Nov 6, 2013
Executives
Katie Pyra – IR Jo Olav Lunder – CEO Hendrik van Dalen – CFO
Analysts
Cesar Tiron – Morgan Stanley Ivan Kim – VTB Capital JP Davis – Barclays Haim Israel – Bank of America Alexander Kazbegi – Renaissance Capital Torsten Achtmann – JPMorgan Igor Semenov – Deutsche Bank Alexander Balakhnin – Goldman Sachs
Operator
Good day, ladies and gentlemen, and welcome to the VimpelCom Ltd. Third Quarter 2013 Investor and Analyst Conference Call.
At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will be given at that time.
(Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Katie Pyra.
You may begin.
Katie Pyra
Hi. Good afternoon, ladies and gentlemen, and welcome to VimpelCom’s conference call to discuss the company’s third 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 the company’s expected capital expenditures, network developments in Russia, Middle East future operating cash flow position, the grant of a 3G license to Orascom Telecom, Algeria, the timing and amount of future payments of dividends by the company and the company’s ability to realize it’s strategic initiatives.
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 Annual Report on Form 20-F; and other recent public filings made by the company with the SEC, including the accompanying earnings release. Also note that 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.
Additionally, the actual financial results of the third quarter of 2013 are unaudited. If you have not received a copy of the third quarter 2013 financial and operating results 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 Olav Lunder
Thank you. Good afternoon for those in Europe and good morning to our guests from the United States and welcome to our third quarter 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 stable first quarter results were negatively impacted by regulatory and governmental measures as well as market slowdown in most of our markets, as a result the group reported an organic revenue decline of 1% year-on-year to $5.7 billion excluding the ongoing impact or the reduction of the mobile termination rates in Italy, VimpelCom’s organic revenue growth would have remained stable.
We continue experiencing strong mobile data revenue growth across our business units. EBITDA decreased 2% organically but we continued to demonstrate strong cost efficiency delivering an EBTIDA margin of 43.5%, excluding the impact of the reduction of the mobile termination rates in Italy and excluding of one-off charges we had in the quarter EBTIDA would have been stable organically.
In the third quarter we achieved strong overall subscriber growth with an increase of 5% year-to-year to 219 million mobile subscribers supported by growth in all business units. Net income was US$255 million down from last year mainly as a result of some specific charges in this quarter, that we will address and explain later on the call.
Finally cash flows for the quarter was solid at US$1.7 billion. Then moving on to some other key developments, we switched our listing to NASDAQ on September 10, since then we achieved another major milestone with our inclusion in the NASDAQ-100 Index last week.
As you know inclusion in this Index was one of the reasons for the switch. We remained committed to recurring value to shareholders.
The Supervisory Board has authorized the payment of an interim 2013 dividend of $791 million or $0.45 per common share. This is in line with our stated dividend guidelines under which we aim to payout at least $0.80 per share per year.
We also achieved two of the major milestones in our market having been granted 3G license in Bangladesh in September and one of the three provisional 3G licenses in Algeria in October. We also received a conditional approval in Algeria to make foreign payments to acquire equipments exclusively dedicated to 3G.
This approval is a conditional exemption to the currency ban on foreign payments. On the management front, I’m pleased to announce that Andrew Davies will start as our Group CFO tomorrow.
And we’re happy to have such an experienced finance and industry professional joining our team. Andrew succeeds Henk van Dalen who has made substantial contributions to VimpelCom and we wish him the very best in his future endeavors.
We also promoted Anton Kudryashov to the Group Executive Board as Chief Group Business Development and Portfolio Officer with Mikhail Slobodin taking over as Head of Russia Business Unit. Mikhail will continue to the important work done over the recent years by Anton and his team to improve our performance in Russia.
Finally, we will host our next Analyst and Investor Conference on January 28 and 29, 2014 in London. There we will provide an update on our strategy, the value agenda.
I hope that many of you will be able to attend this important Analyst Day from our full management team. Moving on to the performance of our business units, starting with Russia.
In Russia our operating performance continued to improve in the third quarter extending the positive trends team in the previous quarters, although at a slower pace. The business recorded a 3% growth in mobile service revenues supported by a 30% increase in mobile data revenues.
EBITDA remained stable at savings from the operational excellence program both invested in the mobile data network and expansion of the owned mono-brand stores. I’ll return to those points on later slide.
The EBITDA margin remained strong at 42.6%. Last four months CapEx to revenues stood at 19% and we expect it to increase up to 22% for the full year 2013 as we continue to invest in network quality and capacity to support growth for mobile data.
Let me then update you on our progress in expanding our mobile data networks in Russia. Improving the quality or our network in Russia remains a key priority for our company.
We are fully on track to achieve the goals of being on par with our peers by the end of ‘13 in our key regions, which generate the majority of our revenues in Russia. As you can see on this slide, we have significantly expanded the number of 3G based stations this year connecting more base stations via IP and acquiring our network to HSPA+.
We are on track to reach our targets for this year. In particular, in Moscow, already 93% of our base stations are IP connected and 90% are offering HSPA+ and we aim to reach a 100% by the end of this year.
In fact, we have three-fold the number of 3G base stations in Moscow by the end of this year. We are pleased with our network development in Russia today, but of course, it will take more time to align the market perception with improved quality of our networks.
We also focused on expanding LTE coverage in Russia. The LTE roll out continued during the third quarter and we launched the first commercial LTE network in two regions in October.
We expect to commercially launch LTE also in Moscow and three other regions in the next few months. Looking ahead, we plan to accelerate the LTE roll out by launching services in 12 cities with more than 1 million inhabitants, this include St.
Petersburg, Ekaterinburg, Novosibirsk and Nizhny Novgorod in the first half of next year. The next phase will be the development of LTE in more regions in the second half of ‘14 and we will closely of course monitor the penetration of 4G devices and demand for LTE services to adjust our rollout plans accordingly.
The way it looks right now, we expect to cover half of the Russian populations with our key networks by the end of 2015. And as you probably saw, we also started official sales of iPhone 5S and 5C in Russia last month.
In Russia, we continue to invest in the rollout of mono-brand stores to offer better customer service, improve our product offering and consequently reduce churn. This year as you can see on this slide, we will triple the number of mono-brand stores to 1240 in total.
As a result, the percentages of sales in mono-brand stores has increased. By now half of our sales are done through Euro set and mono-brand stores.
I would say in summary, we have stabilized our operations in Russia and we continue to invest in 3G and 4G networks and the rollout of more mono-brand stores. With the new management team in place we are now entering into the next phase of transition of our business in Russia and we have hopes for the future.
Moving to Italy, WIND continued to outperform the market in the third quarter in a highly competitive environment delivering a strong relative performance. Our mobile subscriber base increased 4% to well over 23 million, driven by the success of all inclusive bundle, which continue to attract customers due to the simplicity and the transparency of the offerings.
Total revenues, excluding the impact of mobile termination rate cuts, was down 1% mainly as a result of competitive pricing pressure. However, mobile Internet revenues were up 44% and fixed line broadband was up 8% as a result of new strategic focus on unbundling, which has a direct positive effect on profitability of our fixed line business.
EBITDA in the third quarter decline by 6% mainly due to the price competition in the mobile market and again MTR cut. Reported EBITDA margin increased to 40.6% driven by the ongoing cost efficiency measures.
If you look to the fourth quarter of this year, we expect continued pressure on the top line for mobile termination rate to continue, although to a lesser extent than in the first half of 2014. That said, we continue to focus on offsetting the impact from the MTR reduction and protecting our cash flow to the implementation of our operational and capital efficiency initiative.
In Africa and Asia business unit, revenues decreased 1% organically impacted by regulatory and governmental actions in several countries. From a reported basis revenues decline by 4% primarily due to local currency devaluation against the U.S.
dollar in Pakistan, consequently EBITDA declined 1% organically also impacted by $7 million in one-offs related to re-branding in Pakistan and restructuring. EBITDA excluding one-offs was stable on an organic basis.
EBITDA margin was strong close to 48%. In Algeria, revenues were stable in local currency with mobile data delivering an impressive 80% growth, despite the ongoing limitation imposed on Djezzy, our subscriber base grew 2% to 70 million, enabling Djezzy to maintain its market leadership position.
EBITDA margin remained strong 57%. Our performance in Pakistan was solid with the revenues and EBITDA both up 5% despite the challenging operating environment and other destructions including harsh weather conditions and power outages.
In Bangladesh, our subscriber base grew 5% while revenues decreased 15%. The revenue decline was mainly due to the lower usage per subscriber resulting from the earlier mentioned deactivation of suspected voice over IP customers in compliance with regulation as well as a negative impact of 15 days of national strike during the quarter.
Excluding the impact of voice over IP, our revenues – revenue growth would have been positive. These declines were partially offset by higher interconnection and value added services revenues.
We continue to expect deactivation of suspected voice-over-IP customers to have a prolonged negative impact for the rest of the year, as previously communicated. EBITDA increased 5% in Bangladesh supported by cost savings and also our lowest impact subsidy.
In Ukraine, our results were under significant pressure, but we continue to deliver strong margins. Our revenues decreased 7% reflecting a decline in mobile.
This was primarily due to customer switching to lower priced bundled tariff plans and difficulty of up-selling existing customers to higher price bundled our mobile subscriber base increased by 6% resulting from an improved market offering and regional sales efforts. On a positive note the mobile data revenues demonstrated continued growth, up 11% year-on-year.
Fixed line revenues increased 9% as a result of strong growth in broadband, which continued to outperform the markets. This increase was driven by growth in the fixed broadband subscriber base and growth of the fixed broadband ARPU of 11%.
EBITDA in Ukraine decreased 10% from our – due to the higher conversion costs of the sales as well as increases in network, IT and G&A cost. EBITDA margin remained high at more than 49%.
The transition of our business in Ukraine is clearly taking longer than we anticipated. However, we are taking significant measures to strengthen our performance in the market by improving the value proposition to customers and a clear focus on customer excellence.
I am sure we want to return to this one during the Q&A. The CIS has continued to deliver strong results in the third quarter, delivering a 9% organic growth and an EBITDA growth of 6%, resulting in a healthy 48% EBITDA margin.
In Kazakhstan we are pleased that the company’s competitive market position improved as a result of its attractive value proposition and subscriber transition to bundled traffic plans is progressing according to plan. Our revenues in Kazakhstan increased by 4% in the quarter driven by a 53% increase in fixed line revenues, while mobile revenues grew by 1%.
If we exclude some one-offs, the EBITDA growth would have been 12% in Kazakhstan. I will now pass the floor to Henk van Dalen to discuss the Group financial performance in a bit more detail.
Henk?
Hendrik van Dalen
Thank you, Jo. Our revenues in third quarter were negatively impacted by regulatory and government elections in the business unit in Africa and Asia as well as in MTR cuts in Italy.
Notably excluding the deduction of MTR in Italy, the group revenues would have remained stable organically. EBITDA on both an organic and reported basis decreased by 2%, reflecting the reduction of MTR in Italy, the voice-over-IP effect in Bangladesh and approximately $27 million of certain one-offs relating to restructuring, re-branding in Pakistan and adjustment in Kazakhstan related to USB dongle’s revenue recognition and certain M&A related costs.
Excluding the MTR cuts and one-offs, EBITDA would have been stable organically year-on-year in the third quarter. EBIT decreased 2% to $1.2 billion, mainly due to the negative EBITDA movement and the impairment of certain statement and in house [ph] goodwill.
Overall, our net income attributable to VimpelCom shareholders in the third quarter decreased 53% to $255 million as a result of negative non-cash has mix effect of $54 million. $31 million of higher finance cost which are mainly related due to the euro bonds that were issued in the first quarter of this year for repayment of maturing debt in 2013 and 2014.
And $165 million charge due to deferred tax provision for withholding tax related to a planned inter-group dividends. Turning to the next slide, gives you an overview of debt, cash and the various ratios.
On a consolidated basis actual net cash from operating activities decreased 16% year-on-year in the third quarter to US$1.7 billion. This was explained by a lower interest received compared to the third quarter 2012 than income from derivative settlement was included.
Gross debt increased to 1% quarter-on-quarter to US$27.6 billion, primarily due to unfavorable FX movements. Net debt decreased 1% quarter-on-quarter to $22.5 billion, leading to a net debt to the last 12 months EBITDA ratio of 2.3 at the end of the third quarter.
The decline in net debt in the third quarter primarily reflects cash flow generated from operations. We ended the quarter with a balance of cash, cash equivalents and deposits of about US$5.1 billion.
Then turning to Group Debt Maturity Schedule, this remains reasonably well balance over the coming years, there is a peak in the maturity profile in 2017 as you know, of course, by the way in Italy that we plan to refinance this before its maturity depending on market conditions. So the growth therefore is US$27.6 billion at the end of the third quarter with an average weighted interest rate of 8.2% in the quarter.
And finally, as you can see from this slide, we have substantial undrawn committed revolving credit facilities in place for the total of US$1.3 billion as of September 30, 2013. And with that I turn the call back over to Jo.
Jo Olav Lunder
Thanks you, Henk. So this is the last slide before we open for Q&A.
So it’s a just – conclusion is that overall operational performance in the quarter was impacted by regulatory measures and also market slowdown. However, we continue to see strong mobile data revenue and subscriber growth in our markets.
We are driving improvement in our operations in Russia. We delivered organic mobile service revenue growth of 3% and a strong mobile date revenue growth of 30% and depending on our strategy to win in mobile data.
And clearly we continue to outperform the market, while maintaining a strong EBITDA margins. But overall, VimpelCom continues to deliver one of the highest EBITDA margins in the industry and we also have a solid cash flow from our operations which enable us to invest in our businesses.
We have also confirmed our commitment to our dividend guidelines of paying $0.80 per annum per share and we have clear the payment of an interim 2013 dividend of $0.45 per common share today. The results are solid in the context of the competitive and regulatory pressure and the market slowdown in my view.
I remain confident in our strategy and like all of you to join us for our annual Analyst & Investor Conference in London on January 28th and 29, as we plan to update on our progress against our strategy, the Value Agenda. And with that, I suggest that we open the floor for questions.
And I hand the call back to the operator.
Operator
Thank you. (Operator instructions) Our first question comes from Cesar Tiron of Morgan Stanley.
Your line is open.
Cesar Tiron – Morgan Stanley
Yes hi. Two questions please.
First on Russia, you have delivered on network improvement as you said, you would, but we are still to see the impact on service revenue growth. For example I would expect MTS and MegaFon to grow by 6% this quarter and service revenues I knew only grew by 2%.
Can you say exactly what you think you need to change in customer perception to accelerate your revenue growth in Russia and how long you think it’s going to take an whether it is possible to see similar situation as in the Ukraine or your network is on par with competition, but you under-perform on revenues. And my second question would be to understand if you are still exploring refinancing options of the peak notes and higher bonds at WIND and what’s preventing you from delivering on this at this stage?
Thank you.
Jo Olav Lunder
Thank you. These are good questions.
I think let’s – I want to comment on a couple of things. You basically stated a fact in your question.
First, if we look at revenue market share development from the first to the second quarter, we actually saw small growth in our favor. Now from the second to the third quarter, you might be right that you lost a bit of what we gained in the last quarter, our service revenue growth in this quarter is 3%, I haven’t seen yet the numbers of MTS and MegaFon.
And I don’t know whether there will be a 6% or lower than that, but we might see that it is still a little bit of – but again in this quarter. But, I think when we look at this figure and everybody it is basically that – look at the number of 3G base satiations in the beginning of the year, in Russia in another slide I show you around 18,000.
We are going to end the year with 27,000. We have basically built 9,000 3G base stations and we have also accredited IP connections on a high percentage of them.
So, what we, we spent years building 18,000, we basically don’t mind 1,000 in a year. Look at Moscow, we have threefold the number base stations in Moscow this year, and then we measure natural performance now.
We see very good results on our end, and I think we are about now to catch up a key regions and gradually in the country as a whole and for that reason we are now also today announce that we will accelerate LTE rollout, and by the end of 2015, we plan to cover 50% of Russian population with LTE network, so we take now this network quality for real and we will make sure that we don’t lack behind competitors on the next generation and mobile broadband. And then, of course, the question is, why you are not growing as quickly as MTS and MegaFon?
And I think we have to just recognize that we bring assets in the networks for a long time, now we have finally been able to organize ourselves so that we can catch up based on the perception out there that our network is performing less than the two others, but I think as long as reallocations are there is just a matter of time before the perception again will change and we look at this in a long term perspective. LTE loan last in Russia for the next 10 years and, of course, we would like to see more rapid improvement in revenue market share also with revenues.
But we also have to look a little longer than just one and two quarters at the time. And I expect that we will see a shift during 2014 in terms of service revenue performance against competitors.
And I think Ukraine, an example we used, is a different one of nature, because in Ukraine we basically have to reset in a way the price stream. We have been using through bundles and that used bundles was clearly that I think to do.
And then when we did that the cannibalization started, because it was basically a correction of the price premium that led to a pressure on the top line. Now we realized that we need more time to adjust the cost base in order to balance Ukraine, but it’s a different situation from the Russian one, because in Russia we’re more or less with competitors in terms of the movement to bundle.
So I think we’ve been basically doubled the number of bundles in the last 12 months. But I think that are two different examples.
So that, it’s a long question, but I think it’s probably two key opening questions for the whole performance side. So that’s all we can say.
When it comes to refinancing, this is a very big and an important question for VimpelCom. It’s probably the best in Italy user income.
We’ve announced that certain a number of times on this call and it’s a very serious and important decision for us whether we are going to refinance and break that returns or not. And we said we would take a decision in the second half of this year.
We haven’t taken that decision yet and there’s no real update we can give on the refinancing question today, but of course, we will respond to you immediately when the decision has been made and we cannot provide the timetable for the next steps, Cesar.
Cesar Tiron – Morgan Stanley
Thank you very much. Just a very quick follow-up question.
Just on this perception of the network, do you have any plan maybe on the marketing side to communicate the improvement that you made on the network for the subscribers to understand that that has happened, especially the Russian subscribers that are not in our network.
Jo Olav Lunder
Absolutely. So, we now see that we have a core product at that benchmark and of course, we need active list to communicate this.
And other types of action is of course, as I said we also now agreed with our focus at selling iPhones in the Russian market again and this will also help the take-up on smartphones and hopefully also improve the user-experience of improved networks that we have right now. But of course, communications and addressing perception is key, although persisting of the basic makes no sense right.
Cesar Tiron – Morgan Stanley
Thank you very much.
Jo Olav Lunder
Thank you.
Operator
Thank you. Our next question comes from Ivan Kim of VTB Capital.
Your line is open.
Ivan Kim – VTB Capital
Yes. Good afternoon.
Two questions please. And the first [indiscernible] that the Russian growth, but the network conversions in this has been significant and I am just wondering probably there are issues elsewhere and one thing there to remember was the case that there was few quite kind of large number of subscribers in old archived tariffs, do we see that these people have started probably to switch to the new ones for pricing, to bundles and probably you are doing that yourself and that I guess could be the reasons for slower revenue growth.
And then secondly, in Russia you incurred some startup cost related to mono-brand rollout from what I understand. If you strip those costs out, what the EBITDA margin would have been?
Thank you.
Jo Olav Lunder
Of course, part of market activity is to recharge to old tariff and plan holders and offer new and more customers new tariff plans, so this is an important part of the growth transition we are doing in Russia right now. But I think that you have to be a little patient on Russia and realize that now we have parity on the core products and now we are doing sort of the cleanup in the tariff base and we have reduced price premium and we now move more and more to bundles and more relevant tariff plans.
But still there is an element of perception here and we know also that changing perceptions and big shifts like the [indiscernible] shares just takes time. But we remain very focused on the long-term opportunity and we are also convinced that we are moving this in the right direction.
And then, we’ve been optimizing the split regarding the product cost on mono-brands then we give the EBITDA margin because we think this is basically – it should be seen as an part of the operating model and the savings that we’ve had now on other areas, really invest in what we believe is the right activities in the market. So for that reason we are really sorry, not to give that split, I’m sorry about that.
Ivan Kim – VTB Capital
Thank you.
Jo Olav Lunder
Thank you.
Operator
Thank you. Our next question comes from JP Davis of Barclays.
Your line is open.
JP Davis – Barclays
Yeah, hi. Good afternoon, everyone.
First question is also on Russia, and you state in your release a little bit of pressure on voice revenues and with more allocation within bundles to data. And just if you could unpack a little bit more for us, and specifically are you seeing customers at all that are starting to try rationalize its spend by using bundles or are you still seeing an upside, an opportunity from bundles?
That’s the first question. The second question for Henk, just around the deferred tax and the future in the company dividends, can you provide a little bit more color on that and specifically as that related to the in house bank and what savings there are from doing this that we could expect in the future.
Thank you.
Hendrik van Dalen
I think when we look at analyzing what’s going on in Russia, I think it’s basically this and what we believe is settle the situation in your way a perception issue. It’s of course adjusting the price even in the market by the movements to band user and new tariff plans as though in a way we are doing multiple things at the same time and hopefully we are now moving this into a situation where we will be on par on network having settled the right price level compared to competitors reflected in bandwidth and elsewhere and the main competition they would be little bit above customer service and customer satisfaction.
So – and that being said, I think also probably we need to expect a little bit of a slowdown in Russia, I think we’ve seen also GDP estimates now for 2014, that is lower than what we may be hoping for a while ago. So we remain very committed and positive of course on the long-term.
As far in Russia there are I think right now we probably also see an element of a slowdown as a result of the macro environment as well. Do you want to talk about…
Jo Olav Lunder
Yeah, certainly on this particular portion on the holding text while there is a normal situation is that when you have a plan to distribute earnings inter-company, now you need to take a provision for deferred taxes of typically in this context that is withholding tax, we have now planned to distribute over a period of couple of years about US$3 billion in dividend. Of course, a large portion of that dividend work will indeed end up in the financing company; a portion might also end up in more work dividend payment to the shareholders.
For the larger portion this will be financing company, you could typically take as basis if this amount is being reinvested in terms of an inter-company loan then on social inter-company loan you will take on average between 8% to 10% interest depending of course a little bit on the area that interest income is an ex-deductible in the country, in which the interest has been paid, and it is non-tax at the place, if you see because that can be offset against the significant amount of tax losses that we have accumulated in our financing company.
JP Davis – Barclays
Thanks for that view.
Operator
Thank you. Our next question comes from Haim Israel of Bank of America.
Your line is open.
Haim Israel – Bank of America
Good afternoon, guys. Two questions on my side if we can.
We discuss with about Italy, but if you can just share with us your views on the market, you’ve written in your press release that you are seeing signs of stability in this market, which is to be quite a drive in your performance in last couple of quarters. Can you just share with us what we’re seeing right now, what are the packages, consolidation, outlook and stuff like that and really what is the outlook for this market?
The second one is going back to Ukraine. I know Mr.
Lunder you already spoke about that, but now if I understand correctly we have seen the impact of the bundling on the top and – on topline and the EBITDA margin and you suggest that it’s going to take time to adjust the cost base. After this change, should we – however, even this market is going becoming a little bit more comparative and eventually the competition will act on that, wouldn’t we – wouldn’t it be fair to assume it’s going to be tougher to adjust numbers and adjust the cost base in this kind of environment and this market is actually going to a more challenging performance in the short run.
Jo Olav Lunder
Okay. Very good.
Let’s start with Italy. I think – as I said, this on a relative basis, we’re absolutely doing excellent in Italy and we have a very strong achieving place there.
And I believe that when you see reports from other operators, you will also see that we took revenue market in Italy, again in this quarter. Summer was quite harsh when it came to competition; there was a lot of discounts in the market.
At the beginning of September, the three main operators did not run summer promotions, which could may be seen as a sign of a more stable market going forward. The fourth mobile operator in the market is still very aggressive and the discount there has been used is massive compared to the three others.
I think although the market needs to find a better way to price data going forward. I think the Italian market has seen – has substantial decline over the last couple of years and I think also when we look at 2014, you might expect to see a further decline as a result of post effect particularly all terminal rates cuts and also a longer price level as a result of the competition that’s been going to in 2013.
So I think it’s not an easy market. We’re doing well relative to the competitors.
And I think just we’ve to be strong in our beliefs and that this will lead to a market consolidation. I think it’s difficult to discuss and be certain about it.
We’ve a general view that the market consolidations are positive and maybe even will fit in certain markets because the demand for data is so big that you basically need strong operators that can reinvest cash flows in accommodating for the data growth, whether this will take place and its only one of this is really hard to predict. So, it’s a challenging market with time for stability, maybe right now, but clearly a market decline is also expected in 2014.
Ukraine, well, Ukraine I think is, let me try to put this into context one more time. I think we will make with our movement to bundles with the decision to move quickly to bundles clearly was the right one, because it was necessary to secure the leading position and secure Kyivstar as the leading brand and secure a high market shares in that market.
So the movement was clearly correct, the problem was of course that it turned out to be difficult to excel from sending new bundles. And it became a correction of the price level.
And then in two parts, some of the price premiums that we had in the market so when we saw up selling turned out to be difficult, we saw sort of, as challenge number two building the cost side and the cost side is now being addressed. We optimize the service cost and contents, we look at interconnect and transit.
We really look at dealer commissions, we’re addressing equipment cost. We are delivering the regional structure in the company to make it easier and less bureaucratic.
We are looking at – we reduced IT spending. We were discussing with vendors to more support to do some of these changes and there is a big, big problem now of activities going on which is led by our CO Mikhail Gerchuk [ph] that also heavily supported by our Deputy CO [indiscernible] here from Amsterdam and I remain very confident that we will term the quarter in 2014 but I think we have a couple of difficult quarters ahead of us before we see the actual results of the work that is – is being done now.
And the important thing is of course that this is still a business that generates close to 50% EBITDA margins and it’s also a market with not a very high level of CapEx to revenues, so when you look at cash flow generation of, it’s probably top 10%, 20% in the whole telecom universe in terms of cash flow levels and that’s why we looked at [indiscernible] of assets that we would like now to just take the time land and putting in place the necessary actions to make sure that the securities a valuable assets for many, many years to come instead of being too toxic and too driven quarter-to-quarter to look better you know basically taking a long term view, restructuring everything and we probably will be building for the future and taking the short term –
Haim Israel – Bank of America
Thank you very much.
Jo Olav Lunder
Thank you.
Operator
Thank you. Our next question comes from Alex Kazbegi of Renaissance Capital.
Your line is open.
Alexander Kazbegi – Renaissance Capital
Yes, good afternoon. The first question is on the Russia.
Again, given your focus on the investments and your – again, the more accelerated, if you wish, outlook for the LTE deployment, what is the outlook for the CapEx for the next year or maybe even two. As in absolute or the relative terms how do we – how should we think about it if – and over the first one.
Secondly, on Italy as well, I just noticed that usually after the MTR cuts, sequentially you are witnessing quite a big decline in the mobile revenues for Q3 vis-à-vis Q2, for instance for Q1 vis-à-vis Q4. It didn’t not happen this time, was there a one-off or what is the nature of that?
Should we so to say extrapolate this numbers in the future or anything we need to be aware of that, please. And then last also maybe just a general sort of say overview of the Kazakhstan business, because there again you are, if you wish, rebalancing the tariffs, you’ve been catching up also with the newcomers, supposedly you’ve sort of achieved what you wanted to achieve.
But what is the outlook in your view there. Where are the ARPU subs, do you think there is more stability in market general?
And also vis-à-vis the EBITDA margin, especially nature of the provision which you had there, what happened with this so to say dongles and what would be the outlook again for the margins going forward? Thank you very much.
Jo Olav Lunder
Thank you, Alex. I will try to address them without being too long.
CapEx to revenues in Russia this year is estimated to come in around 22%, 20 for the group. We haven’t given an outlook for next year and we plan to do that on the Analyst Investor Day in London in late January.
But I do think that the accelerated LTE and the fact we now have done a lot of the 3G catch-up this year, I don’t expect a massive shift in the CapEx levels next year in Russia, but we’ll give you a better and more precise numbers late January, but I don’t think you need to expect a massive shift in the overall CapEx level for Russia next year.
Alexander Kazbegi – Renaissance Capital
By shift you mean either way?
Jo Olav Lunder
Shift either way from this year, yeah.
Alexander Kazbegi – Renaissance Capital
Yeah. Okay.
Jo Olav Lunder
Because we do want one part to finish the job and not start being too focused again on sort of delivering the short-term cash flow. We really now want to make sure that the core product is at par and equal to competitors.
Then on Italy, I think the point here is basically that the MTR cuts this summer is lower than what we had earlier. So, when you model this, you’d probably see that the first reduction was mature and then the second reduction is less than I think better.
That’s why also you see a less decline in the third quarter versus the second quarter and again versus the first quarter. I think that’s reflecting the cost in MCR rates.
Then Henk can probably better than me explain the provision in Kazakhstan that’s related to the revenue recognition on Dongles. So that’s probably I think Henk can do that when it comes to the outlook for Kazakhstan I think right now we have quite good momentum.
We are taking a little bit of revenue market share from competitors and we have no reason to believe that this is not possible to do going forward. So we have a quite positive outlook for Kazakhstan next year.
Hendrik van Dalen
No, I just want to say, that’s not to the detriment to the overall revenues. You are sort of say again, it’s not the very low pricing which makes you take the subscribers away, it’s just…
Jo Olav Lunder
No it’s not, this is if I not to be old, Kazakhstan will grow somewhat build for the future. So this is really much more about the value proposition than a big discount.
Hendrik van Dalen
Yes, the correction in Kazakhstan just basically had to do with double count which was incorrectly represented in the revenues so then we had to basically turn it back to the original position and then take it over a longer period related to the usual number.
Alexander Kazbegi – Renaissance Capital
But reversal basically.
Hendrik van Dalen
Yes.
Alexander Kazbegi – Renaissance Capital
Okay. Okay.
Thank you very much.
Operator
Thank you. Our next question comes from Torsten Achtmann of JPMorgan.
Your line is open.
Torsten Achtmann – JPMorgan
Good afternoon. Thank you.
Do you focus quite a lot in Russia on cost cutting and given your change of perception bit more in LTE rollout which has some OpEx, do you think you can continue to offset the increasing cost of that with cost you’ve done in the business so i.e. can you keep the margin unstable or cost stable?
Secondly on Italy you mentioned, you believe in market consolidation but can you give some more details, would you be willing to participate any in market utilization as far as you can say or could that also mean that Italy any more clarity that would be helpful as far as you can? Thank you.
Hendrik van Dalen
Yes. I think in Russia of course there’s a growth in mobile data traffic will be very high and the cost related IT and overall operations Q2 that growth will naturally put pressure on our cost base and then of course over rolling out activity on mono-brands which is probably also going to grow cost related to this fully owned mono-brands.
This offset is done clearly more safer and higher margin and therefore that will partly offset, of course, cost and then probably also lower commission as a result of the more distribution through the mono-brand stores and it is really less from the voice to the data centric model with data network. And more monogram being accept and with higher traffic – higher margin traffic, and hopefully next commissions and investments in the country dealers expect how this will play out in the next year and the years to come and it’s difficult to give precise guidance, and I think on this call, we’ll try to throw some more lights on this like January release, but in general, I think mobile operations despite – should deliver EBITDA margins around the level you see now that a lower ratio in a normal competitive market should probably be able to operate around those level.
And then in Italy, it’s really hard to be more precise, I think it’s – the first decision we need to make now is related to the refinancing and then in terms and as I said, we have not yet made that decision, so still that’s refund, so with high refunds I think to bond holders. We are analyzing and looking into the different aspect with the refinancing, but as I said, I have not yet made a decision and then in market consideration we would generally end up paying possibilities like that, so there is no – nothing to report really from Italy on that front.
Right now we are quite pleased with the EBITDA performance and we have fairly growth revenue market share now and there is nothing to report on any market consolidation activities ongoing.
Torsten Achtmann – JPMorgan
Thank you.
Hendrik van Dalen
Thank you.
Operator
Thank you. Our next question comes from Igor Semenov of Deutsche Bank.
Your line is open.
Igor Semenov – Deutsche Bank
Yes. Hi.
Thank you. I just wanted to drill again on Russia little bit more on the revenue growth rate.
Can you – maybe first of all quantify this decline in voice revenues? And secondly do you think maybe you are not doing enough maybe or you are not doing to the same extent that the competitors are doing in terms of sales of other non-voice services like content or SMS or some other things.
Do you think this could be a reason for slower growth rate for VimpelCom versus your competition? And I have just a couple of questions on Algeria and Canada.
Can you obviously give us an update on what’s happening with, in Canada what are your plans there and in terms of Algeria where do you stand with the talks with the government. And I am not quite sure if I understand the approval for, and the equipment, I mean, is it exceptional or it was like somewhat related to 3G or basically I mean all your equipment these days are going to be 3G, so basically we can assume that this is good to go to go ahead and upgrade [Indiscernible] network.
Jo Olav Lunder
I think on the Russia again, I don’t think we’re doing anything different from some of the main competitors when it comes to – related work with value added services, the way we address data in our bundles. So far, I don’t think we should assume that they are doing things different or smarter than new group.
So, I think first of all, when you analyze the revenue market share on mobile service revenues this year, the decline in our market share is less than what we’ve seen in the past, but we’re about to stabilize this now and I think the main explanation of the two factors I’ve been addressing a lot from this call, network quality perception and distributional reach throughout the ground. And I expect than, now is first of all, result actually and actually we need to start working on the perception and hopefully, we’ll also see then a further improvement in revenue market share again with the main competitors.
So, we strongly believe that we’re going to surpass [Indiscernible] in Russia. But again it’s probably taking more time than we realized.
So, maybe that’s a learning point for all of us. But – and you need to be précised on your investment and your quality of your base and core products in order to avoid the situation you need to catch up and then change to at the later stage to create momentum is always important in business I think.
If you allow me, I can resolve Algeria. Algeria, let’s first talk about before we to go then, should 3G license there is no real uptick on Algeria today.
But I remind you that we’ve to attract plan there where our priority is to reach an agreement with the government and reach a settlement with them, keep 2G and develop 3G and the business. So that – and we’re still negotiating, but there is no space today on the status of negotiation.
And then we’ve also, as I said many times, plan B, for broadband which is all about litigation. And the way this looks now is that the first hearing will take place in the first half of 2014 and we expect the final decision on that hearing announced by the end of 2014.
So if we can’t confirm agreement, we will take this to arbitration with the timetable I just described. Now that’s the fall back.
And we think we’ve strong legal case in that situation, but again, still discussing, still negotiating but no updates as of today. And then I think reading into the 3G licenses, traditional license that was granted on October 14, but the final license with relevant coverage obligations will be granted after we pay some fees and we satisfy conditions in the standard documents et cetera, et cetera.
And we expect now the license cost to be approximately $40 million. It’s going to be about for 15 years.
And then you have received and this is your question an exceptional approval from the Bank of Algeria, where we are allowed to make not foreign payments require assistance but this is exclusively dedicated to 3G technology, and frankly speaking, 3G will be focused in Algeria as well because the military start rolling out 3G we can also move of course 2G traffic into 3G. So even if we can’t import 2G equipment right now I think this is still good news for the company.
And then the last question was Canada. In Canada we have entered into an auction process and that process will come to an end in the middle of January, so right now we are still analyzing that we would like to buy spectrum or how much we would be willing to pay for spectrum and if we have there options available everything from you know, exceeding the market or that we should take a longer term view on Canada and try to build a sustainable business there.
So I am starting off to be able to be more precise, but we are basically just evaluating these different options against one another and trying to make a good decision that is in the interest of shareholders. So I think there are good options still available in Canada.
Igor Semenov – Deutsche Bank
Okay. Thank you.
Jo Olav Lunder
Thank you.
Operator
Thank you. It looks like we have time for one more question from Alex Balakhnin of Goldman Sachs.
Your line is open.
Alexander Balakhnin – Goldman Sachs
Yes, good afternoon. It’s Alex Balakhnin from Goldman.
I had two questions if I may. First is, can you please update us on what were the KPIs or the cost, so you outlined for the new share of Russia and how different they are versus what the previous year Russia had.
And my second question is on cost dynamics. In press presentation you mentioned that you’re reinvesting some cost savings on the Russian market.
My question is would you recommend your cost guide in a country which went a little bit too far or you still think that there is a reasonable room for the cost guide in the medium term? Thank you.
Jo Olav Lunder
Alex, I think without going into specific KPI, let’s talk more directional on Russia. I asked Jo to release sort of the reset to cost base, change the commission structure, get the programs on monogram going, but create the quality of the technical division and start catching up on 3G that was basically what we call fixing the basics.
I think he executed that very well and that’s why we decided now this fall to take [indiscernible] to take advantage of his qualities in some other project that we’re looking at right now and then we brought Slobodin in September. The margin order for Slobodin is basically that we are pleased with the current revenue market share and we’ve got no market share position to have in Russia.
So we are not going to change marginal market share growth, but what we want to do is really now to take advantage of the catch-up of the network quality and make sure now that we have a very, very strong core product that very strong of highest quality compared to both the contest quality compared to competitors and then we want now to move much more our focus on customer experience, customer service, customer quality meaning that the core product is there and the business model is much more about retaining customers having the right customer programs for the right segments. And making sure that we give them the good data experience that 3G and 4G in Russia together with smartphone and can offer and that suggests our value propositions and go-to-market concept.
Right, so that’s just to me now so on the next stage and develop Q4 cost of bidding and of course there was a combined from the numbers. When it comes to costs I think first quarter we are giving cost exercises overtime we are looking at operational improvement projects on an ongoing basis.
I think it’s difficult to see serious cost cutting on the current base I think we have to assume that what we gain probably will be invested in, in next steps what I described as a high quality core product to network and customer programs and new products and outlook, but I wouldn’t expect the cost base in Russia to take after this downturn compared to the base level.
Alexander Balakhnin – Goldman Sachs
Thank you.
Jo Olav Lunder
Thank you.
Operator
That does end our Q&A session. I like to turn the call over to Mr.
Lunder for any further remarks.
Jo Olav Lunder
Well I’ll probably just to thank everybody for the continued interest in third quarter performance and also of course for the participation today in the third quarter result conference call. I hope really that you can come in and be with us on the analyst and investor conference in London at the end of January and we hope that we can give you an update and also a view on how we are going to – the relatives in the best interest of all shareholders and stakeholders.
So with that I wish you all a very good day and again thank you very much.