significant footprint and a large customer base in the Italian marketplace. This transaction will accelerate, we believe, innovation and investment in Italy, and the joint venture will be better positioned than ever to compete against the two other main competitors in that marketplace.

It is our intention to build a very strong network, mobile network, in Italy with 21,000 sites offering broader services and better indoor coverage. It's also our intention to accelerate 4G and LTE networks and services to cover in fact by 2017 90% of the population. And we will accelerate our investments in fixed broadband to ensure a series of convergence and innovative services in the marketplace.

And finally, the joint venture should in fact have about 1,000 or so points of presence, monobrand stores to effectively compete in this marketplace.

We've also ensured that there is a clear corporate governance for this joint venture. We've worked hard with Hutchinson to ensure that there is a substantive shareholder agreement to ensure the success of this joint venture. We will be putting in place a strong, empowered independent management team that will be lead by Maximo Ibarra, the current CEO of Wind. The board of this joint venture will consists of six members, three from each parent party and the chairman will be rotating on an 18-month basis and have a casting vote on a number of matters to ensure that there is no gridlock.

And obviously we want to ensure post-closing, and subject obviously to regulatory approval, that as fast as possible this joint venture operates as one company.

Obviously we expect to see substantial value creation. We expect that there will be EUR700 million of run-rate synergies, 90% we expect will be captured within the first three years or by year three in fact, post-closing of the transaction, representing in excess of EUR5 billion of net present value from these cost synergies net of the integration cost.

We also expect solid dividends from this joint venture starting within the first three years after closing, and, obviously, as we'll see, a strong deleveraging profile.

Now, there are five main strategic dimensions to this transaction, and obviously a solid rationale for in-country consolidation. The first for us is really to create a leading convergent operator in Italy.

The second is obviously to compete much more effectively than our independent companies can today through superior customer experience.

The third is obviously to achieve the EUR700 million of cost synergies by year three at a 90% level, enhanced profitability and cash generation.

And finally, we believe that this transaction is transformative not only for Wind in Italy and for VimpelCom as we'll see, but obviously for VimpelCom shareholders, all of this underpinned by a clear corporate governance to ensure the success of this 50-50 joint venture with Hutchinson.

Let's now go through each of these main strategic dimensions. The first obviously is creating this leading converged operator in the fourth largest telecom marketplace in Europe. The joint venture will have some 36% market share in terms of customers and about 33% revenue share in the marketplace at the same level as Vodafone and a point behind Telecom Italia.

Independently, we've seen that Wind and 3 Italia have grown substantially their position in the marketplace over the last five years, ensuring that there is momentum as we see this joint venture being put in place following the regulatory approvals.

As I indicated, we intend to be a convergent operator in this marketplace. And the joint venture should dispose of some 16% market share in the fixed broadband Italian marketplace. And finally, an ability to accelerate investment and an objective to cover 90% plus of the population by 2017, a much better coverage in fact from a 4G LTE point perspective than what our companies could have done independently.

The second obviously dimension is to compete much more effectively in the Italian marketplace through superior customer experience. We want to build a very strong and broad mobile network in Italy with over 21,000 sites. This network we believe will deliver superior data services, but obviously with or ability to offer conversion services it's not just about mobile services but also fixed high-speed broadband services for our customers.

We expect to see an acceleration of innovation, and innovation obviously focused not just on convergent services but also on innovative digital services as part of the VimpelCom strategy.

Our presence in the business segment will be strong and we intend on focusing on not just serving large corporates, but also on focusing on the SME and SOHO marketplace. And obviously, the joint venture should dispose of a very solid physical distribution network as I indicated of some 1,000 or so monobrand stores in line with our main competitors.

The synergies and as in most in-market consolidation plays are significant. We value these at EUR700 million, about 70% of these synergies will come from OpEx savings, about 30% from a CapEx point of view.

And there are three main drivers for these synergies, obviously integrating our networks and our IT stacks should lead to some substantial savings for the joint venture. We think that that represents some EUR3 billion in that present value.

Then obviously integrating our front-end operations, our market facing and our customer operations. We believe that that will lead to about EUR1.3 billion in that present value. And obviously creating as fast as possible an integrated SG&A capability, operating out of two sites in Italy, one in Milan one in Rome should lead to some EUR600 million in that present value, representing a total of EUR5 billion for this transaction. And as I indicated, we expect that 90% of these synergies will be realized by year three post-closing.

Let me now hand over to Andrew, who will take us through the other strategic dimensions of this transaction and give us more on the terms and conditions of the joint venture and merger of these two operations in Italy.

Andrew?

Okay. Thank you, Jean-Yves. And a warm welcome from me as well. So clearly this is going to be a very strong combination, much stronger than the two entities in isolation. So on a pro forma basis, including the run rate impact of synergies, this joint venture is going to have roughly EUR6.4 billion of revenue, just in excess of 40% EBITDA margins, a cash conversion ratio of over 60% and a significant deleveraging profile over time.

Combined right now, there would be -- Wind would have 5.6 right now, combined they would be 4.9 including the run rate synergies they'd get the 3.9. The target is to get to three times within three years.

So, let me just illustrate why and how this is such a transformative transaction for both Italy and VimpelCom. We have joint ownership of the leading convergent operator in a major European market. We get significant value creation through the synergies of over EUR700 million on a run rate basis within three years. That equates to an NPV of EUR5 billion.

We have distribution of dividends projected within the first three years. It enables VimpelCom to be more focused on its diversified emerging markets portfolio. And then it significantly enhances the earnings and cash flow profile of the business, and last but by no means least, it gives VimpelCom a significantly stronger balance sheet and basically halves our entire leverage ratio.

So let me just illustrate on this next slide how this improves the earnings and cash flow matrix. But before I get there, let me just talk about for clarity how we intend to account for this going forward. So on signing, so from now on until closing we will show this as a discontinued operation in both the income statement and the cash flow statement and it will be shown as an asset held for sale within the balance sheet.

Then on closing we will account for this using the equity method going forward, so we will deconsolidate all of the Italian operations from VimpelCom's financial statements. So as you can see from this slide, whether you look at revenue growth, EBITDA margin, CapEx to revenue ratios, and in particular leverage, all of these matrix are improved substantially with the deconsolidation of Italy.

Just to illustrate in more detail, what it does from a leverage and a maturity perspective, so you can see that we have no major maturities for the next four to five years, excluding the Italian debt and the leverage ratio that we expect at the end of the year will be roughly 1.6 times.

So let me run through the structure and summary of the transaction terms just so we're all clear. So as we've already said, this is going to be a 50-50 JV between VimpelCom and CK Hutchison. VimpelCom will contribute all of the ring fenced Wind group with all of its debt, Hutchinson will contribute 3 Italia, together with EUR200 million of cash and zero debt. We expect no further cash contribution into the JV from either parent.

The transaction is only conditional on parties being satisfied with a regulatory approval process and remedy packages and there are no breakup fees. We have a very strong and clear dividend policy, linked to leverage ratios and free cash flow generation. Just to illustrate -- and it -- so it ratchets up all the time, but just to illustrate, when we get below the three times net debt EBITDA target, the dividend payout ratio would be 80% of free cash flow for that year, subject obviously to remaining within that leverage target. So it steps down from a 40% payout once we get below four times to 80% payout once we get below three times.

We have a strong management team as Jean-Yves already mentioned. And the transaction is subject to competition clearance. And we expect closing within approximately 12 months.

And with that, I'm now going to hand back to Jean-Yves who will take us through the strategy.

All right. Thank you, Andrew. Obviously, beyond focusing on this transformational transaction in Italy, during my first 100 days or so at VimpelCom, I focused very much with the Board looking at the challenges and opportunities of our business and obviously focused on undertaking this strategic review.

We've obviously seen declining revenues in profitability. And we've seen that traditional mobile growth model that VimpelCom once enjoyed has predominantly run out of steam, even in the emerging marketing portfolio that we have. This is why fundamentally, we believe it's time to profoundly reinvent VimpelCom and as we'll see invent VimpelCom as a digital operator.

The Board and I believe that the telecom industry is at crossroads. We've seen this traditional mobile growth model run out of steam, even in emerging markets. We're seeing as know a commoditization of voice services, pricing pressures across the board and an industry that has had a lack of success in finding new revenue streams and new profit pools.

At the same time, there's a massive opportunity around the explosion of data growth. In our markets we see then that less than 50% of our customer base of 213 million customers have a data plan with VimpelCom today. That's a significant opportunity.

And as we'll see in our second quarter results, our data growth is around 22% for the quarter. In some of our markets our customers, less than 15% of our customers have smartphones today. But the question for us is whether or not we can monetize this explosion in data, whether or not we will have OTT players infringe on our value chain and commoditize our industry further more.

And at the same time, as we know, the telecom industry has a complex business model, high fixed cost we have to continue investing substantially from a CapEx point of view in rolling out new services on our networks. And obviously we've seen that the return on investment model has become more challenging than in the past.

When I look at VimpelCom obviously, first and foremost, I see a solid portfolio of businesses. Obviously a portfolio that's well diversified in emerging markets, particularly following this Wind, 3 announcement and transaction. Solid positions in our markets, we're in fact, number one in five markets, number two in two markets and number three in four markets. Solid customer base, but not just in mobile as we see, the Company today has over 6 million broadband customers across its footprint, and obviously a balance sheet that has been delevered and particularly even more so following this announcement.

We see that in fact the strategy has to focus on three major dimensions. The first is obviously finding new revenue streams, and we'll talk about revenue streams within our Telco model, but obviously new digital revenue streams at the same time. Another dimension is obviously transforming our cost base, right. Moving more and more to assert light type of networks. And finally we believe that there are significant consolidation opportunities, but solely in the footprint where we operate today. And I think that the Italy transaction we've announced a few minutes ago is a good example of that.

So the strategic review rests in fact on six strategic priorities. The first is obviously finding these new revenue streams for VimpelCom.

The second is really fundamentally becoming a digital operator. Engaging much more with our customers, not just from a brick and mortar point of view, but much more from a digital point of view and driving new services as we'll see.

Focusing on transforming our cost base and operational performance is going to be key to the strategy. Consolidation, selective consolidation opportunities, and as we'll discuss also disposing of our tower portfolio as well as sharing more and more network rollout with some of our partners.

And all that we believe needs to be underpinned by a world class operation and a series of structural improvements that we need to further make in the business.

Let me now go through each of these strategic initiatives. And first and foremost focus on new revenue streams. As I indicated, what we see significant opportunity around the demand for data in the markets in which we operate today. Data services represent roughly about $2 billion today at VimpelCom, growing at over 20%. And as I indicated less than half of our customers have a data plan with us today. So we believe that we need to better perform in harnessing this opportunity across all our operating companies.

The second is well VimpelCom has defined itself in the past predominantly as a mobile operator, we have significant fixed broadband assets in, in fact five of our geographies; in Italy, in Russia, in Kazakhstan, in Ukraine and Armenia. 6 million fixed broadband customers today. We want to drive in these markets really a fixed mobile convergent set of services. And we think that there is significant opportunity to do so.

And just as much as we've defined ourselves as predominantly a mobile operator in the past, we've also defined ourselves predominantly as a consumer focused business. And yet today we do about $2 billion in the B2B space. And as we know predominantly the B2B space is a growing segment of the telecoms industry.

We want to put more focus not just on large international or large corporates in the markets we operate in, but particularly on the SME opportunity, as SMEs are a growing dimension of many of the emerging market economies we operate in.

The second strategic initiative is transforming VimpelCom to become a digital operator. We see that our customers in these emerging markets are leading more and more a digital lifestyle. We see as we've indicated that there is substantial demand for data services. We want to move from just having a brick and mortal relationship with these customers to having a digital relationship with these customers.

We want to be able to look at implementing big data type of systems to allow us to better serve the requirements of these customers, but also to ensure that we can market non-core telecom services to these customers. And we believe that we need to be evaluating a number of new digital services such as content, as we lead with fixed mobile type convergence services and new digital services such as mobile financial services.

In fact, in most of the markets where we operate in today, few of our customers have bank accounts. VimpelCom is that electronic digital wallet for those customers. And we believe that there is a significant opportunity to drive these new type of digital services across the board.

At the same it can't be all about just new revenue streams, we believe that we need to fundamentally transform our cost base. That we need to simplify our processes, our systems, our business model we need to digitalize these at the same time. We need to globalize in fact our processes as systems.

Today most of our 14 operating companies at VimpelCom operate on a standalone basis. And we believe that there is significant opportunity to drive cost savings in globalizing a number of these processes and systems.

But it's not just about the cost structure, it's also about our CapEx efficiency and prioritization as well as focusing in fact on working capital. And there we see opportunities to better leverage our scale through global procurement to a transition to shared service centers. And we've recently announced the appointment of Alexander Matuschka, who's just joined us from Nokia, where he did exactly that transformation to lead this with a dedicated team across VimpelCom.

We will also focus on selective consolidation opportunities, just as we have announced the transaction in Italy today. Many of the markets in which we operate have not yet consolidated. And we believe that there is substantial consolidation opportunities. And we want to be the consolidator of those markets where we operate today.

We will not undertake any type of cross-border merger and acquisition opportunities. It's all about focusing on the portfolio in which we operate today. We will continue focusing on disposing some of our smaller assets such as Laos and Zimbabwe.

And from a network point of view as we want to operate in the future VimpelCom as a digital operator, we want to move to a more network light type model. And hence, we will have two major initiatives; the first of which we will want to look selectively at disposing of a very significant tower portfolio that we've built up over the years, just like we've done in Italy a few months ago and that generated some EUR800 million for our business.

And finally, we believe that we need to selectively enter into network sharing arrangements, particularly in those markets that have very large geographies. We believe that the future will not be about building networks only on a standalone basis.

All of this obviously can only be successful if we underpin these four strategic initiatives with a world class set of operations. We will intend on globalizing a number of these initiatives across all our operating companies. VimpelCom has done so successfully in the past with our Customer First program and the improvements that we've seen in NPS scores.

And at the same time we'll be looking at reinforcing our management teams and putting the appropriate organizational structures in place to ensure that we deliver on our strategy and we up the game in terms of execution at VimpelCom.

And finally, we believe that there are a series of structural improvements that we need to continue making across the board. Andrew and the team obviously have done significant work over the past few quarters, in terms of addressing the capital and tax structure, more certainly is to be done there even if obviously the Italian transaction from a Dutch leveraging point of view will profoundly change our business.

We need to accelerate our turnaround in Algeria as part of these structural improvements. And we think we have a robust plan with our new CEO Ghada Gebara, although that will take some time.

So this is more than just another strategy at VimpelCom. It's about profoundly reinventing our business. We believe that the new VimpelCom needs to be leaner, more digitally focused and customer-centric than ever before. And our strategy is focused on growing profitability and cash flow for our shareholders.

And as part of that strategy we've set a target to improve cash flow by some $750 million on an annual basis in the next three years.

With that I'd like to handover to Andrew to take us through the improved quarter-on-quarter financial results for the second quarter.

Andrew?

Thank you again, Jean-Yves. So I know you want me to fast-forward, so we get to Q&A. And talk about Italy and strategy, but it's important we talk about second quarter results. It demonstrates a continued ability to execute on the initiatives that we've set out over the last 12 to 18 months.

So, second quarter highlights. Clearly, we've got a very significantly transformative transaction in Italy, announcing the strategy to deliver an incremental annualized $750 million of cash flow. We've got good operational performance and with continued improvements in most of our operating units. We have a very successful 3G launch in Ukraine. And as you can see we've significantly strengthened the management team in many areas.

In addition, we're confirming today our 2015 annual targets was actually a slight improvement in our CapEx to revenue ratio and therefore on leverage, demonstrating already some success from the new strategy to deliver cash flow growth. And I'll talk about targets right at the end.

So second quarter financial highlights first. So we have an improving organic year-on-year trend. The results are very much in line with our expectations. We have an organic decline of 2% in service revenue mainly driven by the delayed 3G launch in Algeria and a little bit of continued market weakness in Italy.

However, we had 22% year-on-year growth in mobile data revenues, clearly demonstrating that we're now getting traction from the investments that we've made on our high speed data networks.

EBITDA margin decreased marginally, but that's mainly a result of the towers transaction that we completed in Q1 in Italy. And EPS is up significantly year-on-year for the first half and in line with our full year expectations.

I now start moving onto the business units. So in Russia, we've got continued improvements in NPS and we've now surpassed one of our main competitors. Churn has improved to the best level within the last five years and we've now got the third consecutive quarter of customer growth as a consequence.

Again, significant data revenue growth 19% year-on-year and excluding currency headwinds, EBITDA margins would actually have been stable year-on-year in Russia.

Within Italy again we show sequential improvement in the year-on-year trend. So it's minus 2% on service revenues this quarter which is a 1 percentage point improvement from what we showed in the first quarter.

Mobile ARPU continues to grow. It now represents -- and data ARPU represents 41% of mobile ARPU. And actually mobile ARPU is now increasing quarter-on-quarter in Italy. So you can see some significant progress there. We have 16% growth year-on-year in mobile data revenues driven by the significant increase in mobile data customers there to just over 11 million.

Now the EBITDA decreased due to the impact of the towers transaction, but excluding that EBITDA margins within Italy would have been stable year-on-year.

Algeria clearly remains a very challenging market for us. We're in the midst of a major turnaround program and organizational restriction which is going to be lead by the new CEO Ghada Gebara. We have -- we are still however the clear leader in NPS.

And we still have strong EBITDA margins of 53%. And so we're going to continue investing in that business. And it's going to be a strong asset for us, and once we've got the 3G network roll out completed. We have a 50% growth quarter-on-quarter in mobile data revenues, and actually a six-fold growth year-on-year. However, results are going to remain under pressure and we expect the transformation program there to take at least another 9 to 15 months.

Within Pakistan, we have successfully completed the SIM re-verification program. We were able to re-verify 87% of the customers representing roughly 99% of all the revenues within that business. And because we were more successful than our competitors in the re-verification program, we basically gained a percentage point of market share quarter-on-quarter.

We have 75% year-on-year mobile data revenue growth driven by the fact that we've got a very wide 3G network already and we were the first operator to get to the top 200 cities in the country with 3G.

Bangladesh also continues to be a very strong asset for us. We have continued revenue market share gains with the 7% year-on-year growth in revenue, despite what remains somewhat difficult environment with pretty aggressive pricing.

EBITDA is actually increased 18% year-on-year. And we now have an EBITDA margin of 42% thanks to both the revenue growth and very good cost control. And in addition to that, we are seeing significant increase in data traffic which we're monetizing, and that's actually driving over an 80% year-on-year growth in mobile data revenues. And we're going to continue to invest in the 3G network in the Bangladesh.

In Ukraine, we had a very, very successful launch of 3G right at the end of the second quarter significantly ahead of the competition offering, but far in the array the widest coverage. We have got a 26% year-on-year growth in mobile data revenues, thanks to what was already a pretty high smartphone penetration within our customer base.

We've got improvement in annualized churn of 5 percentage points. Now clearly because of the network growth CapEx increased significantly within the quarter. And you can expect to see that for the next few quarters as well because we're really going to press home our advantage. And the strong revenue growth in cost efficiencies drove a 12% improvement in EBITDA year-on-year to a 46% margin.

Within Kazakhstan, underlying mobile service revenue showed a 3% year-on-year decrease excluding the MTR reductions. However, within that we actually have a very strong growth from data revenues again of 34% year-on-year. EBITDA margins are stable at 49%, but we expect the recent ratcheting up of competitive intensity in that marketplace will remain in place for the rest of 2015 at the very least.

On Eurasia, we've got organic revenue growth of 1%, mainly attributable to Kyrgyzstan we have a very solid set of assets and very solid EBITDA and low CapEx driving very, very significant cash flow conversion.

And we've got improved churn in all markets with the exception of Georgia. I would note though that the competitive intensity in Uzbekistan is also starting to increase. And therefore, we expect results in that market to come under increasing pressure as we go through the balance of the year.

So if I focus on the income statements, so I've already talked quite a bit about service revenues and margins. So I'm going to focus on the bottom half of the income statement.

So depreciation and amortization shows a significant year-on-year reduction, clearly a lot of that is attributable to their currency headwinds, okay. But in addition there's underlying improvement from the reduction of amortization of customer relationships in Italy and also the impact of the towers transaction in Italy.

The financial expenses show a significant year-on-year improvement clearly a result of all the refinancing activities that we've accomplished over the last 12 to 15 months.

FOREX and other is very much non-cash based accounting transactions. In the second quarter we had an adverse movement on some derivative instruments has actually some of the currencies actually strengthened quarter-on-quarter. And in the second quarter of last year we reported some one-time gains associated with the Italian refinancing and settlement of some withholding tax situations.

From a tax perspective, we've reported lower to effective tax rate for quite some time. It's kind of in the 20% range for the quarter. Now that does benefit from a one-time gain of about $74 million associated with the restructuring of legal entities within the Kazakhstan business unit.

And the net income is relatively flat year-on-year reflecting the fact that we've got a negative movement on the non-control interest which is driven by two things. Firstly, is the fact that we sold 51% of OTA in Algeria earlier this year and then we've got reduced losses within GTH, partly as a consequence of the funds from Algeria.

So move on to the cash flow statement. So clearly, the interest costs or the interest paid within the quarter is also significantly reduced year-on-year, again a result of all the work that we've done on financing.

And again, income tax reduced part of that is the currency effect, part of it is the underlying reduction in profitability. But is also part of it which is due to the improved efficiency of our tax situation which is mainly related to the refinancing.

So net cash used in investing activities showed significant year-on-year reduction as well. Clearly, again currency plays its part there. But there's also the fact that we are already starting to see the benefit of a renewed focus on capital efficiency coming through in the second quarter. And there's also the fact that we were running some pretty high network modernization projects throughout 2015.

Finally, and from a cash flow perspective we show a major outflow in the quarter related to financing activities. And that's nearly all to do with the settlement of the dollar bond tender which actually closed in the first week of the quarter. And that was for about $1.8 billion, $1.9 billion.

So annual targets, so you can see here how our first half results compare with the targets. So we're already in line with these targets as we get to the half year point. Now with the announcement of the Italy transaction, we've taken the opportunity to announce a slight update to our targets for the year. So from a service revenue and an EBITDA margin and even in the EPS perspective, the targets remained unchanged.

On the CapEx revenue as Jean-Yves already mentioned, we're improving that to somewhere in the 18% to 20% range. Also again reflecting the focus on the strategy and on capital efficiency. And then as a consequence of that, we're actually improving what we think the leverage is going to be at the end of the year. So on a excluding Italy basis we now think we're going to be at 1.6 times rather than the 1.7 times previously. And of course, the group leverage including Italy is no longer relevant.

So let me conclude, we have a significantly transformative transaction within Italy. It's going to improve the earnings, the cash flow and the leverage profile of the Group in a very, very fundamental way. We expect that JV to deliver synergies in excess of EUR700 million, with 90% of that coming within the first three years. It creates, as Jean-Yves already mentioned, to an NPV just in excess of EUR5 billion.

In addition, we're announcing the new strategic framework, which will deliver an incremental $750 million of unrealized cash flow improvements, okay. So just to be clear that's incremental and separate from the Italy synergies. And again, you tax and you discount that $750 million and you get to another EUR5 billion of NPV benefit, okay.

So we've got continued improvements operationally. Despite what are some very challenging macroeconomic circumstances, I'm going to remain confident in our ability to deliver on our 2015 targets.

Let me just remind you that we're going to hold an analyst and investor event on the 8th and 9th of October here in London where we'll go into the new strategic framework in much more detail. I hope you're all going to be able to attend that including those on video.

And with that I'm now going to leave the floor to Gerbrand.

Thank you, Andrew. There is now sufficient time for Q&A. We're going to do it slightly different. I will walk through the audience so that I can hand -- hold the microphone. But we will take first questions here from the audience in London and then after we will go to the wire to see who has questions there on the website and then we'll come back for questions here.

For my team and the people in the webcast, please state your name and your firm name before asking the questions. Please, can we ask you to stick to one question at a time? You will have ample time to ask your questions. San, you were the first to raise your hands. I'm going to give you the mic first.

Thank you very much. San Dhillon here from the Royal Bank of Canada. First of all, congratulations on closing of the Italy deal. Unsurprisingly, my question is initially on Italy. Given the EUR5 billion NPV of synergies, you noted there were many OpEx and CapEx synergies. Italy being prepaid mobile market in nature seems like it would lend itself to quite a lot of revenue synergies and -- or [mark] repay on the revenue side. How do you foresee your pricing strategy as a combined entity and what do you think will happen from a revenue perspective? Thank you.

Look, I think we've been prudent in modeling these synergies as with any transaction. I think we've wanted to focus with Hutchison first and foremost on the cost synergies. Post-closing we want to move very fast in this one-company concept as I indicated, bringing together our networks as fast as possible and then obviously our front office and back office operations.

I think as to potential revenue synergies, it's too early. We want to position the joint venture as a strong competitor in the market place that's going to leverage a very strong network. It's not about reducing as you've seen the network in terms of number of sites. In fact, it's having hopefully the strongest network in Italy bringing more services to our customers. We want this joint venture to be a convergent play. And obviously we think that there is opportunity there. And obviously, we want to continue innovating such as Wind has done in terms of digital services.

Having said that, I think it's just too early today to be able to quantify these revenue synergies. And I just would be very prudent on that from that point of view. As we see in the Italian market place and the quarter remains competitive and I want to focus first and foremost the joint venture on the cost side.

And we move to Haim for the next question.

Thank you very much. Haim Israel from Bank of America and congratulations on the transaction. One question from my side. Now, that the transaction is closed and as you stated your -- the VimpelCom net debt to EBITDA goes down below two times. What should we expect in terms of dividend and shareholders' return, especially when you also fine tune your guidance in terms of the CapEx and the cash flow generation?

We've just announced the transaction. There's still 9 or 12 months before we close it. And we've just announced it about I think 52 minutes ago, 1 minute before we were entering in this room. So I'm not sure we've done a lot of work on what the dividend policy is going to be, with some guidelines is what our thinking is to be able to come to you with a structure on that.

Yes. So as Jean-Yves mentioned, it's a little bit premature to be talking about that. We actually need to get to closing the transaction which is as I said probably at least 12 months away. And then we actually really get the deleverage.

Now, you'll also notice from the presentation, if you look at our cash flow statement for the quarter, on an operating cash flow basis before financing we're pretty -- it's pretty much zero. And that's why it's important that the strategy delivers and that we can generate the incremental unrealized cash flow improvements. Because right now with the business as it is, there's just no net cash flow after paying for the interest to tax from the CapEx to be able to pay the dividends. So that's why it's important that the strategy pays off.

Okay, we move. Next question, Herve.

Yes, thank you. Question as well on the synergies on cost, Wind with 3. I mean with Italian market mostly a prepaid market. I'm sure there are some cost synergies you can get. But I was wondering how quickly you think you will get those synergies out. You gave a figure there.

And also the second thing is within the Group 50 million annual improvement on the cash flow. Does it exclude anything you do with Wind Italy or 50% of that or is it included?

So let me address the second question first, first the easy one to get out of the way. So the $750 million completely excludes Wind Italy. And just to be clear, assumes that Wind Italy is deconsolidated. So it's just focused on the diversified emerging markets portfolio that we have once we've deconsolidated Italy. And then the Italy synergies of EUR700 million a year are on top of that.

And the first part of the question, how quickly. Well, we think we're going to be able to get to extract 90% of the synergies within the first three years post-closing, that's important. So it's not from now, it was actually post-closing. And there will be a gradual glide path towards that 90% ratio. I would say that we also expect within the first couple of years to incur couple of hundred million of integration costs where we decommission infrastructure et cetera.

Okay, we go to the next question, Mark.

Hi there. Mark Murphy from Macquarie. So you've mentioned with respect to Italy that your strategy will revolve around convergence. Just two points on that. I was wondering �- I know it's obviously difficult you're bringing two business together. But broadly speaking, what you think that does to your EBITDA margin and within that what is your broadband strategy?

All right, let me maybe take the second part of the question and I'll leave Andrew to talk about margins. I think our broadband strategy is going to be around continuing to offer a strong portfolio of ADSL services and to continue focusing on LLU opportunities. But at the same time we will I think roll out more and more fiber offerings in the market place. I think there's still work to be done by the joint venture, once it's up and running on build versus wholesale in Italy as the wholesale opportunities are relatively significant.

That's one of the attractions I think in the convergent play that we will embark on. It is not the necessity to necessarily build ourselves our own fiber networks in that market place today, given its structure.

Okay. And the margin part of the question. As one of the chart showed, when you take the existing EBITDA that the companies generate, aggregate those and then add on top the run rate synergies that we expect from OpEx, you get to roughly a 40% EBITDA margin business. And we expect it to be in the low 40% EBITDA margins going forward with as we said you know a cash conversion ratio, so operating free cash flow margin in excess of 60% going forward.

Okay, thank you. Sure, you have the next question.

Yes, hi. Alex Balakhnin from Goldman Sachs. I want to ask you on the regulatory approval, what remedies would you concede as acceptable for that transaction?

I think it's too early for us to even mention that. It's going to take several weeks before we file with the Italian and European authorities so there's substantial work that we need to be doing at this stage.

As I indicated or Andrew indicated, one of the terms of the transaction is the ability for Hutchison or VimpelCom to break the deal with no fees should we find that the remedies are unacceptable for the business and are too constraining for the planned joint venture.

So I think that we've got a well-set framework. Obviously we've seen and studied the remedies that have been imposed in other in market consolidation place in Europe recently. And as I said we expect to file in the next couple of weeks in the September, October time frame. And we expect that we'll go through a phase two and hence (technical difficulty).

Well, if I may specify out of the assets you are merging what are the most important for you in terms of basically, if you face the regulatory drawbacks, like what it could be, the spectrum, the asset disposal and the fixed line, for as -- well, hard to see that, but the asset disposal or some scale limitations, what would be the list of things you would never give up?

It's too early.

Okay. Thank you.

Evan, I'm coming to you.

Okay, it's Evan Miller from Gamco. Given where the first half net debt to EBITDA had come to I'm wondering why there were no adjustments to the full year expectation there?

Yes, okay, I can explain that. So you'll have to bear with me on the mathematics lesson here. So at the moment we still benefit from the fact that -- so let me back up. The calculation is -- uses the trailing 12 month EBITDA, right. It's a rolling 12 month EBITDA calculation, so therefore, at the half year we still benefit from the fact that we've got the second half of last year's EBITDA in the calculation pre-currency devaluations in many of the markets, okay.

Whereas the net debt number, obviously, it's a one-time translation. So the net debt number fully reflects all of the currency devaluation already, right. So as we go through the third and fourth quarter and that year-on-year devaluation impact plays its way into the third and fourth quarter EBITDA number you're going to see the net debt to EBITDA ratio increasing, that's all it is.

I think that's a very clear answer. Stella, I saw you have a question as well.

Hi there, Stella from Barclays. I actually have two questions. My first one would be with regards to the debt sitting at Wind, I was wondering what preliminary discussions you may have had between yourselves about how you may address that if the transaction is successful?

Maybe I could just ask my second one at the same time. The there were some press reports in the last couple of weeks about the potential involvement of a private equity partner within the business. I was wondering if that is an ongoing point of discussion, and if there's any opportunities at the moment?

You want to take both?

Yes, I'll certainly take the debt question. We haven't had any conversations in detail about what to do with the debt that is there per se, and the individual debt instruments if you like. I mean the focus has been, and the agreement has been on this is a business that we need to deleverage as quickly as possible through organic means, the synergy extraction, leveraging the scale of the business et cetera. We literally have had no conversations about what we might do to specific debt instruments once we start generating synergies.

And with regards to the second question, I would say don't believe everything you read in the press, that there is no foundation to that speculation whatsoever.

But I think what's important to note is the deleveraging profile of this business given the level of synergies.

Yes.

As we've seen in most in-country type of mergers on a mobile to mobile perspective.

Next question goes to [Visam] and then I'll come to you Sergey.

Thank you. Visam from [Farallon Capital]. I just had a quick question on Algeria. So you mentioned that the transformation plan is going to take still a significant amount of time. At the same time I think you're press release referenced some sequential improvement. The last results meeting you did speak about some key kind of things that you were aiming to improve in terms of relationship with the regulators, speed of deployment of offers et cetera. I'm just wondering what you're seeing on the ground more recently, and whether the sequential improvement could be expected to continue?

Look I don't think that it's going to be a quick fix in Algeria as Andrew mentioned. We've got to work on quite a number of dimensions of the turnaround plan. One dimension is obviously the regulatory framework. We are still tagged as a dominant player in Algeria. And hence it's a constraint with now our partner, the government and the regulator in looking at whether or not that dominant status still applies or not. And there are number of ongoing discussions on that basis.

The second dimension is really in terms of our positioning in the market place. I'd say as the leading player in the Algerian market place, we haven't been sufficiently innovative from a tariff point of view, we haven't been sufficiently innovative from a service point of view, our distribution is not a effective as it should be. And that's a big part of our turnaround plan. And you'll see a series of announcements or movements between now and the end of the year from that perspective in the Algerian market place.

And thirdly, just as much as we want to transform the cost base across VimpelCom, we have started that in Algeria, okay. Because whilst our EBITDA margins remain healthy as Andrew indicated above 50%, we believe that this business can be substantially changed from a cost perspective. And many of the things that I indicated we are looking at or are already in the process of implementing in Algeria.

So it's a broad turnaround plan of an asset that remains I think very interesting giving the characteristics of the Algerian marketplace. I mean we're just rolling out 3G in Algeria, all right. Everything is in front of us in Algeria from that perspective, but we've got to get the business on solid footing.

The next question will be from Sergey.

Thank you. Sergey Libin from Raiffeisen Bank. You mentioned OTT as one of the pillars of your digital strategy. Could you please be more specific on that? Rather do you have any clear idea of how to monetize that probably, or even maybe more broadly on your digital plans if there is anything specific you could share?

Well, one of the dimensions of our digital plan certainly today to share with you is the acceleration of our focus on mobile financial services, all right. That is absolutely critical as part of the strategy. Today, VimpelCom does some $100 million already in this space.

In many of the markets as I indicated, either the population doesn't have a bank account. If we look at Algeria, Pakistan, and Bangladesh less than 15% of the population has a bank account.

And in many of the markets where we operate in other markets, there might be a banking system, but there's not much trust in the banking system. And in many ways given that all these markets are prepaid markets, we are already de facto the wallet or a wallet for -- and a trusted wallet for large proportions of the population. So you'll see more and more initiatives around this space to position VimpelCom as a serious provider of mobile financial services.

And from then on we think that there are significant other opportunities to become a digital player, because the content giants, the Internet giants are not as present in many other markets that we operate in today. And there are significant barriers to entry.

As we think about content and whether it is to be a content aggregator or even a content producer in certain of these markets, we see that these customers aren't necessarily interested in Anglo-Saxon movies or music et cetera. It's all about the local content. And that local content in many ways hasn't been digitalized yet in the markets we operate in. And that's the whole opportunity for VimpelCom, and hence, why we want to reinvent ourselves as a digital operator.

And look for me having come from running one of the largest telecom assets in Europe in the last couple of years, fundamentally I see much more opportunity to reinvent a telecom operator in the emerging space then in the industrialized space clearly.

[Ferg Lianson]

It's [Louie Jiminardo] from HSBC. One more question on Italy. I was wondering whether the corporate governance framework you have agreed upon includes a pass to control for one of the two shareholders over time?

And what are the mechanism in case of strategic disagreement between the shareholders in order to facilitate and take decisions? Thank you.

Okay, thank you. I'll take that one. Yes, I think the easiest way to answer that one is to say that -- and it's articulated in the slides that following three years post completion either parent company can at any time invoke a buy-sale mechanism. So that would be the main thing that would address the issues that you articulated.

Roman.

Roman Arbuzov from UBS. Two questions, please, are both around the strategy. So first of all you've mentioned in sort of consolidation opportunities within the various -- within the various countries across your footprint. So maybe you could just elaborate maybe you see some particular markets as more ripe than others in terms of consolidation.

Italy?

Yes, exactly, naturally. See analysts are already getting very excited about what's coming next.

And then secondly just in terms of the -- perhaps more for Andrew, the $750 million incremental cash flows. There is a number of things sort of go in within that, but then maybe some things are more concrete than others. So maybe if you could just elaborate just a little bit, maybe in terms of one or two initiatives that will be adding to that and maybe add a target as well? Thank you very much.

Look I think in terms of the portfolio as we look at it, I think there's a few dimensions that we consider or want to in terms of the priorities from a consolidation point of view.

I think the first dimension is that most of the markets we operate in haven't yet consolidated. And we want to emerge as a number one or a strong number two in each of these markets, clearly. That's the first dimension for us to analyze.

The second dimension is obviously the market structure. Those markets that have five or six mobile players and potentially some fixed broadband opportunities those are the markets that we're going to want to concentrate on first and foremost.

Clearly, looking at bringing back the markets to three or four player type of models because we think that long-term that's the better model in terms of shareholder value creation in one dimension, but also in terms of being able to long-term deploy the appropriate infrastructure and LT type infrastructure in those type of countries.

So that's another dimension in us determining what we need to do. And obviously at the end of the day it's about what are -- where are there opportunities. And obviously I don't want to give a list today of any type of opportunity.

But Italy has been a major, major focus as you know for us from that perspective. Being a distant number three in Italian marketplace and for Hutchinson a distant number four, we think was not the best competitive position to be in long-term.

Yes. And then the second part of the question on $750 million synergies. So I would say broadly they're going to be 50-50 between OpEx and CapEx. So our intention is long-term that we get to a 15% CapEx to revenue ratio. And within the CapEx savings you're going to see focus on more network sharing, you're going to see more intelligent network design, so single-run architecture et cetera. And you're going to see a renewed focus on procurement, and really making sure that we get significantly better prices from most of our vendors.

And then on the operating cost side of things, the simplest way to think about this is that both from a customer facing front end perspective and also back office, right now we have 14 different ways of doing everything. So Jean-Yves talked about developing a digital stack and then leveraging that across the entire footprint.

So that's going to drive synergies, but we're also going to basically do the same kind of thing with all of the back office processes as well. And we're going to look -- not look, we will be deploying shared service centers for all of our back office type work.

And just one point coming back on the consolidation priorities. I just want to stress again that our sole focus will be on the current portfolio that we have today.

Yes.

Haim, you have a follow-up question?

Thank you. Just as a follow-up question from the consolidation question from Roman. Fast forward a little bit post the transaction in Italy from a P&L perspective, you are dramatically increasing your exposure to Russia. That's going to be your number one market, again from a P&L perspective.

And trying to take what you said about the consolidated market, especially when this market is about to see a fourth operator which is -- should launch soft or hard launch or whatever you call it, how do you see the market? What is the prospect, at least, for the next six months or one year or do you see eventually a market that could be consolidated and this new player could consolidate into the big three? Or -- and what is the -- how do you see the value that could be create over there?

Look I think when we look at the market in Russia, I think there's a number of dimensions obviously to consider. The first is just the macroeconomic environment today that we're operating in, which is challenging. And when I think of the opportunities in Russia long-term, I think that everything being cyclical this should long-term remain an attractive market for VimpelCom.

And whilst, yes, it will weigh more in our portfolio following the deconsolidation of Italy post-transaction. At the same time I think for investors the readability of the portfolio improves in terms of just being emerging markets overall.

I'd also say that with our strategy and our consolidation strategy, I think over time Russia could weigh less in the portfolio if we're successful in other consolidation plays across the board and in growing some of our countries that have greater growth opportunities such as Bangladesh, Pakistan, again back to Algeria.

The market structure I think in Russia today is around as we know three main operators, we like that market structure. And I think it's too early to tell right now whether there needs to be consolidation from a mobile perspective and whether Tele2 or not can have any impact in terms of the respective market shares there.

It's not an easy market to enter into. And as we know operating a network in Russia and even in Moscow given the scale of these cities and the geography is not to be done overnight and underestimated.

Having said that I think that it all then comes to our own business and how we're operating it. We've seen significant improvements in our business under Mikhail Slobodin in Russia. When we look at most of our metrics and we're pleased with that performance. And we believe that there is more to come from that performance in Russia. We believe that we can change the battle field in different dimensions of becoming more of a digital operator than just a traditional mobile operator as we've done.

Focusing on fixed mobile convergence that's something we've never talked about virtually in Russia. It surprises me coming in to VimpelCom that we've got substantial fixed broadband platforms and yet we sort of discounted them because we wanted to be a mobile operator only. Fundamentally, I want to be a convergence operator and I like the fixed broadband platform that we already have in Russia and I think that's a great platform to build off.

So, once the macroeconomic headwinds are there in Russia I think that we've got momentum and more to come.

Okay. Follow-up question from Visam.

Thank you very much. You mentioned a couple of times just the towers opportunity and what that could represent. I was just wondering if you could give us an idea of the size of that opportunity and how it would tie into your objectives of sort of 150 million cash flow improvement. Presumably there you've got a negative impact, but also a one-off positive impact in the offset. Just a rough idea of where the priority lies and sizing if possible?

We have a portfolio that we own of over 50,000 towers. It's one of the most substantial portfolios of towers of any operator in the world. We've done the Italian transaction and we will if the conditions are right continue selectively to monetize that portfolio over time.

Obviously it does have an impact from an OpEx point of view, but the NPV and cash impact are substantial for our business.

We will take one more question now from the room and then we will go to the Internet and then we come back to the room. [Sen].

Yes, cheers guys for taking the follow-up. Just quickly on the timing of the $750 million, Andrew. Should we think about it when you take the operating free cash flow in 2015 ex-Italy, and three years later it should be $750 million higher on constant FX and then $750 million per annum or were you using a 2014 base?

And on Italian towers I think Hutch is around 8,000 off the top of my head or something of that range. Is that something you could sell to Cellnex (inaudible)?

That will be one of the options that we consider once we are able in fact to share more data and really focus on building a network integration plan. But as you know, we can't do anything before we obtain regulatory approval so that's 9 or 12 months down the road, all right

But fundamentally, we want to move to being a digital operator and have more of an asset like type of network model than we have in the past. And we think there's substantial opportunity given the valuations for tower portfolios across world.

Yes. And then the first part of the question, the synergies. Yes, the $750 million is derived from or based off of the 2015 pro forma numbers for the deconsolidation of Italy, and as you pointed out assuming constant currency. It's a pretty major assumption.

Okay. Can we have the first question from the Internet?

(Operator Instructions) Stanley Martinez, Legal and General Investment Management.

Good afternoon and congratulations on the transaction. I wanted to ask about Djezzy, following up first, what are sign posts that we should look for the next 9 to 15 months to identify the turnaround?

I mean specifically I always want to draw a parallel between a network investment Banglalink made in late 2013 and early 2014. And that led to their improvement in net add EBITDA margin that we're seeing now and applied that to Djezzy. But from what I see the DZD4.5 billion of CapEx in Q2 after DZD4.2 billion in Q1. It just doesn't look nearly as significant relative to EBITDA as Banglalink's a year ago. Should CapEx meaningfully increase from here or are there still some local constraints perhaps with the regulator in terms of how fast you can deploy the 3G spectrum and make that network investment in order to get back into gaining revenues market share against [Redo] and Mobilis?

Good morning, Stanley. Thank you for the question. This is Andrew, I'll take that question.

So I think the one thing that's kind of missing a bit from your calculus is generating significantly higher EBITDA margins than Banglalink was back at the end of 2013, and is also doing it from within the market place a relatively -- well not relatively, a much higher market share position as well. So that's a long way of saying that we're very happy with the run rate on the investment on network in Algeria.

And I think to the first part of your question the where you would start to see the benefits of that flowing through over time are in clearly improving customer numbers, improving revenue market share and improving ARPU in particular, because one of the things that we've previously discussed that we is a challenge right now for us in Algeria is we are suffering from a relatively high churn within the high value customer segments which is pressurizing ARPU.

Okay. Thank you, Stanley.

I mean, it almost sounds, Andrew -- and so you're -- and so you're running Djezzy still more on a EBITDA less CapEx basis. And I would think that after today's transaction you just have more degrees of freedom in order to pursue inorganic improvement in further strengthening your EBITDA margin position and your revenue market share.

No, two things, Stanley. Don't forget the debt in Italy is ring fenced. So the fact that we've got a significantly higher leverage profile as a consolidated group actually as I've been saying for several quarters actually has no practical impact because that debt is ring fenced. And so that is not an impediment to investing anywhere else. And we're investing as quickly in Algeria as we practically can.

Okay.

But I can add we still have a number of regulatory constraints around the investment cycles. And the speed of those dimensions I noted that we still have to get right. We can't roll out 3G in the whole country, we're constrained in rolling out 3G in a number of the regions.

And the turnaround I think in Algeria is not about just a superior network against our competitors because in fact when we look at our network scores and NPS scores in Algeria from a network point of view they're very good. It's more to do with tariffs, the services, the distribution that's ineffective right now in Algeria. And that's not to say we should discount the network, but it's not just a network roll out issue in Algeria.

Okay, thanks. And if I could just one follow-up, it's sort of related to NPS and distribution, but turning that over to Beeline in Russia. I mean you had 8.5 million gross adds, up about 500,000 versus the year ago quarter. Could you just help to mention what was the positive impact from the [Swassnoy] distribution channel and maybe the negative impact of what weak retail environment for Russia overall? And then maybe just share any perspective on the Q3 gross add environment so far.

I think that when we look at the net adds in Russia I think the two drivers who really enhanced distribution was Swassnoy and also the continued improvement from a customer satisfaction NPS point of view. Those are really the two drivers.

The NPS score now for us on many dimensions puts us as the number two player in the marketplace, its six consecutive quarters of improvement. So those are two dimensions that remain really important for us in Russia, distribution and our NPS scores.

Thank you, Stanley. We move on to the next question from the Internet.

Ivan Kim, VTB Capital.

Just going back to the deal in Italy. So the combined CapEx for sales in 2014 if I just look at simple sum of the two was 18% CapEx for sales. What's your target here and what kind of CapEx for sales levels you think did you -- that you would be able to achieve?

And do you think there will be a need for some accelerated spending in the coming years? Thank you.

Okay, Ivan, I'll take that question. So we actually think that over the medium-term, the JV is going to be able to get down to below a 15% CapEx to revenue ratio, but will do so with -- at the same time being able to accelerating investment and get to a 90% plus 4G LTE coverage within the next -- within three years post-completion.

And again, it comes back to really intelligent network design, single run architecture and using the enhanced scale that we will have to really, really drive procurement synergies.

Thank you, Ivan.

Thank you.

Can we have the next question from Internet and then we go back to the room here.

Marco Gironi, Credit Suisse.

Another two-and-a-half questions with regards to the Italian deal. What will be the cash restructuring charges and the timing of those charges?

And secondly, upon completion, how long do you think it will take to turn 3 Italia to free cash flow breakeven given they were in a free cash flow burn situation in 2014. How many months will it take to do that?

And therefore wrapping these two together, do you think you'll need to draw the RCF to bridge these cash outflows? Thanks.

So I didn't quite catch the first part of the question, Marco, related to charges. Can you just repeat that, please?

Cash restructuring charges to go alongside the EUR700 million potential savings.

Okay. Yes, so we think the integration costs are going to be in the order of EUR200 million to EUR300 million, and that's NPV over the next -- for the first two years or so post-completion.

And then with regards to the second part of your question, we've not really modeled as such the -- what the standalone performance is going to be of each contributing unit going forward because it's going to be a JV. But we don't expect that as I sit here right now that we would need to draw on that RCF. We think it's going to be able to fund its operations from EBITDA right from the start.

Okay, great. Thanks for the information.

Thank you. Thank you, Marco. We go back to the room. Next question. I see Kay has a question.

Thank you. Kay Hope, Bank of America Merrill Lynch. I wonder if you could talk at all about ratings. Have you had any discussions with the rating agencies?

And one of the things that at least I've often thought was some of the ratings maybe a bit low, particularly if you are a company with say 1.6 times net leverage. Can you give us any color on what the process for that might be or what discussions might be ongoing?

Yes. So you're talking about the ratings for VimpelCom or ratings for Wind?

I'm happy to hear about both.

Okay. I shouldn't have asked.

Got yourself into trouble.

Yes. So, yes we on a fully embargoed basis we've had some conversations with rating agencies within the last 24 hours literally with just -- and that's just specifically with regard to Wind. And I think at least one of the agencies we've had the conversation with has kind of indicated that they probably going to increase the rating or the outlook that they give to Wind from kind of a stable to a positive outlook.

We've not yet had any detailed conversations with rating agencies about what this means from a VimpelCom perspective.

But again, to your point, you would expect a slight improvement. Now I would say that a couple of the rating agencies because of the ring fence have already tended to look at VimpelCom as almost two separate debt structures anyway, and clearly to the extent they do that that doesn't change anything going forward.

Alex, you have a follow-up, I see.

Alex Balakhnin from Goldman Sachs. Two questions actually if I may. One is, I'm trying to reconcile the breakdown of the synergies. So it's around 60% of the NPL synergies comes from network and IT, and in the same time 70% of EUR700 million of all synergies is from OpEx. Is this including the roaming charges 3 Italia pays Telecom Italia or like why is that if should I mean?

And my second question is on the $750 million free -- sorry, cash flow improvement, just a few technical questions. What do you mean by cash flow here? Is this your EBITDA minus CapEx definition or more sort of traditional free cash flow definition?

And my second -- well, third question here is, is this incremental in three years or every year you'll be $750 million?

Okay. Okay, should I take all of those?

You can.

Okay. So the answer to the first part of your question is relatively simple which is that network and IT is more than just CapEx. There's OpEx within the network and IT savings, so that explains the apparent discrepancy that you eluded to.

In answer to the second part of your question, yes, we're defining cash flow as net operating cash flow, so everything pre-financing. So it's EBITDA plus or minus working capital movements, less interest tax and CapEx. So we expect all of those combined to improve by $750 million and it will be on a per annum basis. Per annum generally means every year, yes.

Three years it's going to be $2.35 billion or?

No, we'll get to the run rate of $750 million within three years.

Okay. Thank you.

Once again Sergey from Raiffeisen. Could you try and specify the amount of the synergies you could derive from this fixed mobile convergence? And is it in already in this $750 guidance?

Transformation plan, it's too early for us to be able to breakdown the $750 million in that type of discrete analysis.

The bulk of those improvements I mentioned, we think that a big part of that is going to come from cost transformation as Andrew talked about and obviously working capital improvements. That's where we want to first and foremost direct our efforts in the short to medium-term, longer term obviously or medium to longer-term is about the new revenue streams and obviously within that the convergent play is important.

I'm looking around for the next question. I think everybody is exhausted to have been able to ask their -- all their questions. So I think with that I want to move to conclusion.

Of course you can reach out to the team if you have any follow-up. I'm sure you're going to call us certainly today and tomorrow.

We will be on the road certainly in September, a lot of conferences we will attend, so we hope to see you there. But also I would like to use this opportunity here to thank you all for the last four and a bit year to be able to work with you because you have seen moving on and have the honor to become the CFO of Global Telecom.

In September 1 my successor Bart Morselt, he has been Head of Investor Relation of Swisscom, he will join the team and he will therefore be your host on the Investor Day on October 8th and 9.

And with that, I would like to thank you for being here today, following us on Internet and those who have not been gone on to holiday, happy holidays. Thank you.