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Executives

Jo Lunder - CEO

Henk van Dalen - CFO

Analysts

Haim Israel - Bank of America

Herve Drouet - HSBC

Alex Balakhnin - Goldman Sachs

Dalibor Vavruska - Citigroup

Olga Bystrova - Credit Suisse

Igor Semenov - Deutsche Bank

Alex Wright - UBS

VimpelCom Ltd (VIP) Q4 2012 Earnings Call March 6, 2013 8:30 AM ET

Operator

Good day ladies and gentlemen, and welcome to the VimpelCom Fourth Quarter 2012 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 follow at that time. (Operator Instructions) As a reminder, this conference call maybe recorded.

I would now like to introduce your host for today's conference, FTI Consulting. Please go ahead.

Unidentified Company Representative

Good afternoon ladies and gentlemen, and welcome to VimpelCom’s conference call to discuss the company’s fourth quarter 2012 financial and operating results.

Before getting started, I would like to remind everyone that forward-looking statements made on this conference call involve certain risks and uncertainties. These statements relate, in part to future dividend payments, the company’s medium term value agenda objectives and the company's expected future debt position and refinancing plans.

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 earnings release and presentation announcing fourth quarter 2012 results, the company’s annual report on Form 20-F, and other recent public filings made by the company with the SEC.

Certain amounts and percentages that are used here have been subject to rounding adjustments. As a result, certain numerical figures shown as totals including in tables may not be exact arithmetic aggregations of the figures that proceed or follow them. Please note that the actual financial results of the fourth quarter of 2012 are unaudited.

If you have not received a copy of the fourth quarter 2012 financial and operating results release, please contact Investor Relations at 31207977234 and it will be forwarded to you. In addition, 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 Jo Lunder, Chief Executive Officer of VimpelCom.

Jo Lunder

Thank you. Good afternoon for those in Europe and good morning to our guests from the United States and welcome to our fourth quarter 2012 earnings presentation. I am joined here in Amsterdam by Henk van Dalen, our Chief Financial Officer who will be covering the financials in detail and Gerbrand Nijman, our Head of Investor Relations.

Our fourth quarter results reflect continued delivery on our strategic priorities highlighted by profitable growth and strong cash flow generation. The Group recorded organic revenue growth of 3% year-on-year, with revenues reaching $6 billion, with solid performance across our business units. Excluding the impact of the reduction of mobile termination rate in Italy, organic revenue growth would have been 5%.

EBITDA increased 13% over the previous year leading to an EBITDA margin growth of 3.3 percentage points to 41.1%. Organic EBITDA was up double-digit in Russia, Africa, Asia and the CIS.

Operational developments continued to be positive in Russia and in Italy we continue to outperform the market. Additionally, we are successfully transitioning our customers to bundled offerings in the Ukraine.

In the fourth quarter, we achieved strong overall subscriber growth with an increase of 5% year-over-year to 240 million mobile subscribers. Africa and Asia delivered especially strong subscriber growth in the quarter.

Despite unfavorable currency movement, our financial performance was strong with net income increasing substantially to $801 million. Net cash from operating activities increased 24% to $2.3 billion in the quarter.

Moving on to our full-year results, 2012 has been a successful year, with solid organic performance in all our business units. We achieved a 4% organic growth in revenues reaching $23.1 billion as well as an 8% organic increase in EBITDA to $9.8 billion. This led us to deliver a 2 percentage point increase in EBITDA margin to 42.4%.

Net income grew to $2.1 billion in the full year. It is worth highlighting the turnaround we have witnessed in Russia, where in 2012, we realized more than double the initial targets of the RUB 5 billion in annualized savings. Our strategy remained centered around increasing cash flows and our efforts on these objectives are clearly visible in the 19% increase in the net cash that we realized in 2012.

Before discussing our business unit performance, I would like to mention some recent important developments. On January 16th, we held our Analyst and Investor Day in London. We presented our enhanced value agenda for ‘13 through 2015. We also announced our medium term objectives which include revenue and EBITDA CAGR of around mid single-digits, net debt-to-EBITDA below two times by the end of 2015 and CapEx to revenues excluding licenses below 15% in 2015. We indicated our intention to deliver improvements in annual cash flows compared to 2012 of $2 billion from operations and of between $600 million and $900 million from finance optimization by the end of 2015. In February this year, we successfully completed a debt refinancing of $2 billion equivalent.

We held our Annual General Meeting on December 21st in which nine Supervisory Board Members were elected, four of Alfa, three of Telenor and two Independent Directors. The Supervisory Board also unanimously elected Alexey Reznikovich as Chairman.

In January 2013, we paid in total $1.3 billion in dividend. The dividend policy is currently under review following the announcement conversion by Altimo. In the second quarter 2013, we expect the Supervisory Board to make a decision on dividend policy, the final dividend for 2012 and if possible extraordinary dividend related to the proceeds of the conversion. And finally, we continue to negotiate with the Algerian authorities on finding a mutually beneficial agreement and discussions are progressing.

Let me then move on to the performance of our business units, starting with Russia. In Russia, our operating performance continued to improve in the fourth quarter extending the positive development witnessed in the first quarter of the year. The business saw organic revenue growth of 4% with an impressive 37% increase in mobile data revenues.

EBITDA increased 15% leading to an EBITDA margin of 41.3% up 4.2 percentage points over the previous year. The strong EBITDA growth was in part due to a favorable comparison over the same period of last year which was impacted by high commercial and technical costs and one-offs RUB 800 million in total, including a provision for HR cost and inventory write-down.

However, the performance in the fourth quarter of this year clearly demonstrates execution on our strategy to deliver profitable growth. Our operational excellence program in Russia delivered even stronger result than expected and we realized more than a double the initial target of 5 billion rubles in annualized savings in 2012.

Improving network quality continues to be our focus in Russia with the aim to be on par with our peers in the key regions by the end of 2013. We expect CapEx revenues to increase to 22% in 2013 versus 18% recorded in 2012.

In summary, we are pleased with our progress in Russia in 2012 but there is still improvement potential. And in ’13, we will focus on executing the strategy by improving network quality, reducing churn and also including our customer excellence offerings.

Moving on to Italy, in Italy Wind continued to gain market share, outperforming the competition once again. Total revenue grew 2% if we exclude the impact of mobile termination rate cuts. Our mobile data offerings continued to achieve very strong results with mobile broadband revenues up 37%.

Our mobile subscriber base increased to 21.6 million with a strong growth in mobile broadband consumers up 24% year-on-year. In fact, we achieved over 55% share of net additions in the quarter.

On the fixed line side, we delivered 6% increase in the more profitable new broadband subscriber base. EBITDA declined 4% reflecting the impact of mobile termination rate cuts on the top line which was partially offset by structural cost savings initiatives implemented during the year.

Excluding the impact of the MTR cut, EBITDA grew 2%. EBITDA margin increased to 37.5%. In 2012, we were able to substantially offset the MTR impact by implementing operational excellence and capital efficiency initiatives to protect our cash flow.

Looking ahead into 2013, we expect continued pressure on top line as a result of further mobile termination rate cuts. The first cut took place in January ‘13 and the final and last cut is scheduled for July ’13 which will bring the MTR below one Euroset.

In order to preserve our EBITDA and cash flows, we are implementing a cost efficiency program which includes substantial OpEx and CapEx savings. One example, we have already launched the network transformational project that is aimed at achieving OpEx savings of around 40 million to 45 million Euros per annum starting this year.

Moving on to Africa and Asia, in our Africa and Asia business units we achieved organic revenue growth of 11% driven by strong subscriber growth and increase in prices in Pakistan and Bangladesh and an acceleration in data and value added services usage.

Reported revenues grew 2% adversely impacted by the devaluation of local currencies in Algeria and Pakistan against the US dollar. EBITDA increased to US $426 million achieving an organic growth of 36% year-on-year, partially as a result of the ongoing operational excellence initiatives.

The strong increase in Africa and Asia is also driven by the doubling of the EBITDA in Bangladesh as a result of significantly lower commercial OpEx versus last year. In addition, EBITDA for the fourth quarter of ‘11 was affected by provisions for corporate contingent liabilities and cost associated with the demerger of OTMT. This profitable growth is however the result of the combined FX or solid top line growth and operational excellence initiatives implemented in our businesses.

Touching on the three biggest emphases in Asia, Africa, in Algeria, revenues increased 9% in local currencies, with mobile data revenues up 12%, our subscriber base grew 8% enabling (inaudible) to maintain it leadership position with a 55% market share. EBITDA in Algeria increased 8% in local currency.

Our performance in Pakistan was also strong despite the impact of several government imposed shutdowns of all the cellular networks efforts. Mobilink delivered a revenue and EBITDA growth of 9% and 12% respectively in local currency. The strong performance was driven by subscriber growth of 6% and a 44% increase in mobile data revenues. In the quarter, we also launched our mobile financial services offering.

And then finally in Bangladesh, our subscriber base grew 9% and revenue increased 13% in local currency. EBITDA increased 104% reflecting a savings on commercial OpEx but the growth was partly flattered by a favourable comparison of the same period last year which saw high customer acquisition cost.

The new regulation regarding Voice over IP usage negatively affected revenues in the fourth quarter and it expected to have a significant negative impact in 2013.

Moving on to Ukraine, Ukrainian business units, we achieved revenue growth of 4% in fourth quarter, mobile service revenue return to grow up 3% year-on-year reflecting the successful transition to bundled tariff plans and a 5% growth in the mobile subscriber base.

At the end of 2012, we have transitioned 75% of all subscribers to bundled tariff and by now we have almost completed the transition. Fixed line revenues were up 3% as a result of strong FTTB revenue growth, fixed residential broadband revenues continued to outgrow the market up 77% driven by strong growth in subscribers and ARPU.

EBITDA in Ukraine increased 9% leading to an EBITDA margin improvement of 2.2 percentage points to 52.5% driven by the growth in mobile revenues, cost measures and improved revenue mix in the fixed line business.

Then the last business unit CIS, in CIS we continue to deliver strong profitable growth while competition remains intensive in several markets especially in Kazakhstan. Revenues grew 21% and EBITDA grew 45% on organic basis. But these results were materially positively impacted by the network closure of the competitor by the authorities in Uzbekistan.

EBITDA margin in the quarter increased to 48.1% up 7.3 percentage points. On a normalized basis, adjusting the growth in the fourth quarter in Uzbekistan to the level of the first half year of 2012, the underlying revenue and EBITDA growth for the CIS would have been 9% and 17% respectively.

A few words about Kazakhstan, our largest CIS market. Organic revenue growth was 2% and the mobile data revenue increased 40%. In 2013, we expect an MTR cut of 15% which will increase the pressure on our top line. As we successfully did in Ukraine, we are now transitioning our subscriber base to tariff plan also in Kazakhstan.

In the last quarter of the year, EBITDA grew 8% and EBITDA margin improved 2.6 percentage points to 46.2% reflecting positive impact from a number of operational excellence project.

I will pass onto Henk van Dalen that he will discuss the financial performance in more details.

Henk van Dalen

Thank you, Jo. It was the case for the previous three quarters also our fourth quarter actual reported results were impacted by the appreciation of the US dollar against the local currencies and almost all of our operating units compared to the same of last year.

On an actual basis, as usual revenue is increased 1%. However, on an organic basis overall revenues would be 3% year-over-year and excluding the impact of mobile termination rate cuts in Italy underlying organic revenue growth that being close to 5%. EBITDA on an organic basis increased 13% year-on-year, while the reported EBITDA increased 10%. Excluding the mobile termination rate cuts in Italy underlying EBITDA would have grown by around 14% organically. As fourth quarter ’11 EBITDA was impacted by the certain one-off charges; the year-on-year growth comparison was also helped a little bit by this effect.

EBIT in the fourth quarter ’12 grew by 231% year-on-year to $709 million US. The comparison was however influenced by non-cash items which I will explain further on in the presentation. Excluding these combined effects for the fourth quarter of ’11 and the fourth quarter of ’12, EBIT would have grown by 24%.

Profit before tax was $764 million US helped substantially primarily due to the higher EBIT and a reevaluation related to our investment in Euroset. As a consequence, net income in the fourth quarter increased significantly to $801 million US. To take you through the full year, as previously mentioned by Jo, our 2012 performance was strong and delivered a 4% organic revenue growth and an 8% EBITDA growth.

On a reported basis, however results were impacted offset by the unfavorable FOREX movements. Our Russia revenues increased by 1% in US dollars and 7% in local currency. In Italy revenues in US dollar decreased by 10% and decreased in local currency by 3%, as a result of the sharp MTR cuts. Excluding MTR effects, net operating revenues improved by 5% underlying.

The Africa and Asia reported organic growth of 9% and had stable revenues in US dollar terms, while the Ukraine delivered growth of 2% in both US dollars and local currency. Lastly CIS continued to achieve strong performance with a revenue increase of 15% organically, primarily as a result of the network closure of competitor by the US bank authorities.

Our Russia EBITDA increased by 13% organically, while EBITDA growth in Africa and Asia and CIS were up 15% and 22% respectively. In Europe and North America EBITDA decreased by 10% in US dollar terms and declined by 3% in local currency mainly due to the impact of the MTR cuts. In Ukraine EBITDA decreased by 1% in local currency and by 2% in US dollar terms.

EBIT increased by 31% mainly as a result of the growth in EBITDA coupled with a declining amortization schedule applied to intangible assets as part of the Wind Telecom acquisition. Net income grew almost four times as a result of the increase in EBIT and non-cash items that I will explain on the next slide.

On this slide you see the main items that relate to non-cash effects in EBIT and net income including also a further clarification on the declining amortization schedule, which is applied to intangible assets as part of the Wind Telecom amortization. So EBIT was impacted by impairments and as you know we do these impairments on a regular basis for cash generating units.

In 2012 we performed a detailed business review of our Canadian operations leading to an impairment of the shareholders loan to Wind Mobile by $328 million US dollar. In 2011, we recorded an impairment of $577 million US dollar following our review of the operations in Vietnam and Cambodia. EBIT in 2011 asset was also impacted by provision for HR cost and inventory write-offs in Russia of $30 million US in total. Furthermore, the decline in amortization schedule apply to certain tangible asset as part of the Wind Telecom acquisition, led to a lower in D&A in 2012.

Net income was impacted by certain fair value adjustments and as a result of the acquisition of the additional 0.1% in Euroset in 2012; IFRS required a positive fair value adjustment of the previously held interest in Euroset for $606 million US. In 2011, we recorded negative fair value adjustments related to the embedded derivative in the [inventory debt] instruments and all the fair value adjustments for a total of $332 million.

So this gives a little bit picture of this main items in that overview. Then I go to the depth and cash ratios and also the comparisons for the full-year. So you can see here that our financial position remained solid. On a consolidated basis, actual net cash from operating activities in the fourth quarter was $2.3 billion US. Gross debt increased slightly in the quarter to $77 billion US, mainly as a result of foreign exchange movements.

Net debt decreased to $22 billion US, leading to a net debt to the last 12 months EBITDA of 2.2 at the end of the year. We ended the quarter with a very high cash balance and deposit balance of over $5 billion US, a part of which was used to pay the $1.3 billion US in dividend in early January 2013. And then finally a little bit of an update on the debt compensation and the maturity profile, there is peak in the maturity profile in 2017, caused by Italy debt which we plan to refinance before the [debt]. However this will not be [completed] before the second half or this year and timing will of course always depend on market circumstances as well.

Total gross debt was $27 billion US at end of the year with an average rate of interest rate of 8.5% in the quarter. The balance of foreign exchange exposures in gross debt remains diversified across various currencies and during the fourth quarter we also established the $500 million US bilateral credit facility with the China development bank. The credit facility in financing equipment and service Huawei has a tenure of 8 years and is to date undrawn.

As mentioned previously in February 2013, the VimpelCom completed approximately $2 billion US in that refinancing by issuing a $600 million US 5.20% guaranteed notes, 10-year, $1 billion US 5.95% guaranteed notes and 5-year RUB 12 billion 9% guaranteed notes.

Proceeds will be used for the repayment of maturing debt in VimpelCom and general corporate purposes. The coupon on the US dollar notes was the lowest coupon in VimpelCom’s history. Additionally, the RUB denominated Eurobonds represent the first such issuance by a non-financial services or non-state-owned company.

Following the recent debt refinancing, VimpelCom has secured its refinancing requirements into 2014, and this has also improved our debt maturity profile after these refinancing are done. As you can also see from the blue doted boxes in the chart that we show here which has an element coming in 2019 and we didn’t have maturities and of course also the $1 billion of the 10 years in 2023.

This completes the financial parts, Jo over to you.

Jo Lunder

Thank you, Henk. To the last slide. I think it’s been a very good year for VimpelCom with not the best starting position, and I think we end the year with improved positions in most of our markets. If you look at the last slide, you will see an organic revenue growth for the year ‘12 of 4%. If we adjust that for the MTR cuts in Italy, we actually had a 6% revenue growth in the year and if we do the same exercise on EBITDA you will see a 8% EBITDA growth in 2012 and if we adjust again for MTR affects in Italy that hopefully this is the last year with adjustments on MTR rates, in Italy we see a EBITDA growth of 10% and also clearly an improvement on the EBITDA margin.

So I think we have shaped this new group in a good way, I think we have managed to direct every operating entity in the direction we want with profitable growth and focus on cash flows. There is still lots of improvements potential and I think now moving into 2013, we will just keep focusing on executing on our strategy and the discipline on the medium term objectives that we announced on the Analyst and Investor Day in January of this year.

So I think that ends our presentation this afternoon and morning and we are ready to take questions. Back to you operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Haim Israel of Bank of America. Your line is now open.

Haim Israel - Bank of America

Just one question from my side about the Canadian operation; we saw some headlines coming that after increase in position in WIND Canada you will consider to make some acquisitions over there to strengthen the position of the company and can you comment a little bit about that, what are the opportunities you see and how you see the Canadian activity and so on?

Jo Lunder

Yeah, I'll do that. I know that the reference point as well. Let me try to clarify at least I tried to say when this comment came out. Stage 1 is to take control of the entity in Canada, so we are buying out the local partner and we are now converting non-voting shares to voting shares and this require of course regulatory approval in Canada and that is still pending. But step one now is to take control of the company and the reason for doing that is basically to decide our own destiny in the country without having to deal with partners and too many stakeholders.

Then we will just evaluate the options available and there are multiple options available for us in Canada. We can decide to exit. We can decide to do any market merger and consolidate. We can decide to grow organically in the country. We have a good momentum right now in the postpaid market with a new strategy. So all I said was basically this is a two-step approach, control it at one, step two is to create options for ourselves and then we will select the option that we believe is in the best interest of shareholders and we will test the different options available. So it was not meant to be a declaration of acquisition strategy in Canada even though maybe it was maybe perceived like that.

Haim Israel - Bank of America

And the final question from my side is, can you give us any kind of update about the (inaudible) operation negotiation with the government?

Jo Lunder

Yeah, I would start sounding like a broken record I think on this topic, but I don't have any news today, but I can repeat what I've said in the past that we have a good atmosphere, we have momentum, we are making progress; we are communicating on sufficient high level within the Algerian government. We have two projects teams that is working together and we have meeting schedules; we have time tables and I remain optimistic to resolve and find a good solution for our company and our shareholders, but we don't have anything outside that to report today.

Operator

Thank you. Our next question comes from Herve Drouet of HSBC. Your line is now open.

Herve Drouet - HSBC

My question is more regarding the conversions of preference shares into ordinary shares. Can you give us a bit of an idea if this conversion is going to be done at market pricing, what would be your expected inflow of cash for the company and either any idea at this stage on what proportion you may give back to extraordinary dividend to shareholders? Thank you.

Henk van Dalen

On page number three of the press release, you will find in the linear which is very exclusively going in to the financials of this conversion if it is executed. And so you will see that the price there for the conversion is usual 10.835 for convertible preferred share, which leads to approximately receiving $1.4 billion from Altimo for the conversion and as a result of that Altimo’s voting percentage, of course it will remain to be the same, but as economic interest in the company limit this to 56.2%.

Herve Drouet - HSBC

Right, and in terms of this portion of cash potentially been reduced I mean is there any decision of how big you know this portion could be, I mean….?

Jo Lunder

Yeah, I think that’s a good bridge into what we also said today about dividend. So we remain of course committed to the $0.8 per common share assuming 1.628 million outstanding shares, so nothing has changed with respect to that. But what we have decided to do is basically in the context of the fact that the number of shares are increasing, the Supervisory Board would like to review the dividend policy and discuss if that will lead to a change in the guidelines on the dividend and in the same context we will also decide the final dividend for 2012 and also have a discussion on a possible extraordinary dividend related to the proceeds of the conversion and this decision on the dividend guidelines, the final ‘12 and extraordinary we will make in the second quarter of this year and it's basically just related to the factor that the Supervisory Board wanted to have enough time to talk through it, so we will announce it as I said in the second quarter.

Herve Drouet - HSBC

May be let me rephrase the question, I mean is the extraordinary dividend going basically potentially to upset the dilution with the number of shares, so I mean the $0.8 per dividend is also that it for the new number of shares, is it what that mean?

Jo Lunder

Yeah, that’s what I tried to answer, that’s exactly the discussion that the Supervisory Board need to take because of course this is a dilution of 8% I think in the number of shares which logically could also lead to subsequent adjustment of the dividend guidelines reflecting the new number of shares, but that’s the discussion the Supervisory Board would like to have. So we haven't decided whether we’re going to keep the $0.80 or that we are going to adjust for the new number of shares and in that context we will also decide on the final dividend for ‘12 and potentially also pay an extraordinary dividend related to the proceeds from the conversion to $1.4 billion and this will be one combined announcement sometime in the second quarter.

Operator

Thank you. Our next question comes from Alex Balakhnin of Goldman Sachs. Your line is now open.

Alex Balakhnin - Goldman Sachs

I have two questions; one is probably some elaboration on the previous question on the dividends. So essentially it’s the choice right between deleveraging and the level of dividends and I am sure the Board while having the discussions having consultations with the management team, and for you as a management team, what would be the bigger priorities to probably speak to the same number of the dividends with the high number of shares, or you would prefer to stay on the path of deleveraging which you had in mind before?

And my second question is, can you elaborate on the priorities of the CapEx spend plans in Russia for 2013; I mean what are the key areas -- do you invest more in like base stations or base stations connectivity or back haul of the network; any details on the breakdown of capital by project would be very helpful? Thank you.

Jo Lunder

Yeah, I think on the dividend question. I think I tried to express kind of that the process there and I think we should let management be careful to take a firm position on our opinion here. I think it's a judgment call in the call that we would like to deleverage using the 1.4 for deleveraging or by the way we would like to use it for an extraordinary dividend.

I think the most important thing here is that you clear the commitment to reduce net debt to EBITDA below to by the end of 2015 remains in place. That will be done by cash from operation and it does not assume any new shares, it does not assume any divestment, its basically going to come from improved EBITDA and increased cash flows also including a dividend payment in the period.

So that deleveraging target is still valid regardless of this discussion on guidelines, on dividend and what we are going to spend $1.4 billion for. And then on Russia, we are going to do now a catch up in 2013 and we are behind the MTS and MegaFon even though drive tests and the other things we are doing is clearly showing improved network quality on our side.

We still would like to focus investment clearly to Moscow in 2013 and I think also by the end of ’13 we will have done the catch up in most of the important and prototype regions and then the rest of the catch up will probably melt somewhat into 2014.

When it comes to IP optimization and overall backhaul, I think the percentages we have in 2012 at the end of ’12 we are approaching 50% and the target at the end of 2013 is to get to close to 80% to 90% and of course also part of the investment it will have to go into 3G base stations to close the gap we have there to MTS which has actually increased a little bit in 2012 and again focus on the key strategic regions and again as I said on par with peers in terms of coverage in key regions by the end of ’13 and fully probably into the first quarter or second quarter of ’14.

And the CapEx to revenue guidance we've given for Russia 22% in 2013 substantially up from the one we have in 2012 is also clearly an indication from the Group that Russia has a clear priority in 2013 and very important market for us and for that reason we allocate capital to Russia and the second country in terms of priorities on CapEx is hopefully Algeria, the minute we have a solution there we will clearly do a catch up on (inaudible) with investments there as well. So for that reason, ‘13 would be a little bit of an increase compared to ‘12 and contradicts a little bit of long-term guidance we have given on CapEx to revenues that we still remain committed to the 15% CapEx to revenues by the end of ’15. So that that’s the best I can give you.

Operator

Thank you. Our next question comes from Dalibor Vavruska of Citigroup. Your line is now open.

Dalibor Vavruska - Citigroup

I like to ask two questions if I may. One is about market share in Russia. I think overall, the Group results were likely strong. In Russia, they also look strong but if you are talking about operational excellence, I think it's fair also to say that you keep losing market share, your voice revenue is falling. Your pricing is still higher than that of competitors at least in a simple of ARPU, MOUs yield point of view and that you increased your EBITDA by 16 but MegaFon increased it 25.

So if you compare also competitors, I think I just like to ask where you see the market share on revenue and EBITDA going and whether you think that your CapEx budget for 2013 for Russia is enough to potentially reverse this because we are hearing some discussions about your competitors’ potential increasing and MTS for example, the increasing CapEx compared to your expectations to even higher numbers that you are talking about.

Also on that if I can, there is some discussion in the market about potential consolidation specifically Tele2 assets, so my question would be if for example, some of your competitors end up acquiring customers through acquisition for example, Tele2 whether there are certain thresholds of market share where you are not going to be comfortable and you know if that’s the case then how are you going to respond?

And my second question is very short and technical, when we look at your local numbers, for example, for Italy, revenue and EBITDA and then we look at the consolidated contribution of revenue in EBITDA the margin watch out slightly different and I just wanted to see whether there was any discussion, any cost allocation that you apply when you do this consolidation, which could impact this or what is the reason basically for the different things in the margin? Thank you.

Jo Lunder

Okay. Dalibor thank you very much. Henk will confirm that there is no allocation issues related to the numbers and I guess you can have a follow-up call if you like after call, but Henk can give his comments on that.

Dalibor Vavruska - Citigroup

Sure. Thank you.

Jo Lunder

But let me kick off with your question on Russia, because I think in a way you related to market share and competitive performance of for example MegaFon. So it's a little bit a broader question, you basically raising, I think my take on all this is basically that, first of all, there has clearly been a market repair in Russia that we should all be satisfied with. There are much more focus on revenue market share, on cash flows and on network quality, investments in next generation, investments in customer, etcetera instead of buying subscriber market share and value leakage to distribution and value leakage to all the players in the volume chain side.

I am very pleased with the way the mobile market in Russia has shaped over the last total 12 to 18 months. I think also we should be a little careful to compare directly because of course in VimpelCom we have ethics operation combine with the mobile operation. I think probably one of the competitors you mentioned mobile phone has a cleaner mobile operation and then you will know that margins in the mobile segment is high than in a combined segment.

We are not reporting combined margins but we are quite pleased when we look at our margin in the mobile segment compared to two competitors. So I think it’s a little bit of a mix bag and difficult to give a straight comparison on the call like this, but that all that being said, I still think the improvement we have seen in 2012 for VimpelCom, we should be very happy about that we do clearly see that we still need to improve and the main area of focus next year is network quality which and also 3G coverage to address the data potential.

And number two churn level is too high in Russia still compared to the mature markets. So we would very much like to drive churn down by using distribution concepts and other measures to make that happen. And the last one is really to now investing customers and make sure that the [Beeline] brand is representing value for customers and a good customer experience. So those are the three areas of focus next year that hopefully will lead to further progress for our Russian operation and then when it comes to [Telecel] I think any consolidation in any market right now would probably be of benefit. I think it depends on the terms it could benefit the one doing the consolidation, but it could also benefit I think other players in the market and I have a general view on consolidation.

I think we will see more consolidation in the telecom market going forward. I think there are so big investments required for next generation LTE etcetera, that it’s going to be very hard to have six, seven players in the market and also have rentals on top of that. So I think you will see in market consolidations, I think you will see cross-border consolidation and I think you will see an industry basically consolidating in order to have enough financial capacity to allow the next generation of mobile broadband networks and for that reason in general I would be positive to a consolidation also in Russia in that context.

So I hope that answered some of your questions and then Henk can maybe pick up on the margin and the consolidation part of the question.

Henk van Dalen

I cannot give you a very detailed answer there (inaudible), but the main effect of course that you see is that the one is a statement in euros and the other is in dollars and when you translate from euros to dollars you have euro elements, you have dollar elements, you have sometimes other currencies in it. So there are always big translations elements in it and there is an element of rounding in it as well. So we can give you some of those details, but it has nothing to do with additional allocation or something like that.

Dalibor Vavruska - Citigroup

Thank you very much Henk and Jo. If I can just ask one very little follow-up on the market share issue; I remember about a year, year and a half ago you basically said that you are comfortable with being a number three operator in Russia in terms of say revenue market share, but you would not be comfortable if the gap between number one and you would exceed certain levels. Is that still the case and how is that view maybe changing in light of the consolidation possibilities.

Jo Lunder

Yeah, I think that's still the case. The revenue market share is the platform for earnings and growth in any market. So it’s much more important than subscriber market share and we have sort of to do certain adjustments during 2012 because the subscriber base was a little inflated by high growth sales at the end of ’11. So we knew that we had to do adjustment in the subscriber base in 2012 in Russia. I think we've done that, so now the subscriber base reflects value customers and a more real in a more sort of in reality mirroring what we have there.

So we don't want revenue market share now to decline anymore than what we have now. So in 2013 we will not be pleased with losing revenue market share. I would actually hope that maybe we could take back a little bit, but I don't think you will see big movements in the years to come. I think you will see more stable revenue market shares development.

Operator

Our next question comes from Olga Bystrova of Credit Suisse. Your line is now open.

Olga Bystrova - Credit Suisse

I wanted to ask two questions and one follow up from my colleagues. One is that you are now doing transition to bundle tariffs in Kazakhstan after Ukraine, and you mentioned, generally focusing on bundle tariffs transition generally as sort of a new strategy. Which other markets will you expect that to do next and where you see that most sort of applicable or necessary at this stage.

The second question is on Russian sales and marketing expenses. It seems to me that given the numbers you provided that sales and marketing expenses in Russia are relatively stable in relative terms. I wanted to ask if you are seeing any positive impact from consolidation of ownership at the Euroset, but you have seen the origin or you expect more efficiency from Euroset ownership changes to come to you in 2013?

And the final question on sort of pull up on a special one off [JV]. What's the advisory board decision on the special JV or on the magnitude of the special JV depend on any events such as cash inflow because of Algerian resolution, your ability to refinance versus repay debt more expensive debt in Italy or let’s say your ability to see some consolidation opportunities in your key markets in 2013? Thank you very much.

Jo Lunder

Let me offer a few reflections on the bundling in general first and then we can relate them to our markets. I think probably people see a trend towards bundles in most markets going forward. You probably can look to the US which is the most advanced LTE market, the currency involved and you will see a variety of bundled tariff plans there. So that’s probably a trend you see now, also voice and SMS becomes application in a bundle and you offer certain data volume and then when you reach that level either your speed, is being reduced or you pay more for getting more or higher speed, because I think that’s probably the future of the pricing structure for telecom.

Ukraine has done this successfully already and as you said Kazakhstan will follow this year. We see also trends of and finds these happening in Italy. We see some movements to bundles in Russia and we don't [publish] it yet in less developed market. But I think it's very often something that comes with the growth and more advanced services and higher penetration, and of course the best would be if you can do a smooth transition into bundles without having big movements and then quickly transition like we have to do in Ukraine. So this is something we monitor very closely and something very receptive to and I think we have knowledge and experience to understand the timing and then this is the right thing to do.

Then your question on Euroset related to sales and marketing expenses in Russia. We are now moving to more sort of revenue base dealer conditions also for Euroset. We have moved into that with the number of dealers in Russia during 2012, and now entering ‘13 we will do the same exercise with Euroset, and as you remember the governance model here in Euroset is six numbers, three from each shareholder and we are now commercial (inaudible) mobile phone that is basically in the same booth and also having the same interested as we have. So for that reason I think Euroset will be receptive to this desired change and then we will also as a shareholder in the company be able to manage that.

And then to your last question on the discussion that the supervisory board will need to have on this extraordinary dividend, I think all the points that you are raising is probably points they would like to discuss because before they make their final decision on the extraordinary dividend and its very hard for me to reflect and sort of balance those different arguments, whether its Algeria deal, deleveraging potential consolidation opportunities, I think this is exactly the discussion they would like to have and then based on all that we will announce something in the second quarter on the future dividend guidelines, final for ’12 and also about dividend, extraordinary dividend on the proceeds of the conversion of the preferred shares of Altimo.

Olga Bystrova - Credit Suisse

Just two quick follow-ups; on bundles first of all you are mentioning that you see sort one off ort sort of temporary negative impact on your transition into bundles and you mentioned in Ukraine it was very quick one; when did exactly that happened, did it happened in the second quarter or the third quarter?

And the second follow-up on new receipts, should we expect some positive impact on your sales and marketing expenses profitability in January in Russia from new receipts specifically in 2013 or that would be sort of a more general impact of your operational excellence strategy?

Jo Lunder

No, in Ukraine we did the transition starting late in the second quarter and did basically the whole transition in the third and the fourth quarter of the year and it continues now into the first quarter, so that's basically a full transition into bundles in less than 12 months so that's very quickly. And when it comes to Euroset, we hope that moving to a revenue share model with Euroset will positively impact also margins in 2013.

Operator

Our next question comes from Igor Semenov of Deutsche Bank. Your line is now open.

Igor Semenov - Deutsche Bank

A couple of technical questions; can you explain the decline in the gross margin, it seems like the service cost went up, could you explain what was driving that and then at the same time sales and SG&A were down as a percentage of revenues. So is this some sort of reallocation, can you just explain on what’s going on in Q4 relative to previous quarters?

And also on the dividends I mean I just have to say that I mean the guidelines appear to be quite explicit that you are paying $0.80 and you are aiming to announce the final dividend when you announce the Q4 results. So I don't know it’s a common sort of question, but I find it very disappointing and I think its just not, yeah I mean its just, I don't know its just not how you do things, I think if you announce something you plan to do and you don't deliver it is just not good I think in my view is common? Thank you.

Jo Lunder

Yeah, let me pick up on the last point. I wouldn't see it as a disappointment. I would rather see it as an opportunity actually. There will be a good discussion and there will be an announcement in the second quarter. And the dividend guidelines, we remain committed to the $0.80 with the 1.628 million shares, so the only discussion we are going to have is whether we're going to keep it or whether we are going to reflect the dilution of the shares. So there is no negative embedded news in that revision that they are going to have. So it's still reflecting and there is sort of consistence with what we've said in the past and as a result of that, and the fact that also an extraordinary dividend is an option is being discussed, we decided to package it into one announcement on the final 12 potential extraordinary and the final guidance of the conversion of the shares. So I hope that’s not people are disappointed. I see no reason for being that, there will be an announcement in due course in the second quarter and the first question on service margins versus sales and marketing, I think Henk can you pick up that?

Henk van Dalen

Yeah, so I assume you were looking at the consolidated statements of income for the group. So there you see indeed the surface costs increasing in long-term in the fourth quarter ‘11 versus fourth quarter ‘12. We don’t have the exact details of that, Bob, but it seems there is a significant difference in the cost of content and the whole movement on-net, off-net in the quarter compared to fourth quarter 2011.

(Inaudible) can certainly come back on that in further detail later on. In the rest of the operating expenses, as you see, it's all continuing to move in the direction that we have seen before and particularly also the selling, general and administrative expenses are regarding where it’s moving in right direction.

Igor Semenov - Deutsche Bank

For example in 2013, I would just say that the gross margin should be in-line with the full year 2012 or it should be better or worse?

Henk van Dalen

Well, our aim is certainly to increase the service margin on our operations in all of our countries. And that is a mixture of the tariff plans, the bundled tariff plans, the approach we take in the market of course and focusing on the growth and data and focusing on that.

Operator

Thank you. Our next question comes from (inaudible). Your line is now open.

Unidentified Analyst

Thank you. I actually have two questions, one is again on this the whole dividend debate, although this since I am representing there will be credit the bond side of the story, I am actually just wanted to say that in the past we heard quite and biggest some comments from the IR, on VimpelCom saying that the proceeds from press conversion will be mainly used to deleverage and therefore, a change of wording and language is quite upsetting, the fact that you are going is actually to maybe increase in the dividend payouts is also and you are kind of slowly moving away the deleveraging deadline and the whole thing, effectively cash being worked in Algeria.

So your actually adjusted leverage is higher, is a bit upsetting. So I would like to hear your comment on that and the related question possibly in regard to win them bonds refinancing any additional color you can provide on that whether timing or other details?

And the second question I have and which you may have covered and I missed that, but you had very material increase in accounts payable in fourth quarter, and I wanted to know whether this is sustainable increase where it came from or whether it will be retained this cash gain or it will actually a reverse in the months to come? Thank you.

Henk van Dalen

Okay, just on the first portion, I cannot imagine that the statement you refer to was an explicit statement by our Investor Relations department because I have been very close to any statements related to possible proceeds of conversions. I think what we already said is that in none of our financial targets and none of our objectives with regard to the deleveraging we have ever included any proceeds from conversion. Also in the targets setting and the approach is that we discuss on the January 16 when we were looking at 2013-2015 plan that was even explicitly excluded.

Some of these now basically of course to the supervisory board will have to decide on any proceeds of this conversion when they come in. We remain as Jo mentioned earlier very much focused on this deleveraging process as well in the context of the strategy that he explained.

The whole approach with regard to Italy I think I explained and probably have been able to follow that on the January 18 that any step with regard to Italy and will not be taken before the second half of 2013 that has been a consistent message by us for two years or two and a half years in a row and basically what we also said in that meeting is that we have given the context of how we would like to restructure the group from a financial perspective all of the elements we mentioned including the establishment of an in-house bank, but I also I think really said is that of course, we cannot go into any particular roadmap that would lead us to precisely indicate what we are going to do in the market at any moment in time in the next two years.

I think that would be an interesting transparency but probably too much to the negative of VimpelCom shareholders. So we will manage it step-by-step but within the context as clearly explained on the January 16 this year. Indeed, we have seen an improvement in the working capital, a part of that on the payable side is sustainable because we have started as I mentioned as well a broad working capital project in 2012, part of it always has to do with kind of year end phasing, so that we will then be paid of course in the first quarter 2013. But overall I think we are making a very good progress with the working capital project, targeting not only the payables but also the receivables side and focusing on the CapEx payables and the CapEx related in terms of these as well. We’ll certainly give a further update on working capital progress in the next Analyst and Investor Day.

Unidentified Analyst

And maybe a follow-up is the accounts payable is that entity specific or it was like group wise and also can you disclose the cash position of the Algerian entity as of the one with a recent reporting date and your last reporting date. Finally on the Wind refinancing I think the last results call you, or one of the results call the wording has somewhat changed to end of ’13 a completion of the refinancing so or something like that. So it wasn’t exactly totally consistent from one comment to another.

Henk van Dalen

Yeah these accounts payable of course are the consolidation of the accounts payable that we have in each entity. So in itself it is managed of course as always working capital is managed on our entity level. With regard to the Italian debt, I think we have always said not before the second half of 2013 and I mentioned later on that I would not expect any of these steps to be completed before the second half of 2014, which is a logical thing because you are looking at quite a complex exercise. Maybe that indeed was an addition which might have created some questions but then they are clarified now. The Algerian, that’s a question like cash positions in any of the entities, we never go in to take a look at acquisitions and entities.

Operator

Our last question comes from Alex Wright of UBS. Your line is now open.

Alex Wright - UBS

I had a couple of questions on regulation in Pakistan and Bangladesh please. On principle, if you can just confirm whether you are still seeing network shutdowns in Pakistan and in the first quarter. Secondly you are really focused now being (inaudible) voice over IP regulations in Bangladesh. I just wondered if you could help us to quantify in anyway the impact of that on revenues and margins in 2013 and then finally for both markets if you can update us on the latest understanding of the 3G license process in both of those markets. It didn’t look as though the process is moving ahead in Bangladesh, but if it's still facing problems in Pakistan, if you could summarize your thoughts on that please, that would be helpful.

Jo Lunder

I think when it comes to the network shutdown in Pakistan; we have seen that continue in to the first quarter of ’13. So we have had multiple events over this year, so that continues. When it comes the 3G processes, I think it's a difficult to give good guidance here, because every time we hear something it looks like it's changing, but the last thing we have on 3G to my knowledge is a plan and during Bangladesh on June 24th, and we have no clarity on when 3G trend will take place in Pakistan and then when it comes through voice over IP and the consequences in Bangladesh, I would like to give a guidance on that but it's too early to give it.

We need to see a little bit how things are playing out in the first quarter and see a little bit more the effects of what this is doing to our business, but clearly it affected revenues in the last quarter of ’12 and it will effect more into ’13 and I think during my intro, I used the wording expected to have significant negative impact in ’13 and that is right now I think the best guidance we can give. And then let’s see if we can be slightly more specific when we present the first quarter and then look at the rest of ’13, but we have a good business in Bangladesh and good opportunities and good growth and the brand is strong there.

So these are adjustments we will just have to live with the from time to time and take a long term view instead. So we are interested in the 3G license and we are interested in bringing data to the people in Bangladesh and we expect this also to help on the future growth there. So its never a market without some bad use from time to time and I think voice over IP in Bangladesh is going to be over the negative big thing in ‘13 and we will give you a little bit more brief on that next time we speak I hope.

Alex Wright - UBS

Okay, and just one quick follow up on Bangladesh. Are these voice over IP revenues which set to [fix] the higher than average margin revenues or lower than average. Is it possible to give some directional confession in that regard?

Jo Lunder

Yeah, this will typically be high end users we talk about here. Okay, thank you. I think where from yes, Gerbrand is nodding. So we are done with the Q&A. Let me just wrap up; first of all thank you very much for this big audience attending today. We are very happy and pleased that you interest in VimpelCom and thank you very much for a lot of good questions. We are over here to new follow ups, we have a team waiting for your questions and happy to answer any follow ups you might have.

I'm on my way to the US actually to meet investors tomorrow. So I assume I will meet some of the people also attending on this call. So with that I suggest we wrap up and end the call and I wish everybody a continued good day. Thank you very much.

Operator

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.

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