Executives: Bart Morselt - Head, IR Jean-Yves Charlier - CEO Andrew Davies -

CFO
Analysts: Herve Drouet - HSBC Ivan Kim - VTB Capital Dalibor Vavruska - Citi Stan Kondratyev - Goldman Sachs Roman Arbuzov -

UBS
Operator: Good day, and welcome to the VimpelCom Second Quarter 2016 Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bart Morselt, Head of Investor Relations. Please go ahead, sir.

Bart Morselt: Thank you.

Good afternoon, ladies and gentlemen. Welcome to VimpelCom's second quarter 2016 results conference call. Today, I'm pleased to be joined on this call by Jean-Yves Charlier, our Chief Executive Officer, who will present the strategic and financial highlights of the quarter; and Andrew Davies, our Chief Financial Officer, who will focus on the countries, the overall financial performance, and the guidance. Then, after, we will do a Q&A session, which will be handled by the operator, directly. Moving on to page 2, and before really getting started, I would like to draw your attention to the disclaimer.

Forward-looking statements made during today's presentations involve certain risks and uncertainties. These statements relate, in part, to the Company's anticipated performance and stated performance targets for future periods, future market developments and trends, expected synergies and timing of pending transactions, and the Company's strategic initiatives. 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 made by the Company with the SEC. 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. I will now hand over to Jean-Yves, who will run you through the Group highlights, and the financial highlights of the second quarter.

Jean-Yves. Jean-

Yves Charlier: Thank you, Bart. And good afternoon. Let me start by focusing on the highlights of the quarter and the half year. We are pleased to report that the first half 2016 results are in line with expectations.

Although we delivered a weaker than expected service revenue trend in the second quarter, we drove, at the same time, strong underlying EBITDA and operating cash flow margins. Second quarter 2016 operational performance was particularly strong in Pakistan and Ukraine, offset by continuing challenging conditions in Algeria. Mobile data revenue continued to grow at a strong pace, by 26% year on year in the quarter. As a result, our 2016 guidance is broadly confirmed, albeit at the lower end of the range, for service revenue and underlying EBITDA margin; whilst CapEx-to-revenue ratio is positively trending towards 17%, and we expect to deliver strong operating cash flow margins. VimpelCom also made significant progress during the quarter on its strategic priorities, as we focused on two major in-market consolidation transactions.

First, on the merger between WIND and 3 Italia, we officially filed commitments to the European Commission on the 6th of July and in parallel signed definitive formal agreements with Iliad as a potential remedy taker of the transaction. We remain confident on securing the approval, and expect a decision by the European Commission by the 8th of September. Second, on the 1st of July, we completed the transaction in Pakistan to strengthen our leadership position in one of the fastest growing telecom markets in the world. During the quarter, we also delivered on our strategic initiative to transform VimpelCom in to a digital operator as we announced a seven year agreement with Ericsson to provide a new business support system stack, representing an investment over $1 million with both operational and financial benefits for the Group. Let me now focus on the financial performance of VimpelCom, which is, once again, in line with expectations, and with the guidance, provided for 2016.

However, our reported results have continued to be impacted by currency headwinds in many of the countries where the Group operates. During the quarter, service revenue, on an organic basis, decreased slightly by 0.7% year on year, driven by a weak performance in Algeria. We saw good operational performance in Pakistan and Ukraine, almost fully compensating the lackluster performance in Algeria. Without Algeria, the service revenue would have increased organically by 1.5%, implying that Algeria eroded approximately 2% of year-on-year growth in the quarter. Mobile data revenue are continuing to grow at a double-digit pace, posting a growth of 26% organically year on year.

Underlying EBITDA was still very solid, and grew organically in the second quarter by 3%, leading to a margin at 42.3%, or 1.2 percentage points higher than last year in organic terms. Net income stood at $138 million for the quarter, growing 29% year on year, with a solid contribution from Italy. On CapEx, the reduction trend, driven by our objective to be more focused in our investments, reached an LTM CapEx-to-revenue ratio of 17.3%, moving to the lower range of our guidance for 2016. The absolute CapEx figure, excluding licenses, decreased 34% year on year. I will now focus on the progress that VimpelCom has made in terms of the strategic transactions.

One year ago, we announced that transformative transaction in Italy, aimed at merging WIND and 3 Italia through the creation of a 50-50 joint venture of VimpelCom and Hutchison, creating the number one mobile operator in Italy. As of today, the regulatory process has proceeded in line with our expectations, and we remain confident that we will receive clearance from the European Commission. We view our transaction as a positive and pro-competitive development, with benefits for Italian customers, at the same time as creating value through efficiencies for investors. On July 18, we formally submitted final commitments to the Commission, centered around the sale spectrum, the sale of certain tower assets, a network-sharing agreement, and a national roaming agreement. These commitments are backed by definitive formal agreements, signed by VimpelCom and Hutchison with Iliad, which are conditional on the approval of the European Commission, as well as closing of the transaction.

We expect the European Commission to make its decision on the proposed transaction and commitments by September 8. We remain confident of the outcome, and expect to close the transaction, subject to the Commission's clearance, by the end of this year. Whilst the new market entrant will certainly have an impact on the synergies we announced in August last year, it is too early to assess this. Furthermore, this impact will partially be offset by the proceeds of the asset sale, as well as the recurring revenues from our agreement with Iliad. Let me now turn to how we are creating the leading telecom operator in Pakistan, which represents one of the fastest-growing telecom markets in the world.

On July 1, we completed an important in-market consolidation transaction, strengthening our leadership position in the country, by closing the merger between Mobilink and Warid. VimpelCom will have an 85% share ownership in the new venture. The new combined entity, with a 37% customer market share, serves over 50 million customers, in a country with approximately 200 million people. The opportunity remains significant as Pakistan is still lagging behind in terms of smartphone penetration and data consumption with both these metrics expected to almost triple by 2020. We see an attractive and unique opportunity, not only in terms of the market opportunity, but also in terms of the synergies expected from the transaction that we value at over $100 million, both in terms of OpEx and CapEx on a run rate basis.

We also expect to provide significant value to our customers in Pakistan. Mobilink's customers will benefit from Warid's 4G LTE services, while Warid's client base will benefit from the largest 3G network, and from a full range of mobile financial services from Mobilink. In order to achieve these benefits, we expect to start the integration plan at the beginning of the fourth quarter of this year, whilst the legal merger is expected to take place within six months, at the beginning of 2017. A final comment on the governance of the combined entity, a Board of Directors will be composed by seven members, of which six nominated by VimpelCom/GTH, and the Board will be chaired by His Highness Sheikh Nahayan. On 13th of June, we announced a seven-year agreement with Ericsson to provide a new business support system stack, representing an investment of over $1 billion, with both operational and financial benefits for the Group.

This agreement marks a fundamental milestone in our transformation as we move ahead with our strategy to transform VimpelCom in to a true digital operator. The new digital stack will help us better respond to our customers, while also globalizing and simplifying our business, creating lean and agile operations that will result in a more efficient cost structure across our global footprint. The future is about being real-time, customizing our offerings, and making them relevant and engaging for our customers as they navigate the digital world. Only by investing in latest technology and focusing on our digital strategy will we be able to provide new innovative and competitive services to our customers across the globe. The implementation of this new digital IT stack will contribute to the overall reduction of IT expenses with the ratio on revenue for the Group expected to be reduced by more than 50%, to approximately 2%, by the end of year three.

The strategic transactions and investments announced during the quarter are the demonstration of our progress in profoundly transforming VimpelCom. On this, I will now let Andrew take us through the Group and country financials in more detail. Andrew?

Andrew Davies: Thank you, Jean-Yves. And a good afternoon, or good morning from me as well. I would, first, like to touch base on the Group's financial highlights for the quarter.

In particular, total revenue was organically stable year on year, while the service revenue was slightly down by 0.7% year on year. Implicitly, we had higher equipment sales during the quarter compared to the same period of one year ago. Notable from this slide is the robust growth, by 1.8 percentage points, in operating cash flow margin, now at 23.3% on a last 12-month basis, as shown in the bottom right-hand side of the slide, benefiting from both the underlying EBITDA margin improvement; and also, our continued CapEx efficiencies. On Slide 9, and looking at the macro environment, and, in particular, our foreign currency portfolio, as we did in May with our first-quarter results, we've plotted the VimpelCom currency basket, weighted by the respective revenue contribution of the various countries. We have indexed this VimpelCom coin with the first quarter of 2014 at 100.

The index was at 56 for the second quarter of this year, compared to 76 in the second quarter of last year, which clearly articulates the year-on-year headwinds that we're facing. But there does seem to have been a bit of an inflection point towards the end of Q1 2016. And, as time moves on, if currencies remain stable, we should see a gradual moderation in the impact of these currency headwinds on our result. On the next slide, we provide a breakdown of the evolution of our service revenue, both in reported and organic terms. On a reported basis, our second-quarter 2016 service revenue was still impacted by the adverse foreign exchange movement, resulting in nearly a 17% year-on-year decrease, with a translation effect of foreign exchange rates and service revenue being a negative $408 million for the quarter.

However, on an organic basis, service revenue was almost flat with a 0.7% year-on-year decline. Looking at the composition, you can see from the top chart that the legacy analog revenues from voice, interconnect, and roaming continued to decline. But this was almost entirely offset by significant growth in the more digital revenue streams, such as data and MFS, which grew year on year, in organic terms, by 26% and 17%, respectively. In the chart at the bottom, the geographical breakdown has been simplified compared to past quarters. Emerging markets is still the basket of GTH countries, being Algeria, Pakistan, and Bangladesh; but Ukraine and Uzbekistan are now more transparent in the chart, along with Russia, given their relative size within the footprint, while the smaller Eurasian operations are now included in other.

Looking at the trends, the marginal decline in Russia's service revenue, which mainly resulted from the competitive market environment in mobile and continued pressure on fixed-line revenues, was more than offset by two emerging markets

in particular: Pakistan and Bangladesh. As previously noted by Jean-Yves, in the second quarter we had a material year-on-year service revenue decline in Algeria, which contributed almost 50 million in terms of the year-on-year movement on revenue. I will expand on the causes of this, later in the presentation. Excluding Algeria, Group service revenue would have grown organically by 1.5% year on year. Last, but by no means least, Ukraine and Uzbekistan, both positive, both posted positive year-on-year contribution, more than offsetting a marginal decline in other.

If we move on to the EBITDA analysis, on slide 11. On a reported basis, EBITDA declined almost 26% year on year, due to both foreign exchange translation impact of $186 million, and exceptional costs of another $116 million, which mainly related to the performance transformation program. On a year-on-year basis, this performance transformation program has contributed $96 million to the underlying EBITDA improvement, which more than offsets the short-term reinvestments and counter effects that we have in the cost base from our value-accretive initiatives, such as investing in mono-brand shops, devices, and network development, which together totaled $48 million of year-on-year impact for the quarter, and are aimed at driving future growth. Looking at the lower chart, we should see that on an organic underlying basis Group EBITDA grew by 3%, driven by growth in Pakistan, Ukraine, and Bangladesh, which more than offset the decline in Algeria, which, obviously, is related to its negative revenue trend; and also, in Uzbekistan, which has been materially impacted by the increased customer tax. Moving on to the next slide, where we look at the Group consolidated P&L account.

I will highlight the most important elements below EBITDA. Depreciation and amortization including impairments was down year on year by 5%, with the beneficial impacts of both currency deterioration and lower impairment charges in the second quarter 2016 more than offsetting $70 million of accelerated depreciation that we booked in both Pakistan and Ukraine, resulting from their respective network swaps. Tax expenses, both for the second quarter of 2016 in isolation, and the year-on-year increase in tax, require a slightly more detailed explanation than usual. Last year, in the second quarter we recorded a positive effect of $75 million as a result of some legal entity restructuring related to our Kazakhstan and Kurdistan assets, while in second quarter of this year we had two major effects that are worth highlighting. First, the change in the tax regime in Uzbekistan, which is now called the effective tax rate in that country, to exceed 50%.

And secondly, we had two non-tax provisions in Tajikistan and GTH, respectively which, together, amounted to $26 million. Profit from discontinued operations totaled $187 million, a $350 million year-on-year increase. Approximately two-thirds of this improvement is accounting related, as from the third quarter of 2015 onwards we stopped the depreciation and amortization of the Italian assets, as a result of Italy being classified as held for sale. In addition, though, WIND Italy's standalone results also improved, due, primarily, to the 2015 refinancing activities. Finally, in this quarter we saw an increase of nearly 30% in the attributable income year on year, from $108 million last year to $138 million in the second quarter of this year.

Let me now focus on net income from continued operations for the first six months, which decreased year on year by $188 million. However, if we exclude impairments and exceptional items, underlying net income from continued operations grew by $35 million year on year, from $227 million last year to $262 million in the second quarter of this year. If we look in to the evolution of this underlying performance, we've had positive contribution year on year, in organic terms, from improvements in both underlying EBITDA of $42 million, and reduction of depreciation and amortization by another $127 million. Net financial expenses showed a year-on-year organic decrease of $50 million, resulting mainly from last year's U.S. dollar bond tender; and we had an underlying increase in taxes for $15 million, due entirely to the changes in Uzbekistan.

ForEx and others, on a year-on-year basis, weighted on the net profit by $157 million which is the impact of the retranslation on both EBITDA, on the depreciation and amortization line, together with FX losses that we report below EBIT. Moving on to the analysis now of net cash flow from continued operating activities. Last year, we had a tiny positive inflow of $37 million from operating activities, significantly affected by payments related to the closing of the Algeria transaction, which amounted to just in excess of $1.3 billion. If we exclude the Algeria closing and Italy, which is accounted for as discontinued operations, the underlying net cash flow from continuing operating activities in the first half of last year was just above $1.1 billion. The underlying EBITDA, in real dollar terms, declined by 301 million, reflecting the adverse impact of foreign exchange rates, the cash flow impacts from interest, taxes, and working capital contributed positively year on year, partially offsetting the EBITDA decrease, which resulted in a net year-on-year reduction in operating cash flow from continuing activities of about 11% to just below 1 billion in the first half of this year.

If we look at the full perimeter, including Italy, net cash flow from operating activities posted a growth of 1.3% year on year. Moving on now to the net debt evolution, in the second quarter of this year net debt has increased by approximately $168 million to roughly 6.6 billion, looking in to the cash flow movements, you can easily notice how this quarter the net cash flow was affected by exceptional items and ForEx, worth, together, more than 400 million. However, if you look at the operational metrics, we see the positive contribution coming from EBITDA more than offsetting 250 million in aggregate from the impact of interest, taxes, cutbacks, and working capital. Before exceptional items and ForEx, the net debt to last 12-month EBITDA leverage ratio would have been at about 1.7 times. And the actual ratio, including all the foreign exchange and the exceptionals, was equal to 1.8 times; completely in line with the guidance for the full year, which is approximately 2 times.

I will now move in to the operational and financial analysis of our main countries, starting, as usual, with Russia. In Russia, we see continued signs of increasing competition in the market with pricing pressure on devices and increased data allowances, while the macro environment remains challenging. Service revenue decreased year on year by 2%. And this performance is mainly attributable to fixed line, where service revenue decreased by 11% year on year, as a result of further customers moving from US dollar to ruble-denominated contracts. However, the mobile customer base is broadly stable at 57.4 million, mainly thanks to our highly focused commercial strategy also leveraging on the growth in our monobrand stores.

In local currency, mobile service revenue was broadly flat year on year, driven by a strong 20% mobile data revenue growth. And underlying EBITDA before performance transformation costs decreased, but was also broadly stable year on year, while EBITDA margins showed 70 basis points of year-on-year accretion of approximately 41%, reflecting the impact of the performance transformation program. This trend in the quarter clearly shows that we've improved relative to one of our main direct competitors in the country, not only in revenue, but particularly when it comes to EBITDA. In addition, in terms of NPS, the best measure of customer satisfaction, our relative ranking keeps improving and is now on par with our competitors. The last 12 months CapEx-to-revenue ratio decreased by 1.7 percentage points to 16.6%, with a 35% year-on-year reduction in CapEx, due to phasing and the ongoing capital efficiency plans.

Moving on to slide 17, and Algeria, this clearly remains a very challenging market for us. As you can see from this slide, in the second quarter of 2016 we experienced a 15% decline in service revenue that then translated in to an 18% decline in EBITDA. We are still experiencing overly high churn with a decline in our mobile customer base of 4% year-on-year in the second quarter. Also driving this service revenue decrease is the ARPU erosion, caused by both the loss of high-valued customers, and a shift in Ramadan. EBITDA margin remains above 50%, mainly due to a focused commercial and network cost optimization, and management de-layering.

We've also announced, in Djezzy, a further reduction of personnel, early in Q3. On the positive side, data revenues strongly grew by 53% year on year, driven by higher data usage and a substantial increase in the number of data customers, which, obviously, is a direct impact of the 3G rollout. At the end of June, Djezzy had already covered 41 out of 48 wilayas with its 3G network, giving Djezzy the largest network in the country with the widest coverage; and Djezzy plans to invest significantly to bring it to the next level. This includes modernizing and upgrading our 2G sites to the latest single-run technology, making them 3G and 4G LTE-ready. This upgrade has already been performed on approximately 1,000 sites.

On top of this, Djezzy is also proceeding with the upgrade of its network to an all-IP enabled technology, aiming to manage the data peaks expected with the launch of 4G LTE later this year. In May, Djezzy was awarded one of three national 4G LTE licenses, and the commercial launch of this service is expected in the second half of the year. We will also start upstreaming cash from Algeria in Q3, following the approval of dividends for a gross amount of $128 million, which equates to roughly 48% of 2015's net income. Last, but not least, since July, Tom Gutjahr, the new CEO, is on board. And we continue to strengthen, in other roles, the senior leadership team in Algeria.

Let's move on to the next slide, in which we discuss, in a little more detail, the issues affecting Algeria's second-quarter performance, and how we intend to address them. First of all, it's important to note that our operations in Algeria have been [counter-revised] by several years of underinvestment. In addition, our significant market-player status, along with MTR asymmetry, and restrictions in the rollout of 3G, have prevented Djezzy from fully benefiting from its market leadership; and also, impacted on the agility required to face the more intense competitive environment. Looking in to the fundamentals, both customer losses and ARPU erosion contributed to the revenue trend. As far as the customer base is concerned, in the second quarter we faced distribution challenge, as a result of some changes that we made to the dealer-commission schemes; and this issue is being corrected, as we speak.

In addition, the change in billing increments made in Q1, which we then reversed part way through Q2, together with the forced migration of customers to a new tariff structure in Q1, negatively affected both customer growth and ARPU. ARPU was also negatively impacted, year on year, by nearly 2.5%, due to the shift of Ramadan by almost two weeks. We're already undertaking a series of actions. As I've already mentioned, we are strengthening the leadership team and have appointed Tom Gutjahr as the CEO, from July onwards. On distribution, we are accelerating our monobrand store rollout, and refurbishing existing shops in the medium term.

We are simplifying our pricing structures in order to align them more closely to customers' needs, driving smartphone penetration with bundled offers. But also, promoting micro-campaigns in order to increase customer satisfaction perhaps most importantly, we expect to launch our 4G LTE propositions in autumn this year, which presents a significant opportunity for us to regain the ground that we have lost in the last several quarters. Moving on to slide 19 and Pakistan, Mobilink has recorded double-digit growth in both revenue and EBITDA, and further gained market share in the second quarter of 2016. The positive momentum in data revenue continues with a strong 55% year-on-year growth, driven by successful data monetization initiatives, with data user growth above 30% year on year. The customer base has increased by 17% year on year.

And this growth has been driven by the continued focus on simplifying the pricing offers, and improving billing transparency, and by further investments in distribution. Mobilink reported strong EBITDA margins, 5.2 percentage points on an underlying basis, due to the revenue growth and benefits accruing from the performance transformation program. CapEx decreased year on year to a last 12-month CapEx-to-revenue ratio of 17%, resulting from both a conclusion of the network swap and a continuous effort on efficiencies, while still investing appropriately in other business. Also in Pakistan, the new CEO, Aamir Ibrahim, is now on board. In July, we completed the acquisition of Warid, following which Jeffrey transitioned the CEO role to Aamir, who was previously the Chief Commercial Officer and the Deputy CEO of Mobilink.

At the bottom of this slide, we have provided a quick overview of Warid's financial contribution going forward, which will be, roughly, $350 million in annualized revenues, with approximately a 20% EBITDA margin and $350 million of net debt; all of which we will be consolidating, starting from Q3 onwards. In Bangladesh, our operations continue to grow, both in service revenue, up 3% year on year, driven by 60% growth in data revenues; and in EBITDA, growing at 19%, despite the Ramadan impact, and intense market competition. The main focus during the second quarter was the ongoing SIM re-verification program, which was successfully completed in July. Banglalink was one of the leaders in this initiative, and managed to verify 93% of its customers, securing, basically, 100% of its revenue base. Underlying EBITDA grew by nearly 19% on the year-on-year basis, resulting in outstanding margin growth to around 48%; an improvement year on year of 6 percentage points, driven by performance transformation, with particular success in reducing salary costs, and in optimizing the commercial cost base.

Finally, Banglalink continues to invest in high-speed data networks with the last 12-month CapEx-to-revenue ratio of 22.6%, with 3G population coverage reaching 50% at the end of the quarter, compared to 33% at the end of last year. On Slide 21, we focus on Ukraine, where the business performance continues to be strong during the quarter, with mobile service revenue growth of 11% year on year, driven by a 79% growth in mobile data revenue, as a result of the 2015 launch of our 3G network and related commercial propositions. We remain the clear leader in this country, which is still characterized by a challenging environment. The strong revenue growth, coupled with cost efficiencies from performance transformation program, grew by 34% year-on-year increase in EBITDA, with a very robust 55% EBITDA margin. The operating free cash flow margin in the country was 34% for the quarter.

And 3G technology now covers almost 50% of the population; up from 35% at the end of 2015. In Uzbekistan, service revenue continued to show healthy growth at 8.3% year on year, mainly as a result of the impact of Beeline's price plans being denominated in U.S. dollars, together with the impact from growing interconnect revenue, and solid mobile data revenue growth of 10% year on year. This strong growth is notable, given the recent changes in the market structure from two to four players, which has caused a year-on-year decrease in the customer base of about 9%. EBITDA margin is still robust at 57%, but represents a year-on-year decrease of approximately 7 percentage points; of which, over 4.5 percentage points of erosion is due to the doubling of the customer tax from 1st of January, this year.

Finally, we're extremely pleased in Uzbekistan to have received a 15-year extension to all of our operating licenses. Let me now complete the country section with Italy, which is still accounted for as an asset held for sale, pending the closing of the JV. As Jean-Yves already mentioned, the decision of the European Commission, following the filing of the commitment and the remedy package, is expected by early September. Total revenue and EBITDA for the quarter actually grew year on year. Second-quarter 2016 mobile service revenue showed a slight year-on-year decline of 0.8%, which is a better year-on-year trajectory than we saw in Q1, when you adjust for the leap-year impact.

Mobile ARPU grew by 0.8% year on year to just over €11, confirming signs of continued market recovery, while mobile data revenue continued to exhibit strong performance, up 13% year on year. WIND's mobile customer base was 20.9 million at the end of the quarter, with 4G LTE population coverage now approximately at 62%; up from 56% at the end of 2015. In fixed line, the robust performance in fixed-direct customers continues, showing a 3.7% year-on-year growth, with an even better performance in the broadband segment, which grew by 5.1% year on year. EBITDA showed year-on-year growth of 0.5%, while the EBITDA margin was broadly stable at 36.6%. On the commercial and operational side, in April, WIND signed an agreement with Enel Open Fiber for the nationwide deployment of fiber.

After just one month, in May, the first fiber-to-the-home customers were connected, with four more cities expected to be covered by the end of Q3. I'll now conclude this section by discussing guidance, before we move to the Q&A. The second quarter, as demonstrated, continued momentum across the footprint, with the exception of the lackluster performance in Algeria, where, however, we have taken measures to restore momentum over time, all the metrics for which we have provided guidance are in line with expectations in the first half of the year, especially on the cash flow and leverage side. As a consequence, with today's visibility, we broadly confirm our guidance for the full year; albeit, and as Jean-Yves already mentioned, we now anticipate that service revenue and EBITDA margin will be at the lower end of the range, while the CapEx-to-revenue ratio is trending positively towards 17%. With regard to the operating cash flow improvements that we started discussing this time last year, following the strategy refresh, we confirm that we remain on track to deliver the incremental year-on-year benefits of between $100 million and $2 million for this year; and that we are well on track to deliver the $750 million of unrealized improvements from the end of 2018.

With that, we'll now start the Q&A session. Operator?

Operator: Thank you. [Operator Instructions] We will now take our first question from Herve Drouet from HSBC. Please go ahead. Your line is open.

Herve Drouet: I just wanted two questions. Firstly, on Algeria, I was wondering, in terms of the pricing, especially on net tariff, how do you compare with competition after the adjustment you have done with the new tariff? And also on Algeria, how long time do you think it will take to stabilize and reduce churn, especially of those high-value subscribers, which may have left because of either issues with distribution, or they have been forced to migrate to those new tariffs? I just wanted to get a bit of an idea on how quickly you think Algeria might stabilize, and if it's something we may assume that may happen when 4G LTE is launched, or it will take more time. And the second question is, is there any news about the Russian towers? Do you think something might happen this year on those plans of selling the Russian towers, or is something which may take more time? Thank you very much. Jean-

Yves Charlier: I'm going to take the questions in reverse order. I'll do one and two, or three and two; and then, I'll let Andrew talk about the tariff structure in Algeria.

I think, on towers, we've been very clear on wanting to move to an asset-light or more asset-light network model as part of our strategy. And we've earmarked to dispose the totality of our tower portfolios across the world. We are progressing on that. But there are two things that are very important, and timing is not one of those. The first two things that are important for us is obviously, doing deals that just don't provide not only liquidity but doing deals that really maximize value.

And so that's a major driver. We're not focused at all on just the liquidity driver, or are forced in to any rapid fire of sale of any of our assets. The second dimension is in each of the countries is really finding the right partner to do these transactions with. These are long-term partnerships. These are not just simple M&A deals.

So that's very important. So it's going to take the time that it needs to take to find the right partner, right value for us in each of the markets. And I don't want to give any specific calendar, whether it's on Russia, or any one of the other markets that we're working on. We're just doing the work that we need to be doing. And if the values and the right partners are there, we'll do deals.

If those two dimensions are not there then we'll just push back. So this is a medium-to-long-term initiative, it's not a next quarter, short-term initiative that we kicked off end of last year. On Algeria, I think I've been always very conservative about how long it would take to turn around the Algerian upco, and I reiterate that on this call. This is not a short-term turnaround; this has always been a medium-term turnaround. It's not just about how the asset is performing today in the market; it's about the years in which we couldn't invest, or were held back from investment, and weren't able, in fact, to manage the asset appropriately.

It's only been since last year that we've started, I think, really reinvesting in Algeria. We're catching up on 3G. I think we've made good progress around the performance transformation. We haven't been satisfied with the management team that we appointed last year and, hence, the changes we've made. We've been disappointed with some of the commercial decisions that, that previous management team has made.

It's a central focus to get right. But, again, it's going to take, I think, some time. Obviously, the 4G license, we feel, is an opportunity. We've seen, when we get it right, in other markets, such as Ukraine, the impact it can have. And, obviously, we're focusing on getting that absolutely right in Algeria.

And we think that that can be certainly one of the drivers of the turnaround of the business that we have at hand right now. Andrew, do you want to talk about the commercial front-end tariffs?

Andrew Davies: Yes, absolutely. Thank you for this, Jean-Yves. Test of my operational knowledge. Broadly speaking, actually, in Algeria we are now competitive, on par with the competition.

And we've each got tariffs in the marketplace whereby for on-net traffic the pricing is between DZD4 or DZD5 for every 30 seconds. The issue that we had in Q1, which we corrected in Q2, was twofold. First of all, billing, typically, in Algeria had been on a 30 second increment basis. We actually moved so that the initial increment was a 60-second increment, which obviously has a big impact on the effective price of the -- of a call for certain individuals. And also, coupled with that, we didn't have small enough sachet sizes, as they would be termed in the market.

In most emerging markets it's typical to have a daily, a weekly, and then a monthly kind of prepaid product, and we didn't have enough of the smaller product sizes in the marketplace. But we've now -- we've certainly corrected the former issue, and we're in the process of correcting the latter issue, as well.

Operator: Thank you. [Operator Instructions] And we'll take our next question from Ivan Kim of VTB Capital. Please go ahead.

Your line is open.

Ivan Kim: I have a couple of questions. First, on Italy, I was just wondering how do you view the prospects of Italian markets with the arrival of a fourth player, Iliad, as a result of the remedy? And the Italian market pricing is obviously much lower than that of France, where you had successfully answered. But Iliad also gets plenty of frequencies, access to basis tower infrastructure, and national roaming on your network, so it can be quite active from day one, pretty much. So any thoughts around those would be very welcome.

And then secondly, on Russia, the EBITDA was quite [reviewing], despite the revenue loss. And especially if you look sequentially, the EBITDA improved in the second quarter of 2016 versus the first quarter of 2016 much more than the service revenue, about RUB1.5 billion more, actually. Can you please elaborate on the savings, maybe, that you are doing this transformation program that you are doing in Russia, and what, maybe, you expect going forward, as well? And maybe just one last small question on whether there is any update on the class action suits relating -- related to Uzbekistan? Thank you. Jean-

Yves Charlier: All right, I'll let Andrew take the question on Russia and class action. You want to start off with both of those? And then, I'll do Italy.

Andrew Davies: Yes, okay. The class action, first of all, do it in reverse order then, there is no traction, no momentum on that lawsuit. We're going to vigorously defend ourselves if it actually comes to an action. But, at the moment, it remains undetermined who, if anybody, under US law is going to be even designated to file a complaint; or whether even the court is actually going to certify it as a class action lawsuit. So, as I said, as we said continually, no real traction or momentum on that right now.

On Russia EBITDA, I think you have to bear in mind that we did point out when -- with the first-quarter results, that we actually had some negative one-offs in Q1. We had bad debt issues, and we were overly subsidizing devices, particularly data devices, which, broadly, cost us about RUB1 billion to RUB1.1 billion in that quarter. The major reason for the sequential EBITDA improvement is actually the lack of any negative one-offs in Q2. Now, coupled with that, we are continuing to make progress on performance transformation. We are closing, or in the process of closing, some buildings.

We are, in particular, reducing middle-management layers, particularly with regard to the legacy regional structure that we had in Russia. But, as with many parts of the Group, it's a broad-based program. The other thing that I would point to in Russia, where they are slightly ahead of the rest of the Group right now, but it's part of it a Group-wide project, is the move of back-office operations towards shared service center concepts. Russia's been developing a shared service center in Yaroslavl for quite some time, and they've now actually got really good momentum behind that program. So, Jean-Yves, Italy?
Jean-

Yves Charlier: Yes, on Italy, I think, as you pointed out, obviously, the market conditions between France and Italy are vastly different.

But, needless to say, I think we view Iliad as a formidable competitor, and we need to take that in to account, as I said in my remarks, on the potential impact this will have on our synergies. Net-net, we continue to believe that our merger with 3 Italia will be materially accretive to our investors, and to VimpelCom. This makes us the number one mobile player in the marketplace. As you know, this restructures completely the VimpelCom balance sheet from a debt perspective. And, thirdly, the €5 billion of NPV synergies that we announced in August last year really never accounted for any market repair.

These are all cost-driven synergies and CapEx-driven synergies, and, as such, whilst if the market is competitive with Iliad, we expect to be able to deploy these synergies. Some of the market competitive pressures might eat in to them. But, on the flip side, we believe that we've obtained also material value for our assets that we will dispose of to Iliad on the basis of, obviously, the Commission letting us proceed with this transaction, and the ongoing revenues and profits that we will generate from the contracts, whether it's on the roaming contract, or the savings on the network sharing arrangements that we've negotiated. So, I come back to, net-net, this is still a very material accretive transaction for the Group.

Andrew Davies: Yes, and just to point out as well, as I habitually do so, the synergies in Italy exclude also any corporate finance-type benefits.

So there's nothing in there for potential benefits from future refinancing, utilization of tax losses, etc.

Operator: Thank you. We'll take our next question from Dalibor Vavruska from Citi. Please go ahead. Your line is open.

Dalibor Vavruska: Two questions. Just to follow up on what Andrew was talking about Russia, we also saw the results of MegaFon, and we saw that they went quite aggressively in this handset market in the second quarter, and, clearly, they probably lost some market share to you as well. I'm just wondering if you can talk about -- maybe add a few comments on this competitive dynamic in light of this new activity by MegaFon, the packages in the handset market; and also, whether you see them as the main driver of the competition now, or whether it's Tele2 in Moscow. Just, maybe if you can be more specific, what do you think is happening on the competitive front? And the second question is on free cash flow. I think you had some good overall result in terms of EBITDA, but, as you know, the free cash flow -- the pure free cash flow generation has been challenging.

I think still, in this quarter the numbers are not huge. So I'm just wondering, in terms of your expectations, when do you think that we can start seeing some real turnaround in the free cash flow at the Group level, and at the current structure? Maybe you phased down the transformation costs, I don't know what, but whether there is some kind of visibility on that. Thank you.

Andrew Davies: Thanks, Dalibor. I guess, I'll take both of these questions then.

In Russia, yes, I think it has become increasingly competitive. And I think we see that from both the two principal competitors in that country, who are, from our perspective, both equally aggressive when it comes to the service offering and started a move towards unlimited data packages at certain price points, and are also subsidizing some devices. Candidly, we don't see, right now, the need to subsidize devices. Our focus has been on, first of all, improving the customer proposition just by the ease of interaction with us as a business, and then moving much more towards integrated bundles, where we're offering voice, text, and data at a given price point, the ability to share data with friends and family, etc.; and, as part of that, bringing some devices in to the bundle without actually overly subsidizing them. So it's difficult, because there is a huge gravitational force pulling in the other direction right now.

But we are trying to resist that force as best we can for right now, and doing, what we think, reasonably well

with that: mobile service revenue basically flat year-over-year for the quarter and the improved EBITDA performance. On free cash flow, yes, you're right, it's been an intense area of focus for us. We remain confident that we're going to see a more meaningful generation of free cash flow before financing activities from the second half of this year, onwards. I think, clearly, in the first half of this year that number's been skewed significantly by the fact that we've paid out in excess of $800 million related to the Uzbekistan case, both in terms of the settlement itself, but also the legal costs. But, yes, we think that from the second half of this year onwards the free cash flow generation before financing activities becomes more meaningful.

Operator: Thank you. [Operator Instructions] Now we'll take our next question from Stan Kondratyev from Goldman Sachs. Please go ahead, your line is open.

Stan Kondratyev: I have two questions on Russia, if I may. First is on Russian CapEx.

It's down more than 30% year-on-year in ruble terms. I fully take the argument that part of that reduction is driven by some procurement system optimization. But can you probably share how much you invested in the first half versus the same period last year in real terms, not only money terms, and how much you plan to invest in the full year in real terms? My second question is also on Russia, but with regards to distribution market. Can you probably share your strategy on the Russian distribution market, and, in particular, your thoughts on the optimal split of distribution channels among on monobranded stores, independent multi-branded stores, and your estate? I think that would be very helpful. Jean-

Yves Charlier: Okay, let me maybe just take the first part of the question on CapEx, as it pertains, I think, to the overall strategy that we're driving for the Group; and then, I'll let Andrew specifically address the question vis-à-vis Russia, and then distribution.

I think, overall for the Group, we've made it very clear that we want to not only move to a more network asset-light model by disposing the tower portfolio, by undertaking strategic network sharing deals. And we think that that's important for the future of our business model. At the same time, in zero-growth markets the model that we had two years ago of continuing to invest 20%-plus CapEx to revenue is just simply unsustainable. We're moving to a model where we're much more focused in terms of where we spend, and where we invest. We're much more focused on a model that drives NPS improvement; and we've seen in Russia, as well as most of our other major markets, significant NPS improvement over the quarters and last 12 months.

And we're also driving the globalization of our procurement. Very little procurement was done of the basis global contracts in 2014 and 2015. This year, over one-half of how we procure for network investments will be done on a global basis. Clearly, driving the CapEx intensity down is a part of our strategic focus. As I said in my comments, we are now going to be tending towards the lower end of the range for CapEx in terms of our guidance.

We're trending much more down towards 17% for 2016, and we think that's where it needs to be. It will continue trending downwards beyond that, and probably an optimal model of around 15% of our revenues as a medium-term goal. Now, I think the first half was particularly weak, because as we were putting in place this global procurement and global contract that has led to delays specifically in investments in Russia. But in Q2, we saw, if I recall, one of the highest NPS scores that we've had in a long time in the Russian marketplace; and we're now within immaterial distance from the other two competitors in terms of our NPS scores. So it is not affecting the way that customers certainly are rating our overall service in the Russian marketplace.

Andrew, do you want to be more specific on that?

Andrew Davies: Yes, so just to think about this, I would say roughly half of the year-on-year reduction in the CapEx that we have spent in the first half of this year is due to the procurement delays. From my perspective, the other half is due to CapEx efficiency-related initiatives, either network sharing, or just better discipline and better control of the warehousing and the inventory that we've got. We've depleted our network inventory, not just in Russia, but across the Group, quite considerably, in the first half of this year. So there -- obviously, in doing so, what we're effectively doing is deploying in the field equipment which we bought and capitalized in prior periods. So, yes, that's how I think about CapEx in Russia.

Moving on to the second part of your question on distribution, so we've increased our monobrand store footprint by roughly 20% year on year, we've gone from, broadly, 1,250 to closer to 1,500 stores. That, we still think we've got some way to go, both in terms of the total number of stores that we need, which probably needs to be somewhere closer to 2,000 in Russia; but also, refurbishing, and maybe even relocating, some of the monobrand stores, because some of them are maybe in areas and locations where that are not ideal for a monobrand store. But I think long-term clearly, monobrand's important to us but also the relationships with the high quality indirect distribution, such as Euroset and Svyaznoy are also important. What we'd like to do less of is the business with the really small mom-and-pop type indirect distribution, which does tend to be a bit of a washing-machine effect and attracts lower quality customers.

Operator: Thank you.

And we'll now take our next question from Roman Arbuzov from UBS. Please go ahead, your line is open.

Roman Arbuzov: I have two. The first one is on Russia. Just wanted to get in to the Russian market a little bit deeper, and specifically Moscow.

MegaFon, on their conference call, they've described the increase in competition in Moscow as dramatic over the last six to 12 months. At the same time, we saw some price increases early this year. So just wanted to get your opinion, in terms of Moscow, do you think we're passed the low point and things should be getting a little bit better, helped, perhaps, by somewhat less aggression coming from Tele2 because they've raised their prices? Or do you think things are actually getting worse, as of right now? And just generally in terms of Moscow competition, how much of that do you attribute to Tele2? And how much do you attribute to the competition between the bigger players? And then, my second question is on Pakistan and Bangladesh CapEx. Telinor has been, I think, particularly aggressive in the first half of the year in terms of investments in these markets, so just wanted to get your view whether you think what you're doing currently is sustainable. Or do you think you need to step up your game in terms of investments, just to follow Telinor?

Andrew Davies: Okay, I'll take the Moscow question, in Russia.

Jean-

Yves Charlier: I wouldn't qualify the Moscow market as being dramatic, right?

Andrew Davies: No, I wouldn't. I'm not going…
Jean-

Yves Charlier: [indiscernible]

Andrew Davies: No, we didn't see dramatic competition. Clearly, Tele2 came in at a pretty material discount in terms of pricing, but, candidly, we didn't see much of an impact in terms of our customer base. And we watch the flows and MNP movements, etc., amongst all operators, very acutely, on a daily basis. And I'm not surprised at the comments that MegaFon made, because we saw them being the big loser in the Moscow market compared to -- in terms of the impact when Tele2 entered the market, and the MNP flows.

Actually, despite being the leading operator in Moscow, we actually had the lowest outflows, through MNP and any other process, towards Tele2. So, Jean-Yves' right, we've not seen a dramatic impact in Moscow at all, anyway. Now, obviously, what happens going forward, really does depend on what Tele2 does. But, so far, the level of price competition that we are seeing from them is not affecting our customer growth that much.

Roman Arbuzov: Can I just follow up with that, quickly? I think it's fair to say that they haven't taken that many primary customers from you, and I think the impact has been more incremental, so people are just taking Tele2 as a second server.

But in terms of pricing, general pricing in the market, isn't it true that Moscow pricing has come down much further, and ARPUs in Moscow have come down much further than the rest of Russia? Would you say that's true?

Andrew Davies: Not for us. No, we don't see that.

Roman Arbuzov: Okay. Thank you. Jean-

Yves Charlier: Right, just on the question of Bangladesh and Pakistan, I think, on Pakistan, we clearly both countries, in fact, have, as we know, had very strong performance in the first half.

Pakistan, with the Warid transaction, obviously, is going to see an increase in CapEx-to-revenue ratios as we combine the networks. And our objective is

very simple: to have the best footprint around Pakistan, around 3G and 4G, as well as 2G, in fact. So I think that our leading position will be now further reinforced, from that point of view. And Bangladesh, we haven't seen the need to underpin the strong performance with more CapEx at this stage. Andrew, you want to bring some color into that?

Andrew Davies: There's not much more to say, actually.

I think, in Pakistan, we're just in the process of concluding a very large network swap, which is working really well. Clearly, we're going to invest with the Warid acquisition, as you have already mentioned. But I think you've covered it.

Operator: Thank you. And now, I would like to turn the call back to Mr.

Bart Morselt. Thank you.

Bart Morselt: All right. Well, ladies and gentlemen, thank you very much for joining this call. Please feel free to call us at IR, if you have any follow-up questions.

We wish all of you a very pleasant day. Goodbye.

Operator: That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.