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Executives

Jennifer Milan – IR

Jo Lunder – CEO

Henk van Dalen – CFO

Analysts

Cesar Tiron – Morgan Stanley

Dalibor Vavruska – Citigroup

Alex Kazbegi – Renaissance Capital

Ivan Kim – VTB Capital

Herve Drouet – HSBC

Olga Bystrova – Credit Suisse

Anna Kurbatova – BCS Financial Group

Vivek Khanna – Deutsche Bank

Alex Balakhnin – Goldman Sachs

VimpelCom Ltd. (VIP) Q1 2013 Earnings Call May 15, 2013 8:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the VimpelCom’s First Quarter 2013 Investor and Analyst Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct question-and-answer session and instructions will follow at that time. (OPEARTOR INSTRUCTIONS) As a reminder this conference call is being recorded. I would now like to introduce your host for today’s conference Jennifer Milan. Ma’am you may begin.

Jennifer Milan

Good afternoon ladies and gentlemen and welcome to VimpelCom’s conference call to discuss to company’s first quarter 2013 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 company’s dividend guidelines, plans to optimize cost in Russia and Middle East and 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 first quarter 2013 results, the company’s annual report on Form 20-F, and other recent public filings made by the company with the SEC.

Please note that the actual financial results of the first quarter of 2013 are unaudited. If you have not received copy of the first quarter 2013 earnings release. Please contact investor relations 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 so and good morning to our guests from the United States and welcome to our first quarter’s 2013 earnings presentation. I’m 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 first quarter results reflect continued delivery on our strategic priorities highlighted by profitable organic growth. The Group recorded revenues $5.6 billion with an organic growth of 1%. Excluding the impacts of the reduction of mobile termination rates in Italy, VimpelCom’s revenue growth would have been 4% organically.

EBITDA increased 3% organically, leading to an EBITDA margin growth of 1 percentage points to 42%. Organic EBITDA growth was led by solid growth in Russia, and CIS. Excluding the impacts of reduction of MTR in Italy. VimpelCom’s organic EBITDA growth would have been 5%.

Operational developments continued to be positive in Russia and we continue to outperform competitors in Italy.

In the first quarter, we achieved solid overall subscriber growth with an increase of 4% year-on-year to 250 million mobile subscribers. We saw contributions from CIS, from Ukraine, Africa and Asia.

Strong growth in fixed and mobile broadband subscribers was achieved in Russia, in Italy and also Ukraine. The company generated solid cash flows in the first quarter of 2013 and net income increased substantially to $408 million.

Before moving on to other performance of the business unit level. I would like to mention a few recent events. On April 18th, we announced the approval of the final dividend 2012 and also the approval of an extra-ordinary dividend for total payment of $2 billion.

At the same time, we also reaffirmed of dividend guidelines. Then on April 19th, we announced sale our stake in Cambodia to our local partner there. The disposal of these assets was a result of the ongoing strategic portfolio at a view earlier announced. And today OTH announced the agreement to sell its operations in CAR and in Burundi. Of course, subject to closing conditions.

During April, WIND successfully stood EUR575 million bonds used to optimize its cash flow and maturity profile in the coming years. And we also have our annual general meeting on April 24th, during which all nine Supervisory Board Members were re-elected including four nominated by Altimo, three nominated by Telenor and two independent directors.

The Supervisory Board also unanimously re-elected Alexey Reznikovich as its Chairman. In relation to Algeria, we continue to negotiate with the local authorities on finding mutually beneficial agreement, but there is no material updates to report today.

Moving on to the performance on our business units. Starting with Russia, our operating performance continued to improve in the first quarter extending the positive development of 2012. The business generated organic revenue growth of 5%, with a 31% increase in mobile data revenue. EBITDA increased 6% and EBITDA margin expanded 0.5 percentage points to 41.8%.

EBITDA development was mainly driven by consumed of our operational excellence program. The primary contributors were savings in commercial cost, which were mainly driven by the shift to a revenue share model with all distributors, as well as savings in HR costs. Overall our performance in the first quarter demonstrates execution on our strategy to deliver profitable growth.

Quarterly churn introduced by 2% to 15% with a main focus on further churn reduction in 2013 by increasing the quality our data network, improving the quality of our subscriber base and by a loan of a comprehensive churn reduction program. These initiatives will be further supported by expansion of our mono-brand stores. Improving the quality our network in Moscow and Russia remains a priority and we aim to be on par with our peers in the key regions by the end of this year.

Last 12 months CAPEX to revenue stood at 18%, but we expect CAPEX to revenue to increase to 22% in 2013. As we continue to invest in improving our network. In summary, we are pleased with the continued progress we made in Russia during the first quarter and we believe also there is further upside that can be achieved there.

Moving on to Italy, yes WIND again outperformed it competitors and gained market share in what remains a challenging environment. Our mobile subscriber base increased 4% to more than 22 million now, with strong growth in mobile broadband customers up 39%. On the fixed-line side, we delivered 3% increase in the profitable direct broadband subscriber base.

Total revenues grew 1%, if you exclude the impact of MTR reduction and our mobile data offerings continue to achieve very strong result with mobile broadband revenues up 29%. Excluding the impact of the reduction in MTR, EBITDA grew 2% as a result of cost saving initiatives implemented in the period. As a result, our EBITDA margins include 1.3 percentage points to 37.5%.

We continue to deploy our operating excellence in capital efficiency initiatives in Italy. Which will provide savings in both OPEX and CAPEX going forward and we do this in order to protect our cash flow and offset the impact of the MTR cuts. And we then move to Asia and Africa. Revenues were negatively impacted by regulatory and governmental actions in our main operations in this quarter.

Organic revenue declined 1% primarily driven by a slowdown in Bangladesh. Revenues were also negatively impacted by the ongoing restrictions on Djezzy [ph] in Algeria and political unrest and macroeconomic issues in Pakistan. On a reported basis, revenues declined by 7% primarily due to our local currency devaluation against U.S. dollar, mainly in Algeria but also in Pakistan.

Despite these developments, EBITDA achieved 2% organic growth reaching $412 million and EBITDA margin improved 2 percentage points to 47.7% primarily due to the margin improvements in Bangladesh. If you then look to the three main markets, starting at Algeria revenues remained relatively stable in local currency terms with mobile data revenues increasing 49%.

Our subscriber base grew 1% to 17.9 million customers and they believe enabling users to maintain with leadership position with 55% market share. EBITDA decreased 2% in local currency mainly due to higher IT and also some administrative cost. And within Pakistan, our performance there was strong, despite the challenging operating environment we had revenues up 5% and we had an EBITDA growth of 5% in local currencies.

In the quarter, all mobile networks in major cities were shutdown several times by the government for security reason and this is impacting performance in Pakistan in the quarter. In Bangladesh, our subscriber base grew 5%, while the revenues decreased 13%. It is due to the new regulation regarding Voice over IP usage as well as the enforced 10 seconds billing.

The country also experienced 19 days of strike during the first three months. EBITDA increase 5% primarily reflecting lower subscriber acquisitions cost due to fewer gross additions. The disconnection of suspected Voice over IP customers in compliance with new regulations is expected to have prolong negative impact during 2013 as we over highlighted in our previous earnings release.

Moving on to the next slide; Ukraine. We achieved 3% revenue growth in the first quarter in Ukraine, reflecting the successful transition to bundled tariff plans and 11% growth in the mobile subscriber base. Mobile data revenues demonstrated continued growth up 8% Year on Year. The completion of our transition to bundled tariff plans also contributed to a reduction of this churned numbers in the quarter.

Fixed-line revenues increased 13% as a result of strong growth of fixed broadband revenues, which continue to outperform the market with growth of 64%. EBITDA decreased 1% and EBITDA margin declined 2.1 percentage points in the quarter. This primarily due to higher customer acquisition cost as a result of the strong growth in the mobile subscriber base, this is partly offset by savings on the HR cost.

Then the last business unit in CIS. We continued to deliver strong profitable growth in the first quarter positively impacted by the situation in Uzbekistan, where the authorities closed the network of our competitor in the third quarter of last year. Revenues grew 20% and EBITDA grew 38% from an organic basis leading to 6.4 percentage point increase in the EBITDA margin to 48.8%.

On a normalized basis, if we adjust for growth in Uzbekistan in the first quarter of 2013 to the growth level of the first half of 2012, underlying revenue and the EBITDA growth of the CIS would have been approximately 7% and 6% respectively. In Kazakhstan, our largest CIS market we delivered organic revenue growth of 1%. As we successfully did in Ukraine, we are now transitioning our subscriber base in Kazakhstan to bundled our response, in order to solidify the market position there. This transition is impacting revenues and the pressure on the top line which further increased by the introduction of our limitation on tariff during the first quarter, while the MTR was cut by 15%, as we have anticipated.

With that, I’ll pass onto Henk van Dalen and he will discuss the financial performance in more details. Henk?

Henk van Dalen

Thank you, Jo. Our first quarter reported results were impacted by the appreciation of the U.S. Dollar against the local currencies and most of our operating units compared to the same period last year. In the reported basis, revenues were stable year-on-year from an organic basis however, overall revenues increased 1%, asset excluding impact of the MTR cuts in Italy organically growth would have been 4%.

EBITDA and organic basis increased 2% year-on-year while reported EBITDA increased 2% supported the operational excellence initiatives. Excluding the MTR cuts in Italy, EBITDA would have growth by about 5% organically.

EBIT in the first quarter grew 9% to $1.1 billion reflecting by their operational performance and the positive impact of decline in amortization applied to certain intangible assets as well as lower losses recognized on asset disposals.

Profit before tax was $543 million down 8% from last year primarily due to a lower foreign exchange gain. However, net income attributable to VimpelCom shareholders in the first quarter increased 28% to $408 million, as a result of the (inaudible) higher EBIT, somewhat higher from financial expenses and a favorable impact attributable to non-controlling interest mainly related to losses in OTH.

Then on the debt, cash and ratios. If you can see on this slide 13. Our financial position remains solid on a consolidated basis. The actual net cash from operating activities in the first was $1.3 billion primarily impacting the temporary negative of changes in the working capital compared to the same period last year and the phasing of the tax and interest payments and receivables.

The change in working capital was mainly caused by higher inventories and receivables related to handset sales and not yet converted into cash lower customer advances and deposits on top ups and lower payables as a result of inline with the payment terms.

Gross debt increased 6% in the first quarter to $28.6 billion, mainly due to the completion of the unfortunately $2 billion in debt refinancing during the quarter.

Net debt increased to $22.9 billion, mainly due to the $1.3 billion in dividend payments in January 2013 leading to the net debt to the last 12 months EBITDA of $2.3 million at the end of the first quarter.

We ended the quarter, with a balance of cash equivalents and deposits of $5.8 billion, part of which was used to pay the $2 billion in dividends in May, 2013 and partly reserved to debt repayments at OJSC VimpelCom in 2013 and 2014.

Then turning to the debt maturity schedule, this remains reasonably well balanced over the coming years, it’s actually on the short-term, it improves due to the various bond issuers that they had in the first couple of months. There is peak in the maturity profile in 2017 and 2018 as you know of course, by the WIND Italy debt that we plan to refinance this before that date. However, this will not be considered before the second half of 2013 and timing they’ll of course always also depend on market circumstances.

Total gross debt was $28.6 billion at end of the first quarter with an average rate of interest rate of 8.3% in the quarter. A balance of foreign exchange exposures in gross debt remains diversified to gross Euro, Ruble, U.S. Dollar and other currencies. As mentioned previously, in February, 2013 we completed approximately $2 billion in debt refinancing issuing Euro bonds in U.S. Dollars and Rubles. This refinancing secured our refinancing requirements into 2014 and improved our debt maturity profile.

Proceeds to be used for repayment of maturing debt in OJSC VimpelCom and certain and general corporate purposes. In April, WIND successfully issued EUR575 million Senior Secured Notes in a combination from the EUR150 million 2019 floating rate notes at three-month EURIBOR plus 575 basis points and aside from $50 million, 2020 at 6.5%.

The net proceeds of this operating were used to prepay the 2014 and 2015 loan maturities optimizing WIND’s cash flow profile over the coming years. And finally, as you can see from this slide we have still substantial earned underlying committed revolving credit facilities in place for result below $1.1 billion as of March 31, 2013.

Then the slide on the cash returns to the shareholders and little bit on the update on the dividend guideline. Of course we have, quite a solid dividend history since 2011, up till today. We paid our dividends of total $4.5 billion of which $1.4 billion is related to the recent extraordinary dividend. It is our intention to continue to pay dividend and that will develop substantially in line with our operational performance.

With that in mind and barring any unforeseen circumstances of course, our goal is pay all the significant part of our annual operating free cash flow in the form of dividends. The operating free cash flow as you’ll see is here defined as net cash from operating activities minus capital expenditures.

In this context, as it is our aim to continue to pay a dividend of at least $0.80 per common share per annum notwithstanding the recent increase of the number of outstanding to 1,757 million shares following of the most conversion of its preferred shares. Now let me turn the call back over to Jo.

Jo Lunder

Thank you Henk. We will wrap over the last slide before we open for questions. I think the first quarter of 2013. We continued to deliver profitable organic growth with revenues and EBITDA increasing despite the impact of regulatory and governmental measures. If we excluded impact of underlying results, it will both show mid single digit growth in revenues and in EBITDA.

The result demonstrates, I think our continued focus on profitable growth as well as our continued focus on operational excellence and cost control. We are confident in our ability to make further progress. We are committed to implementing our programs focused on customer excellence, capital efficiency and operational excellence designed to deliver against the value agenda that we presented back in January on our analyst and investor day.

So with that, we are ready to open the floor for questions. Back to you operator.

Question-and-Answer Session

Operator

(OPERATOR INSTRUCTIONS) Our first question comes from Cesar Tiron of Morgan Stanley. Your line is now open.

Cesar Tiron – Morgan Stanley

Yes. Hi. Jo mentioned is, it is upside Russian business in the next quarters, would that be an acceleration of revenue growth or is it more on OpEx side and if it’s on the OpEx side, can you please explain to which cost items that would apply? Last question on Russia, I would like to understand where do you stand in terms of matching your competitors networks in terms of 3G?

I remember for example that Anton to committed to double 3G base stations in Moscow at the investors day. So if you could, please comment on that. Thank you very much.

Jo Lunder

Very good. Thank you. I think when I, talk about upside in Russia. I think that, what we’ve seen progressed during 2012 and also what we saw progress in the first quarter of ‘13 is that, we are building now stone-by-stone and building ourselves stronger and stronger. I think, we clearly admit that we have some difficult years in 2009 and 2010 and 2011. We did oversee the numbers and also earlier today from MegaFon that, we’re growing as slowly than then on the top line, but at the same time, I think we also this gives us some upside and potential for improvement.

We focus a lot on the network right now and at the end of this year. We will have catched [ph] up with our two main competitors in Moscow and all the key regions outside Moscow in Russia. This is the number of 3G base stations and this goes with network quality and a capacity and of course, this is the core product we delivered and it’s going to help us projecting further. At the same time, we also think that there is still upside to gain on the cost side and for that reason. We hope to see the trend we see right now, with a gradual improvement on the top line relative to competitor, as a result of improved network and the base product and at the same time, we will keep working on operational excellence and bring cost down, so that we can also see margin expansion in Russia.

So my take on Russia is that this is a long-term play, where we need to be patient and allow ourselves time to close the gap. We are doing that this year in terms of network and we clearly see that the performance is quite good to many other markets, but not good enough yet relative to competitors. Which I had no problems admitting to and as I said, that’s why I also believe its upside.

Cesar Tiron – Morgan Stanley

Thank you very much.

Operator

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

Dalibor Vavruska – Citigroup

Good afternoon. I just had one question, just a follow-up on the Russian situation. If I understand correctly, your aim was to stop losing revenue market share this year. I don’t know exactly how you define these, but assuming that you’re talking about more wireless service revenue market share. It seems that you still have some work to do, even you look at the MegaFon numbers and I’m just wondering, I mean assuming that the upgrade in network and that you’ve done improved the quality.

How are you’re going to persuade your customers to – what are you going to do commercially to stop reversing market share trend or you think, that it will just calm itself or do you think, that you’ll have to take some actions. Also I think, if you could comment on this in wide of what’s happening now in the market for example, I understand that MegaFon, MTS are now pushing these very low cost smartphones. If I understand correctly MegaFon now has open up the 4G network, which they have to smartphones as well as dongles.

I mean, do you think that these things are important? I mean, are you going to respond to some of these things. I just wanted to get a little bit clarity on how you want to tackle the market shares issue in Russia? Thank you.

Jo Lunder

Thank you Dalibor. Good questions. I think we want to stabilize the revenue market share this year and the main driver for this objective is really the catch up from the network side. And as I said, we are now and we also told you that in January that we will have a CapEx to revenues this year in Russia 22%, which is much higher than the last 12 months and the whole catch up is related to that.

So that main, of course it starts with the basic products and in addition to that, frankly speaking Beeline is also having a very strong brand. We have a very strong position in Moscow and we have a number of good activities ongoing on the commercial side. We are also growing the number of mono-brands this year, from 400 to 1,000 at the end of the year. And the combination of an improved network building on a strong brand and growing the number mono-brands.

We hope, this is enough to stabilize the revenue market share this year and then we will enter into 2014, even stronger than the year started and when it comes 4G. We will also commercially open our LTE network at the end of this year. If you look toward the market, it’s not going to happen and lost with 4G, not in Russia either this year. I think we talk probably 2015 until LTE will have real commercial impact on the performance in the marketplace.

So we also believe that, the plans we have on LTE and 4G, is good enough and for sure, we are not going to put ourselves in the position, where we also have to catch up and delayed on LTE compared to what the experience on 3G. So this is very much focused area for us, but at the same time there is no need to spend money too early and too much before, it has real impact on the current two shareholders.

So I don’t have a better answer than that. Dalibor.

Dalibor Vavruska – Citigroup

Thank you. Jo.

Jo Lunder

Thank you.

Operator

Thank you. Our next question comes from Alex Kazbegi of Renaissance Capital. Your line is now open.

Alex Kazbegi – Renaissance Capital

Yes, hi. Just wanted to get a bit more details maybe on the so to say, dealer commission side and just understand again because I mean moved off of course on the revenue sharing model with the dealers pretty much with all of them, is that all basically already included in the benefit of that, is included in your Q1 numbers, do you expect anything an improvement going further or actually to the opposite side, do you actually recognize already all the cost associated with that, as we so to saying in Q1 because the revenue share presumably is connected with the longevity of the subscriber, which stays on the network? So when on these cost to so to say, recognized?

And secondly just to understand also the general competitive situation maybe in Kazakhstan which as you mentioned was fairly tough in the beginning of the year, what’s going on now? Do you see any stabilization of the market? Do you see still market being very aggressive from the point of view of the Tele2 and the offers? And actually yourself as well introducing quite aggressive offers, where you do see the market moving? Thank you.

Jo Lunder

Thank you Alex. On the accounting treatment of the dealer commissions, we will get back to you and give you a more detail update on that, but they’re clearly linked to revenues that we’re now. So we now pay dealer commission as we pay, as revenues are growing. So they’re much to revenues. I think in the first six months, but we’ll get back to you on the accounting treatment exactly of this, but there is no big thing that is being pushed forward or any sort of – (inaudible).

Alex Kazbegi – Renaissance Capital

On the records, yes.

Jo Lunder

Yes on the number, but let me be instead of speculating on this call. I mean, be precise and get back to you and have someone call you on, exactly how we see that. When it comes to the general question on the overall market sentiment. I think the Russian market is performing quite well actually believing that, there is an increased type focus on product quality, on innovations, on service offerings, on rolling out mobile broadband.

All operators are having focus on profitability and cash flow, so that money can be reinvested in to the market and continue to grow on the new data services. And I see at least that same behavior from all the big players from time-to-time, you also of course have price competition and it should be like that. It is of course a competitive market, we saw some Tele2 [ph] attempts, but in general I would say that it’s a healthy good competition with focus on profit and cash flow, so that we can build the next generation of networks and products through consumers and businesses in Russia and we feel good about Russia.

We feel good about our position and we think, we have a good plan to catch up and come back over the next year or two.

Alex Kazbegi – Renaissance Capital

Okay, that’s fine. The actual question was Kazakhstan as well in terms of the competitor situation there.

Jo Lunder

Well about – no Kazakhstan is very competitive and being Kazakhstan we try now to move as much as we can over bundles and we as you know, we have appointed our Chief Commercial Officer from our Ukrainian operation, new CEO in Kazakhstan and the whole idea is looking to bring with this experience from Ukraine on movement to bundled and the way we develop ourselves Ukrainian business into Kazakhstan, so but there is clearly a strong competition in the marketplace.

As I said, we will concentrate on subscriber base growth now and focus on bundles and bucket pricing and also trying to move more into the ARPU segment right now, but Tele2 it’s clearly a difficult competitor in Kazakhstan.

Alex Kazbegi – Renaissance Capital

But was the priority in Kazakhstan still the revenue preservation or the rather than margin preservation at the moment?

Jo Lunder

We would like to stabilize the revenue market share and to secure the base, and secure the position and then after, we’ve done that, we would like to move to focus on margins and profitability. So right now, we don’t want to slip [ph] anymore on revenue market share.

Alex Kazbegi – Renaissance Capital

Okay, clear. Thank you very much. Jo.

Jo Lunder

Thank you.

Operator

Our next question comes from Ivan Kim of VTB Capital. Your line is now open.

Ivan Kim – VTB Capital

Yes, good afternoon, two questions please. One on the potentials listing. You were talking previously about European listing, is there any progress on that? And also now (inaudible) since you have changed the treatment of Russian listing on foreign companies and there is a better view as it gets into an index from what I understand, so are you thinking in the direction of Russian listing problem as well.

And then the second thing on the leveraging, so can you – the high yield bonds are callable from the mid-July. So is there is anything before when you start to assign any preparations or anything (inaudible) you can probably rate on this size of the initial debt to refinancing, thank you.

Jo Lunder

I will do the first and then and then I’m sure Henk would like to answer on deleveraging and the second question. We’ve put secondary listing and the index on hold, right now and it’s mainly related to the low free floats we have, we are still discussing this with our two main shareholders. We would like to increase the free float to the company and I think as part of that clearly to look at the secondary listing and also index inclusion would be very logical and good for the company.

So we have not at all abandoned the ID, but we have put it on hold until we get more clarity on how the two strategic view free floats of all the company going forward. So that’s basically the answer on the first question and then Henk on the second.

Henk van Dalen

Yes, on the deleveraging. I basically can refer to the presentations of January that we did at the Analyst Day, that we have been looking at several elements to optimize the financial structure including implementing financing company for the group, including looking at the total structure of the group that legal entities as much as possible, directly linking to the VimpelCom Holdings Amsterdam level to, prevent holding taxes on dividends, maximizing the up streaming of cash.

So all these instruments are being brought in place as we speak. The first funding steps from the financing company have been realized in the meantime. So that is I think a good signal that the whole process is starting to come on stream, is starting to work, but we also mention I think during this analyst meeting. Is that of course we have a range of plans and alternatives scenarios in place, which we will pick based on the what the best approach for the group is, but as we’ll not do is, give exact timings and roadmaps on that because that would of course, not lead to the optimum outcome for VimpelCom.

So I cannot be specific on your request and your question, but we’re like this of course give you elements of what we are doing and how we will move in the period to come.

Ivan Kim – VTB Capital

Okay. Thank you.

Operator

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

Herve Drouet – HSBC

Yes, sorry. Good afternoon. My question is in fact regarding more Orascom Telecom and how that has impacted your numbers and how you see that looking forwards on in. It looks like in Asia and Africa there have been some relatively weak numbers are being posted on and part of it is due to the from regulatory change, but if you look Pakistan for instance, that was the interest had in subscribers in the past eight quarters.

If we looked at Bangladesh, the revenues declined quite significantly. I was wondering, if you can share with us, how do you see your main subsidiaries Orascom Telecom reacting to that, and how do you see in the short-term, the Asian and African business progressing? Thank you.

Jo Lunder

Let’s focus on the three big markets Pakistan, Bangladesh and Algeria. I think, all three of them had as I said, governmental activities and situations in the first quarter that hopefully not is permanent. Algeria of course has banned on importing equipments that not very helpful for the company, and that is clearly influencing their revenue numbers right now compared to others.

In Bangladesh, we have new regulations on Voice over IP as I mentioned, we also have this 10 second billing, that is going to affect us all during 2013 because that is change that will affect the revenue bar of our operation in Bangladesh and that’s kind of about 12 months perspective on that one.

Pakistan I think is probably is slightly different. If you look into the first quarter, I think our relative performance to competitors are strong. I think we’ve had some network shutdowns on a number of days that has affected of course revenues and earnings. So I would say, Pakistan is clearly something we can expect seeing improvements from in the quarters to come. Bangladesh will have this new regulation on Voice over IP affecting them this year and Algeria is still dependent on how we resolve the conflicts with the government there.

And then of course you have, the 3G coming up in all three countries. Bangladesh clearly this summer. Pakistan little bit unclear and also Algeria on hold for now, but assuming also 3G being issued in this market will lead to a good growth I think in revenues from data services also there. We have strong positions in all three markets. So we are looking through the short-term challenges and looking at long-term opportunities in all these three markets. We are very committed and big believers in all three markets.

Herve Drouet – HSBC

Just a follow-up question on Algeria. I mean they were at one stage on news into the first quarter that CapEx restrictions could be lifted in Algeria. I just wanted to get any comments on your side on that. And also there were some piece of news saying that Algerian Government where reviewing evaluations for Djezzy and wanted to get your comments as well on how you see that impacted the current negotiations and agreements with Algerian Government on Djezzy?

Jo Lunder

Yes there is, some there has been also in the past lots of press reports and the rumors of different nature on Algeria. What I can say today is that, we are still negotiating with the government, but we don’t have any news, we don’t have any updates outside what we’ve said in the past on the situation there.

Herve Drouet – HSBC

And on the CapEx, I mean can you confirm if a list is happening or if it’s still constraint off any imports of equipments in Algeria?

Jo Lunder

There is no changes, the ban is globally. There is no changes and if so, we’d have, we would have communicated this.

Herve Drouet – HSBC

Okay. Thank you. Thank you very much.

Jo Lunder

Thank you.

Operator

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

Olga Bystrova – Credit Suisse

Good afternoon. I wanted to ask you, to comment on potential news reports on Canadian asset sales as well as recent reported interest of Mr. Xaverius [ph], WIND in Italy. What you think about it, has your strategy changed in anyway, have you progressed on your decision regarding particular Canadian asset that also maybe WIND?

The second one is follow-up on your comment about increase in free float. As per we sort of question, maybe not a fair question to you but, how would you think likely execution on that could be, do you think one of the shareholders would be sellers or you would be doing recapitalization as per you etc.

And finally to follow-up on the question on cost in Russia. Your sales and marketing cost tracking, basically double for your competitor, who just supported today. Your subscribers are pulling, you have very similar sort of distribution platform. So I was just wondering to see, where could discrepancy come from and whether we should see some upsides and downside risks to those cost items that are going forward? Thank you.

Jo Lunder

Okay, let me take, that was actually four questions. Let’s take Canada first. In Canada, we’re still in process of getting the regulatory approval for converting our non-voting stake into voting for the acquisition of shares from Mr. Tony Lacavera our partner there, and of course, when we get that approval, we will get to 100% ownership that approval is not yet given. So for that reason that’s the focus right now and then we – we will conclude that we do an organic growth play there, and (inaudible) that we merge with, try to merge with some of the regional players or that we simply dispose the assets. And we keep our options open in Canada, but as I said focusing now on getting this regulatory approval for converting the non-voting stake.

On Italy, I mean if you look at WIND in Italy it’s I think stunning current performance, which is 100% of the net debt in the first quarter and we grow revenue market share, we grow subscriber market share. We have a very strong brand there, we have a very strong spectrum package for LTE and we have a good team. So we are big believers in WIND and committed to Italy. Will be managed now, the company basically focus two purposes.

Number one for instance, our relative position. Number two, trying to secure the same absolute cash flow. This year as we have last year, of course EBITDA will go down as a result of termination rate cuts, but at the same time we are also cutting cost and we are also making investments more attractive, but hopefully we will be able to deliver more or less within cash flow in absolute terms.

If we are able to do that and come through this and MTR cut process together with the market crisis [ph] in Italy. With the same ability to generate cash, I think we’ve done a very, very good job and I haven’t spoken Xaverius [ph] about buying Italy and we don’t have any plans to sell.

On the third question you, free float. It’s really a question more to shareholders maybe then to management, but as I said as management we see big advantages in increasing the free float of VimpelCom and we think also, doing that in combination with the secondary listing and index inclusion could potentially help the valuation of the company for that reason. We’re analyzing different ways of doing this, but in the end. This is the shareholder decision and is very hard for me to speculate, in what preferences they might have going forward any of them.

And then on Russia, I didn’t fully capture the double cost base logic you have there, but let’s, if we revisit sort of my logic on Russia. First of all, I remember that VimpelCom is a combined, fixed and mobile operator and the fixed margins are all over than the mobile margins. So when you compare for example MegaFon numbers today to VimpelCom numbers, you need also to make sure that you compare apples to apples and of course the mobile margin in VimpelCom is higher than the fixed margin, meaning that the mobile margin is higher than the margin we reported today.

And I think also, we run tight shift and our cost base if benchmarking. Well I think to any of the other players and there is also an big difference in the margins or the structures of any of these companies if we adjust for fixed and mobile. So our view on Russia is basically that, we have a strong history, we have a strong brand. We are improving quarter-by-quarter, this is the fifth quarter in row, we’re showing progress.

We are fixing the network now. We have a good LTE package. We have capitals that we can invest. And we have good plans to catch up and make sure that we make our position in Russia sustainable, and that’s the best answer I can give and frankly speaking, if you look at the performance in absolute numbers compared to many other markets, it’s still good performance. We’re slightly underperforming relative to competitors and we have been doing that for a while and we are focused on it and we want to fix it.

Olga Bystrova – Credit Suisse

Okay. Thank you very much. Just a follow-up on this free float issue. What is the potential timeline for the decision you would think?

Jo Lunder

I don’t have a timeline for you, unfortunately. I think this would be good for the company, but I don’t have a guidance on any timeline, sorry about that.

Olga Bystrova – Credit Suisse

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Anna Kurbatova of BCS Financial Group. Your line is now open.

Anna Kurbatova – BCS Financial Group

Good afternoon. Thank you very much. My first question is, well whether you could provide the numbers for your handset sales and the respective cost of handset sales because it would be very helpful, to continue tracking your performance in let’s say, in mobile retail and my second question is follow-up of previous question.

Well I wonder, whether your terms of corporation [ph] with Euroset are absolutely the same, with those which MegaFon now has, so you are fixed [ph] shareholders on Euroset or both and whether your have absolutely equivalent terms of corporation [ph] with Euroset or the process is that your deal with Euroset to negotiate with Euroset separately because see some benefits for MegaFon on entering Euroset capital, but still in your results it’s not that obvious.

And my third small question is, what’s your strategy with regards to Russian fixed-line broadband assets, with in light of previous rumors of potential decision to dispose those assets? Thank you.

Jo Lunder

I can do the number two and three and then Henk can explain, how we report our numbers. That the terms of VimpelCom and MegaFon to my knowledge similar. We don’t disclose the details of course, but commercially its similar terms as far as I know on the fixed-line in Russia, this has only been market. We never said that, we are in the market to sell our fixed-line operation in Russia. This is an integrated part of VimpelCom. This is an operation, we have spent a lot of time to integrate into our offerings and into our operations.

And I’ll call this market rumors and we are happy with the way, we have organized our business in Russia.

Henk van Dalen

Yes on the handset sales, I think we included in the press release a couple of remarks that the sales of handsets and related equipment was somewhat high in the first quarter this year and the first quarter last year. We did not provide the specific details because we feel it also has a competitive element in it. Which we wouldn’t like to be in detail in the market available, but of course we will also continue watch our competitors are disclosing information and at a certain moment that might also lead to certain adjustments from our side.

Anna Kurbatova – BCS Financial Group

Yes, that’s really clear. Now I’m unable to track your mobile service revenue separately from your retail sales. Thank you.

Henk van Dalen

I see the background of your question.

Anna Kurbatova – BCS Financial Group

Yes, thank you.

Operator

Thank you. Our next question comes from (inaudible) of Deutsche Bank. Apologies, if I mispronounced that.

Unidentified Analyst

Well, it’s okay. Thank you. It’s (inaudible) from Deutsche Bank. A question relating to the cash flow. Considering your CapEx plans, I understand that you’re going to increase the CapEx to sales ratio to 21%, also the redemption of dividend payments and looking at the operating cycle of the company. Do you expect that considering, if the debt serving CapEx and any potential M&A that you’ve planned, you would have to borrow to breach the gap in your cash flow because it looks like, first quarter you had a negative free cash flow. If you consider it post dividends and post CapEx. Which means that your debt obviously increased, so do you expect the total debt to continue growing this year? Based on your CapEx projections and so forth? Thank you.

Henk van Dalen

No, we wouldn’t expect that to further grow. Bear in mind of course, that the situation for the end of 2012 was relatively advantageous with a relatively high level of cash in the group, related to the effect that we having been paying dividends in the year 2012 itself and those payments were done in the beginning of 2013. The run rate of the net cash from operating activities, if you take that after interest in after taxes paid.

You saw that 2012 had about $7.3 billion. We would expect with all of the actions that we do that in principal 2013 will end up at a higher level than that. And if you then from their demand, start to deduct the CapEx based on the 22% that you mentioned and normal dividend payment for the year itself, for the year 2013 then, no we do not expect that is (inaudible).

Unidentified Analyst

Wonderful and just to double check, whether I’m correct with my calculations here. If we take out Italy from your debt and obviously we take out the Italy’s EBITDA, am I right in assuming that’s the net leverage ratio of VimpelCom excluding Italy is about 1.5 times.

Henk van Dalen

It’s about that.

Unidentified Analyst

Okay, wonderful. Thank you so much.

Henk van Dalen

Thank you.

Jo Lunder

Thank you.

Operator

Thank you. Our next question comes from Vivek Khanna of Deutsche Bank. Your line is now open.

Vivek Khanna – Deutsche Bank

Hi good afternoon actually my question already announced, so it’s a apology to try to get offline.

Operator

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

Alex Balakhnin – Goldman Sachs

Yes, good afternoon. A very quick one. Your effective tax rate was declining quite nicely over the last four quarters and then in the first quarter, here is time and up again. Can you clarify why this is happening and probably more generally that g gives us a seasonality thing or some steps to streamline the tax structure from off the group not bearing fruits that soon and basically where you’re with streamlining the tax structure of the firm? Thank you.

Henk van Dalen

Well, I have always have indicated this that in order to look at the tax position, whether to look at the cash taxes paid, so the cash taxes paid for the group are roughly between 9% and 10% of EBITDA per year and there is well, (inaudible) of the action that I explained in January during the analyst meeting. We would like to bring back to about 8% on EBITDA that is aim because at the end of the day that is auditing that really counts.

In the current structure, we still have a couple of inefficiencies that have to do with non-deductibility of certain interest costs in countries of all the (inaudible) as well as in Italy. There are also elements relate to impairments that we can only take the positive tax effect after we have had income to which we can offset the certain tax losses related to the impairments and particular in this first quarter that was also the case, it’s regard to the impairments related to CAR and Burundi.

If you will have taken, this tax asset basically on CAR and Burundi impairment actively, then the underlying tax rate would have been around 34% instead of 39% that we are talking about now. So also that is continued into move in the right direction, whether this quarter-to-quarter relative impacted by these specific elements for those who are helping for your models and for the models that are used of course related to cash, then it’s important to have this percentage of EBITDA as a notion for taxes paid.

Alex Balakhnin – Goldman Sachs

Thank you.

Operator

Thank you and at this time. I’m not showing any further questions. I’d like to turn the call back to management for any closing comments.

Jo Lunder

All right. Thanks very much and thank you for all good questions and I think also that, all the questions for our performance as I said, this year good about the quarter and if you’ll we have good opportunities going forward. We’re committed to the plant that we’ve had explained and then told you about and then with that, I suggest to end this call and of course, our Investor Relations team is available for any follow-ups you might have and I also hope to see some of you in my future trips plans off this release as well.

So with that, I wish everybody a good day and thank you very much for the interest.

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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