Aug 6, 2015
Executives
Gerbrand Nijman - Head of Investor Relations Jean-Yves Charlier - Chief Executive Officer Andrew Davies - Chief Financial Officer
Analysts
Sunderland here - The Royal Bank of Canada Haim Israel - Bank of America Mark Murphy - Macquarie Alexander Balakhnin - Goldman Sachs Stella - Barclays Roman Arbuzov - UBS Stanley Martinez - Investment Management Iven Kim - VTB Capital
Operator
Good afternoon here in London. Thank you for coming to this place where we have been also half a year ago.
Also a warm welcome to our audience on the webcast. We started five minutes late because we wanted to be able to share with you the good news of today.
We did announce today a transformative transaction in Italy. Today we also will talk about a strategic update and clearly about the earnings of the second quarter.
I’m here on stage joined by Jean-Yves Charlier, our Chief Executive Officer; and Andrew Davies, our Chief Financial Officer. And may I ask the audience here in the room to really put your phone on mute.
And of course as you are used of me, I would like to draw your attention to the disclaimer. As forward-looking statements made on this presentation involve certain risks and uncertainties.
These statements relate in part to the anticipated benefits from the Italy transaction, the ability to complete the Italy transaction, the company’s strategy to generate sustainable annualized cash flow improvements in the next three years, and the ability to realize our 2015 target. 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 the Form 20-F and other recent public filings made 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. Our program of today is in three parts.
We will highlight the transformative transaction for Italy and VimpelCom. We will give you a strategy update and the second quarter earnings release and then of course, we have ample time for your questions.
With that I would like to hand over to Jean-Yves – Jean-Yves Charlier, our Chief Executive Officer.
Jean-Yves Charlier
Thank you, Gerbrand and obviously delighted to be here with you today to talk obviously about our strategic review and present with Andrew our Q2 results that show another quarter-on-quarter improvement and are in line with our expectations. During the first quarter analyst and investor conference call we announced we were in advanced discussions with Hutchison to merge our operations in Italy.
Today I’m pleased to announce that we have just released on the wires I think just a few minutes ago, in fact that we are merging our operations in Italy through a joint venture, 50-50 owned by Hutchison and VimpelCom. This transaction obviously first and foremost will mark a new era for telecoms in Italy because in fact the merger of 3 Italia and Wind will see a leading convergent operator in the fourth largest telecom market place in Europe.
We intend to offer innovative mobile services to both consumers and enterprises alike, but we also intend to offer significant and strong fixed broadband services to this marketplace. Obviously as we will see, the combined entity will have a significant footprint and a large customer base in the Italian market place.
This transaction will accelerate, we believe, innovation and investment in Italy, and the joint-venture will be better positioned than ever to compete against the two other main competitors in that marketplace. It is our intention to build a very strong network, mobile network in Italy with 21,000 sites offering broader services and better indoor coverage.
It is also our intention to accelerate 4G and LTE networks and services to cover in fact by 2017 90% of the population, and we will accelerate our investments in fixed broadband to ensure a series of convergent and innovative services in the marketplace. And finally, the joint venture should in fact have about 1000 or so points of presence, monobrand stores to effectively compete in this marketplace.
We have also ensured that there is a clear corporate governance for this joint-venture. We have worked hard with Hutchison to ensure that there is a substantive shareholder agreement to ensure the success of this joint-venture.
We will be putting in place a strong empowered independent management team that will be led by Maximo Ibarra, the current CEO of Wind. The board of this joint venture will consist of six members, three from each parent party and the chairman will be rotating on an 18-month basis and have a casting vote on a number of matters to ensure that there is no gridlock.
And obviously we want to ensure post closing and subject obviously to regulatory approval that as fast as possible this joint-venture operates as one company. Obviously we expect to see substantial value creation.
We expect that there will be €700 million of run rate synergies, 90% we expect will be captured within the first three years or by year three in fact, post closing of the transaction, representing in access of €5 billion of net present value from these cost synergies net of the integration cost. We also expect solid dividends from this joint venture starting within the first three years after closing, and obviously as we will see a strong deleveraging profile.
Now there are five main strategic dimensions to this transaction, and obviously a solid rationale for in-country consolidation. The first for us is really to create a leading convergent operator in Italy.
The second is obviously to compete much more effectively than our independent companies can today through superior customer experience. The third is obviously to achieve the €700 million of cost synergies by year three at a 90% level, enhance profitability and cash generation, and finally we believe that this transaction is transformative not only for Wind in Italy and for VimpelCom as we will see, but obviously for VimpelCom’s shareholders, all of this underpinned by a clear corporate governance to ensure the success of this 50-50 joint venture with Hutchison.
Let us now go through each of these main strategic dimensions. The first obviously is creating this leading converged operator in the fourth largest telecom marketplace in Europe.
The joint-venture will have some 36% market share in terms of customers and about 33% revenue share in the marketplace at the same level as Vodafone and a point behind Telecom Italia. Independently we have seen that Wind and 3 Italia have grown substantially their position and marketplace over the last five years, ensuring that there is momentum as we see this joint-venture being put in place following the regulatory approvals.
As I indicated, we intend to be a convergent operator in this marketplace and the joint venture should dispose of some 16% market share in the fixed broadband Italian marketplace. And finally an ability to accelerate investment and an objective to cover 90% plus of the population by 2017, a much better coverage in fact from the 4G LTE perspective than what our companies could have done independently.
The second obviously dimension is to compete much more effectively in the Italian marketplace through superior customer experience. We want to build a very strong and broad mobile network in Italy with over 21,000 sites.
This network we believe will deliver superior data services, but obviously with our ability to offer convergent services, it is not just about mobile services but also fixed high-speed broadband services for our customers. We expect to see an acceleration of innovation, an innovation obviously focused not just on convergent services, but also on innovative digital services as part of the VimpelCom strategy.
Our presence in the business segment will be strong and we intend on focusing on not just serving large corporates but also on focusing on the SME and SOHO marketplace. And obviously the joint venture should dispose of a very solid physical distribution network as I indicated of some 1000 or so monobrand stores in line with our main competitors.
The synergies and as in most in-market consolidation plays are significant. We value these at €700 million, about 70% of these synergies will come from Opex savings, about 30% from a Capex point of view and there are three main drivers for these synergies.
Obviously integrating our networks and our IT stacks should lead to some substantial savings for the joint venture. We think that that represents some €3 billion in net present value.
Then obviously integrating our front-end operations, our market facing and our customer operations, we believe that that will lead to about €1.3 billion in net present value. And obviously creating as fast as possible an integrated SG&A capability operating out of two sites in Italy, one in Milan and one in Rome, should lead to some €600 million in net present value representing a total of €5 billion for this transaction, and as I indicated we expect that 90% of these synergies will be realized by year three post-closing.
Let me now hand over to Andrew, who will take us through the other strategic dimensions of this transaction and gives us more on the terms and conditions of the joint-venture and merger of these two operations in Italy. Andrew?
Andrew Davies
Okay. Thank you Jean-Yves, and a warm welcome from me as well.
So clearly this is going to be a very strong combination, much stronger than the two entities in isolation. So on a pro forma basis, including the run rate impact of synergies, this joint venture is going to have roughly €6.4 billion of revenue just in excess of 40% EBITDA margins, a cash conversion ratio of over 60% and a significant deleveraging profile over time.
Combined right now there would be – Wind would have 5.6 right now. Combined they would be 4.9, including the run rate synergies they get to 3.9, the target is to get to 3 times within three years.
So let me just illustrate why and how this is such a transformative transaction for both Italy and VimpelCom. We have joint ownership of the leading convergent operator in a major European market.
We get significant value creation through the synergies of €700 million on a run rate basis within three years. It equates to an NPV of 5 billion.
We have distribution of dividends projected within the first three years. It enables VimpelCom to be more focused on its diversified emerging markets portfolio, and then it significantly enhances the earnings and cash flow profile of the business and last, but by no means least, it gives VimpelCom a significantly stronger balance sheet and basically halves our entire leverage ratio.
So let me just illustrate on this next slide how this improves the earnings and cash flow metrics, but before I get there let me just talk about for clarity, how we intend to account for this going forward. So on signing, so from now on until closing, we will show this as a discontinued operation in both the income statement and the cash flow statement and it will be shown as an asset held for sale within the balance sheet.
Then on closing, we will account for this using the equity method going forward. So we will deconsolidate all of the Italian operations from VimpelCom’s financial statements.
So as you can see from this slide, whether you look at revenue growth, EBITDA margin, Capex to revenue ratios, and in particular leverage, all of these metrics are improved substantially with the deconsolidation of Italy. Just to illustrate in more detail what it does from a leverage and a maturity perspective so you can see that we have no major maturities for the next 4 to 5 years, excluding the Italian debt and the leverage ratio that we expect at the end of the year will be roughly 1.6 times.
So let me run through this structure and summary of the transaction terms, just so we are all clear. So as we have already said this is going to be a 50-50 JV between VimpelCom and CK Hutchison.
VimpelCom will contribute all of the ring-fenced Wind Group with all of its debt, Hutchison will contribute 3 Italia, together with 200 million of cash and zero debt. We expect no further cash contribution into the JV from either parent.
The transaction is only conditional on parties being satisfied with the regulatory approval process and remedy packages and there are no breakup fees. We have a very strong and clear dividend policy linked to leverage ratios and free cash flow generation.
Just to illustrate and so it ratchets up over time, but just to illustrate when we get below the 3 times net debt to EBITDA target, the dividend payout ratio will be 80% of free cash flow for that year, subject obviously to remaining within that leverage target. So it steps down from a 40% payout once we get below 4 times to 80% payout once we get below 3 times.
We have a strong management team as Jean-Yves already mentioned, and the transaction is subject to [competition] clearance, and we expect closing within approximately 12 months. And with that I’m now going to hand back to Jean-Yveswho will take you through strategy.
Jean-Yves Charlier
All right. Thank you, Andrew.
Obviously beyond focusing on this transformational transaction in Italy, during my first 100 days or so at VimpelCom I focus very much with the board on looking at the challenges and opportunities of our business and obviously focused on undertaking this strategic review. We have obviously seen declining revenues and profitability and we have seen that the traditional mobile growth model that VimpelCom once enjoyed has predominantly run out of steam, even in the emerging market portfolio that we have.
This is why fundamentally we believe it is time to profoundly reinvent VimpelCom and as we will see, reinvent VimpelCom as a digital operator. The board and I believe that the telecom industry is at crossroads.
We have seen this traditional mobile growth model run out of steam even in emerging markets. We are seeing as we know a commoditization of voice services, pricing pressures across the board and an industry that has had a lack of success in finding new revenue streams and new profit [bulls].
At the same time there is a massive opportunity around the explosion of data growth. In our markets we see that less than 50% of our customer base of 213 million customers have a data plan with VimpelCom today.
That is a significant opportunity. And we will see in our second quarter results our data growth is around 22% for the quarter.
In some of our markets, our customers, less than 15% of our customers have smartphones today. But the question for us is whether or not we can monetize this explosion in data, whether or not we will have OTT players infringe on our value chain and commoditize our industry furthermore.
And at the same time as we know the telecom industry has a complex business model, high fixed cost, we have to continue investing substantially from a Capex point of view, in rolling out new services on our networks. And obviously we have seen that the return on investment model has become more challenging than in the past.
When I look at VimpelCom obviously first and foremost I see a solid portfolio of businesses. Obviously a portfolio that is well diversified in emerging markets, particularly following this Wind 3 announcement and transaction.
Solid positions in our markets. We are in fact number one in five markets, number two in two markets and number three in four markets.
Solid customer base, but not just in mobile as we see, the company today has over 6 million broadband customers across its footprint and obviously a balance sheet that has been delevered and particularly even more so following this announcement. We see that in fact the strategy has to focus on three major dimensions.
The first is obviously finding new revenue streams, and we will talk about revenue streams within our Telco model but obviously new digital revenue streams at the same time. Another dimension is obviously transforming our cost base, moving more and more to asset-light type of networks, and finally we believe that there are significant consolidation opportunities but solely in the footprint where we operate today and I think that the Italy transaction we have announced a few minutes ago is a good example of that.
So this strategic review rests in fact on six strategic priorities. The first is obviously finding these new revenues streams for VimpelCom.
The second is really fundamentally becoming a digital operator, engaging much more with our customers not just from a brick and mortar point of view, but much more from a digital point of view in driving new services as we will see. Focusing on transforming our cost base and operational performance is going to be key to this strategy, consolidation, selective consolidation of opportunities and as we will discuss also disposing of our tower portfolio as well as sharing more and more network rollout with some of our partners.
And all that we believe needs to be underpinned by a world-class operation and a series of structural improvements that we need to further make in the business. Let me now go through each of these strategic initiatives.
And first and foremost focus on new revenue streams. As I indicated we see significant opportunity around the demand for data in the markets in which we operate today.
Data services represents roughly about $2 billion today at VimpelCom, growing at over 20% and as I indicated less than half of our customers have a data plan with us today. So we believe that we need to better perform in harnessing this opportunity across all our operating companies.
The second is while VimpelCom has defined itself in the past predominantly as a mobile operator, we have significant fixed broadband assets, and in fact in five of our geographies, in Italy, in Russia, in Kazakhstan, in Ukraine and Armenia, 6 million fixed broadband customers today. We want to drive in these markets really a fixed mobile convergent set of services and we think that there is significant opportunity to do so.
And just as much as we have defined ourselves as predominantly a mobile operator in the past we have also defined ourselves predominantly as a consumer focused business. And yet today we do about $2 billion in the B2B space.
And as we know predominantly the B2B space is a growing segment of the telecom’s industry. We want to put more focus not just on large international or large corporates in the markets we operate in, but particularly on the SME opportunity as SMEs are a growing dimension of many of the emerging market economies we operate in.
The second strategic initiative is transforming VimpelCom to become a digital operator. We see that our customers in these emerging markets are leading more and more a digital lifestyle.
We see as we have indicated that there is substantial demand for data services. We want to move from just having a brick and mortar relationship with these customers to having a digital relationship with these customers.
We want to be able to look at implementing big data type of systems to allow us to better serve the requirements of these customers, but also to ensure that we can market non-core telecom services to these customers. And we believe that we need to be evaluating a number of new digital services such as content as we lead with fixed mobile type convergent services, and new digital services such as mobile financial services.
In fact in most of the markets where we operate in today, few of our customers have bank accounts. VimpelCom is that electronic digital wallet for those customers and we believe that there is a significant opportunity to drive these new type of digital services across the board.
At the same time it can’t be all about just new revenue streams. We believe that we need to fundamentally transform our cost base that we need to simplify our processes, our systems, our business model.
We need to digitalize these at the same time. We need to globalize in fact our processes and systems.
Today most of our 14 operating companies at VimpelCom operate on a stand-alone basis, and we believe that there is significant opportunity to drive cost savings in globalizing a number of these processes and systems. But it is not just about the cost structure, it is also about our Capex efficiency and prioritization as well as focusing in fact on working capital and there we see opportunities to better leverage our scale through global procurement, through a transition to shared service centers, and we have recently announced the appointment of Alexander Matuschka, who has just joined us from Nokia, where he did exactly that transformation to lead this with a dedicated team across VimpelCom.
We will also focus on selective consolidation opportunities just as we have announced the transaction in Italy today. Many of the markets in which we operate have not yet consolidated and we believe that there is substantial consolidation opportunities, and we want to be the consolidater of those markets, where we operate today.
We will not undertake any type of cross-border merger and acquisition opportunities. It is all about focusing on the portfolio in which we operate today.
We will continue focusing on disposing some of our smaller assets such as Laos and Zimbabwe. And from a network point of view as we want to operate in the future VimpelCom as a digital operator, we want to move to a more network light type model and hence we will have two major initiatives.
The first of which we will want to look selectively at disposing of a very significant tower portfolio that we have built up over the years, just like we have done in Italy a few months ago, and that generated some €800 million for our business. And finally, we believe that we need to selectively enter into network sharing arrangements particularly in those markets that have very large geographies.
We believe that the future will not be about building networks only on a standalone basis. All of this obviously can only be successful if we underpin these four strategic initiatives.
With a world-class set of operations, we will intend on globalizing a number of these initiatives across all our operating companies. VimpelCom has done so successfully in the past with our Customer First program and the improvements that we have seen in NPS scores and at the same time we will be looking at reinforcing our management teams and putting the appropriate organizational structures in place to ensure that we deliver on our strategy and we up the game in terms of execution at VimpelCom.
And finally we believe that there are a series of structural improvements that we need to continue making across-the-board. Andrew and the team obviously have done significant work over the past few quarters in terms of addressing the capital and tax structure.
More certainly is to be done there even if obviously the Italian transaction from a debt leveraging point of view will profoundly change our business. We need to accelerate our turnaround in Algeria, as part of these structural improvements and we think we have a robust plan with our new CEO, Ghada Gebara, although that will take some time.
So this is more than just another strategy at VimpelCom. It is about profoundly reinventing our business.
We believe that the new VimpelCom needs to be leaner, more digitally focused and customer centric than ever before. And our strategy is focused on growing profitability and cash flow and as part of their strategy we’ve set a target to improve cash flow by some $750 million on an annual basis in the next three years.
With that I’d like to handover to Andrew to take us through the improved quarter-on-quarter financial results for the second quarter. Andrew.
Andrew Davies
Thank you, Jean-Yves. So, I know you want me to fast-forward, so we get to Q&A and talk about Italy and strategy but it’s important that we talk about second quarter results it demonstrates and continued ability to execute on the initiatives that we’ve set out over the last 12 to 18 months.
So, second quarter highlights, clearly we’ve got a very significantly transformed the transaction in Italy announcing the strategy to deliver an incremental annualized $750 million of cash flow. We’ve got good operation performance and with continued improvements in most of our operating units.
We have a very successful 3G launch in Ukraine. And as you can see, we’ve significantly strengthened the management team in many areas.
In addition, we confirming today our 2015 annual targets with actually a slight improvement taking our CAPEX to revenue ratio and therefore on leverage demonstrating already some success from the new strategy to deliver cash flow growth. And I’ll talk about targets right at the end.
So, second quarter financial highlights first. So, we have an improving organic year-on-year trend.
The results very much in line with our expectations, we have an organic decline of 2% in service revenue mainly driven by the delay in 3G launch in Algeria and a little bit of continued market weakness in Italy. However, we had 22% year-on-year growth in mobile data revenues, clearly demonstrating that we now get in traction from the investments that we’ve made on our high-speed data networks.
EBITDA margin decreased marginally but that’s mainly a result of the towers transaction that we completed in Q1 in Italy. And EPS is up significantly year-on-year for the first half and in line with our full year expectations.
So, I now start moving on to the business units. So in Russia, we’ve got continued improvements in NPS and we’ve now surpassed one of our main competitors.
_ has improved in the best level within the last five years and we’ve now got the third consecutive quarter of customer growth as a consequence. Again significant data revenue growth 19% year-on-year and excluding currency headwinds EBITDA margins would actually have been stable year-on-year in Russia.
Within Italy, again we show sequential improvement in the year-on-year trend, so it’s minus 2% on service revenues this quarter which is 1 percentage point improvement from what we showed in the first quarter. Mobile ARPU continues to grow it now represents and data ARPU represents 41% of mobile ARPU and actually mobile ARPU is now increasing quarter-on-quarter in Italy.
So, you can see some significant progress there. We had 16% growth year-on-year in mobile data revenues driven by a significant increase in mobile data customers there to just over 11 million.
Now the EBITDA decreased due to the impact of the towers transaction but excluding that, EBITDA margins within Italy would have been stable year-on-year. Algeria clearly remains a very challenging market for us.
We are in the midst of the major turnaround program and organizational restructuring which is going to be led by the new CEO Ghada Gebara. We have -- we are still however the clear leader in NPS and we still have strong EBITDA margins of 53% and so we are going to continue investing in that business and its going to be strong asset for us once we’ve got the 3G network roll out completed.
We have a 50% growth quarter-on-quarter in mobile data revenues and actually a six-fold growth year-on-year. However, results are going to remain under pressure and we expect the transformation program there to take at least another 9 to 15 months.
Within Pakistan, we have successfully completed the SIM re-verification program, we were able to re-verify 87% of the customers representing roughly 99% of all the revenues within that business and because we were more successful than our competitors in the re-verification program we basically gained the percentage point of market share quarter-on-quarter. We have 75% year-on-year mobile data revenue growth driven by the fact that we’ve got a very wide 3G network already and we were the first operator to get to the top 200 cities in the country with 3G.
Bangladesh also continues to be a very strong asset for us. We have continued revenue market share gains with the 7% year-on-year growth in revenue despite well remains somewhat difficult environment with pretty aggressive pricing.
EBITDA has actually increased 18% year-on-year and we now have an EBITDA margin of 42% thanks to both the revenue growth and very good cost control. And in addition to that, we have seen significant increase in data traffic which we monetizing and as we driving over an 80% year-on-year gross in mobile data revenues and we’re going to continue to invest in the 3G network in Bangladesh.
In Ukraine, we had a very, very successful launch of 3G right at the end of the same quarter significantly ahead of the competition offering but far and away the widest coverage. We’ve got a 26% year-on-year growth in mobile data revenues, thanks to what was already a pretty high smartphone penetration within our customer base.
We’ve got improvement in annualized churn of 5 percentage points, now clearly because of the network growth the CapEx increased significantly within the quarter and now you can expect to see that for the next few quarters as well, it’s really going to press more advantage and the strong revenue growth in cost efficiencies drove a 12% improvement in EBITDA year-on-year to a 46% margin. Within Kazakhstan underlying mobile service revenue showed a 3% year-on-year decrease excluding the MTR reductions.
However, within that we actually have a very strong growth on data revenues again of 34% year-on-year. EBITDA margins are stable at 49%, but we expect the recent [rachititing] of competitive intensity in that marketplace will remain in place for the rest of 2015 at the very least.
On Eurasia, we’ve got organic revenue growth of 1% mainly attributable to Kazakhstan, we’ve a very solid set of assets and with very solid EBITDA on low CapEx driving very, very significant cash flow conversion. We’ve got improved churn in all markets with the exception of Georgia would note though that the competitive intensity in Uzbekistan is also starting to increase and therefore we expect results in that market to come under increasing pressure as we go through the balance of the year.
So, if I focus on the income statement, I’ve already talked quite a bit about service revenues and margins, so I’m going to focus on the bottom half of the income statement. So depreciation and amortization shows a significant year-on-year reduction clearly a lot of that is attributable to the currency headwinds.
But, in addition there is underlying improvement from the direction of amortization of customer relationships in Italy and also the impact of the towers transaction in Italy. The financial expenses show a significant year-on-year improvement clearly result of all the re-financing activities that we’ve accomplished over the last 12 to 15 months.
ForEx another very much non-cash accounting transactions. In the second quarter we had adverse movement on some derivative instruments as actually some of the currencies actually strengthened quarter-on-quarter and in the second quarter of last year we reported some onetime gains associated with the Italian refinancing and settlement of some withholding tax situations.
From a tax perspective we have reported the lowest effective tax rate for quite some time. It's kind of in the 20% range for the quarter.
Now that does benefit from a onetime gain of about $75 million associated with the restructuring of legal entities within the Kazakhstan business unit. And then, net income is relatively flat year-on-year reflecting the fact that we have got a negative movement on the non-control interest which is driven by two things firstly is the fact that we sold 51% of OTA in Algeria earlier this year and then we have got reduced losses within GTH partly as a consequence of the finance from Algeria.
So, move onto the cash flow statement, so clearly the interest costs or the interest paid within the quarter is also significantly reduced year-on-year again a result of all the work that we have done on financing. And again, income tax reduced part is the currency effect, part of it is the underlying reduction in profitability but it's also part of it which is due to the improved efficiency about tax situation which is mainly related to the refinancing.
So, net cash used in investing activities shows significant year-on-year reduction as well. Clearly again currency plays it's part there, but it's also the fact that we are already starting to see the benefit of a renewed focus on capital efficiency coming through in the second quarter and is also the fact that we were running some pretty high network modernization projects throughout 2014.
Finally, from a cash flow perspective we show a major outflow in the quarter related to financing activities and that's nearly all to do with the settlement of the dollar bond tender which actually closed in the first week of the quarter and that was for about $1.8 billion, $1.9 billion. So, annual targets so you can see here how our first half results compare with the targets.
We are already in line with these targets as we get to the half year point. With the announcement of Italy transaction we’ve taken opportunity to announce a slight update to our targets for the year.
So from a service revenue and an EBITDA margin and even an EPS perspective the targets remain unchanged. On the CapEx revenue as Jean-Yves already mentioned we are improving that to somewhere in the 18% to 20% range also again reflecting the focus on the strategy and on capital efficiency and then as a consequence of that we are actually improving what we think the leverage is going to be at the end of the year.
So, excluding Italy basis, we now think we are going to be at 1.6x rather than 1.7x previously. And of course, the group leveraging including Italy is no longer relevant.
So let me conclude. We have a significantly transformative transaction within Italy.
It's going to improve the earnings, the cash flow and the leverage profile of the group in a very, very fundamental way. We expect that JV to deliver synergies in excess of 700 million Euros with 90% of that coming within the first three years and that equates as Jean-Yves already mentioned to an NPV just in excess of 5 billion.
In addition we are announcing the new strategic framework which will deliver an incremental $750 million of unrealized cash flow improvements. So that's just to be clear that’s incremental and separate from the Italy synergies.
And that again you tax and you discount that $750 million and you get to another 5 billion of NPV benefit. So you have got continued improvements operationally despite what are some very challenging macroeconomic circumstances and we remain confident in our ability to deliver on our 2015 targets.
Let me just remind you that we are going to hold an investor event on the 8th and 9th of October here in London where we will go into the new strategic framework in much more detail. I hope you are all going to be able to attend that including those on video.
And with that I am now going to leave the floor to Gerbrand.
Gerbrand Nijman
Thank you, Andrew. There is no sufficient time for Q&A we are going to do slightly different, I will walk through the audience so that I can hold to the microphone but we will take first questions here from the audience in London and thereafter we will go to the wire to see who has questions there on the website and then we will go back for questions here.
For my team and the people on the webcast please state your name and your firm name before asking the questions please can we ask you to stick to one question at a time, you will have ample time to ask a question. So, first to raise your hands, I am going to give you the mic first.
Q - Sunderland
Thank you very much Sunderland here from the Royal Bank of Canada. First of all, congratulations on closing the Italy deal, unsurprisingly my question is initially on Italy.
Given the 5 billion NPV of synergies there are many OpEx and CapEx synergies, Italy being prepaid mobile market in nature seems like it would lend itself to quite a lot of revenue synergies and mark pay on the revenue side how do you foresee your pricing strategy as a combined entity and what do you think will happen from a revenue perspective? Thank you.
Jean-Yves Charlier
Look, I think we have been prudent in modeling these synergies as with any transaction, I think we have wanted to focus with Hutchinson first and foremost on the cost synergies post closing. We want to move very fast in this one company concept as I indicated bringing together our networks as fast as possible and then obviously our front office and back office operations.
I think as to potential revenue synergies it's too early. We want to position the joint venture as a strong competitor in the marketplace that's going to leverage a very strong network.
It's not about reducing as you have seen in network in terms of number of sites and facts, it's having hopefully the strongest network in Italy bringing more services to our customers. We want this joint venture to be a convergent plate and obviously we think that there is opportunity there and obviously we want to continue innovating such as Win has done in terms of digital services.
Having said that I think it's just too early today to be able to quantify these revenue synergies and I just would be very prudent on that from that point of view as we see in the Italian marketplace in the quarter remains competitive and I want to focus first and foremost joint venture on the cost side.
Gerbrand Nijman
And we move to Haim for the next question.
Haim Israel
Thank you very much, Haim Israel from Bank of America and congratulations on the transaction. One question from my side now that the transaction is closed and as you stated your – VimpelCom net that goes down below two times what should we expect in terms of dividend and shareholders return especially when you are so fine tuned your guidance in terms of the CapEx and the cash flow generation?
Jean-Yves Charlier
We have just announced the transaction. There is still 9 or 12 months before we close it.
And we have just announced it about I think 52 minutes ago one minute before we were entering in this room. So I am not sure we have done lot of work on what the dividend policy is going to be but maybe Andrew can give you sort of some guidelines as what our thinking is to be able to come to you with a structure on that.
Andrew Davies
So, as Jean-Yves mentioned, it's a little bit premature to be talking about that. We actually need to get the codes in the transaction which is as I said probably at least 12 months away and then we actually really get the deleverage.
Now you will also notice from the presentation if you look at the cash flow statement for the quarter that on a operating cash flow basis before financing we are pretty, it's pretty much zero. And that's why it is important that the strategy delivers and that we can generate the incremental unrealized cash flow improvements because right now with the business as it is, there is just no net cash flow after paying for the interest, the tax and the CapEx to be able to pay the dividends.
So that's why it is important that the strategy pays off.
Gerbrand Nijman
Okay we move to next question.
Unidentified Analyst
Yes thank you. Question as well on the synergies on the costs when we are see, I mean when we see Italian market mostly a prepaid markets I am sure there are some cost synergies you can get but I was wondering how quickly you think you will get those synergies out, I mean, you gave a figure there.
And also the second thing is within the group synergy you expect 750 million annual improvements on the cash flow, does it exclude anything you do with WIND Italy or 50% of that or is it included?
Jean-Yves Charlier
Yes, so let me address the second question first the easy one to get out of the way. So the 750 million completely excludes WIND Italy and just to be clear assumes that WIND Italy is deconsolidated.
So it's just focused on the diversified emerging markets portfolio that we have once we have deconsolidated Italy. And then the Italy synergies of 700 million a year are on top of that.
And the first part of the question how quickly while we think we are going to be able to get to extra 90% of the synergies within the first three years post closing that's important so it's not and that was actually post closing and there will be a gradual glide path towards that 90% ratio. I would say that we also expect within the first couple of years to incur couple of hundred million on integration costs where we decommissioned infrastructure etcetera.
Gerbrand Nijman
Okay we go to the next question. Mark.
Mark Murphy
Hi there Mark Murphy from Macquarie. So, you have mentioned with respect to Italy that your strategy revolve the range of convergence just two points on that I was wondering I know it's obviously difficult you bring two business together broadly speaking what do you think that does to your EBITDA margin and within that what is your broadband strategy?
Jean-Yves Charlier
Alright. Let me maybe take the second part of the question and I will leave Andrew to talk about margins.
I think our broadband strategy is going to be around continuing to offer a strong portfolio of ADSL services and to continue focusing on LLU opportunities but at the same time we will, I think roll out more and more fiber offerings in the marketplace. I think there is still work to be done by the joint venture once it's up and running on build versus wholesale in Italy as the wholesale opportunities are relatively significant.
That's one of the attractions I think in the convergent play that we will embark on is not necessarily build ourselves our own fiber networks in that marketplace today given its structure.
Andrew Davies
Okay and the margin part of the question, as one of the chart showed when you take the existing EBITDA that the company generate aggregate those and then add on top the run rate synergies that we expect from OpEx you get to roughly 40% EBITDA margin business and we expect it to be in the low 40% EBITDA margins going forward with as we said cash convergence ratios so not operating free cash flow margin in excess of 60% going forward.
Gerbrand Nijman
Okay, thank you. You have next question?
Alexander Balakhnin
Yes, Alex Balakhnin from Goldman Sachs, I want to ask you on the regulatory approval. What remedies would you consider acceptable for the transaction?
Jean-Yves Charlier
I think it's too early for us to even mention that. It's going to take several weeks before we file with the Italian and European authorities, so there is substantial work that we need to be doing at this stage.
As I indicated or Andrew indicated one of the terms of the transaction is the ability for Hutchinson or VimpelCom to break the deal with no fees should we find that the remedies are unacceptable for the business and are too constraining for the planned joint venture. So, I think that we have got well set framework.
Obviously, we have seen and studied the remedies that have been imposed in other in market consolidation place in Europe recently and as I said, we expect to file in the next couple of weeks in the September/October timeframe and we expect that we will go through a phase two and hence [Audio Gap].
Unidentified Analyst
Well, if I may specify out of the assets you are emerging what are the like the most important for you in terms of basically like if you face the regulatory drawbacks like what it could be spectrum, the asset disposal and the fixed line I’ve to see that, but like the asset disposal or some scale limitations like what would be the list of things you would never give up?
Andrew Davies
It's too early.
Unidentified Analyst
Okay. Thank you.
Andrew Davies
Okay it's Evan Miller from CamCo, given where the first half net EBITDA had come to, I am wondering why there were no adjustments to the full year expectation there?
Jean-Yves Charlier
Yes, okay I can explain that. So, you will have to bear with me on the mathematics lesson here.
So, at the moment we still benefit from the fact that so let me back up the calculation uses the trailing 12 month EBITDA it's a rolling 12 month EBITDA calculation so therefore at the half year we still benefit from the fact that we have got the second half of last year's EBITDA in the calculation pre currency devaluations in many of the markets. Whereas the net debt number obviously it's a onetime translation so the net debt number fully reflects all of the currency devaluation already.
So, as we go through the third and fourth quarter and that year-on-year devaluation impact plays its way into third and fourth quarter EBITDA number you are going to see the net debt to EBITDA ratio increasing. That's all it is.
Gerbrand Nijman
Stella, so you have a question as well.
Stella
Hi there Stella from Barclays. I actually have two questions.
My first one would be with regards to the debt setting at WIND I was wondering what preliminary discussion you may have had between yourself about how you may address that and at the transaction is successful? If I could just ask my second one at the same time.
There was some press report in the last couple of weeks about the potential involvement of a private equity partner within the business. I was wondering if that is an ongoing point of discussion and if there are any opportunities at the moment?
Andrew Davies
Yes, I will certainly take the debt question. We haven't had any conversations in detail about what to do with the debt that is there per say and the individual debt instrument if you like.
The focus is being on the agreement is being on this is business that we need to deleverage as quickly as possible through organic means, the synergies extraction, the origin, the scale of the business etcetera. We literally have had no conversations about what we might do to specific debt instruments once we start generating synergies.
And regard to the second question I would say don't believe everything you read in the press. There is no foundation to that speculation whatsoever.
Jean-Yves Charlier
But I think what’s important to note is the deleveraging profile of this business given the level of synergies as we have seen in most, in country type of mergers on a mobile to mobile perspective.
Gerbrand Nijman
Next question goes to [indiscernible] and then I will come to you.
Unidentified Analyst
Thank you. [Indiscernible] I just had a quick question on Algeria so you mentioned that the transformation plan is going to take significant amount of time at the same time I think your press release reference some sequential improvement at the last result's meeting you did speak about some key kind of things that you are aiming to improve in terms of regulators, speed of deployment of offers etcetera, I am just wondering what you are seeing on the ground more recently and whether the sequential improvement could be expected to continue?
Jean-Yves Charlier
Look, I don't think that it's going to be a quick fix in Algeria as Andrew mentioned. We have got to work on quite a number of dimensions of the turnaround plan.
One dimension is obviously the regulatory framework we are still tagged as a dominant player in Algeria and hence it's a constraint that we have to operate within. So we are working with now our partner, the government and the regulator and looking at whether or not that dominant status still applies or not and there are a number of ongoing discussions on that basis.
The second dimension is really in terms of our positioning in the marketplace. I would say as the leading player in the Algerian marketplace we haven't been sufficiently innovative from a tariff point of view.
We haven't been sufficiently innovative from a service point of view our distribution is not effective as it should be. And that's a big part of our turnaround plan and you will see series of announcements or movements between now and the end of the year from that perspective in the Algerian marketplace.
And thirdly, just as much as we want to transform the cost space across VimpelCom we have started that in Algeria because whilst our EBITDA margins remain healthy as Andrew indicated above 50% we believe that this business can be substantially change from a cost perspective and many of the things that I indicated we are looking at all or already in the process of implementing in Algeria. So it's a broad turnaround plan of an asset that's remains I think very interesting given the characteristics of the Algerian marketplace.
And we were just rolling out 3G in Algeria. Everything is in front of us in Algeria from that perspective but we have got to get the business on solid frame.
Gerbrand Nijman
The next question will be from Sergo.
Unidentified Analyst
Yes, thank you. [Indiscernible] you mentioned OTT as one of the pillars of the strategy could you please be more specific on that rather do you have any clear idea of how to monetize that probably or even maybe more broadly on your digital plans if there is anything specific you could share?
Jean-Yves Charlier
One of the dimensions of our digital plan certainly today to share with you is the acceleration of our focus on mobile financial services. That is absolutely critical as part of the strategy today VimpelCom does some $100 million already in this space and many of the markets I have indicated either the population doesn't have a bank account if we look at Algeria, Pakistan and Bangladesh less than 15% of the population has a bank account.
And in many of the markets where we operate another markets there might be a banking system but there is not much trust in the banking system. And in many ways given all these markets are prepaid markets we are already defalcate, the wallet or A wallet for and a trusted wallet for large proportions of the populations so you will see more and more initiative around this space to position VimpelCom as a serious provider of mobile financial services.
And from that on we think that there are significant other opportunities to become a digital player because the content giants, the internet giants are not as present in many of the markets that we operate in today. And there are significant barriers to entry.
As we think about content and whether it is to be a content aggregator or even a content producer in certain of these markets, we see that these customers aren’t necessarily interested in anglo sacks and movies or music etcetera, it’s all about the local content and that local content in many ways hasn’t been digitalized yet in the markets we operate in and that’s the whole opportunity for VimpelCom and that’s why we want to reinvent ourselves as a digital operator and look for me having come from running one of the largest telecom assets in Europe fundamentally I see much more opportunity to reinvent a telecom operator in emerging space than in the industrialized space, clearly.
Gerbrand Nijman
Got the answer.
Unidentified Analyst
Its [indiscernible] from HSBC, one more question on Italy, I was wondering whether the corporate governance framework you agreed upon includes pass to control for one of the two shareholders overtime. And what are the mechanisms in case of strategic disagreement between the shareholders in order to facilitate and take decisions?
Thank you.
Andrew Davies
Okay, thank you. I’ll take that one.
Yes, I think the easiest way to answer that one is to say that and its articulated in the slides that following three years post completion either parent company cannot anytime invoke by sell mechanism. So that would be the main thing that would address the issues that you articulated.
Roman Arbuzov
Roman Arbuzov from UBS. Two questions please, are both around the strategy.
So first of all you mentioned in sort of consolidation opportunities within the various countries across your footprints, so maybe you could just elaborate may be you see some particular markets as more ripe than others in terms of the consolidation?
Jean-Yves Charlier
Italy.
Roman Arbuzov
Yes exactly, naturally. So, analysts are already getting very excited that was coming next?
And then secondly, just in terms of 7, perhaps more for Andrew the $750 million incremental cash flows, there is a number of things sort of going within that but then maybe some things are more concrete than others. So maybe if you could just elaborate just a little bit maybe in terms of one or two initiatives that will be adding to that and maybe targeted as well?
Thank you very much.
Jean-Yves Charlier
Look I think in terms of the portfolio as we look at it I think there is a few dimensions. We consider or want to consider in terms of the priorities from the consolidation point of view.
I think the first dimension is that most of the markets we operate in and having yet consolidated and we want to emerge as number 1 or strong number 2 in each of these markets, clearly that’s the first dimension for us to analyze. The second dimension is obviously the market structure, those markets that have five or six mobile players and potentially some fixed broadband opportunities those are the markets that we are going to want to concentrate on first and foremost.
Clearly, looking at bringing back the markets just three or players type of models because we think that long-term that’s the better model in terms of shareholder value creation on one dimension but also in terms of being able to long-term deploy the appropriate infrastructure and LT type infrastructure in those type of countries. So that’s another dimension in us determining, what we need to do and obviously at the end of the day where are their opportunities and obviously I don’t want to give a list today any type of opportunity but Italy has been a major, major focus as you know for us from that perspective being a distant number 3 in Italian marketplace and for Hutchison the distant number 4 we think was not the best competitive position to be in long-term.
Andrew Davies
And then the same part of the questions on the 750 million synergies. So, I would say broadly they are going to be 50/50 between OpEx and CapEx, our intention is long-term that we get to a 15% CapEx to revenue ratio and within the CapEx savings you are going to see, focus on more network sharing you are going to see more intelligent network design so single run architecture etcetera.
And you are going to see a renewed focus on procurement and really make sure that we get significantly better prices from most of our vendors. And then, on the operating cost side of things, the simplest way to think about this is both from a the customer facing front-end perspective and also back-office right now we have 14 different ways of doing everything.
So, Jean-Yves talked about developing a digital stack and then leveraging that across the entire footprint so that’s going to drive synergies. For growth we are going to basically do the same kind of thing with all of the back-office processes as well.
And we are going to look, not look, we will be deploying shared service centers for all of our back-office type work.
Jean-Yves Charlier
And, just one point coming back on the consolidation priorities, just want to stress again that our sole focus will be on the current portfolio that we have today.
Gerbrand Nijman
And you have a follow up questions?
Unidentified Analyst
Thank you, just as a follow up question from the consolidation question from Roman and fast-forward a little bit post the transaction in Italy from a P&L perspective you are dramatically increasing your exposure to Russia that’s going to be your number 1 market again from a P&L perspective? And trying to take what you said about the consolidated market especially when this market is about to see a fourth operator which should launch soft or hard launch or whatever you call it, how do you see the markets what is the prospective for the next six months or one year or do you see eventually a market that could be consolidated in this new player could consolidate to the victory or a – and what is the – how do you see the value that could be great over there?
Jean-Yves Charlier
Look I think when we look at the market in Russia I think there is a number of last dimensions obviously to consider. The first is just the macroeconomic environment today that we are operating in which is challenging when I think of the opportunities in Russia long-term, I think that everything being cyclical this should long-term remain an attractive market for VimpelCom.
And whilst yes it will weigh more in our portfolio following the deconsolidation of Italy post transaction, at the same time I think for investors the readability of the portfolio improves in terms of just being emerging markets overall. I’d also say that with our strategy and our consolidation strategy I think overtime Russia could weigh lessen the portfolio if focus is successful and other consolidation plays across the Board and then growing some of our countries that have greater growth opportunities such as Bangladesh, Pakistan again back to Algeria.
The market structure I think in Russia today is around as we know three main operators, we like that market structure. And I think it’s too early to tell right now whether there needs to be consolidation from a mobile perspective and whether Italy to or not can have any impact in terms of the respective market shares there.
It’s not an easy market to enter into and as we know operating a network in Russia and even in Moscow given the scale of these cities and the geography is not to be done overnight and underestimated. Having said that I think that’s then comes to our own business and how we are operating it.
We’ve seen significant improvement in our business under Michael [indiscernible] in Russia. When we look at most of our metrics and we are pleased with that performance and we believe that there is more to come from that performance in Russia.
We believe that we can change the battle field in different dimensions will be coming more of a digital operator than just a traditional mobile operator as we’ve done. Focusing on fixed mobile convergence that’s something we’ve never talked about virtually in Russia.
It surprises me coming in the VimpelCom that we’ve got substantial fixed broadband platforms and yet we sort of discounted them because we wanted to be a mobile operator only. Fundamentally, I want to be a convergence operator and I like the fixed broadband platforms that we already have in Russia and I think that's a great platform to build off.
Whilst the macroeconomic headwinds are there in Russia I think that we have got momentum and more to come.
Unidentified Analyst
Thank you very much. You mentioned a couple of times just the towers opportunity and what that could represent.
I was just wondering if you could give us an idea of the size of that opportunity and how it would tie into your objectives of $750 million cash flow improvement presumably there you have got negative impact but also one off positive impact in the offset. Just the rough idea of where are the priority lines and sizing if possible?
Jean-Yves Charlier
We have a portfolio that we own of over 50,000 towers it's one of the most substantial portfolios of towers of any operator in the world. We have done the Italian transaction and we will if the conditions are right continue selectively to monetize that portfolio over time.
Obviously, it does have an impact from an OpEx point of view but the MPV and cash impact are substantial for our business.
Gerbrand Nijman
We will take one more question now from the room and then we will go to the internet and then we come back to room? Question.
Unidentified Analyst
Yes, thanks guys for taking the follow-up. Just quickly on the timing of the 750 million Andrew should we think about it, operating free cash flow in 2015 ex Italy and three years later it should be 750 million higher on constant Fx and then 750 million per annum or you are using a 2014 base and on Italian towers I think Hutch is around 8,000 of the top line or something of that range is that something you can sell to sell next?
Jean-Yves Charlier
That will be one of the options that we consider once we are able in fact to share more data and really focus on building network integration plan but as you know we can't do anything before we attain regulatory approval so that's 9 or 12 months down the road. But fundamentally we want to move to being a digital operator and have more of an asset light type of network model than we have in the past and we think there is substantial opportunity given the valuations for tower portfolios across world.
Andrew Davies
Yes, and then the first part of the question of the synergies, yes the 750 million is derived from or based off the 2015 pro forma numbers for the deconsolidation of Italy and as you pointed out assuming constant currency. It's a pretty major assumption.
Gerbrand Nijman
Okay can we have the first question from the internet?
Operator
Thank you [Operator Instructions] Our first question comes from the line of Stanley Martinez with Investment Management, Legal and General Investment Management. Your line is open.
Stanley Martinez
Thanks. Good afternoon and congratulations on the transaction.
I wanted to ask about – following up first what is the sign post that we should look for the next 9 to 15 months to identify the turnaround. I mean specifically I always want to draw a parallel between the network investment made in late May 2013 and early 2014 and that led to their improvement in EBITDA margin that we are seeing now and apply that to [indiscernible] but from what I see the 4.5 billion dinars of CapEx in Q2 after 4.2 billion in Q1 this doesn’t look nearly significant relative to EBITDA as Banglalink a year ago should CapEx meaningfully increase from here or are there still some local constraints perhaps with the regulator in terms of how fast you can deploy the 3G spectrum and make that network investment in order to get back into gaining new market share against the redo and mobile?
Andrew Davies
Good morning Stanley. Thanks for the question.
This is Andrew, I will take that question. So, I think the one thing that's kind of missing a bit from your calcus is the fact that [jazzy] has already generating significantly higher EBITDA margins than Banglalink was back at the end of 2013 and is also doing it from within the marketplace a relatively, well not relatively a much higher market share position as well.
So that's a long way of saying that we are very happy with the run rate on the investment on network in Algeria. And I think to the first part of your question where you would start to see the benefits not flowing through overtime and clearly improving customer numbers, improving revenue market share and improving ARPU in particular because one of the things that we previously discussed that we as a challenge right now for us in Algeria is we are suffering from relatively high churn within the high value customer segments which is pressurizing ARPU.
Gerbrand Nijman
Okay thank you Stanley.
Stanley Martinez
It almost sounds that Andrew, so you are running [jazzy] still more on an EBITDA less CapEx basis and I would think that after today's transaction you just have more degrees of freedom in order to pursue inorganic improvement in further strengthening your EBITDA margin position and your revenue market share?
Andrew Davies
Two things Stanley don't forget the debt in Italy is ring fenced, the fact that we have got a significantly higher leverage profile as a consolidated group actually as I have been saying for several quarters actually has no practical impact because that debt is ring fenced and so that is not an impediment to investing anywhere else. And we are investing as quickly in Algeria as we practically can.
Jean-Yves Charlier
I can add we still have a number of regulatory constraints around the investments cycle and the speed of those investment cycles that's one of the dimensions I noted that we still have to get right. We can't roll out 3G in the whole country we are constraint in rolling out 3G in a number of the regions and the turnaround I think in Algeria is not about just a superior network against our competitors because in fact when we look at our networks scores and MPS scores in Algeria from network point of view they are very good.
It's more to do with a tariff of services, the distribution that's ineffective right now in Algeria and that's not to say we should discount the network but it's not just a network roll out issue in Algeria.
Stanley Martinez
Okay thanks. And if I could just one follow-up it's sort of related to NPF distribution but turning that over to Russia I mean you had 8.5 million growth at up about 500,000 versus the year ago quarter could you just help to mention what was the positive impact from the [indiscernible] distribution channel and maybe the negative impact of what looks like a weak retail environment for Russia overall and then maybe just share any perspective on the Q3 growth environment so far?
Jean-Yves Charlier
I think that when we look at the net ads in Russia I think the two drivers were really enhanced distribution was [indiscernible] and also the continued improvement from a customer satisfaction and MPS point of view those are really the true drivers. The MPS score now for us in many dimensions puts us as number two player in the marketplace six consecutive quarters of improvement so those are two dimensions that remain really important for us in Russia, distribution and our MPS scores.
Gerbrand Nijman
Thank Stanley we move on to the next question from the internet.
Operator
Thank you. Our next question comes from the line of Iven Kim, VTB Capital.
Your line is open.
Iven Kim
Good afternoon. Just going back to – in Italy so the combined CapEx for sales in ’14 if I just look at simple – was 18% CapEx per sale what’s your target here and what kind of CapEx per sale that you think would -- do you be able to achieve and do you think that there will be need for some accelerated spending in the coming years?
Thank you.
Andrew Davies
Okay Iven I will take that question. So, we actually think that and over the medium term the JV is going to be able to get down to 15% CapEx to revenue ratio but we will do so at the same time being able to accelerating that investment and get to a 90% plus 4G LTE coverage within three years post completion.
And again, it comes back to really intelligent network design, single run architecture and using the enhanced scale that we will have to really, really drive procurement in the JV.
Iven Kim
Thank you.
Gerbrand Nijman
Can we have the next question from internet and then we go back to the room here.
Operator
Our next question comes from the line of [indiscernible] of Credit Suisse, your line is open.
Unidentified Analyst
Hi, good afternoon another two and half questions with regard to the Italian deal. What will be the cash restructuring charges and the timing of those charges and secondly upon completion how long do you think it will take to turn free Italia to free cash flow for breakeven given there were no free cash flow burn situation in 2014, how many months will it take to do that and therefore wrapping these two together do you think you need to draw the RCF to bridge these cash out flows?
Thanks.
Andrew Davies
So I didn't quite catch the first part of the question Marco related to charges. Can you just repeat that please?
Unidentified Analyst
Cash restructuring charges to go alongside the 700 million potential savings?
Andrew Davies
Yes. So, we think the integration costs are going to be in the order of 200 million to 300 million and that's MPV over the next – for the first two years also post completion.
And then, with regards to the second part of your question we have not really modeled as such what the standalone performance is going to be of each contributing unit going forward because it's going to be a JV but we don't expect that as I sit here right now that we would need to draw on that RCF, we think it's going to be able to fund its operations from EBITDA right from the start.
Unidentified Analyst
Okay. Great.
Thanks for clarification.
Gerbrand Nijman
Thank you. Thank you Marco, we go back to the room.
Next question. CK has a question.
Unidentified Analyst
Thank you, [indiscernible] Bank of America, Merrill Lynch. I wondered if you could talk all about ratings and have you had any discussions with the rating agencies and one of the things that at least I have often thought was some of the ratings maybe a bit low particularly if you are a company with say 1.6x net leverage and can you give us any color on what the process for that might be or what discussions might be ongoing?
Andrew Davies
Yes so you are talking about the ratings for VimpelCom or ratings for WIND?
Unidentified Analyst
I am talking about both.
Andrew Davies
Okay. I shouldn't have asked.
So, yes we on the fully embargoed basis we have had some conversations with rating agencies within the last 24 hours literally. And that's just specifically with regard to WIND and I think at least one of those agencies we have heard the conversation has kind of indicated that they are probably going to increase the rating or the outlook that they give to WIND from kind of stable to a positive outlook.
We’ve not yet had a detailed conversations with ratings agencies about what this means from a VimpelCom perspective. But again, I mean to your point, I mean you would expect a slight improvement and I would say that a couple of the ratings agencies because of the ring fence have already tended to look at VimpelCom as almost two set debt structures to anybody and clearly to the extend they do that, that doesn’t change anything going forward.
Gerbrand Nijman
Cheshire you have a follow-up actually.
Unidentified Analyst
[Indiscernible] from Goldman Sachs. Two questions actually if I may one is I am trying to reconcile the breakdown of the synergy so it's around 60% of the MPL synergies comes from [indiscernible] and at the same time 70% of 700 million flow synergies from OpEx.
Is this including the – well, the roaming charges to Italia based or typical Italia or like why is that – and my second question is on the 750 million cash flow improvement just a few technical questions, what do you mean by cash flow here, is this your EBITDA minus CapEx definition or more sort of traditional free cash flow definition and my third question here is, is this incremental in three years or every year you will be adding 750 million?
Andrew Davies
Okay. Should I take all of those?
Jean-Yves Charlier
You can.
Andrew Davies
Okay. So the answer to the first part of your question is relatively simple which is that network and IT is more than just CapEx, there is OpEx within the network and IT savings.
So that explains the power and discrepancy that you alluded to. And answer to the second part of your question we are defining cash flow as net operating cash flow so everything pre-financing so it's EBITDA plus or minus capital movements, less interest tax, and CapEx.
So, we expect all of those combined to improve by $750 million and it will be on a per annum basis. Per annum generally means every year.
Yes.
Unidentified Analyst
In three years it's going to be 2 billion 350 or -
Andrew Davies
We will get to the run rate of 750 within three years.
Unidentified Analyst
Okay. Thank you.
Unidentified Analyst
Once again, [indiscernible] could you try and specify the amount of the synergies you could derive from this fixed mobile convergence and is it already in the 750 million guidance?
Jean-Yves Charlier
At the group levels in terms of our transformation plan it's too early for us to be able to break down the $750 million in that type of discreet analysis the bulk of those improvements I mentioned we think that a big part of that is going to come from the cost transformation of our cost space, CapEx improvements and optimization as Andrew talked about and obviously working capital improvements. That's where we want to first and foremost direct our efforts in the short term to medium term, longer term obviously or medium to longer term is about the new revenue streams and obviously within that the convergence plays important.
Gerbrand Nijman
I am looking around for the next question. I think everybody is exhausted to have been able to ask all the questions.
So, I think with that I want to move to a conclusion of course you can reach out to the team if you have any follow-up. I am sure you are going to call us certainly today and tomorrow.
We will be on the road certainly in September lot of conferences we will attend so we hope to see you down there. But I would like to use this opportunity here to thank you all for the last four in a bid year to be able to work with you because you have seen moving on and have the honor to become the CEO of global telecom and September 1, my successor [indiscernible] he has been head of investor relation, Swiss Com, he will join the team and he will therefore be host on the investor day on October 8 and 9.
And with that I would like to thank you for being here today. Be following on internet and those who have not been gone on holiday happy holidays.
Thank you.