VEON Ltd (VEON) 2016 Q1 法說會逐字稿

Good day, and welcome to the VimpelCom first-quarter 2016 investor and analyst call. Today's conference is being recorded. (Operator Instructions). At this time, I would like to turn the conference over to Mr. Bart Morselt, Head of Investor Relations. Please go ahead, sir.

Yes. Thank you. Good afternoon or good morning, ladies and gentlemen. Welcome to VempelCom's first-quarter 2016 results conference. Today I am pleased to be joined on this call by Jean-Yves Charlier, our Chief Executive Officer, and Andrew Davies, our Chief Financial Officer.

Before getting started, on page 2, I would like to invite you to pay close attention to the disclaimer, which I will not read out loud but every word of it applies to the following presentation, including the statements on the Italian joint venture and the Warid Telecom transaction.

Now, the earnings release and the earnings presentation as well as the exact disclaimer text can be downloaded from our website.

Let's have a look at the agenda on page 3. For today's agenda, our Group CEO Jean-Yves will run you through the Group highlights and the financial highlights of the first quarter. Our Group CFO Andrew will then talk you through the Group and country results in more detail, to close his speech with the key targets for the year. Following that, Jean-Yves will close the presentation with final remarks before heading to the Q&A session, where both Jean-Yves and Andrew will be available to take any questions you may have.

With that, I would now like to give the floor to Jean-Yves. Jean-Yves.

Thank you, Bart, and good afternoon. Let me first focus on the highlights of VimpelCom's financial performance in the first quarter.

First and foremost, VimpelCom returned to organic growth both in terms of revenues and underlying EBITDA in the first quarter, driven by strong results in Pakistan, Bangladesh, Ukraine and Uzbekistan, and partially offset by Russia. Operationally, these results are driven by the strong momentum in data services, which are growing double digit, by 27% year on year, and this across the whole footprint.

On the Italian joint venture, the regulatory review is ongoing and the process has entered into Phase II. We remain confident to complete the transaction by yearend.

We remain equally confident that the proposed merger of Mobilink and Warid in Pakistan will complete around the end of the second quarter of this year, as we have already received the first of four regulatory approvals required.

In terms of refinancing, GTH Finance successfully issued bonds a few weeks ago for an amount of $1.2b to refinance the shareholder loan with VimpelCom Amsterdam. Andrew Davies, our CFO, will later on this give you a brief overview on the transaction and will explain how it fits into our capital structure strategy.

On the Uzbekistan investigation, we announced settlements with the SEC, DOJ and OM in the first quarter. VimpelCom paid $795m of fines and disgorgements to the relevant authorities. This now is reflected in the net debt figure, which therefore increased at the end of March compared with yearend 2015.

Finally, our strategic priority to streamline our Group and reduce our cost base through the performance transformation program is on track and accelerating.

Overall, VimpelCom delivered improving operational momentum in the quarter, in spite of the headwinds in Russia, a demonstration that our strategy to reposition VimpelCom is on track.

In terms of financial highlights, VimpelCom delivered a financial performance in line with our expectation and with the guidance during the quarter. However, our reported results have continued to be impacted by currency headwinds in many of the countries where the Group operates. If we strip out this impact, service revenues increased by 2.6% organically year on year, primarily driven by the good operational performance in most Group operating companies, especially in Pakistan, Bangladesh, Ukraine and Uzbekistan.

Underlying EBITDA also grew organically in the first quarter, by 1.7%. Our investments in promoting the usage of data services, such as the focus on smartphone penetration, slightly impacted our EBITDA margin compared to the same period of last year, to 39.5%.

Net income stood at $189m for the quarter. The component of net income coming from continuing operations improved by $126m year on year. If we look at the underlying net income, which excludes the gain from tower sale in Italy and impairments in 2015 and minor impairments in 2016, the net income improved year on year by $270m.

On the CapEx side, the first quarter is usually characterized by low seasonality in terms of network deployments. At the same time, we are also implementing a transformation program to be more focused in our investments without under-investing in the business and to optimize the utilization of our inventories. The absolute figure of CapEx excluding licenses therefore decreased 27.9% year on year.

Again, these results are on track with full-year 2016 guidance.

Focusing on these financial results in more detail, on slide 6, we can also indicate that total revenue grew 4% year on year, even faster than service revenue. For the last 12 months, underlying EBITDA margin and CapEx contributed to the growth in operating cash flow margin to 22.3%, or an increase of 1.6 percentage points compared to the same period of last year, in line with the full-year 2016 guidance.

Over the last four quarters, VimpelCom has seen an improvement in organic growth, as indicated on slide 7. Both underlying revenue and EBITDA metrics grew organically. The line chart shows the trend of the reported figures, still hit on a year-on-year basis by our footprint currencies weakening against the dollar, but at the same time with a softening of the negative trend, which is even more visible in the next slide.

On slide 8, we have modeled the VimpelCom currency basket, weighted by the respective revenue contribution of the various countries. We have indexed the VimpelCom coin with the first quarter of 2014 at 100 basis points. Over the last two years, the foreign currency headwinds have significantly hit our reported topline in US dollars. However, if we look at the curve of the currency basket, starting from the first quarter of 2014, it indicates we have potentially reached an inflection point.

Let me now make comments on other highlights, starting with Italy on slide 9. We remain confident to complete the proposed merger between WIND and 3 in Italy by the end of the year. The joint venture will create a stronger competitor, able to compete with the two market leaders and drive competition, innovation, investment and consumer benefits. We believe that the European Commission will review the transaction on its own merits.

The Italian mobile market today is bifurcating in terms of competition, with the first and second players pulling away from the third and fourth players in terms of investment, coverage and network quality. The emergence of a third viable operator with a state-of-the-art network will lead to more competition and greater quality as well as innovation for the benefit of all Italian consumers, as well as support Italy's digital agenda. Our objective is to build a well-structured third competitor in the Italian marketplace with a mobile network of over 20,000, sites offering 99% outdoor and 90% indoor 4G LTE coverage by 2019.

I would like to focus my final comments on our performance transformation program, which is on track and accelerating. Back in February, Alex Matuschka, who heads up the performance transformation program, presented the initiatives in detail. A cornerstone of the program is to simplify our Group and make VimpelCom agile again while taking cost out.

During the last three months, we reduced headcount by 7%, representing 3,700 staff who have left the Company. We reduced almost a third of the micro teams within the organization, hence simplifying our organizational structures. As such, we are closing offices and we have reduced the real estate footprint by 44 office locations during the quarter, representing approximately 27,000 square meters. These measures imply the reduction of 5% of the global office footprint.

At the same time, we are focusing on reducing the CapEx intensity of the Group, and a cornerstone of this is to globalize our purchasing. At the end of the first quarter, 40% of investments is globally managed now through global contracts. Furthermore, we have launched initiatives aimed at mitigating the ForEx impact on our contractual framework and succeeded in reducing the ForEx exposure by 15% during the quarter.

We are also focused on improving the supply chain. We reduced in the first three months of the year inventory levels by 15%. At the same time, we reduced the warehouse space by 7% across the Group.

Bottom line, performance transformation has already delivered a 5% total OpEx savings, coupled with a 15% year-on-year organic CapEx reduction excluding licenses.

I will now pass on to Andrew, who will run us through the Group and country financials in more detail.

Thank you, Jean-Yves. On slide 12, we provide a breakdown of the evolution of our service revenue in both recorded and organic terms.

On a reported basis, our first-quarter 2016 service revenue was still impacted by adverse foreign exchange movements, resulting in a 13.6% year-on-year decrease, with the translation effect of foreign exchange rates and service revenue being a negative $366m. However, on an organic basis, service revenue grew by 2.6% year on year.

If you look at the decomposition of this, you can see from the top chart that the legacy analogue revenues of voice, interconnect and roaming continued to decline. But this was more than offset by significant growth in the more digital revenue streams such as data and MFS, which grew year on year organically by 27% and 26%, respectively.

In the chart at the bottom, we see that the marginal decline in Russia's service revenue was more than offset by strong mid-single-digit growth in revenue from the emerging markets and Eurasian business units. And as I'll discuss in more detail later, the decline in Russia's service revenue is fully attributable to a foreign exchange driven decline in fixed revenues and that mobile service revenue in Russia continues to grow.

Now let's move onto the EBITDA analysis, on slide 13. On a reported basis, EBITDA also declined by 19% year on year due to both foreign exchange headwinds of $160m, roughly, and exceptional costs of $40m, which mainly related to performance transformation, the latter being a conscious successful investment we are making to sustainably improve our annualized cash flow generation by at least $750m.

On a year-on-year basis, and as Jean-Yves has already discussed, this program has contributed $66m to the underlying EBITDA improvement in the first quarter. However, in order to transform the business, we also need to have some short-term reinvestment of these savings in other value accreting initiatives. And in the first quarter of 2016, the amount of this reinvestment was $109m and mainly related to mono-brand shops, devices and expanding the network footprint.

Looking at the second chart, we see that on an organic underlying basis Group EBITDA grew by approximately 2%, with this improvement being driven by growth of 15% and 7% in the emerging markets and Eurasian regions, respectively, as a consequence of both their revenue improvements and their performance transformation programs.

As I'll discuss later, the reduction in Russia EBITDA mainly reflects some commercial issues which are primarily transient in nature rather than having a permanent effect.

Looking at the Group consolidated P&L on slide 14, I will highlight the most important elements below EBITDA.

So, depreciation and amortization including impairments was down significantly year on year, due to local currency depreciation and impairment charges in the first quarter of 2015 in the Ukraine and Armenia. Net financial expenses decreased by $47m year on year, or 22%, mainly as a result of debt repayments following the US bond tender completed right at the end of the first quarter of 2015.

Foreign exchange and other was positively driven by foreign exchange gains recorded in the first quarter of 2016, while the Company recorded foreign exchange losses in the same period of last year. Now, this may seem counterintuitive at first, given the year-on-year currency headwinds that we are facing, but this is primarily caused by the retranslation effect of US dollar debt that's on the Russian balance sheet.

Within the first quarter of last year, the ruble depreciated significantly by about 4%, from RUB56.26 at the end of the fourth quarter of 2014 to RUB58.46 at the end of the first quarter 2015, causing a loss, while within the first quarter of this year the ruble has actually appreciated within the quarter by approximately 7%, from RUB72.88 at the end of the fourth quarter 2015 to RUB67.61 at the end of this quarter, thereby creating a gain.

Tax expense in the first quarter of 2016 increased significantly, mainly due to a change in the tax regime in Uzbekistan which caused the effective tax rate in that country to rise above 50%, together with improved profits in emerging markets.

Profit from discontinued operations totaled $197m, which was a $64m decrease year on year. However, in the first quarter of last year, WIND recorded an extraordinary gain of $322m from the tower sale. Actually, excluding this extraordinary item, the profit from discontinued operations improved year on year, mainly due to the fair value of the call options embedded in the bonds which contributed a net $60m, and significantly lower financing expenses as a result of the refinancing of WIND.

Finally, in the first quarter, there was a negative impact year on year from non-controlling interests, which is due to the increased net income generation within GTH, coupled with the impact of the closing of the Algeria transaction within the first quarter of 2015.

So let's now focus on net income from continued operations, for which we recorded a net profit in the first quarter of $38m compared to a net loss of $88m in the first quarter of 2015. If we exclude impairments and exceptional items, underlying net income grew by $69m, from $17m last year to $86m this year.

If we look at the bridge, in organic terms, we had a positive year-on-year contribution from the underlying EBITDA growth of approximately $16m and slightly reduced depreciation and amortization costs of $6m. Net financial expenses, as I've already mentioned, showed a year-on-year improvement of close to $50m and we had an increase in taxes of $37m.

On a year-on-year basis, we've actually had a net positive contribution in the income statement from foreign exchange of approximately $60m, which is made up of the negative impact of $160m on EBITDA, the positive impact of $80m on depreciation and amortization, coupled with the approximately $140m year-on-year impact in the ForEx and other line, which as I've already mentioned, is primarily driven by the retranslation impact of US dollar debt on the Russian balance sheet. In addition, joint ventures, associates and others negatively contributed $23m on a year-on-year basis.

So now let's move on to the analysis of net cash flow from operating activities. Last year, we had a negative outflow of $764m, which was significantly affected by payments related to the closing of the Algeria transaction totaling nearly $1.3b. If we exclude these payments and Italy, which is now accounted for as a discontinued operation as a result of the JV announcement, the underlying net cash flow from continuing operating activities in first quarter 2015 was equal to $443m.

That has grown by 10% year on year to $488m in first quarter of 2016. Within that, the underlying EBITDA in dollar terms negatively contributed $146m. However, that was offset or more than offset by improvements in cash flows relating to tax, interest and working capital, which then contributed to the overall 10% year-on-year growth.

The next slide shows the net debt evolution quarter on quarter. From the end of 2015, and as we projected in February when we provided our guidance for this year, the net debt has actually increased within the quarter by $911m. The main contributors to this increase are the settlements with the SEC, DOJ and OM in an aggregate amount of $795m, $10m of related legal costs together with performance transformation cash flows of $44m, for a total outflow of $849m in the first quarter of 2016, which is represented by the bar on the right-hand side labeled exceptionals.

These items drove the increase of the net debt to underlying EBITDA ratio to 1.7 times from 1.4 times at the end of December, and this metric is perfectly in line with our target for the yearend, which is approximately 2 times. Excluding the exceptional items and the foreign exchange, net debt would have actually decreased by $62m and the underlying net debt to EBITDA ratio would have remained stable at 1.4 times.

Since we're commenting on debt, we've prepared two specific slides on the recent bond issued by GTH Finance, which Jean-Yves briefly listed among the main events that took place during the quarter.

So, the bond offer by GTH must be seen as part of the natural journey that the Group started in 2013, which started with us issuing bonds with fall-away guarantees from our Russian company PJSC VimpelCom. The structure that we offered in April, in fact, goes completely in the direction of centralizing all of our acquired US dollar borrowings at the VimpelCom holding level, without any guarantees from any of our operating companies.

At a local level, and as I've discussed many times in the past, our strategy is to provide financing for operational needs in local currencies where we leverage opportunistically on market liquidity and availability on a country-by-country basis. Obviously, this journey fits into one of the key strategic priorities for the Group, which is that of structural improvements.

The second slide is a brief description of the main terms of the bonds issued along with a simplified Group structure, in order to fully understand the use of proceeds.

So, in brief, GTH Finance was able to place bonds guaranteed by VimpelCom Holdings with a blended coupon of about 6.8%, which is approximately 80 basis points lower than the Group's average cost of debt for the first quarter. The offer was made up of two tranches, with four- and seven-year tenure and coupons 6.25% and 7.25%, respectively, and was very successful, with the book being oversubscribed more than 6 times by over 650 international investors.

GTH issued these notes in order to fully repay the $1.2b inter-company loan to VimpelCom Amsterdam. And the bonds are guaranteed by VimpelCom Holdings, which will receive in exchange for the guarantee a yearly fee of 3%.

Now I'll take you through the individual country performance, with an explanation of the trends in our key markets.

In Russia, as Jean-Yves has already mentioned, we see signs of increasing competition in the market, with pricing pressure on devices and increased data allowances, while the macro environment remains challenging. Service revenue decreased year on year by 1.3%, and this performance is attributable to fixed line, where service revenue decreased by 11% year on year as a result of many customers moving from US dollar denominated to ruble denominated contracts.

However, we grew our mobile customer base year on year by 3.5% to 57.7m, as a result of the increased number of mono-brand stores and our presence in Svyaznoy. In local currency, this translated into mobile service revenue growth of 1% year over year, which was driven by a strong 19% growth in mobile data revenues.

EBITDA decreased 7% year on year, while EBITDA margin showed a 3 percentage point year-over-year decrease to 36.4%, as I'll discuss in more detail on the next slide.

The last 12 months' CapEx to revenue ratio decreased to 18% from 19% last year, due to ongoing efficiency programs and the phasing of CapEx plans.

On slide 21, we demonstrate the evolution of our EBITDA performance in Russia. The left-hand side of the chart displays what I would consider as the more structural year-on-year changes, while the right-hand side of the chart contains more transient or temporary impacts.

If we focus first of all on the left-hand side of the chart, you'll notice that we have a positive impact from performance transformation with savings year on year of almost RUB1b, driven by a regional restructuring program launched in the technical and IT functions in late 2015 as a result of which the total FTEs have decreased by almost 1,700 or 8.1%; secondly, our efforts in centralization of procurement and tendering processes allowed us to achieve much better pricing; and third, savings due to many different initiatives related to transport network cost optimization.

The contribution from the performance transformation program almost entirely offsets the lower margin contribution from the fixed line decrease that I've already mentioned and the impact of the mono-brand stores rollout.

On the right-hand side, we have negative contributions from increased subsidies on data devices, which ended early in the second quarter, and one-off bad debt costs due to some sub-optimal design and execution of certain prepaid bundles, both of which cost us just in excess of RUB500m for the quarter on a year-on-year basis.

In addition, we had another RUB750m of year-on-year impacts, the majority of which was the negative impact of the currency depreciation which impacts our roaming and interconnect costs, the year-on-year impact of which will broadly start to dissipate as we move through the remainder of 2016.

Excluding these more transient impacts, the EBITDA margin for the quarter would have been broadly stable year on year at roughly 39%.

Moving on to the next slide, in Algeria, the management is focusing the transformation program on commercial recovery, with a particular emphasis on stabilizing the customer base since we are still experiencing overly high churn. As part of this, we are reevaluating our distribution model and rethinking our pricing architecture. These measures should take a few quarters to bring the benefit, and at this stage we expect these actions to be largely completed by the end of 2016.

On a year-on-year basis, revenues were almost stable in the first quarter, but this was aided by the significant benefit year on year from the change in termination rates, without which revenue would have declined by approximately 3% year on year. The market remains challenging, and as I've already noted, the customer base continued to decline as a result of high churn. Having said all of this, we do have some bright spots, most notably in data revenue, which continued its strong growth, more than doubling year on year.

EBITDA increased 9% year on year, with a robust EBITDA margin of 56.8%. And broadly half of the year-on-year EBITDA improvement came from the favorable change in the interconnect rates, while the remaining 50% of the improvement is the impact of the performance transformation program.

Djezzy launched 3G in five new regions at the beginning of this year and the 3G network now covers 60% of the country's population, with 75% population coverage and coverage within all wilayas now planned for the end of this year. Furthermore, we expect the 4G LTE license to be awarded by the end of the second quarter, with the commercial launch in the third quarter of this year.

In Pakistan, Mobilink recorded double-digit growth in both revenue and EBITDA and continued to gain market share in the first quarter. The positive momentum in data revenue continues with a strong 80% year-on-year growth, driven by successful data monetization initiatives, data device promotions and 3G network expansion.

The customer base decreased by 0.2% year on year due to the 2015 SIM reverification process, while quarter on quarter the customer base actually increased by 5%, driven by distribution channel effectiveness and continued focus on price simplicity and transparency.

Mobilink reported strong EBITDA margin, and this now represents the fourth consecutive quarter where EBITDA margin has exceeded 40%. CapEx decreased year on year due to the rapid rollout of 3G network in 2015, and Mobilink is committed to further expand its high-speed data network, with 3G currently covering approximately 33% of the population.

In Bangladesh, our operations continued to demonstrate strong growth, despite intense market competition within the quarter. The main focus during this quarter was the ongoing SIM reverification in the market. Banglalink is one of the leaders in this initiative and managed to verify 72% of its customers by the end of April.

Mobile service revenue increased 6.4% year on year, with the main driver of the revenue growth being data, which showed a 60% increase year on year. Underlying EBITDA grew by 26% on a year-on-year basis, resulting in outstanding margin growth of 48.1% (sic - see slide 24 "45.3%") versus 40.6% in the same period of last year. Last but by no means least, 3G is now covering 34% of the population.

In Ukraine, the business performance continues to be extremely strong during the quarter, with mobile service revenue growth of 13% year on year, driven by a 76% growth in mobile data revenue as a result of the successful launch of our 3G network and related commercial propositions. The strong revenue growth together with cost efficiencies from the performance transformation program drove a 28% (sic - see slide 25 "43.2%") year-on-year increase in EBITDA, with a very healthy 53% EBITDA margin.

Lastly, from a country perspective, let's talk about Italy, which is now, as we've said many times, accounted for as an asset held for sale pending the closing of the JV that we announced last August. And as Jean-Yves mentioned earlier, Phase II of the review was started by the EC Competition Authority at the end of Q1.

First-quarter 2016 service revenue in Italy showed a year-on-year decline of 1.7%, but there has been a further improvement in the trend, with mobile service revenue in particular almost flat year on year at just over EUR700m. Mobile ARPU grew by 1.5%, confirming signs of slight continued market recovery, while mobile data revenue continued to exhibit strong performance, up 13% year on year.

WIND's mobile customer base was 20.9m, with 4G LTE population coverage now at 58% versus 56% in the fourth quarter. In fixed line, the robust performance in fixed broadband continues, with customers increasing 3.3% year on year.

Underlying EBITDA was down by 3.2% year on year if we exclude the impact of the towers transaction which was completed right at the very end of the first quarter of 2015.

And on my final slide, number 27, we confirm the 2016 guidance and the targets that we announced to the market in the middle of February, when we announced our full-year 2015 results.

In summary, for service revenue, we continue to target flat to low single-digit organic growth year on year. We also expect to see EBITDA margins on an underlying basis that are flat to showing 1 percentage point of growth year on year.

CapEx to revenue ratio remains a key focus and we expect it to be at a lower level in 2016, at somewhere between 17% and 18%. Operating cash flow margin, defined as EBITDA less CapEx divided by revenue, is expected to be flat to 2 percentage points of growth, compared to the 22.6% margin that we reported for 2015.

And finally, on leverage, where our target 2016 net debt to EBITDA ratio is based on our assumed FX for 2016 and the assumed closing of the JVs in Italy and Pakistan, here we expect the net debt to EBITDA ratio to finish the year at around 2 times. And as I've already mentioned, this is higher than the ratio at the end of 2015, mainly due to the impact of the settlements with the DOJ, SEC and OM, and the completion of the Warid transaction in Pakistan.

And with that, I will now hand back to Jean-Yves for his final remarks.

Thank you, Andrew.

The first quarter has demonstrated continued momentum and we are well on track to meet our targets, notwithstanding the challenging macroeconomic environment which is still partially weighting on our Group reported results.

On the revenue and underlying EBITDA side, we have posted organic growth on a year-on-year basis. The Italy transaction, now in Phase II, is expected to close by yearend. Performance transformation initiatives across the Group are on track and accelerating. And on the basis of this financial performance, the 2016 guidance is confirmed.

Thank you very much for your attention. We can now start the Q&A session.

(Operator Instructions). Alex Kazbegi, Renaissance Capital.

Yes. Good afternoon. Thank you. My first question would be, I was just wondering, you made certain preparations on the tower sales in Russia. Where do you stand on those ones? And possibly you can maybe just extrapolate a bit on all the subsidiaries. Where do you stand in terms of the tower sales or potential, so to say, deals which could happen there?

My second question would be on Uzbekistan. Is that -- of course, with the EC it's all closed, but there were some class action suits, if I remember correctly, which have been at least rumored to be starting. Is there anything there which is still outstanding or is this issue closed, so to say, put behind?

And the last one, I'm not sure whether you would like to comment on that, but just wondering again what sort of remedies you could be considering to make sure that the deal in Italy goes through. Is there any discussion at all about something which can soften, so to say, the stance of the Commissioner in Brussels to make this deal happen? Thank you very much.

Okay. Let me perhaps start off with Russia tower. I'll let Andrew talk about Uzbekistan and I'll come back to the Italy transaction.

As part of our transformation strategy, as you know, we want to move to a more asset-light network model. As part of that, we are focused very much on looking at network sharing opportunities across our geographic footprint, whilst at the same time we are focused on disposing of our tower portfolio.

I think it's too early to give specific dates as to specific transactions to the tower portfolio disposal. We are looking at this on a country-by-country basis. And I think that you can expect nothing from us before a couple of more quarters, i.e., more towards the end of the year, beginning of next year. So I think that's pretty much what we can say on the tower transactions.

Uzbekistan, Andrew?

Yes. So, on Uzbekistan, clearly we've settled all penalties and disgorgements within the first quarter to the US and the Dutch authorities and we've entered into the deferred prosecution agreement, the DPA, so we expect no further cash outflows to any authorities.

With regard to the class action lawsuit, it is still early days, but as of right now we see it generating no traction or momentum. But as I said, it's early days, and we certainly don't have any provisions on the balance sheet in respect of any potential claims.

But is there a suit which is happening and just doesn't get any traction, or it doesn't even convert to an actionable action?

Well, we're seeing the same as you. It's newspaper headlines. We've certainly not had a suit filed against the Company, and we see this as not generating any traction whatsoever at the moment.

Okay.

All right. Just on Italy and perhaps before talking about remedies, let me perhaps provide the framework under which we are working in terms of seeing through this transaction.

I think the first is really that Italy is seeing a bifurcation in the marketplace and so our perspective is all about creating a third strong, well-structured operator that can compete against number one and number two. So, the question in Italy is not so much whether the market is going to go from four to three; the question is much more for the market to be going from two to three, and three strong operators. Europe has said that they will review each market, each transaction, on its own merits, and we believe that this will be done in such manner.

I think the other thing to take into consideration, obviously, in Italy and the read across from the other transactions in Europe, is that the combined market share of the combined entity is not going to exceed 35%. On a revenue basis, it's even less. There are no network sharing issues in Italy, so I think that we have a strong case for this proposed merger.

And we've just entered into Phase II of the review with the European Commission, and at this stage it is too early to speak of remedies, but we'll be evaluating these, obviously, at the appropriate point in time.

Okay. Thank you very much.

(Operator Instructions). Mitch Reznick, Hermes.

Hi. Thanks for taking the questions. One you just answered, but staying on Italy, on the improvement on the service revenue for the mobile side, can you talk about how sustainable that trend is and whether we can see that that actually reverts to growth on a sustainable basis this year?

And then also, can you talk through what you're doing to resolve some of the pressures you're seeing on the fixed line side of the business? Thank you.

Okay. So let me take the mobile, certainly. Yes, I think we've said for quite some time that we see a gradual recovery in the Italian marketplace. I think ARPUs have continued to initially plateau out and then gradually start growing over the last several quarters and the service revenue trend is following that, albeit lagging by a couple of quarters or so as we collectively lose customers as the multi-SIM phenomenon takes a bit of a backward step.

But yes, what we're seeing on mobile service revenue in Italy we think is sustainable over the medium term. I think to go a little more deep than that, we certainly see now a high degree of rational competition and stable competition when it comes to the headline pricing that's available in retail distribution. The market does see the odd outbreak, probably once a quarter, of under the radar or off the radar, under the table, proactive win-back campaigns where operators maybe for a couple of weeks a quarter are offering pricing at maybe 50% of standardized retail rates, but that's not really impacting the overall market trend.

Okay.

On fixed revenues, Jean-Yves?

I think we continue to see some pressure in the marketplace. I think that has to do more with certain types of customers, particularly in the B2B segment. This is what we witnessed also in Russia.

And then on Italy, is there -- in the, shall we say, unlikely event that the JV isn't approved, I guess what's Plan B for Italy?

We're working on Plan A right now and it's Plan A, Mitch.

Right.

So I'm not contemplating at all a Plan B. We've got a Plan A. As I articulated, I think it's a solid merger proposal that we've put on the table. It's going to be reviewed on its own merits by Europe. And this transaction is very different than the other transactions that the market has seen across Europe in the past couple of quarters.

Okay. And do you think that WIND would require additional capital or support from VimpelCom if the JV deal for some reason didn't go through?

Yes. Let me take that question, Mitch.

Sure.

Over a 12-month time period, we did three very successful rounds of refinancing of WIND Italy and completed the tower sale as part of that. And we took hundreds of millions of euros off the annual interest cost in doing so and also extended the debt maturity profile by quite several years.

So, as a result of that, WIND Italy right now is just about free cash flow positive and is -- we've got a very, very covenant-light structure. So in the unlikely event that Plan A didn't succeed, there'd be no need for the Group to provide any additional sources of capital to WIND Italy.

Okay. All right. Good. Thanks for taking my questions.

Thanks.

Ivan Kim, VTB Capital.

Hi. Two questions from my side, please. Firstly, you have a lot of cash at hand, more than $2b, even if you exclude the cash in Uzbekistan. Do you have any plans to deploy this cash over the course of this year?

And then secondly, a question on Kazakhstan. Do you see any signs of freeing conditions there or it just remains pretty tough? Thank you.

Andrew, do you want to take both questions?

I will take both those, yes. Yes. So, on the cash, we have no immediate plans to deploy it. As I've said quite constantly over the last several quarters, given the foreign exchange headwinds and volatility that we see, we need much more of a liquidity buffer right now than maybe in a more normal environment. And coupled with that, we do have some debt, both in Russia and at headquarters, maturing over the next 12 to 15 months that we would utilize that cash for if we weren't able to refinance that debt.

And on Kazakhstan, yes, actually, we do see small signs of recovery and the revenue trends are gradually showing a lower year-on-year decline. So, yes, we do see some stabilization coming into the market and maybe by the end of this year it will be much more stabilized. But having said that, it still remains a very competitive market for us.

And I would point out that we have gained market share consistently over the last several quarters in Kazakhstan, as we've been much more price rational than our competitors. In particular, we've been very, very focused on our data yields in that country and we've basically managed to double our effective data yields compared to about this time last year.

Okay. Great. Thank you.

Gavin McKeown, Pioneer Investments.

Hi, guys. Thanks for taking the question. If I could just step in on Italy, a couple of questions. Is it correct to think that you would normally get feedback at around the 40 to 45 day mark? If so, will that be disclosed by the Commission or by the JV partners? I appreciate that you are closer to the detail, but on the face of it I think the UK decision makes the Italian deal look very tough. Do you expect that structural remedies will be required rather than just MVNO like remedies?

Thirdly, Jean-Yves, I think you make a good point about the deal being reviewed on its own merits and the bifurcation in Italy and all the reasons why the Italian market is different to the UK, but it would appear on the face of the UK decision that the regulator doesn't necessarily care about the financial position or financial sustainability of the MNOs.

And fourthly, if the deal does fail, would you have to consolidate WIND's north of 6 times of leverage, or are there ways to avoid that?

And just finally, as you point out, the refinancing gives WIND a runway, but it's only, as you say, barely free cash flow breakeven; leverage is north of 6 times. Would it be correct to assume that if support is required in the latter years before the maturities start to kick in that a decision on further support or further injection of capital would be reliant on visibility of finally getting a merger done? Thanks.

All right. That's a lot of questions on Italy, and particularly the latter part, on the deal. The next few years, whether support is required, as I said, I'm working on closing the deal. I'm not sure I have a lot of time to focus on five years out on the Italian transaction right now.

But let me say a few things on perhaps the remedy dimension that you articulated. Look, I think that we will review to get this transaction completed, the implementation of various remedies. As I said, we're not at that stage yet in the process as we've just entered Phase II.

As I said, there are very particular dimensions of why this transaction is very different than all the other transactions in Europe that we've seen in the last couple of quarters. We will evaluate both MVNO and MNO type of remedies, if required, and as I said, there's no network sharing dimension that is a consideration for the implementation of any type of remedy.

And if you've looked at also spectrum in Italy, spectrum has been relatively well balanced amongst the operators up to now and there is sufficient spectrum to see the appropriate remedy structure, if required.

So, look, I think that the Italian transaction, once again, is very specific and we believe can be seen in a very favorable light even if everybody wants, at this stage, to give a relatively negative read across with the decision this week in the UK.

As to the first part of the question, on disclosure, I can't respond to that. I don't know. So maybe, Andrew, do you want to talk about reconsolidation and support required in the outer years, although I don't think we've spent a lot of time on that?

Yes. Let me get my crystal ball out. So I understand the question, Gavin. Look, I think whether we would have to reconsolidate fully the asset depends very much on the decision to approve or not and then our own decision with the Board on what we would then do with that asset, so it's too early to say one way or another. But clearly, to your point, there is the potential that we would have to reconsolidate WIND Italy with its 6 times leverage.

In terms of support, as I said, WIND right now is cash flow positive, a very, very covenant-light structure, with maturities in the 2021/2022 time horizon from a material perspective. So that's really a question that we don't have to address for at least another three years, I think. So I think it's a bit too premature to be speculating in public on that right now.

Okay. If I could just ask two follow-up questions, if that's okay?

Absolutely. On Italy?

Six and seven.

It will make it seven questions. On the point about spectrum, I guess that's an important point, but if you were potentially looking at structural remedies, so separate MNO or taker of that remedy, my understanding is that there's no remedy or no spectrum becoming available until 2021. And on a merged basis my understanding is that the proposed merger, that's roughly equal. So how would the structural remedy taker be able to access spectrum?

All right. Without going into too much detail, but as a result of the transaction the combined entity is going to have substantially more spectrum than the number one and number two player currently in Italy. And one would not need to wait, in the case of a structural MNO remedy, for auctions in the future.

Okay. And just a second follow-up question, mentioned in relation to network sharing again. It's probably important but -- so obviously there is no network sharing agreement in Italy, but Ms. Vestager yesterday said that, and she clearly illustrated it, that she thinks they're a good idea if the merger was to be allowed and then the three remaining players were to look at network sharing options. Does that not then mean that one of the three larger MNOs would be left stranded without some of the share of network routes? Do you think that's a potential issue or not?

No, I don't think that's an issue at all in Italy, because let's not forget where we are today in Italy. As I said, the market is really bifurcating, which we've not seen in any of the other major European marketplaces. Number three and number four today are very weak in this market from a network point of view. We are outspent in investment terms substantially by the number one and number two. Independently, both our entities do not have the same network quality, do not have the same network coverage.

So in the case of just doing a network sharing transaction between WIND and 3, this would not be enough to ensure that the combined businesses would be sufficiently competitive in the marketplace and would have the appropriate synergies to reinvest, innovate and better serve customers. So we don't think that just a network sharing transaction is sufficient versus the full merger that we've put on the table. And as I said, this is about creating a very strong network in Italy that can compete and can catch up with the number one and number two.

So our perspective is this is not about a question of whether this market moves from a four-player market to a three-player market. This is about creating a third player in the marketplace that can compete and can compete in all dimensions of the sectors in Italy and contribute to Italy's digital agenda. Over 80% of the market share in the enterprise segment is held by number one and number two today in Italy. So the question is about creating a really strong third operator in this marketplace.

Okay. Thanks. That's really helpful.

(Operator Instructions). Vivek Khanna, Deutsche Bank.

Hi. Good afternoon, everyone. Actually, as you'd imagine, most of my questions have been asked already. I just had a quick follow-up with regard to discussions with the Commission. Which of the two entities is leading the discussions, or are you both going together into the meetings? Just to understand how that process is being managed between the two merging entities, please. Thank you very much.

All right. I'm not sure I want to or can disclose a lot about it but, look, this is a joint venture. We've established a very strong partnership with Hutchison. And in terms of this joint venture structure, we are obviously doing this together. So that's as much as I want to comment on that question.

Thank you very much.

Thanks, Vivek.

Ksenia Mishankina, UBS.

Hi. Thank you very much for the presentation. I have several questions. The first one is what is the value of your tower portfolio?

And wat portion of your short-term debt to you plan to refinance? I know that you said that you have an ample cash balance. Just wanted to get an idea what portion do you plan to repay versus refinancing.

And how much debt in nominal terms is currently located at WIND level? I only have financials as of full year 2015 for WIND.

And the final question is how quickly will you have to reconsolidate WIND Italy if the merger doesn't go ahead? Is there a requirement? Thank you.

Okay. All right. Let me just talk about towers. Then I'll let Andrew talk about the three other points. And again, I think your questions are very interesting on reconsolidating WIND, but I just want to remind you that is not the strategy that the Company is pursuing. So I'm sure we all like the read across with the decision on the UK, but that is not our plan and the plan that we're pursuing.

On the value of the tower portfolio, I'll just say that VimpelCom has over the years created a substantial tower portfolio across its operations. We today have more than 50,000 towers across our footprint. We believe that these towers have substantial value and, as I said, our strategy is to unlock that value.

I think it's absolutely too premature for me to give any indication of bids that we could be receiving for parts of this tower portfolio but, as I said, I think it's a substantial asset that the business has on the marketplace. And you've seen the valuations of tower portfolios in different parts of the world. We think that we can unlock some substantial value off the balance sheet by pursuing this strategy.

Andrew.

Yes. Sure. So the short-term debt question, first of all. Subject to liquidity pricing and tenure that's available in the market, our intention would be to actually ultimately refinance all of the short-term debt that we've got.

On the WIND debt, I think at the end of Q1 it's roughly $11b, is the net debt that is on the WIND balance sheet.

And the reconsolidation question, I'm not quite sure whether I understand exactly what's behind it. But the timing of when we'd have to reconsolidate, again, depends on the decisions that we make with regard to the asset in the unlikely event that we would not get approval from the European authorities for the JV.

The one thing I guess I ought to point out here, just for absolute clarity, is that the reconsolidation, if it were to happen, and that's a big if, would be retrospective in nature, so it would not just be prospective.

And will the WIND debt remain ring-fenced?

Oh absolutely, yes. It would remain completely ring-fenced and non-recourse; absolutely.

Okay. So just for the clarity, if the merger was not to go ahead, would you still be able to keep this asset for potential merger and not consolidate it into VimpelCom's financials?

Potentially, yes. Again, as I said, depending on what exactly we decided we wanted to do with the asset.

Thank you.

All right. I'm going to draw anyway a line in the sand that we're not going to address more questions on reconsolidating WIND. It's all very interesting, but that's not the plan that the Company has.

Thank you.

Thanks.

All right. I would like to, from my end, thank everybody for your time, for your interest. Any other questions, particularly if they do not relate to Italy, feel free to contact us at investor relations here. I wish all of you a very nice day and let's talk soon.

Thank you, everyone.

Thank you, everybody.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.