VEON Ltd (VEON) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by and welcome to the Vimpelcom fourth quarter 2013 investor and analyst conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions).

As a reminder, today's call may be recorded. Now it's my pleasure to turn the call over to Mr. Gerbrand Nijman. Sir, the floor is yours.

Thank you. Good afternoon to those in Europe and good morning to our guests from the United States. Welcome to our Q4 and full year 2013 results conference call. Before getting started, I would like to remind everyone that forward-looking statements made in this conference call involve certain risks and uncertainties. These statements relate in part to the Company's expected capital expenditures, 2014 annual targets, network development, refinancing plans and potential future dividend payments.

Certain factors may cause actual results to differ materially from those contained in the forward-looking statements, including the risks detailed in the Company's annual report on Form 20-F and other recent public filings made by the Company with the SEC, including the accompanying earnings release. The earnings release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures, presented on this conference call can be downloaded from the Vimpelcom website.

At this time, I would like to turn the call over to our CEO, Jo Lunder.

Thank you, Gerbrand. Welcome everybody. I have a strange voice today. I think I am embarking on a flu here, so it's not the numbers, it's the flu if you don't recognize my voice, but I think I will carry through.

I am joined also here in Amsterdam with Andrew Davies, our CFO, and he is going to cover the financials more in detail later on the call.

During the fourth quarter, our results continued to be impacted by competitive pressure, severe price competition, regulatory headwinds, unstable market environment, and also some market slowdown for our businesses. As a result of this, the Group reported a service revenue decline of 6% year-on-year to $5.3 billion. But we continue to enjoy strong mobile data revenue growth across most businesses.

EBITDA decreased organically 2% year-on-year as a result of the decline in revenue. But we continue to demonstrate strong cost efficiency, delivering an increase in the EBITDA margin of 1.6 percentage points to a strong 42.7%. We closed the year with solid overall customer growth with an increase of 4% year-on-year to 220 million mobile subscribers, driven by growth in all business units.

I am moving to slide 4. Our underlying full-year results were stable if we exclude the impact from MTR reductions in Italy and one-off charges we had during the year. Revenues and EBITDA on an organic basis declined modestly for the year, falling by 2% and 1% respectively. Again, despite the headwind we faced during the year, the commitment this Group has to cost efficiency delivered an increase in margins of 0.3 percentage points, leading to an EBITDA margin of 42.7% in 2013 as a whole, which is in the high end in the industry.

Net losses was $1.4 billion, reflecting non-cash impairment charges of $3 billion, mainly related to businesses in Ukraine and Canada. Andrew will address this much more in detail later on the call.

Our operating cash flow for the year declined 5%, but remained at a solid level, $5.4 billion. The results demonstrate as we continue to deliver on our values and the priorities, and we are particularly successful in operational excellence, cost control and also effective use of capital. However, we need to make more progress on growing the top line.

The initiatives that we presented in our recent Investor Day and also effectively monetizing investments we are now doing in high speed data networks is key building blocks in addressing the top line growth in all our markets. I am sure we are going to talk about individual markets a bit later on the call, during the Q&A as well.

If I then move to the recent key developments, in January, we announced our annual targets for 2014. We expect revenues and EBITDA to remain stable year-on-year, and also stable net debt to EBITDA at 2.3 times. As we continue to invest for growth, we expect CapEx to revenues excluding licenses increase to 21% in 2014. We also announced a new dividend policy to support our investments for future growth from mobile data and to de-leverage. We aim to pay $0.035 per share per annum until the target level of less than 2.0 net debt to EBITDA has been achieved.

In October, we launched 3G services in Bangladesh, after we were awarded the license in September. In December, our subsidiary in Algeria, OTA was granted a 3G license and we received an exceptional approval for foreign payments to acquire 3G equipment. As a result, OTA imported its first 3G equipment to begin building the network, and we plan to launch 3G in Algeria in the second quarter of this year.

Today, we have also announced that we aim to extend the maturity of the shareholder loan to GTH, which is subject by the majority of the minority shareholder of GTH's approval.

Moving on to the performance of our business units, the Russia -- the Russian business unit has entered its next phase of transition. It's involving customer excellence, data network parity and distribution. The transformation process feels like turning a container ship and is expected to run over the coming years. Our management team is building a customer centric organization focusing on customer excellence and implementing a cultural transformation in customer service.

Beeline introduced new customer -- a new customer value proposition supported by clear communications to improve customer perception. And we believe perception is a big challenge right now. We were also simplifying tariff portfolios; we are reducing the number of different options while addressing specific needs. The actions undertaken are expected to improve customer perception over time with a positive effect on the future growth and better relative performance.

The mobile service revenue declined 2% year-on-year. This is mainly due to one-off adjustments in the fourth quarter of 2013. And if we exclude this one-off, mobile service revenues would have increased only marginally. Mobile data revenue grew 25% in the quarter. EBITDA decreased 6% due to the lower revenue and also rising network and IT cost as a result of the increased demand of an investment as well as an increase in HR costs due to the expansion in the roll-out of owned monobrand stores. EBITDA margin declined slightly but remained still solid above 40%, at 40.3%. CapEx to revenues increased to 20% in 2013, due to the increased investments in the mobile data network and owned monobrand stores.

In terms of 3G coverage, as I said also on the Analyst Investor Day, we now have parity with our peers in key regions, and we have built 8,000 additional 3G base stations in 2013. We plan now to continue to invest more in high speed data networks in 2014. And we expect CapEx to revenues at 22% for Russia for the full year 2014. I'm sure we're going to talk more about Russia during the Q&A session.

But if you allow me, moving on to Italy, Wind continued to outperform the market again in the fourth quarter in what we describe as a highly competitive environment delivering again a strong relative performance. Our mobile customers increased 3% to well over 22 million driven by the success of an all inclusive bundle, which continued to attract customers due to simplicity and transparency.

Mobile service revenues excluding the impact of mobile termination rate cuts declined 3% mainly as a result of competitive pricing pressure. Mobile broadband revenue was up 30% while fixed broadband revenues were up 6% as a result of our strategic focus on unbundling. EBITDA in the quarter declined by 3% due to negative impact of the price competition in the mobile market and also MTR cuts. However it was partly offset by cost efficiency measures, as a result EBITDA margin increased to 40.4%. In the fourth quarter we continued to expand our HSPA+ network to remain competitive.

Looking ahead, we continue to see opportunity of strong value equation in Italy further enhanced by the launch of the fourth quarter LTE services in Rome and in Milan and also in the main airports, we see upside in Italy.

In the Africa Asia business units revenue decreased 5% organically impacted by regulatory and governmental actions in several countries as well as an unstable macro-environment in Pakistan and Bangladesh. In addition, local currencies in Algeria and Pakistan devaluated against the US dollar leading to an 8% decline in reported revenues for this business unit. In order to mitigate the top-line pressure we implemented a number of cost efficiency measures which led to a 3% organic decline in EBITDA with the margin increasing by 1.2 percentage points to 46.7%.

We're now investing in high speed data networks in Algeria and Bangladesh following the award of 3G licenses and we're also now modernizing our network in Pakistan to also enhance data and voice services there. And as you probably see there is a 3G auction also now embarking in Pakistan.

Going to the three main countries Algeria, revenues decreased in local currencies by 3%. The subscriber base grew 5% to [80] million. And you see we're able to maintain its market share of 53%, EBITDA margin remained very strong at 58.3% in Algeria. Our performance in Pakistan declined, with revenues down 6% in local currencies and EBITDA was down 18% mainly due to persistent power outages and increased electricity prices resulting in higher network costs.

In Bangladesh our subscriber base grew 11%, while revenues also here decreased -- here we only have 11% mainly due to the unstable macro-environment. Mobile data revenues grew 86% driven by solid customer acquisition and success of partnerships with OTPs. Examples here are the things we've been doing with Facebook, Wikipedia, and WhatsApp in Bangladesh. EBITDA decreased by 20% mainly as a result of the revenue decline coupled with higher customer acquisition costs and of course voice-over-IP is also an element in explaining Bangladesh.

In Ukraine, our results were pressured by the transition to lower price bundled tariff plans but we continued to deliver good margins. Revenue decreased 9% reflecting a decline in mobile service revenue primarily due to lower mobile voice revenues following the switch of existing customers to the bundled tariff plans.

On a positive note, for Ukraine, mobile data revenues demonstrated continued growth and it was up 12% year-on-year and remember there is no 3G in Ukraine yet. Our mobile customers increased by 3% as a result of our improved commercial proposition and the regionally focused sales efforts.

Fixed line revenues increased 15% as a result of strong growth in fixed residential broadband, which continued to outperform the market. This increase was driven by growth in both broadband customers and related ARPUs.

EBITDA decreased 18% primarily due to higher commercial costs driven by growing sales as well as increase in network IT and G&A cost. EBITDA margin remained high at more than 47%. We continued to execute on our ongoing Kyivstar transformation program. And I expect this program to yield results this year.

In relation to the recent events in Ukraine we have not experienced any impact on our operations and our business continues as usual.

The CIS business unit continued to deliver solid results in the last quarter of the year with a 5% revenue and EBITDA organic growth resulting in a strong 48.4% EBITDA margin.

In Kazakhstan, our competitive market position improved as a result of our attractive value proposition and the customer transition to bundled tariff plans, which is progressing according to the plans we've given earlier. Service revenue in Kazakhstan increased by 5% in the quarter, driven by a 2% growth in mobile service revenues and a 41% increase in fixed line service revenues.

EBITDA grew 9% and EBITDA margin increased 1.5 percentage points, just 1 level of 47.7%, again as a result of efficiencies delivered by the operational excellence program in Kazakhstan.

Uzbekistan is currently a two-player market and our focus there is on maintaining our quality of service and basically further improving our network capacity. We expect that it will become a three-player market again in the second half of this year.

With this, I'll now pass the floor to Andrew, to discuss Group financials and performance in more details. Andrew?

Thank you, Jo, and welcome from me as well. So moving on to slide 13. Our revenue in the fourth quarter has been negatively impacted by regulatory and governmental actions in the Africa and Asia business unit which include the ongoing limitations in Algeria together with MTR cuts and price competition in Italy and market slowdowns in certain of our countries.

EBITDA decreased organically by 2% year-on-year to $2.4 billion reflecting negative impact of the MTR cuts and the price competition in Italy as well as the VOIP effect in Bangladesh. EBIT in the fourth quarter decreased to a loss of $1.9 billion primarily due to the non-cash impairments of $2.9 billion.

The impairment on Ukraine was related to macro-economic and political developments leading to an increase in the country risk premium and weakening operational performance.

Additionally, the Company fully impaired its investments in Canada related to the strategic decision to withdraw from the recent 700 megahertz spectrum auction and reassessment of future prospects for continuing operations in that country. We remain committed to serving our customers in both countries and in the short term we expect there to be no impact on our operations.

Overall, the net loss attributable to Vimpelcom shareholders in the fourth quarter was $2.7 billion resulting from the impairment charges together with lower underlying profit before tax and higher tax expenses.

Full year revenue and EBITDA was stable organically excluding MTR cuts in Italy and one-off charges, but both declined by broadly 2% on a reported basis compared to last year.

However, EBITDA margin increased by 30 basis points to 42.7% due to our successful operational expense programs. 2013 EBIT decreased mainly due to non-cash impairments of $3 billion for the full year related to Ukraine, Canada, and certain smaller impairments.

Overall, net loss attributable to Vimpelcom's shareholders in 2013 was $1.4 billion, reflecting these impairment charges and an increase in tax, which I'll explain on the next slide.

On slide 15, we're explaining two things. So first of all why we actually had a tax charge in the year when we have a loss before tax. And secondly, why there is a year-over-year increase in the tax charge.

So if I address the first of these, clearly, the most significant impact is the impairments, it's a non-cash item clearly non-deductible from a tax perspective. And the impact that has on the effective tax rate is $743 million which is 25% of the impairment amount. So that is the main reason why we see a tax charge for the year despite having a loss before tax.

In addition, the increased year-on-year tax charge is related to two things. So first of all, in the third quarter 2013 we took a one off charge of roughly $120 million related to the withholding tax on distributable reserves in OJSC Vimpelcom, which we had previously thought would not be distributable. And secondly, we've had an impact on the differing tax rates between our jurisdictions, which is again roughly $120 million year-on-year. If we exclude the impairments on the prior year adjustments the normalized effective tax rate for the full year was approximately 35%.

So moving on to slide 16, you can clearly see here the impact of the non-cash impairment charges on our net income for the year. Excluding these impairments, we would've realized a net profit of $1.5 billion.

Our operating cash flows declined marginally year-on-year mainly due to both a slight decrease in EBITDA and accelerated investments in high speed networks to drive future growth in mobile data. Interest paid was higher in 2013 than in 2012, when we had the benefit of the unwinding of certain interest rate swaps.

Net cash flow before dividend payments declined slightly to $2.2 billion and the single biggest impact on our end of year cash balance came from the dividend payments in 2013 of a net $2.7 billion.

As you can see from slide 18, our financial positions remained solid. Our debt maturity schedule remains reasonably well balanced over the coming years. There is a peak in maturity profile in 2017 caused by maturing debt within Wind Italy which we plan to address before its maturity.

Total gross debt was $27.5 billion at the end of fourth quarter with an average weighted interest rate of approximately 8.3% in the quarter.

At the end of the year, our net debt was $22.6 billion leading to a stable net debt to EBITDA ratio of 2.3. We can see that our balance of foreign exchange exposures in gross debt remains diversified across the euro, ruble, and the US dollar.

On slide 19, we address our exposures to currency movements. On this slide, we provide you with ForEx sensitivities on revenue, EBITDA, as well as for gross and net debt. And as you can see we have a manageable impact on the Group for potential movements in foreign exchange rates.

So if I just pick one number to illustrate here as an example, in the top line what we're seeing is revenue would be impacted by plus or minus 4% if the ruble-dollar exchange rate moved by plus or minus 10%.

Through our multi-currency exposure, we actually enjoy a form of natural hedge on currency movements. As an example, the recent weakening of both the ruble and the hryvnia against the dollar has been compensated by the strengthening of the euro against the dollar.

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

Thank you, Andrew. With the last slide, slide 21. It's not been an easy year but despite the competitive pressure, the regulatory headwinds, unstable macro environments and also market slowdown our business has continued to hold up well with a stable 2013 underlying revenue and EBITDA.

We also continued to see strong mobile data revenue and subscriber growth in our markets. And if we look at weighted average market share for the Group, it was also stable in 2013. It went up in certain markets, it went down in other markets but if we look at the weighted average it was stable for the Group. So it's more a market related issue rather than a performance related issue on Group level.

We need to focus on Russia and we are undertaking a transformation process in Russia. We've been able to close the gap on network parity and also mono-brands. And now we move into the next stage. And we need to focus on the customer value proposition. It needs to be simple, it needs to be convenient, it needs to be personalized and we need to work hard to protect our customer base and also to protect our high ARPU customers.

We need to upgrade the customer service and at the same time we need to continue to invest so that our high speed data networks is of the same quality as our competitors.

The transformation process right now feels a little bit like turning a container ship and it looks like it's going to take a bit longer than I personally expected in the first place, but we remain very committed to the task. And I believe we are doing the right thing.

In Italy, which is the second biggest market, we once again outperformed competitors. And we were also able to maintain a strong EBITDA margin in Italy. So it's a strong combination of margin and outperformance of competitors.

And overall, Vimpelcom continues to deliver one of the highest EBITDA margins in the industry. The underlying cash flow from operations are solid and that makes it possible for us to invest in our businesses going forward.

I think that is a fair summary of how we see the year and the last quarter and with this we are, of course, ready to discuss the numbers and take questions. Operator?

(Operator Instructions) Cesar Tiron, Morgan Stanley.

My question would be to understand a little bit the dynamics of the recovery in Russia because if we look at the revenue trajectory over the first couple of quarters and also the macro headwinds that the country could face, your guidance of 0% revenue growth which obviously should imply also 0% growth in Russia probably even positive growth because Italy isn't going to grow this year most likely. How do you see that possible and what -- I mean, how many quarters do you think we need to wait to see the performance gap between Beeline and competitors basically improving?

Cesar, I think it's a very valid question to start with. If we take one step back and go back to the beginning of 2012, I think clearly we realize that we had under invested in the networks and (technical difficulty) distribution and as everybody (technical difficulty) by now we took on a plan to create network parity and also parity on monobrand and distribution.

Those two tasks have been executed and fulfilled. So when we now make sure network quality in key regions, we see that our network is performing well. We also have good monobrand coverage on the distribution side. And then -- it's a valid question, it's of course, why is this not then yielding top line results in line with competitors.

And I think probably we have underestimated the perception issue among subscribers that one thing is to catch up and bring parity and spend two years of that but during that catch-up I think probably we had underestimated what that is doing with perception of existing customers and others. And then we look at the subscriber base development in the last quarter of the year.

It's clearly from those numbers that we have a challenge when it comes to general subscriber growth compared to competitors and also high ARPU subscribers in our base if you look at the ARPU.

And we clearly understand this. Management team in Russia understands this. We have plans to execute on this. We will not be short-term oriented now. So we are investing a lot this year even though revenues are not growing because we think that is the real basis for parity also on the revenue growth eventually.

But we now need to turn that perception among subscribers in Russia and make them understand that our network quality and service level is equally good and we need to win back high ARPU subscribers. This is going to take more time than I realized a year ago. I underestimated the perception element of this transformational process and that's why I also used the container ship analogy in my short intro.

It's hard to say exactly when we will see results. But I think it's going to take us more time than expecting to see results in the next two, three quarters. This is -- probably 2014 we will see -- probably underperformance in the beginning of the year, first half of the year, hopefully a stabilization later in the year. And I think probably as early as 2015 is a year to start seeing more parity again on revenue growth.

And of course we work hard to make this a quicker timeframe in terms of achieving results. But we see it's a challenging task and I think we just need to be strong right now and take a very long-term view. Russia is our core market, we are now investing in LTE networks, it's going to last for 10 years.

And now to do short-term gains to satisfy the next quarter or the third quarter, we will not do -- we will do this now very fundamental, take a very fundamental view on what is required and do the job and rebuild whatever trust that needs to be rebuilt. And I think the task is clear to everybody and the problem is clear to everybody.

Torsten Achtmann, JPMorgan.

In Italy, sales revenue growth has been deteriorating and I'm wondering if you could comment on what the impact of the recent price increases and less competitive behavior would have. So is that something we're going to see more in 2014 than in Q4 2013, and any outlook there?

Secondly, on the Ukraine, is it correct that you have no debt in Ukraine, so any write down you would have on the business in terms of currency would -- there would be no offsetting effect on that?

Okay, I'll take both those questions. So with regard to Italy, the headline pricing started stabilizing end of Q3, early Q4. Clearly, there's just the impact of the summer price campaign rolling through the customer base a little bit. And so we're not expecting -- certainly Q4's numbers did not benefit from any price increase that you alluded to. We might see a continued stabilization, maybe a bit of a -- a bit more plateauing and a bit -- less intense price competition in the first couple of quarters of this year.

And I would say that we are significantly beating our main competitors in the Italian marketplace with our overall value proposition. So we remain committed to Italy and we remain confident of our continued ability to win in that marketplace.

With regard to Ukraine, so yes, we have no debt in the country. We have a regular process, because Ukraine is so cash generative, of paying dividends out of Ukraine into Amsterdam, and we do that on a pretty regular basis through the year. And again, I would just remind you that the impairment charge that we took on Ukraine has nothing to do with a write down of the assets in the Ukraine itself to do with any currency devaluations and the write down is simply a write down of the carrying value of our investment in Ukraine at the on the Group's balance sheet, so it's just simply an Amsterdam level entry.

Next question, please.

Olga Bystrova, Credit Suisse.

Jo, you mentioned today on Bloomberg, I think in the interview, that you have "you have valuable Italy assets await consolidation." Can you maybe elaborate a little bit on that, what you meant, how does await consolidation, how should we think about you're awaiting consolidation, is there any progress on that?

And also given that you have written down Canadian asset in full, should we assume that you are not looking for options that you had at your disposal previously in terms of either sale or increasing ownership or maybe participating further in other spectrum auctions there? So you're basically giving up on the asset or you still will be considering those options as well?

Okay. Just for clarification, the first part of the question, the reference you made on Bloomberg, you asked about Italy and market consolidation?

Yes, yes, exactly.

Yes, okay. What I said -- and I didn't say anything different today than what I've said earlier on Analyst Investor Days and earlier calls as well. And we think there is a big upside for our shareholders in Italy. We have a very well-performing entity. We are currently carrying expensive debt that has a potential to be refinanced and the interest rate as a consequence of that to be brought down. Both actions within our control, both actions would yield results for the Group, meaning continued outperformance and a potential refinancing.

And on top of that, of course, there is a potential market consolidation opportunity in Italy. It's been discussed earlier, we have told you that in general market consolidation is something we're in favor of, if the terms are right, there is nothing to report today. There is -- so this is more reflections on the value of baskets in Italy.

So we remain very committed and positive as we are speaking to Italy even though the market has been difficult for years there now and we think that that situation will eventually create good value for shareholders in Vimpelcom, but we will take the time needed and make sure that we play this the best way in the interests of shareholders. And then maybe Andrew can give a short comment on Canada.

Yes, sure. Thanks, Jo. So with respect to Canada, just want to be clear to start off with that the impairment in Canada was related to the results of the recent spectrum auction. We strategically made a decision to withdraw from that auction process, as a result of our inability to take some -- yes, the level of control over that asset. The auction resulted in all spectrum slots being sold in the territories that we operate in, and as a consequence, we have no clear path forward from an accounting perspective right now to be able to realize the enterprise value in Canada required to repay the shareholder loans, and that's actually the nature of our investment in Canada.

However, we will continue to explore all options available to us and we will continue to fund and run the business on a continuing basis as we have done so for the last few financial years. So, we continue to explore all options that could involve again in market consolidation, it could involve a sale of the business. We will not give up and we will do everything that we can to actually generate positive shareholder value in Canada.

Next question please?

[Oder John, Simpel].

Yes (technical difficulty).

Can you speak up please?

It's really hard to hear you, sir.

Your line is open.

Hello?

Better. Good.

Hello? Can you hear me?

Yes.

Okay. Perfect. Question is in fact back to Russia. I was wondering basically, I mean, with all your competitors having given some intent of increasing significantly CapEx in Russia and in 4G LTE and as you mentioned you need to change some perceptions with some of your subscriber base. I'm wondering, how and where do you think you can have the most impact considering the current environment where everybody is spending more in Russia. And where you might still be in a condition of [cash up again]. I was thinking is there anything, particular segments, a particular product where you think you can leverage and to make an impactful difference versus competitors focusing your resource on a particular point rather than just generally just on purely overall investment?

Of course, it is and I think the whole industry is moving towards almost personalized marketing based on their advanced data based model. So, of course, there is a lot we can do in terms of professionalizing the go-to-market offers and how we communicate and then present our products to Russian consumers. So, there is a long list of initiatives here and this is the key focus of the job. That being said, of course, the basic product here it's almost the [resilience] of the -- of the importance of the networks.

In the early days you had coverage and quality of networks being the main competitive advantage and then when voice moved into high-quality and general to everybody, it turned a little bit more into innovation and other stuff. Right now I think the industry again is moving a direction where network quality and capacity has s growing importance. And for that reason we will invest alongside with competitors in Russia and make sure that now 3G stays at par and that LTE also reflects what kind of offerings the others are having. And that's why also saw the increased CapEx we announced for Russia on the Analyst Investor Day and this is the whole logic of carrying back dividend alongside the de-leveraging.

So the basic platform remains the networks and then of course there is many, many things we can do in changing perceptions and working more effectively with segments of segments and even almost individual customers. And we are upgrading people systems and everything in this direction. I think frankly speaking, we do a lot of very, very good things but it's going to take more time than some of us realized when the whole process started.

Igor Semenov, Deutsche Bank.

I just have a specific question on the subscriber figures in Russia and Italy. There was a decline, a quite considerable decline in the sales figures in Russia and the churn picked up very significantly. Is there some specific reason for that? I mean, it just looks quite sharp relative to normalized or just perception issues in Russia. And similarly in Italy, I mean it's not a such big decline but nevertheless over 100,000 of net churn. Can you provide reasons for that and where is actually the churn seems to be improving, so what's going on there?

And Andrew can chip in here, but on Italy of course the fact now that we have been seeing a price increase in the fourth quarter has led to lower gross adds, churn is stable and as a result of that, and the subscriber growth and then we have seen historically it was a difficult -- (inaudible) seeing more benefits from maybe monetizing of the subscriber base by having additional price levels offered rather than focusing too much on subscriber growth and revenue growth.

So, I think we have achieved a certain size in Italy now that will lead to more focus on the right price level and profitability margins going forward rather than subscriber growth. So, for Italy I think it is very well thought through and very logical kind of planned reason for it.

Russia, of course in Russia we are also a little sort of moving in the seasons because we have a strong position in the so-called Gastarbeiter segment which is workers from abroad coming mainly to Moscow to work during summer season and then going back during winter. So if you analyze Vimpelcom's subscriber base development, you will see that we normally perform better during the summer and weaker again during the winter. So that's part of the picture.

I think if you relate it to the announcement yesterday from Vodafone, you will also have an element of (inaudible) calendar that helps them. So, these are factors that explain some of it but not all of it. The rest I think is about what I said customer perception that we need again to work hard to now protect our base and positioned our Company so that customers understand that we have a basic product in place equal to the others. So, it's partly what I said and again partly the perception problem I mentioned in the first answer.

Olga Bystrova, Credit Suisse.

Yes. I have a follow-up question. Can you remind us what are the KPIs for the key management top management within the Company?

Yes, we focus on (inaudible) performance, revenue market share, we focus on cash flow related indicators. It could be EBITDA, it could be EBITDA minus CapEx. We focus on data revenue growth and we're also focused a lot on the so-called net promoter score which is a proxy or an indicator of customer satisfaction. So, but there is nothing magic to this, it's, I would say, a quite a traditional KPIs that clearly reflects the value agenda of the Company.

I would add to that, it's the KPIs that Jo just described, all drive the short-term incentive program but then in addition there is a long-term incentive program which is almost exclusively driven by share price performance and in particular relative to the share price performance of the telecom industries.

Could you move to the next question please.

JP Davids, Barclays Capital.

Please can you provide us some color around your risk management policies, you have in place to deal with geopolitical risks or maybe asked another way, have do you, the management team, prepare yourself with potential challenges like cash repatriation and [ESG] issues and so on?

Sure, I'll try to give you just two minutes on this rather than two hours. So, yes, we have a very well developed enterprise risk management program across the board anyway which clearly has geopolitical risk as one of its assets, with regard to specifically total of repatriation of cash. So we clearly ensure that we are paying dividends on a fairly regular basis from some of these more [emerging market] countries and in addition to the extent that we know that we're going to be paying dividends out from some of these countries we tend to try to hold a lot of the cash to the extent that we are allowed to by regulations in dollars so that we're protecting the outflow or the up-streaming of dividends.

With regard to foreign exchange exposures more generally, what I would say is that we do what 99.9% of corporates do, which is we focus on hedging transactional cash flows country by country. So if I take Russia as an example, within Russia, we would hedge that country's local currency, or that local country's exposure to any dollar cash flows they would have. As an example rather than focusing on translational cash flows in terms of the impact that translating local currency results has -- back into dollars would have. And the reason we don't do that is first of all, the technical term for that is currency speculation. And secondly, even if you wanted to do it, it would be very, very, very expensive.

Do we have time for one more question?

Sure, thanks sir. Ivan Kim, VTB Capital.

Sorry (inaudible) on that, but there was a significant revenue reduction in Russia on a year-on-year basis, and/or seasonal effects on the migrants side of things, but that's more kind of on a quarter-on-quarter comparison. So, I am just wondering whether you saw, and use some other effects behind that, probably you saw some acceleration of subscriber migration from archived tariffs or probably you saw some one offs on the revenue side like fight against fraudulent content, for example, something we saw in the numbers before, any color would be appreciated.

First of all if you look at total revenues in Russia, equipment is down, that's an element we haven't touched upon so far on the call. If you look at service, the news from (inaudible) it has increased 2% year-on-year. If we adjust for some one offs, some clean-ups we've done in SMS spam and other things that we believe is not very useful for our customers and that this is going back to now building a transparent and trustworthy relationship to all of them. If you adjust for these one offs, it was more or less flattish; a fraction marginally up year-on-year.

So, that's basically -- and of course when you compare year-to-year, we compare apples-to-apples. So right now I would say that underlying mobile service revenue trend for Vimpelcom in Russia is flat. And we see the market growing, and for that reason we will be coming again back to the fact that I think we have fixed the basics, it's more a perception issue, and it's about how we grow our subscriber base, how we protect our subscriber base, how we protect our high ARPU subscribers, how we gain back high ARPU subscribers from others, how to monetize data. And here there is a long program, I think, we have a plan in place that will get us there. Unfortunately, I think, it's going to take more time than I realized. It's a big task at hand. But I think we are going to get there, but that's basically the explanation of the revenue trend and the big problem we are currently facing.

Thank you, sir. At this time, I would like to turn the program back over to management for any additional or closing remarks.

It's still Jo here. So, thank you to everybody for interest in Vimpelcom and thank you for participating on the call today. Thank you for the questions. Of course the IR is available for any follow-up questions you might have. And all I can say that we have a lot of work ahead of us. So, it's been a not easy year 2013, and we need now to take a very fundamental long-term view on the business and make sure that we are doing the right thing. I believe we have the right people in place, and I hope that we will be able to turn some of the trends around during the year or a little later than that and hope that everybody will be back. And looking forward to talk to you either on the road or on the next call. And with that I wish everybody a continued good day. Thank you.

Thank you, gentlemen. And thank you ladies and gentlemen. Again this does concludes today's call. Thank you for your participation and have a wonderful day. Attendees, you may now log out at this time.