Feb 25, 2015
Executives
Gerbrand Nijman - Head of Investor Relations Jo Lunder - Chief Executive Officer Andrew Davies - Chief Financial Officer
Analysts
Simon Cooke - Insight Investment Herve Drouet - HSBC Kay Hope - Bank of America Merrill Lynch Stella Cridge - Barclays Alexander Balakhnin - Goldman Sachs JP Davids - Barclays Alex Kazbegi - Renaissance Capital San Dhillon - Royal Bank of Canada
Operator
Good afternoon, ladies and gentlemen. Thank you for coming here to London.
VimpelCom welcome to people who are listening on the conference call or watch via webcast. It’s an honor that we're here.
This is the first time that we present our earnings here live in London and we have the intention to do that, let say every two quarters, so twice a year. And I am joined here by Jo Lunder, our CEO and Andrew Davies, our CFO and later Jo and Andrew will present after I have done the introduction.
After their presentation we will have ample time for questions. We will certainly also take questions from the conference call.
But before we begin, may I kind you ask the people here in the room to put your phone on mute. And now we're going to go a very important slide, where you all have to pay your attention to the disclaimer.
But before getting started, I would like to remind everyone that forward-looking statements made during this presentation involve certain risks and uncertainties. These statements relates in part, to the company's anticipated interest cost savings, the 2015 targets, the anticipated improvement in performance and results of our capital structure optimization effort.
Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risks detailed in the company's Annual Report on Form 20-F and other recent public filings by the company with the SEC, including today's earnings release. The earnings release and the earnings presentation, each of which includes reconciliations of non-GAAP financial measures presented today can be downloaded from our website.
And at this time, I would like to turn the discussion over to Jo Lunder.
Jo Lunder
Thank you, Gerbrand. Good afternoon to everybody in the room and to everybody following us on the webcast.
I hope you can see and hear me well. It feels really good to be here in London face to face, as Gerbrand said this is the first time we do a face to face presentation on our earnings numbers and we will try to do it two times per year going forward.
It’s been a challenging year for sure. We have had geopolitical challenges.
We have had currency movements against us. We have had macro environment not working in our favor.
But despite that, we have been able to deliver on our 2014 targets. Revenue and EBITDA came in as expected.
Our net debt to EBITDA came in as expected and we were able to keep our pledge investing approximately 20% of our revenues into high speed data networks, that is now serving us well going forward and I'll return to that point, because I think we see now an improved trend and momentum in many of the markets as a result of the CapEx programs that we've been running now in 2013 and 2014. Overall, I am very pleased with the progress and the trend in our performance.
I also want to highlight before we go in the individual markets, I want highlight a few things in terms of progress. Let me start first with the portfolio.
Of course, the fact that we have bee able to sign and close Algeria, is a big, big milestone for us. This is a transaction that we have been working on for 3 years.
And I think it gives us a lot of financial flexibility. It’s going to serve us well going forward and finally we can now start also developing our Algerian operation the way we would like it to be developed.
I think also the clean up in our portfolio, selling off some of the smaller entities is helpful, it’s nearly completed. We have few small assets left that is not of strategic importance to us, but they are cash positive and there is no urgency related to them.
The second block in terms of achievement is really the financing area. And a big thanks to Andrew and he will speak much more about this a little later today, but we have been very active in the market.
In 2014, we have done refinancing of $21 billion and the result of all these refinancing activities is actually that our net income on an annualized basis is improving by $500 million going forward and you see probably some of that reflected in the targets for 2015 as well. And then on operational side, I think for me the biggest single achievement that stands out today is the performance in Russia.
For the first time since 2013 Russia is growing its service revenues and it’s growing its subscriber base. But I think also we see major achievements in many other operations as well.
So generally I think we see good progress in the year as a whole. So if we now look a little bit about the investments that we made in high speed data networks in 2014, we see them start to pay of.
Russia for example is now, the leading company in Russia in terms of customer satisfaction on mobile Internet. We are number one in 70 – number one or number two in 75% of the regions when it comes to mobile data speed right now.
So we've really done the catch up with respect to our competitors there. Italy, as you can see here, we have almost 100% HSPA+ coverage.
We have almost 40% coverage, population coverage on 4G/LTE right now. We're launching 3G in Algeria.
We are done with the 2G modernization in Pakistan. We are rolling out 3G there now.
We have the widest 3G network in Bangladesh. We were awarded spectrum last week in Ukraine, rolling out now a 3G network in the second half of the year.
And clearly also in Kazakhstan the high quality 3G network is serving us well and you see it on the result. So, the issue we had 18 to 24 months ago in terms of investments in our networks, I think we've changed that.
We have invested enough. We have upgraded the networks and our position right now is much better and that allow us also to focus more on customer satisfaction and focus more on data services going forward.
And to me there is also one other point here, that is really important. In our portfolio of 222 million subscribers, only 57 million, that’s 25% is on 3G or 4G, which means that’s still 75% is yet to come on to 3G and 4G in terms of using data services, that I think is good news for shareholders and our company.
We have made good progress on customer experience. We are now number one and this is a key focus for us.
So we did fair [ph] to the networks and why do you do that? You do that because you want also higher customer satisfaction, right.
So we are now number one in five operating units. We are co-leader and by definition also number one in two others, Algeria and Italy and we have also substantially improved our position in Russia and Pakistan during the year.
All this I think is a good – it’s a good dynamic in terms of how we look at our business going forward. Then – and Andrew will cover this more in detail.
But allow me to put a few comments on the numbers. If we start with the quarter, the fourth quarter of 2014, revenues declining organically by 2% in the quarter, this in line with targets.
EBITDA is a little disappointing actually, it’s down organically 8%. This is driven by increased cost in related to our network investments.
So it’s a consequence of the CapEx programs that we've been running and it is also linked to FX movement. There is an element of FX in this, as well even though it’s a organic number.
EBITDA margin is a little low in the quarter 36.4, if we exclude one-offs its 38.5. And of course when you look at the reported numbers they are heavily influenced by the currency headwinds that we experienced, especially in the last four month of the year.
Customer growth in almost all our markets, almost 222 million customers, almost adding 5 million in the year as a whole. And if you look at the full year results, revenue is down 4%, EBITDA down 6%, again as expected and the bottom line they are minors almost $700 million is of course influenced by the $1 billion impairment that we decided to take in the last quarter, mainly related to Ukraine and of course also again currency is influencing the net losses.
But of course the impairment of a 1 billion is a non-cash item. And I think also still we have a very solid almost industrial leading EBITDA margin for a group like ours of more than 40%.
I'll now speak a little bit about the different countries and the try to sort of make my points on the individual markets. Russia, I am pleased with Russia in the last quarter of this year.
As I said, service revenues and the customer base is growing for the first time since the third quarter of 2013. We see a 10 percentage point’s decrease of churn.
We see a 20% mobile data growth year-on-year, and again the issue here is the EBITDA number, I think we're down 3.7 percentage points on a year-on-year basis most of this is currency related. The weakening of the ruble to the dollar melting into our cost base.
So if we exclude the currency movements in the last quarter, EBITDA would have been stable year-on-year in Russia. So again a currency effect.
The CapEx program we'll be running now came in as expected around 22% of revenues and I think we're spending our CapEx now in a very effective way and that’s why we also see results coming up. I also want to address one more thing on Russia, of course, there is neutrality in Russia with the ruble trading on the levels we see right now compared to what we saw a year ago.
So we are now very focused on three blocks in terms of managing our business in Russia. The first block, well, is now particular order really, but of course FX management now becomes important.
We have been able to hedge our dollar costs in the first six months of the year. We have been able to renegotiate dollar denominated contracts with vendors.
So all these things is happening as we speak and trying to adjust to the neutrality. I think also we need more focus on sharing arrangements going forward.
So that LTE sharing agreement we have with MTS, I am very pleased, I think the timing was excellent compared to what happened in the marketplace. We would like to do more of that if possible and I think also we need to take a very hard look at our cost base.
It’s just the neutrality in Russia and for that reason we are also launching now a group wide program looking at a more efficient way of running our business, including looking at our cost and that’s a program that we'll – is about to be launched. Italy, also 2014 turned out to be a quite weak I would say and challenging market for Italy.
Still solid relative performance in the last quarter and if we sort of analyze the numbers we will see it, the mobile broadband base is now about 10 million, that’s great news. The mobile broadband grew 16% year-on-year, fixed broadband grew 4% year-on-year.
If we adjust for sort of underlying factors, the revenues are down approximately 5%, it says 9 here, if you look at the underlying decline of revenues, it’s approximately 5%. If you do the same thing on EBITDA, EBITDA is down approximately 6.5%.
I think frankly speaking that we had on a relative basis a satisfactory quarter again in Italy and my expectation now is that Italy market will start to stabilize this year. I think we have, frankly speaking the worst behind us in Italy.
If we put this a little bit into context, that we have now upgraded our networks. We have moved focus to customer satisfaction.
The next sort of wave or the way we want to work is really a digital journey. And Italy is now leading the way in this digital journey and you will see a lot of initiatives now in the next year, this year coming out of Italy where we would like to interact much more on a digital basis with our customers using digital channels and trying to move more way from the classical traditional way that telcos has been interacting with its customers.
And the idea is that Italy now is creating a model for this interaction and choosing IT architecture and platforms that can be replicated into new market, so that we can take a position to lead a digital journey for the group as a whole. And of course also in Italy given now everything happening around us focusing on cost and effective use of capital is also important.
And that’s we also today confirm that we are exploring a transaction on selling part of the towers in Italy to a third party to help deleveraging. Algeria, finally we can start looking forward in Algeria.
The closing is cross road for us. We have a strong local partner now and the main focus this year in Algeria will be to get a good really good rollout of the 3G network.
Numbers are I think to most people following us a little disappointing and for that reason we have started also a transformation program in Algeria addressing these things. We've done this successfully in other markets.
I think again we will be able to do it here. Its going to take a little bit of time, I think we need this year to sort of rebuild the company.
It’s been on hold for years, right, there has been no investments, there have been no real commercial decisions. It’s been a company struggling for survival, now the deal is closed, now we can start looking forward and for that reason we will try to rebuild and really take advantage of being number one in the market, having the most and best brand in the market.
We are strong believers in the Algeria market and believe that we are just going through that transition right now as a result of the history. Three points I want to make on Pakistan.
We're done with modernization of the 2G network. So all the capacity issues we have had in the networks are now resolved, which is good news.
We are investing effectively in the 3G network. We are the first company in Pakistan to reach 2 million 3G customers.
And the last point I want to make is related to the service revenues, it decreases and the main reason why its decreasing in the quarter is that we are also now doing a clean up in Pakistan like we did in Russia. We are taking out all the toxic revenues, focusing on customer satisfaction; we are building for the future.
So I expect now with 3G rollout, with improved customer satisfaction more capacity in the networks that we also will see Pakistan performing better in 2015. Bangladesh, I am almost tempted to say, the numbers speak for themselves.
Its almost hard to – you hardly see these numbers I think for mobile companies these days, double-digit revenue growth, leading customer satisfaction, why this 3G network in the country, EBITDA increased 38% very strong quarter for Bangladesh. Ukraine, good progress in Ukraine on the transformation program, we see now we are the best on what we call net promoter score or customer satisfaction.
We see churn coming down, we see the subscriber base growing again, but clearly the company is influenced with the situation in the country. The EBITDA margin is high but it’s influenced with the number of external factors.
There is new legislation on VAT charges among other things and if you look at the EBITDA margin without these one-off and the new legislation on VAT it would have been 45.6% slightly higher than the one you see here. So still a high margin, but clearly a demanding market.
Data growth 7%, it’s quite impressive without the 3G network, 7%. So I am optimistic let me start rolling out 3G in Ukraine and we hope to launch in the second half of 2015.
I think there is a big demand in Ukraine, but I think we need to be mindful about the environment in general. It’s expected to be quite challenging for us.
But still we are the largest operator, the strongest brand and 3G is coming. We need to take a long-term view on Ukraine and we are still very committed to the country and the market.
This is the last slide before Andrew walks us through the – a lot of the financing and balance sheet activities we've done. CIS very strong performance, I think solid results generally and especially in Kazakhstan.
We had gained market share in five out of six countries on a year-on-year basis. Mobile service revenue increased 4% year-on-year, data is up 24% year-on-year and EBITDA, if we exclude the one-off charges we have we'd have grown 3% year-on-year in the quarter.
So the underlying development in also good here. With that, I will leave the floor to Andrew, he can talk a bit about the numbers and everything we've done on the financing activities.
Then I'll wrap up with the slides at the end and then we can have a Q&A session. Andrew?
Andrew Davies
Okay. Thank you, Jo.
And a good afternoon from me as well. So I am going to talk to you this afternoon about three things, I am going to talk about financial performance for the fourth quarter and the full year, I'll then talk about all the great work that Jo has already alluded to that we've done on improving the capital structure and then finally, I am going to talk about 2015 targets.
So if you look at financials, first of all clearly the thing to talk about is currency headwinds. They had a significant impact on financial performance both in the P&L and the cash flow statement, principally due the deterioration of the ruble and the hryvnia which have fallen by approximately 70% and 100% respectively year-on-year.
However, on an organic basis, as Jo has already told you, service revenue for the quarter declined by only 2 percentage points. Clearly the best trajectory we've had for any quarter during the year, and that’s thanks to growth that we've had in Russia, Bangladesh and CIS.
EBITDA is down 8% year-on-year to US$1.6 billion on an organic basis. Higher network costs resulted from the increased investment in high speed data networks, coupled with some foreign exchange headwinds.
EBIT for the full year is been impacted by $1.1 billion of non-cash impairment charges, principally in Ukraine, but also with a smaller contribution from Pakistan and Laos. It’s important to note that with Ukraine in particular all of our impairment was driven by macroeconomic factors, such as the foreign exchange rate, high inflation rates, et cetera.
Refinancing of Italy contributed to lower interest costs year-on-year for the quarter and then finally, we've got much lower tax in the quarter resulting from low withholding tax intra group dividends, coupled with lower overall profitability. On a full year basis, as Jo has already mentioned, we achieved the guidance; revenues and EBITDA declined by 4% and 6% organically respectively, most of them in line with the target.
Again, the full year EBIT significantly impacted by the non-cash impairment charges which we booked in the fourth quarter, and financing expenses again decreased as a result of the Italian refinancing. FOREX and other costs reflects two things, the currency depreciation we suffered during the year, coupled with one-off transaction cost of approximately $200 million that we booked in the third quarter related to the second phase of the Italian refinancing.
Across both years, our effective tax rate has been significantly distorted by non-cash impairment charges and also the one-off cost which we booked last year consequent to the signing of the Algeria deal. However, on an underlying basis the effective tax rate remains in the mid 30% range and we expected to remain in that range on a reported basis going forward.
If we move on to the cash flow statement, we can see that this is also been effected by the currency headwinds. Net cash from operating activities shows a year-on-year reduction, it’s also an impact from the one-off transaction cost related to the Italian refinancing in the third quarter of this year.
However, it does remain at a robust level of $5.3 billion for the full year. Cash used in investing activities has actually decreased year-on-year despite the higher CapEx, thanks to asset disposals in CIS underwriting [ph] coupled with the return of longer term cash deposits in both Uzbekistan and Kazakhstan.
Compared to last year, there is a significant change in the cash from investing activities. In 2013, we paid out over $4 billion in dividends which has seen a substantial reduction this year, thanks to need to invest in high speed data networks.
But also we've been very active on financing activities in 2014 which is nice lead into the discussion on capital structure. So if you look back a year ago, our capital structure was far from optimal.
So let's remind ourselves what was on you mind and what was on our mind. We were highly levered and we had the need to invest in high speed data networks.
We had an unfriendly debt maturity profile, extremely high interest costs. We had cash on the Algerian balance sheet that we could not access.
And finally, but by no means the least, there was a lot of agitation around the WIND PIK note going cash pay in the middle of 2013 – 2014, sorry, with the currently profound consequences for the entire Italian tax structure. So let's take a look at the progress that we've already made in 2014 to enhance the credit, the capital structure.
As Jo has already mentioned, we refinanced Italy in two phases, one in April, one in July. We've also secured significant new credit facilities and all in all, we financed a total of $21 billion of debt.
In addition, we took the hard but very necessary step to make a substantial reduction in the dividend going forward, to be able to afford to invest in the high speed data networks. However, that’s not enough.
We still need to further improve our capital structure and we're going to be undertaking actions in first quarter to address that. Firstly, as you're all aware, and as Jo has already mentioned, we've closed the transaction in Algeria and we received $3.8 billion of proceeds that we use to repay gross debt.
We are actively exploring the optimum use of that proceeds with our advisors and expect to be doing something shortly. In addition, as Jo has already mentioned, we're exploring a sale of a significant portion of the Italian towers which will be value accretive transaction in its own right and then also delever the company.
So I am now going to walk you through the impact of all of these activities on many of the important attributes to our capital structure, such as maturity profile, leverage ratios, and cost to debt. Okay, so if you wind back to last March, we had a significantly high peak of maturity in the 17, 18 time period, mainly related to expensive debt and wind.
We have now improved the maturity profile by an average of over 2 years, particularly through the refinancing of Italy in April and July. As a consequence, we have no major refinancing obligations until 2020 and no material hard currency maturities for the next several years.
In early 2015, we actually only had $1.5 billion of unutilized facilities. We've been very active, particularly in the second and third quarter of 2014 to secure additional facilities and we now have $4.1 billion of unutilized facilities available with a significantly improved maturity profile.
Indeed, if you take the enhanced credit facilities, together with the amount of cash that we've currency got available, we have over $11 billion of liquidity cushion at present. At the end of 2014, our gross debt to EBITDA ratio stood at 2.3 times, excluding Italy and 3.3 times for the group in total.
If we assume that we use all of the net proceeds from the Algeria transaction to retiring to gross debt, that’s – those ratios are going to decline to 2.9 times on a group basis and 1.7 times excluding Italy. The impact of the Algerian proceeds doesn’t improve the net leverage ratios particularly mainly because as we discussed previously most of the proceeds is actually in the form of inter group dividends.
However, the important thing to take away from this slide is the net leverage excluding Italy. So Italy is completely re-financed, fully self financing and therefore on a group excluding Italy basis the leverage ratio is only 1.1 times.
At the start of 2014 we had an extremely high cost of debt, just in excess of 8.3 percentage points. Thanks to all of our activities.
We now significantly reduced this by about 200 Bps to 6.3 percentage points. So a significant reduction year-on-year in the cost of debt.
And I really, really like this slide. This kind of shows the payoff of all these activities in financial terms.
So at last years Analyst and Investor Day, we talked about an annualized $400 million of cash flow improvements coming from financing activities. If I take account all the things that we've done and are just about do, we're actually going to be able to deliver over $670 million of annualized cash flow benefits.
So, not only are we over delivered, but we've done so by a slightly different geography, which shows the flexibility to deal with vastly changing circumstances and in addition, we still have future opportunities for both the in-house bank and on with holding taxes if and when circumstances change. So if I take all of these benefits together with the tax impact on them, and then also include the impact of the increase minority interest as a result of the Algeria transaction, we get to more then a $0.5 billion of annualized net income benefit.
So to summarize, an extremely busy year from a corporate financial perspective. We have reduced total debt, refinanced most of the debt portfolio, improved maturity schedule, arrange new facilities, improved the currency mix and reduced interest costs.
I think we can safely conclude by saying that with the strong position, additional facilities, no major financing obligations for the foreseeable future, and very robust cash flow generation, that VimpelCom is very fully financed. So now let me move on to 2015 targets.
For abundant clarity, these are all stated on a constant currency basis using the foreign exchange assumptions which were in the appendix and also as you'd expect, but just be clear, it does exclude the impact of any one-offs or exceptional items. So we expect service revenue to be stable to a low single digit decline year-on-year, with an improving year-on-year trajectory compared to what we saw in 2014.
We expect EBITDA margin to be flat to up to a percentage point decline year-on-year. For the first time, we are providing an EPS target.
And on this metric, we expect to deliver between US$0.35 and US$0.40 per share. And it’s on this particular metric that you see the real impact of all the financing move that I just talked about.
We expect CapEx to revenue ratio to be at around 20% for the full year, so broadly in line with what we delivered in 2014. Leverage on a group basis is expected to be 3.2 times.
However, as I said, from my perspective the really important things to focus on the group, excluding Italy, and on that basis we expect the leverage to be around 1.7 times. So with that, I'll now hand back to Jo.
Jo Lunder
Thank you, Andrew. Very refreshing, thank you.
Yes, we were ready now for the last slide. So as we said a couple of times, we delivered on our targets in a challenging market.
Clearly the reported numbers are influenced by the currency movements we've seen in the year, very happy with the closing of Algeria. We have significantly improved our capital structure.
We continue to successfully invest in the high speed networks. We are focused on building a customer centric organization and we see still solid growth in our base.
All things considered, we're in a better shape today than a year ago. And with that, Gerbrand, we can open for questions.
Gerbrand Nijman
Thank you, Jo. We're going to open now for questions, those who follow us through the conference call, please press star one to acknowledge if you want to ask a question.
But we will first take questions here from the audience. But please state your name and company name, but wait for the microphone because the people on the webcast would like to hear your question as well.
Can I invite for the question.
A - Gerbrand Nijman
Elizabeth, thank you.
Simon Cooke
Hi. It’s Simon Cooke from Insight Investment.
And two balance sheet questions if I may. Firstly, on the leverage target, so you're guiding fully, I think you just said for 1.7 times, excluding Italy, but you said that post the use of the gross places from Algeria to pay down debt, I think you said 1.1 times, so is there 0.6 of turn, a move, I mean, if you could just explain what's going on there it be helpful?
And secondly, in terms of your ability to move cash around the group, have you had any trouble doing that, obviously aside from Algeria. And can you give you any sort of rough breakdown of where cash is held as of December, so can tell [in the various] [ph] geographic regions?
Thanks.
Andrew Davies
Yes. I guess, I should take those questions.
So first of all the leverage question, is all driven by foreign exchange, right. So let me try and kind of guide you through this, because prima facie you think, well if you are moving from the 1.1 as quoted to 1.7, that we're going to increase net debt, we are not, right.
We actually expect net debt to reduce year-on-year, mainly as a function of we're going to generate positive income and cash flow. We do have a bit of benefit coming from the Algeria proceeds, which is going to be roughly $600 million improvement in net debt as we discussed previously.
However, what's happening is, if you look at the guidance or the assumptions that we provided on foreign exchange, we are expecting in the year a further devaluation in both the ruble and hryvnia in particular. So the organic EBITDA guidance that we’ve talked about actually translates when you use those foreign exchange assumptions into a much more material impact on EBITDA in reported dollar terms and it is that simple, there is no black magic or voodoo going on.
And on the second same question it was, no the second part of the question, was the cash. Yes, so as of the end of the year we got roughly $1.5 billion type quarters.
We've obviously at the end of the year we had a – still had a significant amount in Algeria and then the other major countries where we've got material cash would be Uzbekistan and Kazakhstan. We've not really - apart from currency control restrictions in Uzbekistan for the most part of the year we haven’t really had any theoretical difficulty in moving cash around the group.
We've chosen to leave cash in Kazakhstan, I should have point out that it’s not – we are not exposed, because it’s actually held in dollars because of potential withholding tax impacts which we're going to solve this year. And the other impact which we saw particularly in the fourth quarter was a tightening up on currency control in Ukraine.
Having said that, that didn’t have a particular practical impact for the fourth quarter because we want to leave the cash in the country anyway to be able to pay for 3G license.
Gerbrand Nijman
Okay. We move on to next question, Herve, you have more questions in this row.
Herve Drouet
It’s Herve Drouet from HSBC. Regarding your margins into different countries, especially you know, Russia, Ukraine, Algeria, where we've seen weakness on margins and you pointed out to currency movements especially on network cost and some of the investments you've done.
Firstly, is I mean, the way you manage cost in those countries, I mean, is there some projects which are in hard currency or do you outsource for some operations in hard currency in those countries or is it really locally managed. I am trying to get at why we may see more impact on currency on your cost structure for your competitor with some of your competitors, for example.
So I was wondering if there are any specificities there at VimpelCom that may explain it or is there some hedging you are doing that at some point of time could be costly for you on equipments and you have to put back to as individual countries and operations that may give that effects. And is there a way for you to reduce the hard currency impact on your cost side, in those countries, so that would be the first question.
Second question will be on Algeria, it has taken a bit of time to gradually invest again and some of your competitors are at head start in 3G, when do you think you will be in positions where you will start to monetize and catch up with your main competitors, in Algeria especially again at the EBITDA level, we understand you know, on the subscriber side things start to improve, but I am also interested on the EBITDA monetizations for Algeria?
Andrew Davies
Yes. So let me take the currency question.
It’s a good question, a bit of complicated answer, let me try and kind of keep it as simple as possible. So, first of all you asked kind of what costs do we actually have in hard currencies?
For the most part it relates to our service costs and some network costs, right. So from a service cost perspective, and this is varies country by country but we have a significant proportion of our service costs which are dollar denominated because it relates to international and roaming traffic and there is not a whole heck of a lot we can do about that.
And secondly, our – roughly across the groups half of our CapEx is dollar denominated and that then means that also that the follow on maintenance and support contracts also tend to be dollar denominated. And I think from a – if you think of Russia, in isolation, roughly 20% of the costs are above EBITDA are actually denominated in dollars, okay.
Now, we are doing something’s about that, Jo mentioned, I mean, specifically to Russia, so we have a hedging policy where we are – we try to hedge hard currency exposure six months rolling forward. So we are hedged through the first six months of 2015.
Quite candidly when we went into the market in January, February to hedge, to try to hedge July and August dollar exposures, we were quoted silly rates, three figure rates. So it’s – that’s not a hedge as far as I am concerned.
But what I would say is for the first half of 2015 in Russia we've actually got over $600 million of – of dollar exposure hedged at an effective rate of less – slightly less than 50 to the dollar, okay. Now, you have to be careful about where some of these things show up in the geography of the P&L, because we do cash flow hedging, rather than transaction hedging.
So the beneficial impact of the hedges will flow through the interest line essentially. The EBITDA and the CapEx still bears the impact of foreign exchange, okay.
And then here in Ukraine and Algeria, because of currency controls it’s very difficult for us why we can't hedge and it’s just a matter of working with the vendors to try to mitigate the impact. Now the other thing that we've done in Russia which Jo alluded to, is we've renegotiated a large amount of supply contracts which are denominated in foreign currency and the way I would suggest you think about it is within the contract we've agreed on a notional normalized range that the currency would normally trade in and then when outside of that range we have a risk sharing mechanism, which varies from contract to contract.
Jo Lunder
Yes. Let me sort of pick up the point to question on Algeria, I think, when you look at Algeria it’s important to understand also the history and remember what this company has been through.
It’s been a company that has been restricted from investing any capital upgrade networks for years. Its been very restricted in terms of commercial activities and of course then [Technical Difficulty] approximately six months due to get kind of a combination of a history without investment coming late into 3G and having the difficult situation that we have had in the country, as a luggage.
And what you see now I think it’s post-effect of those years and in late to 3G. I am not concerned frankly speaking about our business in Algeria.
I am very comfortable with what we're going to do there. This is now resolved.
We have a strong local partner. We will be allowed to operate along side with others.
We will catch up on 3G eventually. We are now also bringing in new and fresh energy by renewing the management team in Algeria, if not a discredit of the past, so it’s just you need a new mindset, you need energy and forward looking people.
And of course we also allocate a lot of people and resources from our HQ office in Amsterdam to help and support in Algeria. There is a lot of activities on the network rollout, on the people side, on the commercial offering happing right now.
But it’s going to take a little bit of time to catch up I think. We will just need to recognize that these are big companies that very often needs time to sort of be able to change and start creating momentum.
We've done this in a couple of other markets already and I think you know how to do it and my estimate is that we need to give Algeria this year to recover, to catch up and start performing. But as I said, we're the biggest company in the country.
We want to stay as the biggest company in the country. We have the best brand and we're going to continue to keep it as the best brand.
So I think we need to take a little longer view on Algeria right now and no reason to be very concerned I think about the last quarter.
Gerbrand Nijman
Can we have the next please?
Operator
Our next question comes from the line of JP David…
Kay Hope
Hello. Kay Hope, Bank of America Merrill Lynch.
I have a couple of questions, one is Andrew you said something that make me wonder, is it still your plan to use all of the proceeds from the Algeria transaction to reduce deb. And then also can you give an update on the in-house bank, I know that was the major subject at a past Investor Day at this time of the year and there was a line in one of the slides that sort of alluded to it.
But where are we on that concept and what sort of the long view around that?
Andrew Davies
Okay. I guess, both of those are for me.
Yes, the answer to the first question is pretty much yes. Clearly we need to be mindful of maturities and liquidity question that you think, you should think about as using substantially all of the Algerian proceeds at some stage to retire gross debt.
The in-house bank, its – we still believe in it. Its really good concept and clearly I guess, to answer this question properly you need to understand the mechanism behind the in-house bank.
So the in-house bank, we basically paid dividends at from the operating units to headquarter and then we recycle that money through in-house bank to provide shareholder loans or that…
Jo Lunder
Dividends, at from the operating units to headquarters and then we recycle that that money through the in-house bank to provide shareholders loans there or inter-company loans down to the up-cos in a tax efficient manner. We still – we're still doing a bit of funding by the in-house bank.
It’s not as material as we would have wanted it to be, mainly because of the ruble situation in Russia and the fact that Russia isn’t generating as much dollar cash right now as we'd expect it to do. But as I said in my presentation, it still has significant long-term potential for us if and when circumstances change for the better.
Gerbrand Nijman
From Stella you had questions as well.
Stella Cridge
Thanks. Stella from Barclays.
I just have a more on the topic of FX, and I was just wondering if you could explain any hedging in place with regards to debt or currency and just how is cash balance is being managed at the moment from a currency perspective. And also in terms of the capital structure I mean, you said that you're still in the process of trying to save the optimal use of proceeds.
I mean, are the rates in Russia at the moment just simply prohibitive when it comes to refinancing the short term debt, is it you general sense that would be the priority to address that debt for us, just any thoughts that you have there would be great. And also I just want to ask frankly, there was a comment in the press release about their ongoing Uzbekistan investigation.
I mean, that you already stated in your report that those – and what are you able to say about. Can you talk about addressing potential liabilities that may arise?
I mean, is that part of the liquidity question that you may be wanting to keep or I am just representing as if you could add there?
Gerbrand Nijman
You'll take Uzbek…
Jo Lunder
I think with Uzbek, do you want to start?
Andrew Davies
Yes, sure. So in foreign exchange, the only debt that we actually hedge actually is in Italy.
So some of the debt within the Italy is actually dollar denominated and we hedged that fully into euros, right the way through to maturity. But then, the rest of the group it’s comprised pretty much of dollar debt and ruble debt in Russia.
So that’s not hedged at all. You're right, we've got some short dated maturities in Russia.
We've got the potential for some ruble bonds to mature at this year and dependent on what the bond holders tell us. Clearly as you said, I mean, we would see – should rates in the short term in Russia is been exorbitantly expensive, so we're going to refinance short term debt right now and yes, kind of one of the reasons why I feel the need for a pretty material liquidity question.
And then, Uzbekistan Jo?
Jo Lunder
On Uzbekistan, as we've disclosed through the investigated about US authorities and Dutch authorities on some of the doings in Uzbekistan in the past. we had been cooperating, we are cooperating and we give disclosure that we find appropriate and we will do more disclosure going forward.
But at this point in time all we can say on Uzbekistan is really what we wrote in the release and there is – all that much I can add as of today.
Gerbrand Nijman
So we have time for one question here. Then we will go to conference call and then we might have some one or two more questions from the room.
Alexander Balakhnin
Yes, Alexander Balakhnin from Goldman Sachs. Two questions if I may.
One, is on the margin outlook and for what you say 20% cost and dollars, so just doing the math, either you should have like a massive cost cutting in Russia or your margin outlook for the rub should be much well, I should assume it be the decline in the profitability. Just can you probably contextualize the cost structure in Russia in terms of the FX exposure and your margin outlook?
And my second question is, with the reappearance over discussion on the potential talent consolidation last week, what's your real stance on the market structure in Italy and to their extent you can comment on that what's your latest?
Jo Lunder
Let's start with the last one, Italy. Yes, these rumors has been coming and going.
We've said a number of times that we are in favor of in-market consolidations. We think this is the way to go, whether its method sharing arrangements or fully consolidation opportunities, we are in favor of trying to do that.
WIND in Italy is strategic asset for us. It represents a big part of our business.
It gives us diversification in hard currencies on the revenue and earnings line. We have maybe the best brand in the country.
We have a strong team there. So if we're going to do a consolidation in Italy it needs to be on the fair and the right terms.
That being said, of course, the fact that we keep Italy at instance [ph] and also the fact that we show leverage excluding Italy, is also expressing that and in market consolidation Italy would lead to a lower leverage than two for the rest of the group. So the opportunity in Italy to create value for shareholders through any market consolidation is clearly there and it will also yield an opportunity for the rest of the group having a leverage below two, that might also be an important impetus report then they discuss a dividend policy.
So the situation in Italy is clearly a situation for us that could yield value for shareholders, it could unlock the situation we see right now, but we are not rushing into anything. We are not jumping on the trend for the purpose of doing that, the term needs to be right and the time needs to be right and if and when we decide to do something like that, surely you'll hear about it.
Andrew Davies
Yes, and so the first part of the question on margins in Russia. So clearly we didn’t have any hedging in place.
That would be pretty material impact to prima facie of ruble being at the assumption of 70 to the dollar versus less than 40 on average for 2014. However, we have hedges in place, I mentioned earlier.
The dollar cost is roughly 20% of the total cost that flow through EBITDA. But we've also got and Jo mentioned is, a pretty aggressive cost reduction program that we've kicked off across the group and actually we've had a cost and asset deficiency program in Russia for probably at least 2 or not 3 quarters of 2014.
So, yes there is pressures there, but we feel comfortable with the overall guidance that we've given across the group on EBITDA margin going forward.
Gerbrand Nijman
All right. So can we take a question from the conference call now?
Operator
Our first question comes from the line of JP Davids of Barclays. Your line is open.
JP Davids
The first one, just looking at your 4Q slide, around the group maturity schedule by currency and there is been a very noticeable increases in your exposure to dollar date or the euro date versus the third quarter, so you are gone from 50% your exposure to 36% in one quarter, maybe you can provide a little bit of color around that. And then secondly, can you provide us any additional color on how much net debt you have in Russia, so you did provide us with gross debt number here which is very useful, but can you provide us a with a net debt number in rubles?
Thank you.
Andrew Davies
So can you just start the first again, you're breaking up at the start of it?
JP Davids
Sorry, yes. Can you please explain the movement in currency exposure in terms of your group, your gross debt?
So in the third quarter you had 50% of your gross debt was in euros and now its 36% and basically it’s switched towards the dollar, so the dollar was at 34% now is at 50% of your gross debt?
Andrew Davies
I am sure, that we've changed any of our dollar or euro debt in the fourth quarter. So I am not sure where you're getting that information from.
Maybe we'll take that one offline.
Jo Lunder
JP, we will follow up with you.
JP Davids
Okay.
Jo Lunder
And we don’t provide net debt numbers…
Andrew Davies
We don’t provide net guidance in Russia.
JP Davids
It was necessarily an asset guidance, it was just as of the end of 2014, if you could provide any color, but if you can't do that, that’s also okay.
Andrew Davies
Okay.
Jo Lunder
Okay, JP. Can we move to the next question please from the conference call.
Operator
Our next question comes from the line of Alex Kazbegi of Renaissance Capital. Your line is open.
Alex Kazbegi
Hi. I was wondering if you could give us a bit more sort of color even it is correlated on your CapEx guidance so of 20% again, given the diversity of the geographies and the currency outlook.
What does it actually so to say mean in terms of let's say Russia for instance I mean, do you see there a decrease in overall so to say to CapEx in absolute terms, do you see its more or less flat, how do you so to say look at different constituents of its ratio? And the second question which is related to that also is that you did say what's and where do you have cash and so on, but I was just wondering if you can give us a bit more color on where do you see the necessity of some cash injection from the house bank and where do you actually see a bit locally available cash that would be enough for all kind of so to say, CapEx and investment activities?
Thank you.
Andrew Davies
Okay. So let me take the second part of that question first.
So, we think that we're pretty adequately or we have adequate facilities and financing of available locally in most of the up-coast. We don’t see the need to actually invest from the group into an up-co, clearly if we can do so in the tax advantages the enhance bank we will do so, but that’s up based on our optionality.
The one exemption to that in the short term is Ukraine. Ukraine clearly we've been awarded the 3G license this week which we'll need to pay for by the end of the quarter and then in addition there is going to be some clearly some 3G CapEx rollout in advance of the commercial launch in the second half of this year.
And it’s probable that, Ukraine business doesn’t have enough cash reserves to be able to fund of all that, so need to find debt some where. And clearly, we think the Russian market is very high right now for sure to debt, you should see well something in Ukraine.
So I think on the short term basis there is the probably the need to provide a little bit of inter company funding into Ukraine and with respect to CapEx, I mean, qualitatively run than rather than quantitatively I mean, I think we'd see again most operations with a slightly lower CapEx number year-on-year comparing 2015 to 2014 with again the exception of Ukraine where we are going to need to invest in 3G networks. So that’s kind of how I would think about it qualitatively.
Gerbrand Nijman
Okay, then. Thank you, Andrew.
Can we have another question from the conference call please?
Operator
Our next question comes from the line of San Dhillon of Royal Bank of Canada. Your line is open.
San Dhillon
Yes. Hi, guys.
Apologies, I couldn’t be there in person really to the desk sadly. Just a couple of question if I may.
On your service revenue growth guidance for 2015, which assets do you think will be the key driver of taking the mid single digit decline that you did in 2014 towards the flat region in 2015? And on your investments which have folks on high speed networks, it seems that Italy kind of 4G is lagged comparatively, while 4G coverage do you expect to get to by the end of 2015 and will be there 4G material improvement in subscribers trends as a result?
Thank you.
Andrew Davies
Yes, I can maybe pick up Italy. So on – thank you for the questions by the way.
Italy, in terms of 4G coverage by the end of the year, I would estimate that to 50% to 60% population coverage by end of 2015. I think we are really sort of at par with our two main competitors there, we actually will see of them in terms of providing data services and I think also you will see some interesting more digital offerings coming out of Italy as I spoke about during my presentation this morning, so we feel good about our technology, it will open strategy in Italy and we think we invest enough to be abele to keep our position an maintain a strong competitor.
We do have two very resourceful competitors there that is investing a lot but I think we have found the model in a way to apply capital the right way and I don’t expect Italy performance wise to look much different in 2015 from what we saw in 2013 and 2014. That being said, we try to move Italy slightly more in the direction of focusing on value, focusing cash flows and not so much anymore focusing on subscriber and revenue market share.
I think this market is so much here and we need now to start normalizing data traffic instead of competing the traditional way on land grabbing. So, clearly we are ready to look at more on cash flows and value in Italy than maybe what we've been doing in the past.
But coming to the technology and the rollout, we feel very good about the program and resources we are allocating to Italy.
Jo Lunder
Yes, and on the service revenue growth question, clearly as we both have discussed already, we saw improving trend year-on-year wise for the fourth quarter, so by which I mean, we had a lower year-on-year decline. I mean, generally we would expect that most of the outcomes would show an improving trajectory in 2015 versus what we experienced in 2014.
The one notable exception to that, is actually in Uzbekistan where MTS re-entered the market in a joint venture with the government, beginning of December 2014 and then we also believe that there will be fourth entrant owned by the government which will come into the market maybe end of first quarter, early second quarter and given that we have a 50% plus market share currently in Uzbekistan. We're expecting that that’s going to have a material impact on our Uzbek revenues and that’s implicit within the guidance that we've given.
Gerbrand Nijman
Okay San, thank you for the question.
San Dhillon
Okay. Thank you very much guys.
Gerbrand Nijman
I would like to move back to the room here for questions. In front row, here one.
Elizabeth, please. And the after we do Vivek and I think then it’s about time to end.
Unidentified Analyst
Thank you. Samson Dore from Fairyland [ph] Just a quick follow up question on your views on your leverage, excluding Italy.
In this kind of current context where obviously cash is difficult to upstream for a variety of reasons, what do you think is an optimal ratio there and do you want to kind of bring it back down to flat or is there a certain amount of leverage that you'd be comfortable with that level?
Jo Lunder
Yes, I mean, I think anywhere in the range of 1.5 times to 1.8 is kind of going to be acceptable. I mean, clearly we need to bear in mind as I said earlier, some short dated maturity profiles of what would be so very expensive local debt refinance, so the need to maybe be keep a bit more liquidity and we just we need to keep a watch and brief on what happens with foreign exchange movements going forward, because as we've already discussed that could have a material impact on a net debt to EBITDA ratio over a 12 month time period.
Unidentified Analyst
And then just following up, the ruble maturities that you were talking about, you could pay down some of that presumable with a ruble cash or cash flows accumulated in…
Jo Lunder
Absolutely.
Unidentified Analyst
Okay.
Jo Lunder
Yes.
Gerbrand Nijman
Okay, thank you. I think right here, you had a last question I think.
Unidentified Analyst
Hi, good afternoon. A couple of questions from me if I may.
And so the first one is just on hedging, just for my math, you said the cost you are hedged six months forward and so are you going to hedge till the second quarter of 2015 or do your hedge is actually around winding towards Q1 of 2015 or even have already unwound? That’s first on hedging.
Then the second things is, just on the EPS guidance which you've given, so I was wondering if you can provide what is the comparable base for the current year over the same sort of assumptions – FX assumptions. And then, finally, just on Ukraine and 3G demand, I mean, I understand you taking a long-term vision which is probably the right thing to be doing.
I am just trying to understand you know, what – how much of 3G handsets selling there, what sort of customer driven demand do you see building up in that country in the short to medium term. And then finally, are there any discussions at all with amongst shareholders which you are aware of potentially any stake sales or stake changes between Telenor and Altimo?
Jo Lunder
I've been taking all…
Andrew Davies
Let me pick up the last two on Ukraine and shareholders. Clearly, I think you'll understand it’s hard for me to comment on behalf of shareholders, so whatever discussions they might have between them I am not involved.
I don’t have any information and if I had I don’t think I was – I would be in a position to disclose them on behalf of them, so I am sorry about that. Ukraine, I think when you look at these markets, we keep getting surprised on the demand of 3G services, data services and we have already a substantial penetration of 3G handsets in our base even without the 3G network, so the pick up rate on 3G will be quite quick and immediate.
So that’s why I am saying, I think we can have hopes for seeing sort of results of over 3G rollout and increase data traffic and hopefully also revenues as a result of that, but of course, my point of long-term view is basically that we have now – this company has spent basically 20 years from its inception to where we are today. We have been through many difficult periods in different markets; right now we are seeing another one in Ukraine.
I think we need to be just passionate for them and long-term oriented and do what people do is best for the business, rollout to 3G networks and I am sure we will see better times in Ukraine at some point in the future, so that’s basically our view on that country.
Jo Lunder
And then there was two others…
Andrew Davies
Unless you want to talk of hedging…
Jo Lunder
Let me address the hedging question Vivek, so, when we said six months forward to the end of June, not meant as of the end of December obviously as we're talking about December results, and yes, you're right to be clearly we've already crystallized a lot of hedges in the first month and three weeks of the year. And so if you think back to the – we'd put those hedges in place in July and August last year when the rate was less than 40, it doesn’t take a rocket science, those hedges were really seriously in the money [ph] And then on EPS, I don’t have, so I mean, we reported a $0.40 loss for the year on a complete reported basis, that obviously includes the impact of impairments et cetera.
If I exclude impermanent, and add kind of non-underlying things, we probably get back to zero or pretty close to zero. Now what I don’t know, I think you mentioned your question, assuming the same foreign exchange rates which we have assumed for 2015, I don’t have that number.
But if that’s of real interest here, we can get that one to you, but no, on a reported basis for this year, excluding the impairments is being pretty negligible.
Gerbrand Nijman
Thank you. And I think that concludes the Q&A session.
If you any questions you still want to ask, you can clearly reach out to me or my team. But I do want to close off before [indiscernible].
So have a nice site visit we're going to have to Georgia and Kazakhstan on March 31 and the 1st of April, you are clearly invited to and our Q1 results of course which will be on May 15 that will be a conference call again. Thank you very much for your attention, also on the webcast, on the conference call and clearly here at the people in London.
Thank you.