VimpelCom Ltd. (VIP)
Analyst and Investor Day Conference Call Transcript
November 15, 2011 7:00 AM ET
Jo Lunder – CEO
Elena Shmatova – EVP and Head of the Russia Business Unit
Dmitry Kromsky – EVP and Head of the CIS Business Unit
Ahmed Abou Doma – EVP and Head of the Africa and Asia Business Unit
Igor Lytovchenko – EVP and Head of Capital Business Unit Ukraine
Ossama Bessada – EVP and Head of the Europe and North America Business Unit
Henk van Dalen – CFO
Cesar Tiron – Morgan Stanley
Alex Kazbegi – Renaissance Capital
Dalibor Vavruska – Citi
Torklid – Skagen [ph]
Alexander Balakhnin – Goldman Sachs
Igor Semenov – Deutsche Bank
Vive Khana [ph] – Deutsche Bank
Alex Wright – UBS
Abby Doray [ph] – HSBC
Victor Klimovich – VTB Capital
Ivan Kim – Renaissance Capital
Previous Statements by VIP
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With a revenue base of $6.1 billion in the third quarter of this year and EBITDA of $2.5 billion and with a mobile subscriber base of 200 million surpassing October, I think now we have developed the scale that we believe were necessary to be able to grow and develop these group of companies going forward.
In fact, I think we offer quite a unique combination in VimpelCom of mature, strong cash generating companies and good growth opportunities in quite a few of the regions. I have with me today all the heads of business units that will present each region to you during the course of the day. I will introduce them a little more in detail later during my presentation.
We have our CFO with us today. We have also Khaled Bichara here. So you have the full senior management team of VimpelCom present. I think we have a very interesting day ahead of us and I hope we will be able to use this day in a way to get everybody a little more familiar with how strong our operating entities are, because I think there has been a lot with VimpelCom over the last year that has kind of clouded the picture a little bit. And I think everybody understands what I’m addressing.
But I think when the dusts ease and we start seeing through it, we see some very, very well-performing entities as part of our group, and I hope you will be able to see that a little bit more clearly when we’re done with today.
We will have a Q&A session at the end of the day and we will also open for questions from the one participating via webcast. And we will basically do that by having eight chairs on the stage and we will answer any questions you might have.
I think the key question investors should ask on a day like this, okay, so you had this M&A history behind you and we already are. So how do you now plan to operate this company going forward? And let me offer a few reflections and solutions to that.
I think first of all our whole philosophy is based on the fact that all business is local. We have a lot to earn this company into a huge bureaucracy where we will try to coordinate and centralize everything from the top. For me and the management team it all starts with 200 million and those customers will be handled by local management in the operating units.
So the whole decision process within the new group will be very vertical-oriented, meaning that, Ossama Bessada, head of our Europe, North America region, he will have his budget, he will have his resources and he will operate that company during the course of the year with that budget and with a lot of delegated authorities.
So, then, the next question is, so what is then the role of the headquarter. Our thinking is that we will develop a very lean and mean and effective headquarter. We will have no more than 150 people in the headquarter and we will not have capacity from the headquarter to get involved in every single operational question that comes up.
And if you see the slide behind me, I think we can divide the focus from the headquarter basically into six main baskets. The one on the left-hand side called business control and target setting, I think, here, my best sort of example would be the mindset of the private equity groups. I think the headquarter will apply a lot of the thinking in terms of setting targets, following targets, operational targets, financial targets and apply a constructive way or control with a different underlying units.
And the first initiative we’ve taken here versus operating units is to establish a value agenda. I talked about that value agenda to some of the investors I met after the second quarter earnings series. And we’re going to develop that agenda more today and we’re going to continue to develop it.
That value agenda is basically built on one key target for this group the next two, three years, and that is to increase cash flows. That is basically our value agenda going forward, to increase cash flows from operations. And we will do that by developing real content for each region along three building blocks.
The first one is what we call profitable growth. And we will explain during the business units reports what we mean by profitable growth. The second building block is operational excellence and the third one is capital efficiency. I’ll touch upon all three of them to give you a little bit more flavor of what we mean, but that’s the content of the business control and target setting.
Then of course, the headquarter will also be very much involved in the strategic direction and (inaudible) portfolio management, meaning that capital allocation, investments, M&A activities, divestments, in market consolidations, everything related to portfolio management, it’s clearly an area for headquarter to be involved in, with the philosophy that capital is a scarce resource. And for that reason, we need to have a centralized and coordinated way of how we apply our capital.
The third area, financial structure, clearly, cash management funding, financial structure is something we will centralize and run from the top. People and talent management, I think, is key. And I think when you look at telecoms now, we get more and more commoditized, and for that reason, having the right people in the right positions with the right mindset is going to be a key success factor going forward.
For that reason, we will develop in VimpelCom what I call a Marine Corps of the key 300 to 500 people, and those 300 to 500 people we will also develop our DNA and make sure that they have the right business mindset, they have the right knowledge, skills to be able to conduct business. But we will not involve ourselves from headquarter in the corporate culture we have in VimpelCom in Russia, or the corporate structure we have in VimpelCom in Italy, because I think the ambition is wrong.
We will not try to turn into a Vodafone. We will allow local brands to survive. We will allow local cultures to survive. But we will develop the key top 300 to 500 employees in a Marine Corps and develop them and their skill sets and move them around in order to develop our business.
Corporate governance and compliance is, of course, also a key and important area for the company going forward also given our history, and we will resolve the issues we have there step by step. And frankly speaking, I will be surprised if any of the governance issues we have ahead of us is going to influence our operational performance much going forward.
And then we will centralize two functions. And that is the two of the functions as of now we’ll centralize. We’re going to centralize procurement because procurement is scale. It’s about making sure that you have enough in your luggage when you go and meet the vendors. And for that reason, we will probably also establish a procurement company to organize that activity. But for sure, we’re going to centralize the function as such. And we will centralize roaming because roaming is also money on the table that we don’t want to give away when you have a group of our size with 200 million customers.
So those two functions are the only one we will centralize. The rest is decentralized and empowered by people sitting with the business units.
So that’s the high-level thinking on the operating model. And then if we move on and have a look at the size of the telecom market, I think these are quite known numbers to most people. We all know the profile now. Voice is flattening out in certain markets. It’s even going down. Data is growing.
So, on the top left-hand side, you can see the total telecom universe based on our sources. I’m going to reference the numbers. Clearly, the profile, as I said, flat voice, growing data. If you go to the lower left-hand side, you’d see VimpelCom’s footprint, excluding Italy. We’re growing faster on voice and we’re growing much faster on both mobile and fixed data.
So I think VimpelCom offers from a market point of view a more attractive profile than the average telecom universe offers today. And then on the lower right-hand side, you saw the dynamics in the Italian markets. The Italian market is very influenced by everything that – those of you following European telecoms see today – the termination rates on mobile is going down. And for that reason, the overall growth in the Italian market is not looking as favorable as the rest of VimpelCom’s footprint.
That being said, I want you really to listen carefully to Ossama’s presentation later today because I think we have a very good story in the Italian market total, and I think we have some good plans how we’re going to address also the challenges that we see there going forward. So if we break this into real numbers, because at least I’m a practical guy and you’re not making much money on percentages. It’s the money that counts.
If we break these three baskets of mobile data, fixed data and mobile voice into three baskets, you see in the middle an estimated cumulative market increase in VimpelCom’s footprint. And then, on the right-hand side, you see how much revenues do we expect to find on the table in ‘12, ‘13 and ‘14 if VimpelCom is growing as with their market share of the different markets we see today.
So we have at least $5 billion on new revenues coming from data services that is on the table and up for grab in our different markets if we apply the strategy for data services correctly going forward. And then, of course, we cannot forget about the voice revenues because voice revenues, even though it’s flat, it’s still very important to protect them, and stay focused on voice and not forget about that, of course.
Each market is quite different and I’m not going to steal the points from the different business unit heads talking about this slide. But I think what we’re going to do is basically to with the philosophy of all business being local or the philosophy of empowering people locally. We also have different value creation strategy plans for each individual company.
Take Russia as an example. We underinvested clearly in Russia in 2009 in connection with the last crisis in the capital markets. We started to lose subscriber market share. We started to lose revenue market share. And our judgment in 2010 was the fact that this is turning into a size problem, eventually, in Russia. So what we need to do. We need to put together a plan there that first addresses the immediate problem, that we are losing subscribers and revenues. And then we can fix the profitability problem after that.
And I think some of the disappointment we’ve seen as of today is basically reflecting that strategy. We have been growing subscribers, we have been growing revenues, and I think now, over the three to six months, our ambition is now to turn that revenue growth into profitability growth and start focusing much more on cash flows and profit in Russia, hopefully improving margins in Russia, instead of combating subscriber market share and revenue market share.
So our value creation plan for Russia needs to reflect that view. While in Italy, we have a different situation. In Italy, we outperform the market all the time. We’ve been doing that for years. We are growing relative much stronger than competitors and we have now great opportunities in the business segment. We have great opportunities within the data services. We were able to secure a great spectrum for LTE in Italy.
So that’s a different value creation plan. And then if you go to the growth engine assets we have, we have some great assets in the second baskets on the slide. We have I think here a lot of untapped opportunities for data services. We have seen 3G yet in Pakistan. We haven’t seen it in Bangladesh. We haven’t seen it in Ukraine. We haven’t seen it in Algeria.
So the most attractive markets in Africa and Asia haven’t even started to go out on 3G. Here, clearly, we expect to see growth in the next two to three years. Not to forget about Ukraine. So the whole story in the second basket is really to take out what is left for voice and then start capitalizing on 3G and data.
And then, in the third basket, we also have some very good markets, I think. The Canadian market is a very good interesting market. Vietnam is a good market. Laos is a good market. Some of the African markets we’re in are good. But here we are now doing what we call a contribution analysis, looking at how attractive do we think these markets area, how long do we think we need to invest there, to be cash positive, and how much do we think those investments, how much will they give us compared to money put into Russia or money put into LTE in Italy.
So this is really we’re trying to make a sound judgment on behalf of our shareholders where should we put our money. And that’s why we also put those assets into developing new businesses. But, of course, we will not abandon them. We will make sure that we apply a sound analysis, that we apply a sound strategy, and then we will put our money where we believe they should be.
Moving on to our value agenda. I talked about three building blocks in my intro. The three building blocks across are – profitable growth, not revenue growth on the expense profitability, but the revenue growth that leads to profitability. It’s about operational excellence – how do we look at our cost space, what kind of initiatives are we putting in place to make our business more effective.
I think telecoms have a lot of opportunities to work with their cost space. I think we have a lot of opportunities to really look at our business processes. And the third basket is capital efficiency. We are still investing a lot of money. And I think people now start questioning, so how much are you actually going to keep investing when you look at the how the dynamics of the business are.
So I think also we need to ask ourselves how can we invest in a more effective and how can we get more profit out of each dollars that we invest. I’ll also address that a little bit more in details.
This slide is a little bit of could be seen as soft talking. So, yeah, what do you mean? But I think what is important – and we will work on this with our key employees – is also to create a new mindset. I think a lot of the telecom companies today is still having the old mindset, the penetrating markets, we are growing on voice, and a lot of the old concepts are still very much alive.
I think going forward, at least for VimpelCom, we would very much like to focus the high-value customers and less look at subscriber land-grabbing. We would much rather look at retention and look at the lifetime of the customers. We need to look at speed of data access because that’s the killer application in order to grow data services and we need to get away from the old-fashion thinking around price per minute on voice to start bundling services and price data services a little different.
And I think specifically on data, we have three key concepts that we would like all our business units to look at and implement. We would like to move away from unlimited tariff funds. It’s a very, very hard concept to implement these days with the Facebook’s and the Google’s and the dollars.
We need a more rational traffic management and they will be addressed later on today with head of business unit and we need also more sophisticated differentiation in the way we work where quality and service and speed should be based on different value propositions going forward.
If I then move to the second building block, which is the operational excellence and cost efficiency. To me this is the base I can work from, the one on the left-hand side. This group has $6 billion each year that we pay for traffic, interconnect and everything related to traffic in our network. Then we have a bulk that consists here of conversion, operating expenses, technical, IT people and other SG&A. That bulk is $7.8 billion. And the last one is the CapEx we invest every year.
So we spend $18.6 billion and when we talk about increased cash flows among the three building blocks operational excellence, these are the cost elements that we will attack and these are the cost elements we will do something with. This could be network swaps. This could be site share agreement, like we do in Pakistan and Bangladesh right now, and this could also be new thinking connected to distribution concepts.
And if we look at the third building block, which is capital efficiency, we’re now spending, as I said, $4.8 billion each year in investments. Maybe the left-hand side is not all that interesting because it’s basically showing the different CapEx profile of the business units. But the right-hand side, I think, is an interesting slide. It shows how VimpelCom is benchmarking a nice peer group consisting of Telenor and Teliasonera to Tele2 and Millicom.