VEON Ltd (VEON) 2014 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for coming here to London. Also, a warm welcome to people who listen on the conference call or watch our video webcast. It's an honor that we're here. This is the first time that we present our earnings here live in London, and we have the intention to do that, let's say every two quarters, so twice a year.

I'm joined here by Jo Lunder, our CEO, and Andrew Davies, our CFO, and clearly Joe and Andrew will present after I have done the introduction. After their presentation, we will have ample time for your questions. We will certainly also take questions from the conference call.

But before we begin, may I kindly ask the people here in the room to put their phone on mute? And now we're going to go to a very important slide, where you all have to pay your attention to the disclaimer.

But before getting started, I would like to remind everyone that forward-looking statements made during this presentation involve certain risks and uncertainties. These statements relate in part to the Company's anticipated interest cost savings, the 2015 targets, the anticipated improvements in performance and results of our capital structure optimization efforts. Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risk detailed in the Company's annual report on Form 20-F and other recent public filings by the Company with the SEC, including today's earnings release.

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

And at this time, I would like to turn the discussion over to Jo Lunder.

Thank you, Gerbrand. Good afternoon to everybody in the room and to everybody following us on the webcast. I hope you can see and hear me well.

It feels really good to be here in London, face to face. As Gerbrand said, this is the first time we do a face-to-face presentation on our earnings numbers, and we will try to do it two times per year going forward.

It's been a challenging year, for sure. We have had geopolitical challenges. We have had currency movements against us. We have had a macro environment not working in our favor. But despite that, we have been able to deliver on our 2014 targets.

Revenue and EBITDA came in as expected. Our net debt to EBITDA came in as expected. And we were able to keep our pledge, investing approximately 20% of our revenues into high-speed data networks that is now serving us well going forward. And I'll return to that point, because I think we see now an improved trend and a momentum in many of our markets as a result of the CapEx programs that we've been running now in 2013 and 2014. Overall, I'm very pleased with the progress and the trend in our performance.

I also want to highlight, before we go into the individual markets, I want to highlight a few things in terms of progress. Let me start first with the portfolio.

Of course, the fact that we have been able to sign and close Algeria is a big, big milestone for us. This is a transaction that we have been working on for three years, and I think it gives us a lot of financial flexibility. It's going to serve us well going forward, and finally we can now start also developing our Algerian operation the way we would like it to be developed.

I think also the cleanup in our portfolio, selling off some of the smaller entities, is helpful. It's nearly completed. We have a few small assets left that is not of strategic importance to us, but they're cash positive and there's no urgency related to them.

The second block in terms of achievement is really the financing area. And a big thank to Andrew, and he will speak much more about this a little later today, but we have been very active in the market. In 2014, we have done refinancing of $21b. And the result of all these refinancing activities is actually that our net income, on an annualized basis, is improving by $500m going forward, and you see probably some of that reflected in the targets for 2015, as well.

And then, on operational side, I think for me the biggest single achievement that stands out today is the performance in Russia. For the first time since 2013, Russia is growing its service revenues and it's growing its subscriber base. But I think also we see major achievements in many other operations as well, so generally I think we see good progress in the year as a whole.

So, if we now look a little bit about the investments that we made in the high-speed data networks in 2014, we see them start to pay off. Russia, for example, is now the leading company in Russia in terms of customer satisfaction on mobile Internet. We're number one or number two in 75% of the regions when it comes to mobile data speed right now, so we've really done the catch-up with respect to our competitors there.

Italy, as you can see here, we have almost 100% HSPA+ coverage. We have almost 40% coverage, population coverage, on 4G/LTE right now. We're launching 3G in Algeria. We are done with the 2G modernization in Pakistan. We're rolling out 3G there now. We have the widest 3G network in Bangladesh.

We were awarded spectrum last week in Ukraine. We're rolling out now a 3G network in the second half of the year. And clearly also in Kazakhstan, the high-quality 3G network is serving us well, and you see it on the results.

So the issue we had 18 to 24 months ago in terms of under-investments in our networks, I think we've changed that. We have invested enough, we have upgraded the networks, and our position right now is much better. And that allows us also to focus more on customer satisfaction and focus more on data services going forward.

And to me there is also one other point here that is really important. In our portfolio of 220m subscribers, only 57m, that's 25%, is on 3G or 4G, which means that still 75% is yet to come onto 3G and 4G in terms of using data services. That I think is good news for shareholders in our Company.

We've made good progress on customer experience. We are now number one, and this is a key focus for us. So we did the upgrade of the networks, and why do you do that? You do that because you want also higher customer satisfaction, right?

So we are now number one in five operating units. We are a co-leader, and by definition also number one in two others, Algeria and Italy, and we have also substantially improved our position in Russia and Pakistan during the year. All this I think is a good -- it's a good dynamic in terms of how we look at our business going forward.

Then, and Andrew will cover this more in detail, but allow me to put a few comments on the numbers. If we start with the quarter, the fourth quarter of 2014, revenues declining organically by 2% in the quarter, this is in line with targets.

EBITDA is a little disappointing, actually. It's down organically 8%. This is driven by increased costs related to our network investments. So it's a consequence of the CapEx programs that we've been running, and it is also linked to FX movements. There's an element of FX in this as well, even though it's an organic number.

EBITDA margin is a little low in the quarter, 36.4%. If we exclude one-offs, it's 38.5%. And of course, when you look at the reported numbers, they're heavily influenced by the currency headwinds that we experienced, especially in the last four months of the year. Customer growth in almost all our markets, almost 222m customers, almost adding 5m in the year as a whole.

And if you look at the full-year results, revenues down 4%, EBITDA down 6%, again as expected, and the bottom line, the minus almost $700m is of course influenced by the $1b impairment that we decided to take in the last quarter, mainly related to Ukraine. And of course also again currency is influencing the net losses. But of course the impairment of $1b is a non-cash item, and I think also still we have a very solid, almost industry-leading EBITDA margin for a Group like ours of more than 40%.

I'll now speak a little bit about the different countries and try to make my points on the individual markets.

Russia, I'm pleased with Russia in the last quarter of this year. As I said, service revenues and the customer base is growing for the first time since the third quarter of 2013. We see a 10 percentage points decrease of churn. We see a 20% mobile data growth year on year.

And again, the issue here is the EBITDA number. I think we are down 3.7 percentage points on a year-on-year basis. Most of this is currency related, the weakening of the ruble to the dollar melting into our cost base. So, if we exclude the currency movements in the last quarter, EBITDA would have been stable year on year in Russia. So, again, a currency effect.

The CapEx program we're running now came in as expected, around 22% of revenues. And I think we're spending our CapEx now in a very effective way, and that's why you also see results coming up.

I also want to address one more thing on Russia. Of course, there is a new reality in Russia now, with the ruble trading on the levels we see right now compared to what we saw a year ago. So we are now very focused on three blocks in terms of managing our business in Russia.

The first block, well, it's no particular order, really, but of course FX management now becomes important. We have been able to hedge our dollar costs in the first six months of the year. We have been able to renegotiate dollar denominated contracts with vendors. So all these things is happening as we speak, and trying to adjust to the new reality.

I think also we need more focus on sharing arrangements going forward, so the LTE sharing agreement we have with MTS, I'm very pleased. I think the timing was excellent, compared to what happened in the marketplace. We would like to do more of that, if possible.

And I think also we need to take a very hard look at our cost base. It's just a new reality in Russia, and for that reason we are also launching now a group wide program, looking at a more efficient way of running our business, including looking at our costs, and that's a program that is about to be launched.

Italy, also 2014 turned out to be a quite weak, I would say, and challenging market for Italy. Still solid relative performance in the last quarter, and if we analyze the numbers we will see it. The mobile broadband base is now about 10m. That's great news. The mobile broadband grew 16% year on year. Fixed broadband grew 4% year on year.

If we adjust for underlying factors, the revenues are down approximately 5%. It says 9% here. If you look at the underlying decline of revenues, it's approximately 5%. If you do the same thing on EBITDA, EBITDA is down approximately 6.5%.

I think, frankly speaking, that we had on a relative basis a satisfactory quarter again in Italy, and my expectation now is that the Italian market will start to stabilize this year. I think we have, frankly speaking, the worst behind us in Italy.

If we put this a little bit into context, that we have now upgraded our networks, we have moved focus to customer satisfaction. The next wave of the way we want to work is really a digital journey, and Italy is now leading the way in this digital journey.

And you will see a lot of initiatives now in the next year, this year, coming out of Italy, where we would like to interact much more on a digital basis with our customers, using digital channels and trying to move more away from the classical, traditional way that telcos has been interacting with its customers. And the idea is that Italy now is creating a model for this interaction, and we're choosing IT architecture and platforms that can be replicated into new markets, so that we can take a position to lead a digital journey for the Group as a whole.

And of course, also in Italy, given now everything happening around us, focusing on cost and effective use of capital is also important. And that's why we also today confirm that we are exploring a transaction on selling part of the towers in Italy to a third party to help deleveraging.

Algeria. Finally, we can start looking forward in Algeria. The closing is a crossroad for us. We have a strong local partner now. And the main focus this year in Algeria will be to get a good, really good, rollout of the 3G network.

Numbers are, I think, to most people following us a little disappointing, and for that reason we have started also a transformation program in Algeria, addressing these things. We've done this successfully in other markets. I think again we will be able to do it here. It's going to take a little bit of time.

I think we need this year to rebuild the company. It's been on hold for years, right? There has been no investments. There have been no real commercial decisions. It's been a company struggling for survival. Now the deal is closed, now we can start looking forward.

And for that reason we will try to rebuild and really take advantage of being number one in the market, having the most and best brand in the market. We are strong believers in the Algerian market, and believe that we're just going through a transition right now as a result of the history.

Three points I want to make on Pakistan. We're done with the modernization of the 2G network, so all the capacity issues we have had in the networks are now resolved, which is good news. We're investing effectively in the 3G network. We're the first company in Pakistan to reach 2m 3G customers.

And the last point I want to make is related to the service revenues. It decreases, and the main reason why it's decreasing in the quarter is that we are also now doing a cleanup in Pakistan, like we did in Russia. We're taking out all the toxic revenues, focusing on customer satisfaction. We're building for the future. So I expect now, with 3G rollout, with improved customer satisfaction, more capacity in the networks, that you also will see Pakistan performing better in 2015.

Bangladesh, I'm almost tempted to say the numbers speak for themselves. It's almost hard to -- you hardly see these numbers, I think, from mobile companies these days, double-digit revenue growth, leading customer satisfaction, widest 3G network in the country, EBITDA increased 38%. A very strong quarter for Bangladesh.

Ukraine. Good progress in Ukraine on the transformation program. We see now we're the best on what we call net promoter score or customer satisfaction. We see churn coming down. We see the subscriber base growing again. But clearly the Company is influenced with the situation in the country.

The EBITDA margin is high, but it's influenced with a number of external factors. There's a new legislation on VAT charges, among other things. And if you look at the EBITDA margin without these one-offs and the new legislation on VAT, it would have been 45.6%, slightly higher than the one you see here. So still a high margin, but clearly a demanding market.

Data grew 7%. That's quite impressive; without the 3G network, 7%. So I'm optimistic when we now start rolling out 3G in Ukraine, and we hope to launch in the second half of 2015. I think there is a big demand in Ukraine, but I think we need to be mindful about the environment in general. It's expected to be quite challenging for us.

But still, we are the largest operator, the strongest brand, and 3G is coming. We need to take a long-term view on Ukraine, and we are still very committed to the country and the market.

This is the last slide before Andrew walks us through a lot of the financing and balance sheet activities we've done. CIS, very strong performance I think, solid results generally, and especially in Kazakhstan. We have gained market share in five out of six countries on a year-on-year basis. Mobile service revenue increased 4% year on year. Data is up 24% year on year. And EBITDA, if we exclude the one-off charges we have, would have grown 3% year on year in the quarter, so the underlying development is also good here.

With that, I will leave the floor to Andrew. He can talk a bit about the numbers and everything we've done on the financing activities. Then, I'll wrap up with a slide at the end, and then we can have a Q&A session. Andrew?

Okay. Thank you, Jo, and a good afternoon from me as well.

So I'm going to talk to you this afternoon about three things. I'm going to talk about financial performance for the fourth quarter and the full year. I'll then talk about all the great work that Jo's already alluded to that we've done on improving the capital structure. And then finally, I'll get to talk about 2015 targets.

So if we look at financials, first of all, clearly, the thing to talk about is currency headwinds. They've had a significant impact on financial performance, both in the P&L and the cash flow statement, principally due to the deterioration of the ruble and the hryvnia, which have fallen by approximately 70% and 100%, respectively, year on year.

However, on an organic basis, as Jo's already told you, service revenue for the quarter declined by only 2 percentage points, clearly the best trajectory we've had for any quarter during the year. And that's thanks to growth that we've had in Russia, Bangladesh and CIS.

EBITDA is down 8% year on year to $1.6b on an organic basis. Higher network costs resulting from the increased investment in high-speed data networks, coupled with some foreign exchange headwinds.

EBIT for the full year has been impacted by $1.1b of non-cash impairment charges, principally in Ukraine, but also with a smaller contribution from Pakistan and Laos. It's important to note that with Ukraine in particular, all of that impairment was driven by macroeconomic factors, such as the foreign exchange rate, higher inflation rates, etc.

Refinancing of Italy contributed to lower interest costs year on year for the quarter. And then finally, we've got much lower tax in the quarter, resulting from lower withholding tax on intragroup dividends, coupled with a lower overall profitability.

On a full-year basis, as Jo has already mentioned, we achieved the guidance. Revenues and EBITDA declined by 4% and 6% organically, respectively, both of them in line with the targets. Again, the full-year EBIT was significantly impacted by the non-cash impairment charges which we booked in the fourth quarter. And financing expenses again decreased as a result of the Italian refinancing.

ForEx and other costs reflects two things; the currency depreciation we've suffered during the year, coupled with one-off transaction costs of approximately $200m that we booked in the third quarter related to the second phase of the Italian refinancing.

Across both years, our effective tax rate has been significantly distorted by non-cash impairment charges and also the one-off costs which we booked last year consequent to the signing of the Algeria deal. However, on an underlying basis, the effective tax rate remains in the mid-30% range, and we expect it to remain in that range on a reported basis going forwards.

If we move on to the cash flow statement, we can see that this has also been affected by the currency headwinds. Net cash from operating activities shows a year-on-year reduction, and it's also an impact from the one-off transaction costs related to the Italian refinancing in the third quarter of this year. However, it does remain at a robust level of $5.3b for the full year.

Cash used in investing activities has actually decreased year on year, despite the higher CapEx, thanks to asset disposals in CAR and Burundi, coupled with the return of longer-term cash deposits in both Uzbekistan and Kazakhstan.

Compared to last year, there is a significant change in the cash from investing activities. In 2013, we paid out over $4b in dividends, which have seen a substantial reduction this year thanks to the need to invest in high-speed data networks. But also, we've been very active on financing activities in 2014, which is a nice lead into the discussion on capital structure.

So if you look back a year ago, our capital structure was far from optimal, so let's remind ourselves what was on your mind and what was on our mind. We were highly levered and yet had the need to invest in high-speed data networks. We had an unfriendly debt maturity profile, extremely high interest costs. We had cash on the Algerian balance sheet that we could not access. And finally, but by no means the least, there was a lot of agitation around the WIND PIK note going cash pay in the middle of 2013 -- 2014, sorry, with apparently profound consequences for the entire Italian debt structure.

So let's take a look at the progress that we've already made in 2014 to enhance the capital structure. As Jo has already mentioned, we've refinanced Italy in two phases, one in April, one in July. We've also secured significant new credit facilities. And all in all, we've financed a total of $21b of debt. In addition, we took the hard but very necessary step to make a substantial reduction in the dividend going forward, to be able to afford to invest in the high-speed data networks.

However, that's not enough. We still need to further improve our capital structure, and we're going to be undertaking actions in the first quarter to address that.

Firstly, as you're all aware, and as Jo's already mentioned, we've closed the transaction in Algeria and we've received $3.8b of proceeds that we're going to use to repay gross debt. We're actively exploring the optimum use of that proceeds with our advisors and expect to be doing something shortly. In addition, as Jo has already mentioned, we're exploring a sale of a significant portion of the Italian towers, which will be a value accretive transaction in its own right and will also de-lever the Company.

So I'm now going to walk you through the impact of all of these activities on many of the important attributes to our capital structure, such as maturity profile, leverage ratios and cost of debt.

Okay. So if you wind back to last March, we had a significantly high peak of maturity in the 2017/2018 time period, mainly related to expensive debt in WIND. We have now improved the maturity profile by an average of over two years, particularly through the refinancing of Italy in April and July. As a consequence, we have no major refinancing obligations until 2020 and no material hard currency maturities for the next several years.

In early 2015, we actually only had $1.5b of unutilized facilities. We've been very active, particularly in the second and third quarter of 2014, to secure additional facilities, and we now have $4.1b of unutilized facilities available with a significantly improved maturity profile. Indeed, if you take the enhanced credit facilities together with the amount of cash that we've currently got available, we have over $11b of liquidity cushion at present.

At the end of 2014, our gross debt to EBITDA ratio stood at 2.3 times, excluding Italy, and 3.3 times for the Group in total. If we assume that we use all of the net proceeds from the Algeria transaction to retire gross debt, those ratios are going to decline to 2.9 times on a Group basis and 1.7 times excluding Italy.

The impact of the Algerian proceeds doesn't improve the net leverage ratios particularly, mainly because, as we discussed previously, most of the proceeds is actually in the form of intragroup dividends. However, the important thing to take away from this slide is the net leverage excluding Italy. So Italy is completely ring-fenced, fully self-financing, and therefore, on a Group excluding Italy basis, the leverage ratio is only 1.1 times.

At the start of 2014, we had an extremely high cost of debt, just in excess of 8.3 percentage points. Thanks to all of our activities, we've now significantly reduced this by about 200 bps to 6.3 percentage points, so a significant reduction year on year in the cost of debt.

And I really, really like this slide. This shows the payoff of all of these activities in financial terms.

So at last year's analyst and investor day, we talked about an annualized $400m of cash flow improvements coming from financing activities. If I take account of all of the things that we've done and are just about to do, we're actually going to be able to deliver over $670m of annualized cash flow benefits.

So, not only have we over-delivered, but we've done so via a slightly different geography, which shows the flexibility to deal with vastly changing circumstances, and in addition we still have future opportunities for both the in-house bank and on withholding taxes, if and when circumstances change.

So, if I take all of these benefits together with the tax impact on them, and then also include the impact of the increased minority interest as a result of the Algeria transaction, we get to more than $0.5b of annualized net income benefit.

So, to summarize an extremely busy year from a corporate finance perspective, we have reduced total debt, refinanced most of the debt portfolio, improved maturity schedule, arranged new facilities, improved the currency mix and reduced interest costs. I think we can safely conclude that by saying that with a strong cash position, additional facilities, no major financing obligations for the foreseeable future and very robust cash flow generation, that VimpelCom is very fully financed.

So now let me move on to 2015 targets. For abundant clarity, these are all stated on a constant currency basis, using the foreign exchange rate assumptions which are in the appendix. And also, as you'd expect, but just to be clear, it does exclude the impact of any one-offs or exceptional items.

So we expect service revenue to be stable to a low single-digit decline year on year, with an improving year-on-year trajectory compared to what we saw in 2014. We expect EBITDA margin to be flat to up to a percentage point decline year on year.

For the first time, we're providing an EPS target, and on this metric we expect to deliver between $0.35 and $0.45 per share. And it's on this particular metric that you see the real impact of all of the financing work that I've just talked about.

We expect CapEx to revenue ratio to be at around 20% for the full year, so broadly in line with what we delivered in 2014. Leverage on a Group basis is expected to be 3.2 times. However, as I said, from my perspective the really important thing is to focus on the Group excluding Italy, and on that basis we expect the leverage to be around 1.7 times.

So, with that, I'll now hand back to Jo.

Thank you, Andrew. Very refreshing. Thank you. Yes, we are ready now for the last slide.

So, as we have said a couple of times, we've delivered on our targets in a challenging market. Clearly, reported numbers are influenced by the currency movements we have seen in the year. Very happy with the closing of Algeria. We have significantly improved our capital structure. We continue to successfully invest in the high-speed networks. We are focused on building a customer centric organization, and we see still solid growth in our base. All things considered, we're in a better shape today than a year ago.

And with that, Gerbrand, we can open for questions.

Thank you, Jo. We're going to open now for questions. (Conference Instructions). But we will first take questions here from the audience, but please state your name and company name but wait for the microphone, because the people on the webcast would like to hear your question as well. Can I invite you for the first question?

Elizabeth, here. Thank you.

Hi. It's Simon Cooke from Insight Investment. Two balance sheet questions, if I may. Firstly, on the leverage target, so you're guiding for -- I think you just said for 1.7 times excluding Italy, but you've said that post the use of the gross proceeds from Algeria to pay down debt you'll be at I think you said 1.1 times, so there's a 0.6 of a turn move. If you could just explain what's going on there, it would be helpful.

And secondly, in terms of your ability to move cash around the Group, have you had any trouble doing that, obviously aside from Algeria? And can you give any rough breakdown of where cash is held as of December, so we can tell where it is in the various geographic regions? Thanks.

Yes. I guess I should take those questions. So, first of all, the leverage question is all driven by foreign exchange, so let me try and guide you through this, because prima facie you'd think, well, if you're moving from the 1.1, as you quoted, to 1.7 that we're going to increase net debt. We're not. We actually expect net debt to reduce year on year, mainly as a function of we're going to generate positive income and cash flow. We do have a bit of a benefit coming from the Algeria proceeds, which is going to be roughly a $600m improvement in net debt, as we've discussed previously.

However, what's happening is if you look at the guidance or the assumptions that we provided on foreign exchange, we're expecting in the year a further devaluation in both the ruble and the hryvnia in particular. So the organic EBITDA guidance that we've talked about actually translates, when you use those foreign exchange rate assumptions, into a much more material impact on EBITDA in reported dollar terms, and it is that simple. There's no black magic or voodoo going on.

And on the second question, it was -- no, the second part of the question?

(Inaudible - microphone inaccessible).

Oh, the cash. Yes. So, as at the end of the year, we've got roughly $1.5b at headquarters. Obviously at the end of the year we still had a significant amount in Algeria. And then the other major countries where we've got material cash would be Uzbekistan and Kazakhstan.

We've not really -- apart from currency control restrictions in Uzbekistan, for the most part of the year we haven't really had any theoretical difficulty in moving cash around the Group. We've chosen to leave cash in Kazakhstan. I should point out that it's not -- we're not exposed because it's actually held in dollars, because of potential withholding tax impacts which we're going to solve this year.

And then the other impact which we saw particularly in the fourth quarter was a tightening up on currency control in Ukraine. Having said that, that didn't have a particular practical impact for the fourth quarter, because we want to leave the cash in the country anyway to be able to pay for a 3G license.

Okay. We move on to the next question. Herve, you have one question, I saw.

It's Herve Drouet from HSBC. Regarding your margins in the different countries, especially Russia, Ukraine, Algeria, where we've seen weakness on margins and you pointed out to currency movement, especially on network costs on some of the investment you've done. Firstly, the way you manage cost in those countries, is there some projects which are in hard currency, or do you outsource for some operations in hard currency in those countries or is it really locally managed?

I'm trying to get at why we might see more impact on currency on your cost structure for you compared with some of your competitors, for example, so I was wondering if there are any specificities there at VimpelCom that may explain it, or is there some hedging you are doing that at some point of time could be costly for you on equipment and you have to put back to the individual countries and operations that may give that effect? And is there a way for you to reduce the hard currency impact on your cost side in those countries? So that would be the first question.

Second question will be on Algeria. That has taken a bit of time to gradually invest again and some of your competitors had a head start in 3G. When do you think you will be in a position where you will start to monetize and catch up with your main competitors in Algeria, especially again at the EBITDA level? I understand on the subscriber side things start to improve, but I'm also interested on the EBITDA monetization for Algeria.

Yes. Let me take the currency question. So it's a good question. It's a bit of a complicated answer. Let me try and keep it as simple as possible.

So, first of all, you ask what costs do we actually have in hard currencies. For the most part, it relates to our service costs and some network costs. So, from a service cost perspective, this varies country by country but we have a significant proportion of our service costs which are dollar denominated because it relates to international and roaming traffic, and there's not a whole heck of a lot we can do about that.

Secondly, roughly, across the group, half of our CapEx is dollar denominated, and that then means also that the follow-on maintenance and support contracts also tend to be dollar denominated. And I think from a -- if you think of Russia in isolation, roughly 20% of the costs that are above EBITDA are actually denominated in dollars. Okay?

Now, we are doing some things about that. Jo mentioned them in -- specifically to Russia. So we have a hedging policy, where we try to hedge hard currency exposures six months rolling forward. So we are hedged through the first six months of 2015. Quite candidly, when we went into the market in January and February to hedge -- to try to hedge July and August's dollar exposures, we were quoted silly rates, three-figure rates. So that's not a hedge as far as I'm concerned.

But what I would say is for the first half of 2015 in Russia, we've actually got over $600m of dollar exposure hedged at an effective rate of slightly less than RUB50 to the dollar. Okay?

Now, you have to be careful about where some of these things show up in the geography of the P&L, because we do cash flow hedging rather than transaction hedging. So the beneficial impact of the hedges will flow through the interest line, essentially. The EBITDA and the CapEx still bears the impact of foreign exchange. Okay?

And then, in Ukraine and Algeria, because of currency control, it's very difficult for us -- well, we can't hedge there and it's just a matter of working with vendors to try to mitigate the impact.

Now, the other thing that we've done in Russia which Jo alluded to is we've renegotiated a large amount of supplier contracts which are denominated in foreign currency. And the way I would suggest you think about it is, within the contract, we've agreed on a notional, normalized range that the currency would normally trade in, and then when we're outside of that range, we have a risk-sharing mechanism which varies from contract to contract.

Let me pick up the point or question on Algeria. I think when we look at Algeria, it's important to understand also the history and remember what this company has been through. It's been a company that has been restricted from investing any capital, upgrading its networks for years. It's been very restricted in terms of commercial activities. And of course, the (technical difficulty) approximately six months.

So you get a combination of a history without investments, coming late into 3G and having the difficult situation that we have had in the country as luggage. And what you see now, I think, is post effects of those years, being late to 3G. I'm not concerned, frankly speaking, about our business in Algeria. I'm very comfortable with what we're going to do there.

This is now resolved. We have a strong local partner. We will be allowed to operate alongside with others. We will catch up on 3G eventually. We are now also bringing in new and fresh energy by renewing the management team in Algeria. It's not a discredit of the past, but it's just you need the new mindset, you need energy and forward-looking people. And of course, we also allocate a lot of people and resources from our HQ office in Amsterdam to help and support in Algeria.

There's a lot of activities on the network rollout, on the people side, on the commercial offering, happening right now, but it's going to take a little bit of time to catch up, I think. We just need to recognize that these are big companies that very often need time to be able to change and start creating momentum.

We've done this in a couple of other markets already and I think we know how to do it. My estimate is that we need to give Algeria this year to recover, to catch up and start performing. But as I said, we're the biggest company in the country. We want to stay as the biggest company in the country. We're the best brand and we want to continue to keep it as the best brand. So I think we need to take a little longer view on Algeria right now and no reason to be very concerned, I think, about the last quarter.

Can we have the next question, please?

JP David.

Hello. Kay Hope, Bank of America Merrill Lynch. I have a couple of questions. One is, Andrew, you said something that made me wonder. Is it still your plan to use all of the proceeds from the Algeria transaction to reduce debt?

And then also, can you give an update on the in-house bank? I know that was a major subject at a past investor day at this time of year, and there was a line in one of the slides that alluded to it. But where are we on that concept and what's the long view around that?

Okay. I guess both of those are for me. Yes, listen, the answer to the first question is pretty much a yes. Clearly, we need to be mindful of maturities and the liquidity cushion, but you think -- you should think about us using substantially all of the Algeria proceeds at some stage to retire gross debt.

The in-house bank, we still believe in it; it's a really good concept. Clearly -- so I guess to answer this question properly, you need to understand the mechanisms behind the in-house bank. So the in-house bank, we basically pay dividends up from the operating units to headquarters, and then we recycle that money through the in-house bank to provide shareholder loans or intercompany dividends up from the operating units to headquarters. And then we recycle that money through the in-house bank to provide shareholder loans -- or intercompany loans down to the OpCos in a tax efficient manner.

We're still doing a bit of funding via the in-house bank. It's not as material as we would have wanted it to be, mainly because of the ruble situation in Russia and the fact that Russia isn't generating as much dollar cash right now as we'd expected it to. But as I said in my presentation, it still has significant long-term potential for us, if and when circumstances change for the better.

We move on Stella. You had questions as well.

Thanks. Stella from Barclays. Just a bit more on the topic of FX. I was just wondering if you could explain, are there any hedges in place with regard to debt or currency? And just how is cash balances being managed at the moment from a currency perspective?

Also, in terms of the capital structure, you said that you're still in the process of trying to decide the optimal use of proceeds. Are the rates in Russia at the moment just simple prohibitive when it comes to refinancing the short-term debt? Is it your general sense that that would be the priority, to address that debt first? Just any thoughts that you had there would be great.

Also, I just wanted to ask finally, there was a comment in the press release about the ongoing Uzbekistan investigation. I appreciate that you already stated in the report that there's a limit on what you're able to say, but you did talk about addressing potential liabilities that may arise. Is that part of the liquidity cushion that you might be wanting to keep, or just if there was anything else that you could add there?

Do you want to take Uzbek?

I can do the Uzbek. Do you want to start?

Yes, sure. So, on foreign exchange, the only debt that we actually hedge actually is in Italy. So some of the debt within Italy is actually dollar denominated, and we hedge that fully into euros right the way through to maturity. But then the rest of the Group, it's comprised pretty much of dollar debt and ruble debt in Russia, so that's not hedged at all.

You're right; we've got some short-dated maturities in Russia. We've got the potential for some ruble bonds to mature this year, depending on what the bond holders tell us. Clearly, as you said, we would see rates in the short term in Russia as being exorbitantly expensive, so we're not going to refinance short-term debt right now. And yes, that is one of the reasons why I feel the need for a pretty material liquidity cushion.

And then, on Uzbekistan, Jo.

On Uzbekistan, as we've disclosed, we're being investigated by the US authorities and the Dutch authorities on some of the doings in Uzbekistan in the past. We have been cooperating, we are cooperating, and we give disclosure that we find appropriate and we will do more disclosure going forward. But at this point in time, all we can say on Uzbekistan is really what we wrote in the release, and there is not all that much I can add as of today.

Shall we -- if we have enough time for one more question here. Then we will go to the conference call and then we might have one or two more questions from the room. (Inaudible).

Yes. Hi. Alexander Balakhnin from Goldman Sachs. Two questions, if I may. One is on the margin outlook. From what you say, 20% costs are in dollars. So just doing the math, either you should have a massive cost cutting in Russia or your margin outlook for the Group should be much -- well, should assume a bigger decline in the profitability. Just can you probably contextualize the cost structure in Russia in terms of the FX exposure and your margin outlook?

And my second question is with the reappearance of the discussion on the potential Italian consolidation last week, what's your overall stance on the market structure in Italy? And to the extent you can comment on that, what's your latest? Thank you.

Let's start with the last one, Italy. Yes, these rumors have been coming and going. We've said a number of times that we're in favor of in-market consolidations. We think this is the way to go. Whether it's network sharing arrangements or fully consolidation opportunities, we're in favor of trying to do that.

WIND and Italy is a strategic asset for us. It represents a big part of our business. It gives us diversification in hard currencies on the revenue and earnings line. We have maybe the best brand in the country. We have a strong team there. So, if we're going to do a consolidation in Italy, it needs to be on the fair and the right terms.

That being said, of course, the fact that we keep Italy ring-fenced and also the fact that we show leverage excluding Italy is also expressing that an in-market consolidation in Italy would lead to a lower leverage than 2 for the rest of the Group. So, the opportunity in Italy to create value for shareholders through any market consolidation is clearly there, and it will also yield an opportunity for the rest of the Group having a leverage below 2. That might also be an important input to the Supervisory Board when they discuss a dividend policy.

So the situation in Italy is clearly a situation for us that could yield value for shareholders. It could unlock the situation we see right now.

But we're not rushing into anything. We're not jumping on the train for the purpose of doing that. The term needs to be right and the time needs to be right. And if and when we decide to do something like that, surely you'll hear about it.

So back to the first part of the question on margins in Russia, so clearly if we didn't have any hedging in place, there'd be a pretty material impact prima facie of ruble being at the assumption of RUB70 to the dollar versus less than RUB40 on average for 2014. However, we have hedges in place, as I mentioned earlier. The dollar costs is roughly 20% of the total costs that flow through EBITDA.

But we've also got, and Jo mentioned this, a pretty aggressive cost reduction program that we've kicked off across the Group, and actually we've had a cost and asset deficiency program in Russia for probably at least two if not three quarters of 2014. So, yes, there's pressures there, but we feel comfortable with the overall guidance that we've given across the Group on EBITDA margin going forward.

All right. So can we take a question from the conference call now?

JP Davids, Barclays.

(Technical difficulty) balance sheet. But the first one, just looking at your 4Q slides around the Group maturity schedule by currency, there's been a very noticeable increase in your exposure to dollar debt over euro debt versus the third quarter. So you've gone from 50% euro exposure to 36% in one quarter. Maybe you can provide a little bit of color around that.

And then secondly, can you provide us any additional color on how much net debt you have in Russia? So you do provide us with the gross debt number, which is very useful, but can you provide us with a net debt number in rubles? Thank you.

Sorry. Can you just start the first question again? You were breaking up at the start of it.

Sorry, yes. Can you please explain the movement in currency exposure in terms of your Group -- your gross debt? So in the third quarter, you had 50% of your gross debt was in euros; now it's 36%. And basically it's switched with the dollar. So the dollar was at 34%, now is at 50% of your gross debt.

I'm flummoxed. We've not changed any of our dollar or euro debt in the fourth quarter, so I'm not sure where you're getting that information from. We'll take that one offline.

Yes. JP, we'll follow up with you.

Okay.

And we don't provide net debt number for Russia.

We don't provide net debt guidance in Russia.

It wasn't necessarily net debt guidance. It was just as at the end of 2014, if you could provide any color. But if you can't do that, that's also okay.

Okay.

Okay, JP. We move to the next question, please.

Yes, thank you.

Thanks.

From the conference call.

Alex Kazbegi, Renaissance Capital.

Yes. Hi. I was wondering if you could give us a bit more color, even if it is qualitative, on your CapEx guidance of 20% again, given the diversity of the geographies and the currency outlook. What does it actually mean in terms of, let's say, Russia, for instance? Do you see there a decrease in overall CapEx in absolute terms? Do you see it more or less flat? How do you look at different constituencies, if you wish?

And the second question, which is related to that also, is that you did say what's -- and where do you have cash and so on. But I was just wondering if you can give us a bit more color on where do you see the necessity of some cash injection from the house bank and where do you actually feel that the locally available cash will be enough for all CapEx and investment activities. Thank you.

Okay. So let me take the second part of that question first. So we think that we're pretty adequately -- or we have adequate facilities and financing available locally in most of the OpCos. We don't see the need to actually invest from the Group into an OpCo. Clearly, if we can do so in a tax advantageous way via the in-house bank, we will do so, but that's based on our optionality.

The one exemption to that in the short term is Ukraine. Ukraine, clearly we've been awarded a 3G license this week, which we'll need to pay for by the end of the quarter. And then, in addition, there's going to be some -- clearly some 3G CapEx rollout in advance of the commercial launch in the second half of this year. And it's probable that -- well, Ukraine business doesn't have enough cash reserves to be able to fund all of that, so it needs to find debt from somewhere.

And clearly, if we think the Russian market is very high right now for short-term debt, you should see what's happening in Ukraine. So I think on a short-term basis, there's probably the need to provide a little bit of intercompany funding into Ukraine.

And with respect to CapEx, qualitatively then rather than quantitatively, I think we'd see again most operations with a slightly lower CapEx number year on year, comparing 2015 to 2014, with again the exception of Ukraine where we're going to need to invest in 3G networks. So that's how I would think about it qualitatively.

Okay, then. Thank you, Andrew. Can we have another question from the conference call, please?

San Dhillon, Royal Bank of Canada.

Yes. Hi, guys. Apologies I couldn't be there in person. Glued to the desk, sadly. Just a couple of questions, if I may. On your service revenue growth guidance for 2015, which assets do you think will be the key driver of taking the mid-single-digit decline that you did in 2014 towards the flat region in 2015?

And on your investments, which have focused on high-speed networks, it seems that Italy 4G has lagged comparatively. What 4G coverage do you expect to get to by the end of 2015, and will we therefore see a material improvement in subscriber trends as a result? Thank you.

Yes. I can maybe pick up Italy. So on -- thank you for the questions, by the way. Italy, in terms of 4G coverage by the end of the year, I would estimate that to 50% to 60% population coverage by the end of 2015. I think we are really at par with our two main competitors there, or actually all three of them in terms of providing data services. And I think also you will see some interesting more digital offerings coming out of Italy, as I spoke about during my presentation this morning.

So we feel good about our technology rollout and strategy in Italy, and we think we invest enough to be able to keep our position and maintain a strong competitor. We do have two very resourceful competitors there that is investing a lot, but I think we have found a model and a way to employ capital the right way. And I don't expect Italy, performance wise, to look much different in 2015 from what we saw in 2013 and 2014.

That being said, we try to move Italy slightly more in the direction of focusing on value, focusing on cash flows, and not so much anymore focusing on subscriber and revenue market share. I think this market is so mature and we need now to start monetizing data traffic instead of competing the traditional way on land grabbing. So, clearly, we are ready to look more on cash flows and value in Italy than maybe what we've been doing in the past. But coming to the technology and the rollout, we feel very good about the program and the resources we're allocating to Italy.

Yes. And on the service revenue growth question, clearly, as we both have discussed already, we saw improving trend year-on-year wise for the fourth quarter, by which I mean we had a lower year-on-year decline. Generally, we would expect that most of the OpCos would show an improving trajectory in 2015 versus what we experienced in 2014.

The one notable exception to that is actually in Uzbekistan, where MTS reentered the market in a joint venture with the government at the beginning of December 2014. And then we also believe that there'll be a fourth entrant owned by the government which will come into the market maybe end of first quarter, early second quarter. And given that we have a 50%-plus market share currently in Uzbekistan, we're expecting that that's going to have a material impact on our Uzbek revenues, and that's implicit within the guidance that we've given.

Okay. San, thank you for the question.

Okay. Thank you very much, guys.

I would like to move back to the room here for questions. In the front row here one. Elizabeth, please. And then after we do Vivek, I think then it's about time to end.

Thank you very much. [Usan Cherliwell from Franklin]. Just a quick follow-up question on your views on leverage excluding Italy. In this current context, where obviously cash is difficult to upstream for a variety of reasons, what do you think is an optimal ratio there? Do you want to bring it back down to flat, or is there a certain amount of leverage that you'd be comfortable with at that level?

Listen, I think anywhere in the range of 1.5 times to 1.8 is going to be acceptable. Clearly we need to bear in mind, as I said earlier, some short-dated maturity profiles of what would be some very expensive local debt refinance, so the need to maybe keep a bit more liquidity. And we just need to keep a watching brief on what happens with foreign exchange movements going forward because, as we've already discussed, that could have a material impact on a net debt to EBITDA ratio over a 12-month time period.

Just following up, the ruble maturities that you were talking about, you could pay down some of that, presumably, with the ruble cash or cash flows accumulated in (multiple speakers).

Absolutely.

Okay.

Yes.

Okay. Thank you. Vivek, you had a last question, I think.

Hi. Good afternoon. A couple of questions from me, if I may. So, the first one is just on hedging. Just remind me, I thought you said the costs you hedged six months forward, and so are you now hedged till the second quarter of 2015 or your hedges actually are unwinding towards Q1 of 2015 or even have already unwound? That's first on hedging.

Then the second thing is just on the EPS guidance which you've given. So I was wondering if you can provide what is the comparable base for the current year over the same -- with the same assumptions, FX assumptions.

And then finally, just on Ukraine and 3G demand, I understand you're taking a long-term vision, which is probably the right thing to be doing. I'm just trying to understand how much are 3G handsets selling for there? What sort of customer driven demand do you see building up in that country in the short to medium term?

And then finally, are there any discussions at all with -- amongst various shareholders which you are aware of, of potentially any stake sales or stake changes between Telenor and Altimo?

Thank you, Vivek, for all those questions.

I'll pick -- I didn't take notes. Let's try to -- let me pick up the last two ones on Ukraine and shareholders. Clearly, I think you all understand it's hard for me to comment on behalf of shareholders or whatever discussions they might have between them. I'm not involved. I don't have any information. And if I had, I don't think I would be in the position to disclose on behalf of them. So I'm sorry about that.

Ukraine, I think when you look at these markets we keep getting surprised on the demand of 3G services, data services, and we have already a substantial penetration of 3G handsets in our base, even without a 3G network. So the pickup rate on 3G will be quite quick and immediate. So that's why I'm saying I think we can have hopes for seeing results of a 3G rollout and increased data traffic, and hopefully also revenues as a result of that.

But of course, my point or long-term view is basically that we have now -- this Company has spent basically 20 years from its inception to where we are today. We have been through many difficult periods in different markets. Right now, we're seeing another one in Ukraine. I think we need to be just passionate, firm and long-term oriented and do what we believe is best for the business, roll out the 3G networks, and I'm sure we will see better times in Ukraine at some point in the future. So that's basically our view on that country.

And then it was two others. You have them, yes?

I'll take them. Unless you want to talk about hedging. Okay. So let --

I'll try if you want to.

Let me address the hedging question, Vivek. So, yes, when we said six months forward to the end of June, that meant as of the end of December, obviously, because we're talking about December results.

And yes, you're right; clearly, we've already crystallized a lot of hedges in the first month and three weeks of the year. So if you think back to the -- we'd have put those hedges in place in July and August last year, when the rate was less than RUB40; doesn't take a rocket scientist to work out that those hedges were really seriously in the money.

And then, on EPS, I don't have -- so we've reported a $0.40 loss for the year on a complete reported basis, but that obviously includes the impact of impairments, etc. If I exclude impairments and any other non-underlying things, we probably get back to zero or pretty close to zero.

Now, what I don't know -- I think you mentioned in your question assuming the same foreign exchange rates which we have assumed for 2015, I don't have that number. We haven't -- but if that's of real interest to you, we can get that one to you. But no, on a reported basis for this year, excluding the impairments, we'd be -- it'd be pretty negligible.

Thank you. And I think that concludes the Q&A session. If you have any questions you still want to ask, you can clearly reach out to me or my team. But I don't want to close off before inviting you for our nice site visit we're going to have to Georgia and Kazakhstan on March 31 and April 1. You are clearly invited to it. And our Q1 results, of course, which will be on May 15, that will be a conference call again.

Thank you very much for your attention, also on the webcast, on the conference call, and clearly here the people in London. Thank you.

Thank you.