VEON Ltd (VEON) 2017 Q1 法說會逐字稿

Good day, and welcome to the VEON First Quarter 2017 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bart Morselt, Head of Investor Relations. Please go ahead, sir.

Yes, thank you. Good afternoon, ladies and gentlemen, and again welcome to our first quarter 2017 results call. Today, I'm pleased to be joined on this call by Jean-Yves Charlier, VEON's Chief Executive Officer; and Andrew Davies, VEON's Chief Financial Officer.

The structure of the presentation mirrors the previous quarterly results, with Jean-Yves starting with the key financial and strategic highlights of the group, followed by Andrew running us through the operational results review, for both the group and the key countries, ending with comments on the full year 2017 guidance. At the end of Andrew's discussion, we will open the line for the Q&A session.

Before getting started on Slide 2, I would like to draw your attention to the necessary 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 guidance for 2017, including its ability to generate sufficient cash flow; future market developments and trends; expected synergies of the Italy joint venture and the Warid transaction; and the company's ability to realize its targets and 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.

With that introduction, I would like now to hand over to Jean-Yves. Jean-Yves?

Thank you, Bart, and good afternoon. Let me start by focusing on the highlights of the quarter.

VEON reported double-digit revenue and EBITDA growth and close to $200 million of underlying equity free cash flow. After multiple years of currency depreciation, the group is finally enjoying some currency tailwinds, resulting in a robust year-on-year growth rate of our financials.

On an organic basis, revenues were flat for the quarter, accounting for the effect of the leap year, while EBITDA margins strengthened.

Our JV in Italy posted solid results with both top line and underlying EBITDA growth and with the merger integration and resulting synergies on track with our plans. This is a good start of the year and allows us to confirm the full year 2017 guidance, which we presented at the end of February in Barcelona during the full year 2016 results presentation.

The quarter was also marked by the achievements of a series of major milestones in the transformation of our group. We announced during the quarter that the group was resuming a meaningful dividend policy, and in April, we distributed a final dividend of $0.195. This amount was the compliment to a dividend paid in December 2016 of $0.035, bringing the dividend for 2016 to a total of $0.23.

During the same event in Barcelona, we introduced VEON, a new personal Internet platform. The main initiative for our group to accelerate our digital strategy and strengthen our core telecoms business. It is on this a digital ambition that we also decided to rebrand the company from VimpelCom to VEON.

Only a few weeks after rebranding and presenting our strategic update, we initiated a dual listing on Euronext Amsterdam. We now trade on both NASDAQ and Amsterdam Euronext under the new ticker VEON. The Amsterdam listing is in euros and in ordinary shares, whereas NASDAQ continues to be in dollars and in ADSs.

On the 6th of April, Telenor, our second-largest shareholder, contribute to expand our free float by placing a further 4% stake mainly on NASDAQ, but also some of it on Euronext. The free float has more than doubled now year-on-year and stands at approximately 24%.

Finally, we increased our stake in GTH to 57.7% as a result of the cancellation of the treasury shares in GTH and the share buyback program.

Let me now present on Slide 4, the financial highlights of the quarter. Total revenue grew 13.1% year-on-year, boosted by both the consolidation of Warid in Pakistan and currency tailwinds. Revenues were organically stable, adjusting for the leap year effect. Reported EBITDA also increased by 14% year-on-year, also due to the Warid consolidation and currency tailwinds. Underlying EBITDA margin grew organically by 0.6 percentage points year-on-year and stood at just above 39%. Underlying equity cash flow was $194 million, up from $41 million in the prior year quarter. CapEx increased year-on-year, mainly due to procurement led delays in the first quarter of 2016, with the last 12 months CapEx-to-revenue ratio of 18.7%. The times of high CapEx levels are over at VEON as we've moved to a new operating model, where we will be more and more right spending instead. As of today, we are on track to achieve the 2017 guidance.

Let me turn to presenting VEON in more detail, our personal Internet platform, which is at the center of our digital strategy. VEON integrates communication, messaging and everything the Internet has to offer with powerful data analytics and artificial intelligence to put the user in control. To start with, we will focus on building a global user base and user engagement. VEON has been launched as a beta in Italy and has already generated more than 1.5 million downloads. In this quarter, we will launch VEON 2.0 in Georgia and Russia to begin with, as well as upgrade users in Italy. This release will include, first of all, a digital state-of-the-art account management platform and also a full-featured messaging platform for our customers as well as users from other networks with free messaging, chat and voice calling even when out of credit. It will also include a secure and fully authenticated digital identity, with the possibility to connect to any payment instrument. And finally, it will also incorporate personalized content, including video, music and news. We have already announced global partnerships with Mastercard, Vivendi and Deezer, and will include many more content partners at launch in every country.

The short- to medium-term objective of this launch is to create engagement with the large customer base we serve and transforming the relationship with these customers from a brick-and-mortar to a digital relationship, with the objectives of creating better customer loyalty, reducing churn and reducing our cost structure in areas, such as distribution call centers. It's in many ways about strengthening our core telecoms business.

The medium- to long-term objectives will be about monetizing new services through our partners on a revenue share model. Whilst this is an ambitious strategy, we expect to invest approximately $100 million annually into this platform over the next few years. This is relatively modest compared to our overall investments in our core telecom business and can be absorbed while delivering on our cash flow growth targets.

Let me now turn to Slide 6. On the 4th of April, we successfully listed VEON on Euronext Amsterdam. The main purpose of the dual listing is to broaden our investor base, potentially leveraging on the fact that we could be included at a certain point in time in new stock indices. A presence in Amsterdam, which is where our headquarters are, will allow us to gain more visibility to both European investors and brokers. The shares on Euronext and NASDAQ are fungible and will -- and we have agreed with the depositary bank to waive the cancellation fees for the first $70 million NASDAQ listed ADSs transferred into ordinary shares. Since our listing on the 4th of April, some 15 million ADSs were already transferred into ordinary shares in Amsterdam, representing close to 5% of our free float.

Finally, as required by the European Union Transparency Directive, we announced that VEON Ltd. home member state is Netherlands while the country of incorporation continues to be Bermuda.

Turning to Slide 7. In April, Telenor decided to further sell down its holding in VEON, and as a result, we now have a free float of just above 24%, a significant improvement to the 10% free float the group had a number of years ago. The major shareholder remains LetterOne, followed by Telenor, which still holds close to 20% of our group. We will continue to welcome a potential increase of the free float, should Telenor decide to dispose with more shares in the future.

Earlier in the year, we announced our new dividend policy, which is a commitment to paying a sustainable and progressive dividend based on the evolution of the company's equity free cash flow. We also announced at the same time the payments of a dividend in the aggregate amount of $0.23 per share for 2016, comprised of $0.035 paid in December 2016 and the final dividend payment a month ago. Total dividend payments for 2016 added up to a sizable $404 million. Going forward, we aim to distribute both interim and final dividends, respectively, in the third quarter and first quarter of the year.

I will now hand over to Andrew for the detailed results. Andrew?

Thank you, Jean-Yves, and good afternoon or good morning from me as well. I would like to start today with the key driver of the double-digit top line growth just discussed by Jean-Yves, this currency appreciation against the U.S. dollar.

The VEON coin has shown an inflection from Q1 2016 onwards with a further positive year-on-year acceleration during the first quarter of 2017, thanks mainly to the appreciation of the ruble.

Again, this phenomenon explains the bulk of the year-on-year revenue growth for this quarter. And as we noted, when we presented our full year 2016 results in Barcelona, if the currencies remain stable from where they are today, this would enable us to outperform our full year equity free cash flow guidance by up to USD 100 million.

I now move on to the next slide on revenue. In the waterfall chart, we provide a breakdown of the evolution of VEON's total revenue, both in reported and organic terms. On a reported basis, our first quarter 2017 revenue grew by 13% year-on-year, boosted by ForEx, as I've already noted, and the Warid acquisition. Excluding Warid, the year-on-year growth would have still been very robust at over [8]% year-on-year.

Looking at the composition, you can see from the top chart that the continued strong growth in data and MFS revenue is offset by a decrease in voice revenue, which remains a secular trend across the industry.

Mobile data revenue showed strong growth of 48% year-on-year or 31% on an organic basis, driven by the continued focus on monetizing the deployment of our various high-speed data networks.

In the bottom chart, you can see that on an organic like-for-like basis, revenue decreased by 1% year-on-year. And then this like-for-like calculation, we've included Warid's revenue from the first quarter of 2016. The steady negative year-on-year trend is entirely attributable to the leap year effect with an extra day in the first quarter of 2016.

If you look at the geographical breakdown, you'll see the pressure on revenue mainly came from Algeria and Russia, with strong growth in each of Pakistan, Ukraine and Uzbekistan.

Let's now move to Slide 11, the EBITDA waterfall, which shows a broadly similar profile. On a reported basis, EBITDA improved almost 14% year-on-year. Excluding performance transformation costs of USD 40 million in the first quarter 2016 and USD 30 million in 2017 and included -- including Warid in the Q1 2016 baseline, the year-on-year like-for-like growth of underlying EBITDA would have been 8.9%.

As you can see the top chart, on a year-on-year basis, the performance transformation program has contributed approximately $95 million in the first quarter of 2017, to the underlying EBITDA improvement, more than offsetting short-term reinvestments in value-accretive initiatives, such as monobrand shops, devices and network development.

In Q1, this reinvestment aimed at driving future growth, was equal to USD 74 million.

If we look at the bottom chart, we see that on an organic underlying basis, EBITDA also shows solid upward momentum, growing by 0.5 percentage point excluding both the positive currency impact and the exceptional items that I've just discussed.

The trend can be summarized again as follows, with a slightly negative development in Russia and Algeria being more than compensated by the remaining countries, among which Pakistan and Ukraine, again, showed the highest contribution. Uzbekistan was slightly negative and I'll explain later the specific reasons underpinning the trend there.

Moving now onto the country review, starting as usual with Russia. Both the macroeconomic conditions and the ruble continued to stabilize during the first quarter, but the conditions and competition in the Russian market remained challenging at the same time. Total revenue decreased year-on-year by 2% due to a 14% year-on-year decrease in fixed-line service revenue, mainly driven by the effects of the strengthening ruble and U.S. dollar-denominated contracts.

Mobile service revenue increased by 1%, driven by growth in mobile data, value-added services, Mobile Financial Services and interconnect revenue, partially offset by decrease in voice. Adjusting for the leap year effect, mobile service revenue increased 2% year-on-year.

Mobile data revenue continued to grow at double-digit rates during the quarter, increasing 16% year-on-year. This was attributable to bundle promotions, increased smartphone penetration, growth in mobile data customers and traffic growth.

Mobile ARPU grew 3% year-on-year, driven by the continued efforts to simplify tariff plans and successful up-selling activities, while also being supported by the increased penetration of bundle propositions in the customer base.

Underlying EBITDA, adjusted for transformation costs, decreased 1% year-on-year with an underlying EBITDA margin of 37.6%.

CapEx, excluding licenses, more than doubled year-on-year during the quarter as a result of 2 primary effects. Firstly, we had some procurement led delays during the first quarter of 2016. And secondly, our group-wide CapEx planning for 2017 is even more disciplined than in last year, and in particular, there will be a much more consistent linear phasing across the quarters this year, and therefore, much less of a hockey stick effect in the fourth quarter. Beeline continues to accelerate the roll out of mobile high-speed data network, and which led to a 67% 4G/LTE population coverage at the end of the quarter.

We now move on to our major markets, starting with Pakistan. First of all, let me please note that the pro forma comparative numbers on here are a non-GAAP measure and also do not include any purchase price allocation adjustments. Pakistan continues to show strong momentum in the first quarter as the merge integration is almost complete. The annual run rate of gross synergies amounted to just over PKR 11 billion, so just over USD 100 million and [just] is fully focused on the network integration.

Looking at the key financials. Revenue increased by more than 6% year-on-year, boosted by both data revenue, growing at a rate of close to 30%, and Mobile Financial Services with 24% growth compared to last year, which again has been restated to include the pro forma contribution of Warid.

The customer base increased by 9% year-on-year, driven by continued customer satisfaction, with just its focus on price simplicity, distribution availability and offer transparency.

Underlying EBITDA margin, excluding PKR 0.62 billion of restructuring costs related to both performance transformation and the Warid integration was 43.4% in the first quarter of 2017, improving by almost 4 percentage points year-on-year.

CapEx increased year-on-year in the first quarter of 2017, while the last 12 months CapEx-to-revenue ratio decreased to 17.7% and the 3G population coverage at the end of the quarter was 42%.

The regulators issued an information memorandum for the auction of 10 megahertz of paired technology new spectrum in the 1,800 megahertz band and the auction is currently expected to be completed by the end of the second quarter 2017, with a base price for that auction of USD 295 million.

Moving now onto Algeria. Following the appointment of Matthieu Galvani as Chief Executive Officer of Djezzy in January, the recruitment of the remainder of the leadership team has been completed in order to drive the turnaround and the transformation of Djezzy into a digital leader. The regulatory environment has recently improved in Algeria, although, as noted in our Q4 2016 results, the mobile termination rate asymmetry in the country is still a topic, which remains under discussion with the regulator. The country has a challenging macroeconomic environment, with inflation accelerating to 8% in February and a new finance law in effect since the 1st of January, which has increased pressure on the results through an increase of VAT from 7% to 19% on data services, from 17% to 9% on voice services and also increase taxes on recharges from 5% to 7%. These higher indirect taxes directly influenced the performance of the company as they could not be passed on to the customers.

Customer base in Algeria decreased 4% year-on-year to just over 16 million as a result of a competitive pressure and our own commercial missteps, as we previously discussed. Service revenue decreased by 16% year-on-year, notwithstanding the very robust data revenue growth of 58%, which is boosted by a substantial increase in both data customers and consumption as a result of the 3G and 4G/LTE network rollouts. Not only was the company the leader in NPS in the first quarter, but it has also established leadership in 4G/LTE in the country with a population coverage already above 20%.

Last but not least, underlying EBITDA margin was still close to 50%, benefiting from the performance transformation. And this would have been above 51% excluding the impact of the indirect tax increases.

Moving on to Slide 15 on Bangladesh, where the operational focus during first quarter continued to be on improving network coverage, which drove the data growth. Total revenue in the quarter decreased by 1% year-on-year, while bundling service revenue decreased 3% as a result of aggressive competition and also of the imposition of an incremental 2% supplementary duty on recharges effective from June of 2016 on top of the 1% surcharge already introduced in March of 2016. Together with the gap in 3G network coverage versus the market leader.

Data revenue continues to be very strong at a 43% year-on-year growth, while the ARPU trend is also positive at a 2.3% year-on-year growth.

If we look at EBITDA, underlying EBITDA decreased by 6% year-on-year as a result of higher customer acquisition costs and also the higher cost of handsets, which more than offset the savings stemming from the performance transformation program. Underlying EBITDA margin was still robust at 46%, but that represents a reduction of 2.2 percentage points year-on-year compared to the first quarter in 2016.

Finally, on network, at the end of the first quarter, 3G population coverage reached 65% and the the catch up versus the competition is in line with our expectations.

Moving on to Ukraine. Kyivstar continued to deliver strong results during the quarter, despite both the challenging macroeconomic environment and a weakening currency. And we remain the clear leader in both revenue market share and NPS.

Total revenue grew 12% and mobile service revenue increased 11% year-on-year, driven by successful commercial activities and continued strong growth of mobile data revenue, which grew 70% year-on-year, driven by growing data customers, successful marketing activities and the launch of new data bundles.

The customer base grew 3% year-on-year as a result of improvements in churn and increased (inaudible) additions, which is driven by promotional activities mainly for B2C customers.

Underlying EBITDA, adjusted for performance transformation costs, grew 15% year-on-year, mainly as a result of higher revenue and lower interconnect cost. This resulted in an increase of underlying EBITDA margin by 1.6 percentage points to a very strong 53.6%.

CapEx increased year-on-year because of procurement led delays during the first quarter of 2016, while the last 12 months CapEx to intensity -- CapEx intensity ratio is trending down.

3G population coverage increased to 65%, up from 40% in the first quarter of last year.

Now move on to Uzbekistan on Slide 17. We reported solid revenue performance in that country, with total revenue growing 10% year-on-year driven by the impact of the Beeline's price plans being denominated in U.S. dollars together with successful marketing activities and increased revenues from interconnect services, value-added services and mobile data.

Mobile data revenue increased 30%, driven by the continued high-speed data network rollout, increased smartphone penetration and the launch of new bundled offerings.

The overall customer base increased 1% year-on-year, reporting the first growth since the fourth quarter of 2014 as a result of strong growth additions and lower churn, which improved on an annualized basis by 1 percentage to 48%.

Underlying EBITDA decreased 4.1%, excluding the positive effect of reversals of both litigation provision and a bad debt provision during the first quarter of 2016. This decrease in the underlying EBITDA was mainly driven by higher interconnect costs as a result of both higher off-net usage and the negative currency effect, together with increases in content cost, customer cost and structural OpEx.

The underlying EBITDA margin remains at a strong level, well above 50%.

The last 12 months CapEx-to-revenue ratio increased to 26%, despite the year-on-year decrease in CapEx during the first quarter, this is mainly due to prepayments of equipment in the first quarter -- in the fourth quarter of 2016 for deployment in 2017.

I'll now close the country review with a brief discussion on Italy, following the JVs presentation of its own results a couple of days ago. Results were solid and the synergies remained in line with previously communicated targets. Revenue in the first quarter of 2017 increased by 2.1%, driven by higher sales of mobile handsets, coupled with growth in fixed service revenue and broadly stable results in mobile service revenue, which grew by 0.4% adjusting for the leap year effect. While mobile ARPU for the quarter remained stable year-on-year at just over EUR 11.

Fixed service revenue grew by 2.3%, driven by an 8.6% growth in broadband revenue, with a solid ARPU growth close to 3%.

Underlying EBITDA, excluding nonrecurring items, grew strongly by 9.7%, driven by the stable service revenues and the realization of synergies, while the underlying EBITDA margin increased by 2.3 percentage points to 33.3%.

CapEx for the quarter totaled EUR 240 million and was primarily focused on capacity and coverage of both the 4G/LTE and HSPA+ networks, while the last 12 month CapEx intensity ratio decreased to 17.4% from 18% last year.

At the end of the quarter, the net leverage ratio was at 4.1x. Finally, the JV contributed a loss of $89 million to VEON's P&L, primarily driven by integration costs and accelerated depreciation and amortization.

If we now move on to Slide 19, which shows the group's income statement. I'll concentrate my attention below the EBITDA line. Reported depreciation and amortization increased year-on-year by 14% as a result of ForEx, in particular the appreciation of the ruble versus the dollar and the Warid acquisition.

Net financial expenses were driven upwards by the USD 1.2 billion of GTH bonds issued in April last year and the consolidation of Warid's debt.

The most visible impact this quarter comes in the line capturing the share of results from JVs and associates. The significant decrease year-on-year on this line was primarily driven by the share of loss from Wind Tre, as I've just discussed.

Taxes, in absolute terms, increased by 21% year-on-year, driven by higher profitability in countries where there are higher tax rate and a net deferred tax provision in excess of $50 million recorded in the quarter, although it's important to note that cash taxes remained completely stable year-on-year.

On profit from discontinued operations, which has disappeared this quarter, as we no longer account for Italy in this line, I just want to note that last year's first quarter results were positively affected by the fair valuations of call options embedded within Wind's bond.

I now move on to net debt analysis on Slide 20. We closed the first quarter with $7.7 billion of net debt and a leverage ratio of 2.1x. Before ForEx and exceptional items, including within which was $257 million related to the GTH share buyback and the $69 million related to the settlement of the Iraqna litigation, the leverage ratio would have been at 1.9x.

Moving on to the next slide with an update on corporate finance activities. During the first quarter, we signed a multicurrency revolving credit facility and term loan for up to $2.25 billion with a pool of global banks. Repaid bonds issued by our Russian business as 96 of the bonds maturing in 2022, what puts to us following a rate reset. We've also been working to address the refinancing of other elements of PJSC's ruble-denominated debt, aiming at both reducing the cost of debt and eliminating some of the structural limitations. These corporate finance initiatives support the group in securing a strong liquidity profile, expanding maturities and moving towards a leaner capital structure with more centralized borrowing.

In the first quarter, we also reduced the average debt by roughly 0.25 percentage points.

We now move on to the last item, financials before I get to guidance. So as already discussed, the cash flow generation in the first quarter was very healthy and in line with both our internal and external expectations. In the first quarter of 2016, we delivered $41 million of underlying equity free cash flow, but we've grown this significantly in the first quarter of 2017. The robust increase in net cash from operating activities of approximately $200 million more than offset increased cash use for investing activities, resulting in an underlying equity free cash flow for the quarter of just below $200 million.

And we now move on to Slide 23 on guidance. So our Q1 results were in line with our expectations and were in line with the guidance trend. From a revenue perspective, the impact of the leap year in Q1 was quite visible and we expect that on a full year basis, this will be absorbed, and for this reason, we confirm a full year 2017 guidance of low single-digit organic growth.

Underlying EBITDA margin in the quarter grew organically by 0.6 percentage points, in line with our guidance to deliver a low single-digit accretion in 2017.

Finally, and as I've just commented on, equity free cash flow was an underlying $194 million for the quarter, and this leaves us confident on the target for the full year.

The target of $700 million to $800 million for the full year included approximately $200 million of investment for spectrum licenses, which is what the group has typically invested in an average year over the medium term. However, 2017 might see a slight increase in the investment in spectrum. As I've already noted, we expect the Pakistan 4G spectrum auction to conclude by the end of the second quarter, and it is possible that we will also have 4G spectrum auctions in both Bangladesh and Ukraine before the end of 2017. If these were to happen, there's 2 very important points to note.

Firstly, we would've therefore, expect a pretty de minimis spend on spectrum in the next 2 to 3 years as there's no other major spectrum auctions or requirements on the horizon. And secondly, for abundant clarity, we are comfortable with being able to adequately fund any of these auctions, and therefore, we would have absolutely 0 impact on our sustainable and progressive dividend policy.

And with this, we can now start the Q&A session. Operator, please?

(Operator Instructions) We will now take our first question from Madh Singh from Morgan Stanley.

Just a couple of questions. First on Algeria. Is there any -- can you help with us understanding, when the revenue recovery might be visible? I understand that new management has just taken charge, but any help in understanding the trends there would be very, very appreciated. Secondly, in Bangladesh, also the growth seems quite volatile. And the revenue -- we consider Bangladesh as a growth market, but we have hardly actually seen any revenue growth recently. So if you could explain, is there any opportunity still left in Bangladesh? Or we should actually start looking at it as a mature market?

Andrew, you want to take both or the last?

Sure, I'll do that. So let me address Algeria, first of all. So I'm not going to give a specific time line of when we expect to get back to year-on-year revenue stability, let alone growth. But here's how I would think about it. So we knew that the first quarter of this year was probably going to be our toughest quarter from a year-on-year comparison perspective, simply because the first quarter last year where we made some of the commercial missteps, which actually gave us a short-term bump in pricing effective yields, and therefore, revenues. And then we started to suffer the customer losses, and in particular, the high-value customer losses from roundabout the end of first quarter 2016 onwards. We do see a little bit of gradual, sequential progress right now in Algeria. So I would expect that over the course of 2017, that the rate of year-on-year decline should diminish and -- but I still think that we're probably 3 to 4 quarters away from actually seeing anything approaching year-on-year revenue stability. With regards to Bangladesh, I mean as I've noted it's a very competitive market right now. It's -- the market has gone through quite a bit of transition, if you will, in the last 12 months. There's been the imposition of these supplementary duties, which clearly has increased government revenues, but has taken money directly out of the operator's revenue pool. And then in addition, you had the SIM verification exercise. And there's been a lot of aggressive competition for new customers following the completion of that SIM verification exercise. And then also you've had a merger exercise between Robi and Airtel, and that also, obviously, creates a little bit of more competitive tension in the early aftermath. So yes, I think you're right in that you described the market as being a little volatility right now. However, we would not begin to call this a mature market yet. I mean we still think that there's plenty of revenue growth to come from this market in the medium to long term. If you look at all of the normal statistics, I mean user penetration, smartphone penetration, data usage, they all lagged well behind what a mature market would exhibit. So there's a lot more upside to come from Bangladesh. And also we are going to broaden the coverage. We're still only at a 65% population coverage on the 3G network right now, so there's a lot of customers out there that don't even have the reach of a Banglalink 3G network right now. So I would not characterize this as a mature market.

And briefly on the Russian revenue trends. So if you could explain the decline in the fixed line business, and is that a trend we can see continuing during 2017?

Well, as I said in my notes, we -- so it's all driven by U.S. dollar-denominated contracts. So roughly between 15% to 20% of the Russia's fixed line customer base has U.S. dollar-denominated contracts. And therefore, with the ruble depreciating, that just simply translate into -- translates into a lower amount of ruble equivalent revenues. I mean that is almost exclusively the driver for the fixed line reduction in Russia.

We take our next question from Herve Drouet from HSBC.

I've got a couple of questions as well on my side. The first one is back on Algeria, I understand there's been some change in taxes, VAT, those type of things. I was wondering how and why could you not transfer part of it to the end user? Is it because competitions did not signal any willingness to do it? And if it is the case, do you think that can change in the future looking forward? Or do you think that current pricing does not allow that to be passed partly to the end subscribers? The second question is on Pakistan, about the subscriber acquisition cost increased. Could you give a bit more light on the reason, what is behind this -- such increase? And also on the auctions on the spectrum and the base price, which has been put up $295 for those 10 megahertz, is it for the band you are targeting? Or is it for all the bands, which are being put under auctions? So those are my questions.

Okay Andrew, I can take Algeria. Do you want to do Pakistan?

Sure, why not.

Okay. So on Algeria in terms of the increased taxes and VAT, I think that we've found it difficult, in the position that JV is into pass those on to the consumer. I think there is a few issues here to note. First, the third mobile operator, Mobilis, is extremely aggressive from a pricing point of view. So I think that at this stage, very difficult to see ARPU increases there. And secondly, the macroeconomic environment is not good in Algeria, and consumer spending is under considerable pressure, particularly with inflation on food and other items. So the context, both competitively and economically, did not enable us to pass those increases on to the consumer. Andrew, before you address Pakistan, if you want to say anything else on Algeria?

No. Nothing else to say, you've got it spot on, Jean-Yves. So on Pakistan, Herve, so let me address the spectrum question first of all. So there is just one lot of 10 megahertz of paired spectrum in the 1800 megahertz band. That's -- now it's technology neutral, so therefore it's absolutely within kind of our process, it's the absolute kind of the spectrum that we want to obtain in the country. I didn't quite understand your first question, if I'm completely honest.

So basically in term of the pricing with the spectrum, because you indicate into your guidance that your underlying equity free cash flow include, if I well understood, the average annual purchase of spectrum license in the region of around $200 million. So I was wondering, I mean do you believe what may happen in Pakistan will be included in what you consider to be the average annual purchase of the spectrum license? And/or can it also include potentially as well some spectrum inclusion on Bangladesh or you think it's out of the scope?

Oh, yes, look, clearly, as I said, the guidance on equity free cash flow for the year, I assume that we would spend, what's been our average run rate over the last 3 to 4 years of $200 million. So clearly, to the extent that we spent $295 million or thereabouts in Pakistan, that would, all of the things being equal, would put a little bit of pressure on the guidance. And obviously, we do have the benefit right now of currency tailwinds. And there's a number of other things as well. So I don't see it as being a grave danger to guidance right now. And as I said as well, I mean to the extent that it happens in a way to bring forward from next year, so really it doesn't affect how we think about the evolution of equity free cash flow over the medium to long term, and we are very comfortable with being able to fund it. So it has absolutely 0 impact on sustainable and progressive dividend policy that we've announced. But sorry, I also thought you asked some kind of question...

Yes, the EBITDA margin, so basically on the -- I was wondering, I think there was a change on the subscriber acquisition cost, if I well remember, that has...

That was in Bangladesh, not in Pakistan.

Yes, Bangladesh, sorry. In Bangladesh, sorry.

Okay, fine. Okay Bangladesh, I mean, that's driven simply by a higher level of gross additions following the completion of the SIM verification exercise. If you look at the earnings release and we've reported roughly a 3.5% year-on-year decline in customer numbers, but really the impact of the verification program would actually -- did result in 3.8 million SIMs being blocked, which in isolation would have caused roughly a 9% impact on the customer base. So, the level of clearly in order to get to only a 3.5% year-on-year reduction, the level of gross additions that we've done in the quarter year-on-year is much higher than it was in 2016. So it's a volume thing rather than a rate aspect.

We now take our next question from Irina Idrissova from RBC Capital Market.

So a few on Bangladesh for me as well. The first on the price pressures that you've seen, how is that trending into Q2? And what do you expect for the rest of the year, given the consolidation, do you expect some more rationality in pricing perhaps? And then also on the network, when do you expect to catch up to the market leader on 3G coverage? And then also looking ahead to 4G, given the possible upcoming auction, do you anticipate another large-scale network rollout or spend associated with that? Could you just give us more color on that?

Andrew, do you want to take both?

Yes. I think on the pricing side of things, we are here to report Q1 results, I'm not going to start talking about Q2. I think it's too early to say what we think is going to happen for the rest of the year. I think, I mean, clearly there's room for a little more rationality in the pricing in Bangladesh, and in particular, I think, if you think about what we've been able to successfully do in other markets such as Russia, Algeria, Kazakhstan, it's moving towards a much cleaner and simpler data-centric pricing architecture and getting away from some of the clutter that telcos typically suffer from in there, when they're still in the nascent period of rolling out data services. I think on spectrum, as I indicated when I discussed cash flow guidance for the year, there is the potential for a 4G spectrum auction in the country later this year. I think clearly we'd be interested in participating in that auction. And clearly, there would be some impact on -- in terms of having a 4G network rollout, et cetera, but that's probably a 2018 and '19 thing. And overall, long term, that will still leave us with a more efficient network architecture, right. Because on average, the cost of production of a 4G data network is up roughly only 20% of that of a 3G data network, given the propagation characteristics and the other architectural parameters, et cetera. In terms of catching up on 3G network, I think we're several quarters away from being able to catch up with the market leader when it comes to the 3G network coverage. And quite frankly, depending on how quickly the 4G spectrum auction comes along, we may never get there on 3G because it may get surpassed in relatively short order by the 4G network.

We will now move to our next question from Sergey Libin from Raiffeisen Bank.

So first one, I wanted just to have a follow-up on Pakistan, frequency auction. So how important is this block for you? And well, probably how far can you go with the price increases if the competition is significant? And could you also describe the competitive situation in the country? So what do you think whether the peers will be aggressive in this auction or not? And secondly, if you could clarify your spectrum reallocation issue in Uzbekistan. So does it mean that the whole amount of your spectrum will be withdrawn as proposed by the authorities? Or is it just some part of your spectrum is going to be withdrawn and redistributed, so that all operators have more or less par amount of frequencies?

Okay, maybe I can say a few words on both and Andrew, you can compliment. I think in Pakistan and neither Andrew or I really want to discuss any form of auction strategy and where our thinking is at. There was a previous auction last year for a block of spectrum. We did not participate in that auction because we were in the midst of the Warid transaction. If I recall correctly, only Telenor participated in that auction. So I think the competitive landscape is at a different level in the sense that I'm not sure we should expect that all 4 parties will participate in this process. So I don't think there's more to say really on Pakistan at this stage. On Uzbek's spectrum realignment, we've been through this process recently in Ukraine on an issue of fragmentation or defragmentation of the spectrum. I think we're still in very early days with the discussions with the Uzbek government on this. Obviously, alignment for us just makes no sense because the market positions are, between the 3 operators are different. And hence, I think we have a very strong case to maintain, that our spectrum portfolio should be more enhanced than any of the other 2 players in the marketplace. Andrew?

I don't think I've got any further -- anything further to add, Jean-Yves. I was just going to say the exact same thing on Pakistan though.

(Operator Instructions) we'll now take a question from Beatrice (inaudible) from East Capital.

I wanted to hear what your thoughts are and outlook for HQ costs, including the interest that you are paying currently. Is there any plans to restructure the payments and as such bring down HQ cost?

As it pertains to interest and debt structure, Andrew, do you want to take that?

Yes, sure, let me take that one. So yes -- we, as I mentioned in Barcelona, we are looking to do quite a bit further optimization of the debt structure in 2017. We've already made a good start in the first quarter by some of the actions that we've done. We see an opportunity based on where the markets are right now, to potentially refinance. I wouldn't use the word restructure like you did, but refinance quite a bit of our debt portfolio. The intent, as I mentioned in Barcelona, is to do a number of things. So we want to move towards a more balanced currency mix. The debt structure is still too U.S. dollar-centric, so we want to move to more of a broader mix, across particularly ruble, euros as a natural hedge against our investment in the Italian JV dollars and also increasing our exposure to some of the currencies that we have in our emerging markets portfolio. We want to move to a broader mix of -- in terms of the type of debt, by which I mean today, we are too dependent on bonds and we want to move to a better mix between bonds, bank debt and ECA type facilities. And in that regard, clearly, the $2.25 billion RCF in term loan that we put in place in the first quarter was an important step. We wanted to remove all of the upstream guarantees and other structural limitations that we have within the debt structure. And then also start using in a more assertive manner the in-house bank through which we would bring in the debt on a more centralized basis initially, but then flow that through the subsidiary legal entity structure via the in-house bank. And that will give us significant tax benefits both within the in-house bank itself, but also by gearing up some of the OpCo legal entity structures and get a better tax shield at the operating level as well. And in doing so clearly, I help with the upstreaming of cash to headquarters. So yes, we're going to continue to look at and [exclude] all of that in the rest of 2017. And we expect that we can achieve quite a material reduction going forward in both our headquarter's interest costs and in the tax costs, more generally, across the group. And as I noted, I think in Barcelona, the full year impact of -- full year benefit of those initiatives, which would obviously only come into effect from 2018 onwards is probably the main reason why we see an increase in equity free cash flow for 2018 to at least $1 billion compared to the $700 million to $800 million that we've guided to for this year.

Our next question comes from Alexander Vengranovich from Otkritie’s.

Two questions from my side. So first on the spending, on the frequencies in Bangladesh and in Pakistan. How do you plan to finance these acquisitions? Do you think you're going to manage these acquisitions via like own funds these business units? Or do you think you need to acquire some external funding from the headquarter? And just can you also confirm that this like additional spending on the frequencies will have no impact on your dividend guidance? So I understand there will be some negative impact on equity cash flow, but can you just help us to realign these 2 things like the dividend and equity cash flow? So this is it.

Okay, I think the question is for me, Jean-Yves.

Yes, but maybe just going to take maybe the second part just to reaffirm what you said in that, we see this hump of spectrum investments in 2017 potentially having some bearings on our equity free cash flow guidance, but no bearing on our dividend and progressive dividend policy. And as Andrew said, we would expect, if we have these auctions in Pakistan and Bangladesh that its subsequent years, and particularly in 2018, that our sort of $200 million assumed per annum spectrum would be greatly reduced. So I think we can only reaffirm those statements. In terms of financing, Andrew, Pakistan and Bangladesh?

Yes. I mean Ukraine, so yes, in terms of funding, without being overly specific, we are very comfortable that we're going to be -- we would be able to fund any of those auctions in local currencies using either the cash that's all already being generated by those operations or by putting in place additional financing instruments in the countries.

We will now take a question from Alastair Jones from New Street Research.

Just wanted to talk briefly about Russia. I mean, we saw an improvement in your overall revenue growth, it was mobile service revenue growth and it was flat last quarter, it's up about 2% readjusted for the leap year effect. What sort of driven that improvement in revenue growth? Is it to do, more to do with consumer spend? Is it to do with competitive pressures, may be easing a little bit? And in relation to that, can you talk a little bit about your tariff strategy? We've had price increase from the other guys and removal of unlimited data plans. I'm just wondering what your thinking is going forward? And then the second question, just also on Russia in terms of the margins, we saw a slight increase in the margins of 40 bps year-over-year. I know you're still guiding for the group as to low single-digit improvement in margin. Is it right to assume then that you feel that there could be some further increases in the margin going forward in the rest of the year? Or is there anything sort of specific you can talk about why you think maybe margins might tick up as we go through the course of the year?

All right. I can take part of that question, Andrew will complement. I think what we've seen is a more stable market following a degree of stability that was reached in Q4 in the Russian marketplace, certainly much better than what we saw in the first half of 2016. We've been advocating, I think, of the top 3 operators that the market really needs to move from voice-centric pricing to a data-centric pricing. We took early decisions in 2016 to exit the unlimited medium large-screen bundle, data bundles. And as we continue to change our tariff structure, we hope that the market is going to follow and hence create, I think, even further stability and potential, further stability in the mobile revenue growth trends that we've recently seen. So I think that's the context overall. Andrew, do you want to add some details in particularly on margins?

Yes. Thanks, Jean-Yves. Thanks for the question as well. Well, I think, Russia -- Russia's first quarter margins, for the first quarter -- probably on balance in line with our expectations. I think it would be fair to say though, that for the first quarter, it's probably going to be a slightly easier comparison for us, than other quarters because we did have a couple of commercial issues around bad debt costs and overly subsidizing devices in the first quarter of 2016. So I would not get overly carried away with a 40 to 60 bps improvement in underlying EBITDA margins in Russia for just one quarter. There's a lot of hard work to do to stabilize the margins and really radically transform that business, as there is across the rest of the group. So yes, I would say that, overall, we're pleased with where margins are in the first quarter. Again, we've got roughly across the group a 60 bps organic year-on-year increase. Now that is not adjusted for the leap year effect, right? When you actually adjust margins for the leap year effect, which is obviously a real thing, you can't loose a debt in a quarter and pretend as if nothing happens. The underlying margin growth on a day-for-day or like-for-like daily basis is actually well over 1 percentage point up year-on-year. But that's still within the confines of a low single-digit accretion guidance for the year. So I think we are pleased with where we are, but we are not, I wouldn't get overly bullish and start thinking that we are going to -- talk about materially different guidance on margins as we go through the rest of 2017.

Thank you and Andrew, as we've now slightly overrun the time for the call, which is okay, if there are any further queries or questions, please feel free to contact us at IR here in Amsterdam. Before handing over back to the operator, we'd like to thank you for your attention, participating on the call and would like to wish you a very pleasant remainder of the day. Thank you.

Thank you, sir. Ladies and gentlemen, that will now conclude today's conference call. Thank you for your participation. You may now disconnect.