VIP

VimpelCom Ltd. (VIP)

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VimpelCom Ltd (VIP)

Analyst & Investor Day 2013 Conference Call

January 16, 2013, 08:00 am ET

Executives

Jo Lunder - CEO

Gerbrand Nijman - IR

Jan Edvard Thygesen - Deputy CEO & COO

Anton Kudryashov - Group EVP & Head of Russia

Maximo Ibarra - Group EVP & Head of Italy

Ahmed Abou Doma - Group EVP & Head of Africa & Asia

Artem Nitz - CFO, Ukraine

Henk van Dalen - CFO

Analysts

Cesar Tiron - Morgan Stanley

Dalibor Vavruska - Citi

JP Davis - Barclays

Herve Drouet - HSBC

Gavin McKeown - Pioneer

Igor Semenov - Deutsche Bank

Alexander Vengranovich - Otkritie Capital

Sergey Goncharov - Sberbank CIB

Stanley Martinez - Legal & General Investment Management

Barry Zeitoune - Berenberg

Vivek Khanna - Deutsche Bank

Presentation

Jo Lunder

Good afternoon and a warm welcome to our Analyst and Investor Day, our annual event. I am very happy to see all of you and I am very honored to have you here. I hope you will enjoy the day. I think we have put together some very good presentations for you and it’s a great opportunity for me together with the senior executives of the company to present our plans.

The theme of today is value creation. How we plan to create value for our shareholders going forward. A lot of the things we are going to talk about is going to be forward-looking. But if you allow me before we do that, let me take one step back first and look at what we said on our last Analyst and Investor Day, November 2011. We said that we are committed to a mid-single digit growth of revenues, mid-single digit growth of EBITDA, that we will reduce our CapEx spending to 15% of revenues and as a result of that that net debt to EBITDA will reach a level below to and all this by the end of 2014.

I think if you look on the right hand side, we have delivered on our promises, an organic revenue growth of 6% so far in 2012 and EBITDA growth of 8% by the third quarter of 2012. We are started our descent to 15% CapEx to revenues, 19% last 12 months and also deleveraging improvement from 206 to 204. And in the middle of all this, we paid our dividend commitment and I am pleased in general with the progress that we have made the last 12 months and that we have kept our promise. We have also seen a good growth in our subscriber base; 7% growth, because we still are operating in under penetrated markets. Our customer base now is 212 million. The group improved EBITDA quarter-on-quarter during 2012 and reached 44% EBITDA margin in the third quarter of this year.

All the five business units are performing well. To start with Russia, over achievement on our operational excellence program that we announced, strong cost control, strong growth in mobile data, reaching an EBITDA margin of 43.2% in the third quarter of 2012, the best margin in a long time. We have a much better position in Russia today than we had 12 months ago, improved operational performance, improved market position, improved financials.

In Italy, good performance, difficult market, but we are growing our mobile revenue market share; by the end of the third quarter above 20%. Management is showing good cost control in Italy and the most important thing is basically that we are outperforming competitors quarter-after-quarter. We are pleased also with the performance in Italy having an EBITDA margin in that difficult market still above 40%.

Asia-Africa, strong performance in Pakistan, strong performance in Bangladesh, strong performance in Algeria. EBITDA margin approaching 47% for the whole business unit and a clear profile where EBITDA is growing faster than our topline.

Ukraine; Ukraine has probably been the most difficult market this year or in 2012. We have now done a successful migration to bundle. So 75% now of the customer base is on bundles. We have been able to keep the EBITDA margin above 50% during the year and we think we have turned the corner now in Ukraine and you will have a good presentation on Ukraine outlining what we believe the future will bring there.

And the fifth and last loss business unit CIS, double-digit organic growth; impressive revenue growth and impressive EBITDA growth.

In addition to the strong operational and financial performance, I think also 2012 has shown progress on M&A, on governance and on the partnership initiatives that we announced earlier. We have exited Vietnam. We are in the process of acquiring control of the business in Canada with OTH and negotiations with the Algerian government has shown progress, not with the speed of light during 2012, but we're still in process and we're still optimistic to reach a conclusion in Algeria beneficial for shareholders.

On the governance side, we have now a fully functional HQ in Amsterdam with 130 people. I have done three senior recruitments since last time we spoke, Jan Edvard Thygesen has joined us as Chief Operating Officer, Deputy CEO; Jan Edvard has many, many years with Telenor; I know him for years back. He is one of the people in the global telecom universe that I respect most and he is adding a lot of value on the operational side. We have recruited Anton Kudryashov as our new CEO in Russia; Anton has had an excellent first year with good performance in Russia explained earlier and we did an internal recruitment of Maximo Ibarra appointed him CEO of WIND, Italy. Maximo has been instrumental in developing the business we have in Italy, leading the consumer business earlier and now given the responsibility to head the whole company. So I see also the senior management team much stronger today than what it was only 15 months back.

Shareholder dispute is resolved, the FAS claim is withdrawn; Altimo has expressed that they are going to convert their preferred shares to common shares, so another uncertainty is off the table. And just before Christmas we elected a new Board of Directors in VimpelCom. We still have nine directors and we have still two independent directors. And as we also said, we would like to partner with the OTTs and the famous brands that you see on the slide behind me is giving us enhanced customer experience, is giving us ability to innovate, is giving us basically more customer loyalty and we are also very pleased with the ability to work with this famous company.

So in summary, I think we have walked the talk since we spoke in November 2011 on the financial area, on the operational area, M&A, governance and partnership. Okay, so now let's shift gear and talk about the future. So what is going on in our environment? It’s clearly changing, that being said, for me its easier now to understand what the next years will bring than it was two, three years back. I think we have more answers and less questions.

Yes, there is a global economic recession clearly and I am not going to comment on that, there are multiple people and experts on this probably in the audience and elsewhere, what is clear to us is that the telecom sector is less vulnerable to the overall economic recession that we see. I think the services that we providing are covering such basic needs that it’s almost as you can group them now with bread and butter in terms of needs, and for that reason we see less sensitivity on demand in a very difficult global recession period; I think that's a general good news for the industry.

The OTT players are challenging (inaudible), a trend is there, whether you like it not, it’s there, so less like to it instead of asking ourselves that is on the continue what kind of affect it’s going to have, its there and we need to expect it. Regulation is clearly having affect on business; I have spent a lot of time the last year meeting different regulators in all different markets and I see and hear a little bit different pronoun than a couple of years ago. I think also regulators to a larger extent now want to regulate for incentivizing investments in infrastructure and not so much one sided focus on regulation for increased competition. And we see also very different sentiment and mindset in different markets we are operating in. So the risk related to regulation is clearly there, is still there. But I would say and I hope that this risk is lower now than what we saw a couple of years back.

The movement from voice to data is obvious, nothing to discuss, its there, let's relate to it, monetization or mobile data, biggest challenge for the whole industry, we got to talk about how VimpelCom plan to address that problem later today. Basically, we think moving to bundles to protect voice and SMS and to a larger extent pricing speed of access to the internet and also pricing capacity in accessing the internet are probably the future price plans for the industry if the industry can follow that path we think that the whole industry will be able to monetize on a tremendous growth that we will see in the mobile data in the coming years.

And of course the last trend is the requirement of capacity investments in a very failing situation where the traffic is growing probably 15 to 20 times over the next five years in the networks. So against this we believe that the best position to put yourself in, the winners, tomorrow winners, are the operators with the right cost base and the operators with the best CapEx and most effective CapEx programs. And that's why today we are not announcing any radical news. There is not a shift in our strategy. We haven't invented a genius way of reengineering the value chain. We are basically saying that our value proposal is built on the value agenda that we announced 12 months ago and it starts in the yellow circle in the middle.

Our value proposal to our shareholders is to focus on increased cash flows. There are four building blocks of how to increase cash flows. You see them centering the circle. Profitable growth, is going to be all about getting your price models right on data. Operational excellence is going to be a hard execution program for keeping your costs under control. Customer excellence is going to be a lot about dealer commission and also their price excellence. And the fourth building block capital efficiency, how do we increase network sharing, how do we optimize our capital structure.

This is our value proposal basically to shareholders and I'll return to putting some numbers on what we believe is possible to do over the next three years, but before I do that, let me also remind you about our business model, because I think our business model is built for the reality that I just described and its different from many of the big telcos that you see in today's world. We have a fundamental belief in a decentralized business model. We have 66,000 employees on the lowest layer. We have 212 million customers that we interact with every day. We need empowered people. We need strong CEOs that can develop and maintain 10 very, very famous brands that you can see on the lower side.

We have 130 people sitting in Amsterdam; 130 people out of 66,000. We don’t want a big expensive headquarter. We don’t want a big bureaucracy where people on this level is going to fight with people on this level, with metrics and bureaucracy and decisions that will take weeks and months before they can be executed. Here we have brainy, experienced senior people that can interact with local management effectively and be part of making the right decisions. We focus mainly developing synergies from roaming, from procurement and Henk will explain an in-house banking concept that we're launching. Those are the synergy areas.

Aside from that, we focus on performance management. We focus on portfolio management. We focus on people management. That’s the role of the headquarter. And then we try to wrap everything in a VimpelCom way of working. What is recognizing a VimpelCom leader? What is the role models that we are highlighting and what are the heroes inside our company. Our heroes are the passionate, professional leaders; passionate, we have a desire to win professional. We said always customer first, and we have a deep understanding of what the operational excellence programs is all about and a leadership is all about empowering people and is about execution; that’s the model, that’s the culture, that’s the company we are trying to create without spending again a lot of money on unnecessary layers and bureaucracy.

I said I will go back to the numbers, so basically now there are two big baskets where we can generate cash in the next three years. The first basket is operational improvement. If we look at EBITDA minus CapEx in 2012 and we compare that to EBITDA minus CapEx in 2015, we think we have an annualized improvement in cash generation of $2 billion; $1.5 billion is going to come from profitable growth initiatives that the management team will talk about later today, operational excellence initiatives and customer excellence initiatives.

Here, Anton in Russia knows exactly how much of the $1.5 billion he is going to help to generate. Maximo knows it, Ahmed knows it, Dmitry knows it, Igor knows it. We also know how much is going to come from data, how much is going to come from distribution concepts etcetera, etcetera. So here there is a very detailed matrix plan and project how that $1.5 billion is going to be generated. The remaining $0.5 billion is going to come from CapEx efficiency. Same there, country and initiatives. We also have a balance sheet in VimpelCom and a history in VimpelCom that has an upside in terms of creating also improved cash flows from financing activities; Henk van Dalen our CFO is going to end the session today before the Q&A, he is going to walk you through this much more in detail, but basically what we believe is that by establishing an in-house bank, by optimizing the debt, by reducing the gross debt we are sitting on a lot of cash right now and by a corporate restructuring, making it possible there are more tax efficient structure, these all could add up to as much as $900 million on annualized savings.

Again, if we look at interest and tax in 2012, we implement a lot of initiatives related to those four building blocks. Let's look at what interest and tax is going to cost us in 2015; cash improvement of $900 million in a three year period. In addition to all this, we also think and that's quite obvious I think that if we are able to deleverage and if we are doing all these things, of course also the average cost of new debt and refinancing is going to reach lower levels and that comes on top of the $900 million I spoke about.

So we feel good about our own situation. We think we have been able to move the company in the position where we can start talking about these numbers and for that reason we also confirm today the same level of ambitions that you saw in November 2011, objectives, mid-single digit CAGRs on revenues, mid-single CAGR on EBITDA; CapEx to revenues, we commit to the 15% and net debt to EBITDA less than 2%. These are levels at the end of ’15. The true lighter the CapEx to revenues under net debt to EBITDA we talked about end of ’14 a year ago.

The reason why we believe it’s the best thing now to delay this for the year is basically that we will launch a catch up program in Russia in 2013 that will also melt a little bit into ’14 and really once and for all close the perception of quality of the network.

We have the right team in place. We have the right people in place and we feel very good about spending our money on making sure that our network in Russia is having the same quality perception as the other two big players and of course we also hope that Algeria will be resolved and for that reason that we can invest money into Algeria this year and with those two catch up programs we think it’s the right thing to delay our CapEx to revenue to ’15 by the end of ’15.

But I think these are long investment cycles and we believe more in the direction than in the accurate date where you reach these levels. And again, we commit to the dividend guideline that we have announced earlier to pay at least $0.80 per common share amusing the 1.628 million shares we currently have.

So this really ends my intro this morning. We think the whole world is going mobile. We think LTE will be an enabler and a game changer for mobile broadband. We have spectrum both in Italy and Russia.

We think smartphones will completely take out computers, PCs. We think small screens will take out large screens and we think traffic in the mobile networks will grow rapidly. So we believe we have an excellent position to take advantage of all this and for that reason in our strategy when we talk internally we make it very clear, we are a mobile company.

And we will allocate our resources and our investments to mobile capacity and coverage and we will limit our investments in any fixed networks we have. The value creation model for shareholders is increased cash flows. 2 billion is the potential from operational improvements; $900 million is the potential from financial improvements. This adds up to a potential improvement of 2.9 billion, three years from now. And all this needs execution. All this needs the right people; all this needs a passionate performance culture.

I feel very good about the team. I have around me. I feel very good about the country teams we have in all our markets now. I've traveled a lot the last 12 months. I've met with employees, I've discussed with employees. We interact with my direct reports almost on a daily basis.

I feel very good about the quality of the people and I think again this is a people business and I think we have the right people to deliver on this strategy. So I hope we will be able to quantify the numbers. I hope we will be able during the course of the day to explain how we are going to do it in Russia, how we are going to do it in Italy, how we are going to do it in Asia and Africa and how we are going to do it in Ukraine.

Again thank you very much for paying attention this morning. Thank you very much for coming and I think I will give the floor to Gerbrand to walk you through the problem of the day so that you can see the timing and which one to expect.

Gerbrand Nijman

Thank you, Jo. (inaudible) from me warm welcome here for everybody in Newland but also to people who are following us on the internet, which is by quite a few people as well. I'll walk you through shortly through the program but as you can see, there is no Q&A here with Jo; Jan Edvard, but Jo and Jan Edvard will join Henk after his presentation for his shared Q&A.

Read the rest of this transcript for free on seekingalpha.com