VEON Ltd (VEON) 2018 Q1 法說會逐字稿

Good day, and welcome to the First Quarter 2018 Results of VEON Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Richard James, Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and welcome to VEON's First Quarter 2018 Results Conference Call. Today, I'm pleased to be joined on this call by Ursula Burns, VEON's Executive Chairman; Trond Westlie, VEON's Chief Financial Officer; and Kjell Johnsen, VEON's Interim Chief Operating Officer and Head of Major Markets.

The presentation will start with opening remarks from Ursula, followed by Trond [taking] us through the group results, then handing over to Kjell for the country review, and finally finishing with Trond, who will reconfirm our 2018 outlook. At the end of the presentation, we'll open the line for Q&A session.

Before getting started, I'd like to remind you that we may make forward-looking statements during today's presentation, which involves certain risks and uncertainties. These statements relate in part to the company's anticipated performance and guidance for 2018, future market developments and trends, operational and network development and network investment, and the company's ability to realize its target 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 earnings presentation, each of which include reconciliations of non-IFRS financial measures presented today, can be downloaded from our website.

I'd now like to hand over to Ursula for opening remarks. Ursula?

Thank you, Richard. Thank you for taking the time to join us for the quarter 1 results call. My name is Ursula Burns and I'm the Executive Chairman of VEON. As you may know, I took over as Executive Chair at the request of the board in March, following the departure of Jean-Yves Charlier. The VEON that Jean-Yves left is much better than the VimpelCom that he joined. The company has made good progress in the past years. The board has begun the search for a new CEO, and we will let you know as soon as an appointment has been made. Meanwhile, we have a strong and talented management team in place. Our VEON regional CEOs are well -- all experienced leaders in their markets and the leadership team has a wealth of knowledge of telecoms, generally, and beyond, specifically.

Joining me on the call are 2 members of that team, Kjell Morten Johnsen, our Interim Chief Operating Officer, responsible for the markets operations; and Trond Westlie, Chief Financial Officer, who many of you already know. They will update you on what we consider to be a good start to the year and take your questions on our financial and operational performance.

I took the role as Chairman of VEON, because I saw an exciting company with strong prospects and real upside potential. With nearly 250 million customers, VEON operates in some of the world's highest growth telecom markets and great -- with great untapped demand for digital services. I look forward to bringing my experience to the role having served as a CEO and Chairman of a major global technology firm as well as my knowledge and experience gained serving on major corporate boards.

The telecom industry is going through a fundamental change. When I was at Xerox, we experienced a similar time of transition and I clearly see how some aspects of my -- of our successful approach at Xerox can be effectively deployed here at VEON. We need to focus on the future, embrace the digital reality, bring our people with us and stay ahead of the curve. This means, continuing to develop a digitally-centered business model by investing in new technology, digitizing the core, and developing truly innovative services.

The board and the management team remain committed to the strategy, but clearly, in this industry, the strategy must evolve in response to market developments and customer needs. It is in pursuing this course that we will meet the expectations of the market and our shareholders. Some good progress has already been made here, although there is of course more work to be done. One of my first priority is to look at the role of headquarters and to build a simpler, smoother and more operationally effective business that is really focused on delivering sustainable value for customers and investors.

We have a business model that is targeting circa USD 1 billion of equity free cash flow on an annualized basis from revenues of about USD 9 billion. This is an impressive financial performance and shows that we are successfully doing what public companies should do, returning cash to shareholders.

I should say that I'm very happy to have the opportunity to talk to you today on this call, but this will not be the norm. As a general rule, you should expect Kjell and Trond to lead on these calls, pending the announcement of the new CEO. I will now hand over to Trond and Kjell, who will run you through the group highlights and financial results for the first quarter. Trond?

Very well. Thank you, Ursula. Good morning, everybody. Going then to the slide that you hopefully have downloaded or see on the screen and going to Page 3, the key developments for VEON in the first quarter. We see a good organic growth, both in revenue and EBITDA as well as good cash conversion and have an equity free cash flow of $334 million, excluding licenses. And in addition, we are also confirming the guidance that we gave in February for 2018.

Just short on operation -- Kjell will come back with more on that later. Russia, returning to trend and saw a normalization in the EBITDA. And we have continued strong performance in our strongholds in Pakistan, Ukraine, and Uzbekistan. The operational turnaround is in progress in Algeria and Bangladesh, but top line as well as EBITDA remain under pressure year-on-year, and Kjell will come back to more on that as well. [There's] pressure on revenue element in our Italian JV, but synergies is on track, offsetting the top line impact on the EBITDA. In the first quarter, we also acquired spectrum in Ukraine and Bangladesh and we have now launched 4G/LTE in all our operating countries.

In Russia, the Euroset integration and the rebranding into Beeline monobrand stores is on track. And while we're at Russia, I'll give you now our current best estimate of total Yarovaya law expenditures. We see that the total expenditure over a 5-year period, we estimate to be around RUB 45 billion, of which approximately RUB 6 billion will be spent in 2018.

In first quarter, we also withdrew the Mandatory Tender Offer on [JTE] -- GTH and the reason for that is the lapse of time and absence of approval from the regulators in Egypt. And the last point on the slide, I probably won't have to tell you, since Ursula has given you an introduction on her own.

Going then to the financial numbers for the quarter -- on the quarter -- on Page 4. The total revenue is $2.3 billion in the quarter, and it's really driven by Russia, Pakistan and Ukraine, giving us an organic growth of 3.2%. On the reported element, we are showing a 1.4% decline and that is driven by the devaluation of the Uzbekistan som. That is the overriding element of the ForEx change year-over-year in this report.

Mobile data revenue is increasing, a good increase during the quarter of 23% organically, and just short of 16% in reported numbers. And that leads us to an EBITDA of $854 million. And the organic part is here as well, driven by Russia, Pakistan and Ukraine, with the decline in Bangladesh and Algeria. Also here on the reported element is the Uzbekistan som. That is really the major impact on the difference between organic and reported. But we're also delivering a very good margin this quarter of 38%.

CapEx is $355 million, slightly -- or up from last year, it's due to 2 elements. We are focused on the quarterly distribution making -- or focusing on having heavier CapEx spending in the beginning of the year, to even it more out throughout the year. That is one of the reasons. And that leads us to a CapEx revenue ratio of 16.4% on the last 12-month average. Having said that, here we do expect to be around the same level or around the 15% level for the year. The equity free cash flow is $334 million and I'll allude more to the details of the evolvement and comparables later in the presentation. So overall, a good first quarter for VEON.

Going then to Page 5 on the bridge for the revenue development from first quarter '17. On the top of the slide, you see that we show an organic growth of 3.2% and that is driven by the growth in data and MFS. Voice is coming down year-over-year with $56 million and that leads us to an increase or to organic revenue of -- short of $2.4 billion.

If we go on the bottom side -- on the bottom of the slide, you see the country development. And it's really good trend lines on all or most of our markets, led by Russia and Uzbekistan, with an increase of $31 million each. And then you also see the trend line of Algeria, Bangladesh, trending downwards year-over-year.

Coming to the ForEx, it really is -- for the $107 million, Uzbekistan negative effect on the ForEx is $108 million in this quarter, and Russia has a positive element of $38 million, and the rest have a negative element of $39 million. So it really is the Uzbek currency that drives the ForEx development in the quarter.

Going then to the EBITDA development on Page 6. Good traction here as well. 6.3% organic development and that is driven by the increase in service revenue and only moderate increase of $61 million -- I'm sorry -- and only a moderate increase of $7 million of costs, leading us to an organic EBITDA development of $915 million. And here you have the ForEx and Other. ForEx in the $60 million is $51 million, and that leads to the $854 million in EBITDA. Here is also Uzbekistan that is the overall element with $48 million of negative development year-over-year.

On the bottom of the slide, you see the country evolvement. And here it is driven by Russia and Pakistan with, respectively, $29 million and $31 million increase. And you also see the trend line on Bangladesh and Algeria with $21 million and $20 million negative development. And that leads us to the $854 million, which is slightly -- decline in reported EBITDA.

Moving to corporate costs in Slide 7. As we stated in February in our Q4 presentation, we are very focused on reducing corporate costs and we do expect to realize savings around 20% year-over-year, from 2017 level of $430 million. In Q1, corporate costs were at $80 million, it's slightly up from last year. That is driven -- that increase is driven mostly due to severance costs, which is partially offset by a release of provision for long-term management incentive plans. So all the initiatives to address corporate costs are progressing and in line with expectation.

So with that part of my introduction, I leave the word to Kjell.

Thank you, Trond, and good morning, everyone. I'll try to take you through the operations of VEON. Starting off with Russia, where I'm happy to say that we have reported good results in Russia, good EBITDA, returning to the trend after Q4, which was impacted by non-recurring costs. However, we expect the macro economic and market conditions to remain challenging, as to the result of the recent weakening of the ruble.

Total revenue increased by 2.9%, driven by 3.7% growth in mobile service revenue and growth in sales of equipment and accessories, partly attributable to the additional monobrand stores, following the Euroset integration.

We continue to see good growth in mobile data revenue of 8% year-on-year with other value-added and mobile financial services offsetting the decrease in voice revenue. As a result, we've seen a year-on-year growth in ARPU of 4.4%, supported by successful upselling activities and continued efforts to simplify tariff plans. Also supported by increased penetration of bundle propositions across the customer base.

Fixed-line service revenues decreased by 8%, which is an improvement in the declining trend compared with previous quarters. This decline was mainly due to a decrease of foreign revenue in legacy contracts and a decrease of transit traffic revenue, which were partly centralized at VEON Wholesale Services, a group division centrally managing the arrangements of VEON group companies with international carriers.

We continue the turnaround of our fixed-line services via the modernization and expansion of the fixed-line networks, improving service quality, reducing connection times and offering superior propositions, such as the FMC offering. And the FMC customer base continues to grow, now at 925,000 customers at the end of Q1, 2018. EBITDA increased 4.7% year-over-year and normalized at a margin of 38%, which is an improvement of 2.3 percentage points quarter-over-quarter and 0.7 of a percentage point year-over-year.

The Euroset integration is on track, and we completed the integration of around 800 stores by the end of April 2018. The Euroset integration costs were approximately RUB 600 million during the quarter, as we closed the transaction at the end of February 2018 and we continue to expect approximately RUB 3 billion of negative EBITDA impact for the full year of 2018. We, therefore, of course, continue to expect negative impacts on the EBITDA and EBITDA margin, driven by integration costs and the change in revenue, respectively. We do not advise to extrapolate the year-over-year growth of EBITDA that we saw in the first quarter to repeat it for all quarters of the year.

As Trond talked about, we have now more clarity on the Yarovaya. And the key numbers are; a total expenditure of around RUB 45 billion CapEx and approximately RUB 6 billion of that coming in 2018. So again, we will then have to restore voice and SMS from the 1st of July this year and data communications for 6 months, and so the 1st of October of this year.

Moving then to Pakistan. Pakistan continues to show growth, both in terms of revenue and customers, despite competitive market conditions. Total revenue grew by 5.7% year-over-year, driven by mobile data revenue growth of 34%, supported by growth in data customers as a result of higher bundle penetration and continued data network expansion. After the completion of the network integration with Warid in Q4, 2017, just now -- is now able to offer 4G to all of its customers.

EBITDA increased by 20.1% year-over-year, driven by revenue growth, OpEx synergies, and the phasing out of merger integration costs, leading to a strong EBITDA margins of 47.5%, which is up 5.7 percentage points year-over-year and 1.8 percentage points compared to Q4, 2017. CapEx doubled year-over-year during the quarter, mainly due to the 4G network expansion.

Then moving over to Algeria, where the operational turnaround of Djezzy continued in Q1, 2018, despite a challenging macro, regulatory and competitive environment, which remains characterized by inflationary pressure, import restrictions, new taxes and strong competition. And the telecom share of wallet, overall, it's on a significant pressure in Algeria. The result is that revenue is still under pressure, decreasing by 9.3% year-over-year, with a customer base reduced by 4.5%. However, we do see positive development, as initiatives start to pay off. We do see good uptake of the new price offers, we do see an increase in the quarter-over-quarter customer base, and we do see strong growth in data revenue, 80% year-over-year, driven by new commercial offers and leveraging on the 4G network leadership.

EBITDA deceased 17.3% year-over-year. However, we have seen a quarter-over-quarter EBITDA margin improvement. So in summary, for Algeria, we are confident that we're on the right path. We have the strongest network performance, we have coupled that with improved distribution, leading to a good relative performance versus peers. But there is still work to be done and we expect the results for the turnaround to become visible at some point in the second half of this year.

Then moving over to Bangladesh. The market is still characterized by intense price competition. And we continue to see pressure on revenue, which is down 10.6% year-over-year. However, Banglalink is much better equipped for a turnaround after the spectrum auction in Q1, 2018. 4G was launched in February, with rollout gaining pace and now covering 12% of the population. Customers grew 5.6% year-over-year, supported by improved distribution in the form of 11,000 new outlets.

Data revenue grew 8% year-over-year, with the acceleration of data customer growth at 21% and doubled data usage. EBITDA decreased by almost 30% year-over-year, due to the decline in revenue and customer -- increasing customer acquisition costs and OpEx-related network expansion. The increase in CapEx was driven by investments to improve network resilience and the 4G launch and rollout. So I would say my final comment on Algeria applies to Bangladesh. We are making good progress, having fixed the structural disadvantage and purchased new spectrum. We have also improved our distribution. We're confident that we're on the right track, but we don't expect the results of the turnaround to be visible before at some point in the second half of this year.

Then moving on to Ukraine. And I'm happy to say that Kyivstar continued to deliver robust results during the quarter. We secured a 4G license, both in the [2.6] and 1,800 bandwidth and launched 4G in April 2018. Ukraine was behind few countries with respect to the launch of 4G, which they also were on the 3G launch, and we expect a strong uptake of these services. Kyivstar is well positioned to benefit from this. Total revenue continued its double-digit growth, up 10.1% year-over-year, driven by continued strong growth of mobile data revenue, which grew 59% as a result of growing data customers and successful marketing activities, stimulated by the continue rollout of the 3G network and data-centric traffic -- tariffs.

As a result, data consumption per user more than doubled in Q1, 2018, compared with the same quarter in the previous year. The customer base grew by 1.9% year-over-year, driven by improved churn. EBITDA grew 16.4% year-over-year, driven by higher revenues, leading to a high EBITDA margin of 56.6%. And then to coverage. 3G population coverage is at 74.5%, up from 65% in Q1, 2017. Strong quarter for the Ukraine.

In Uzbekistan, we also see another quarter of strong revenue performance, despite the liberalization of the Uzbek som on the 5th of September 2017. Total revenues grew 20.1% year-over-year. The company's tariffs, which were previously tied to the U.S. dollar were fixed at the pre-liberalization FX rate of UZS 4,210 to the dollar, which is a higher level compared to the prior year.

Mobile data traffic more than doubled, driving mobile data revenue growth of 38.9% year-over-year. We see strong uptake in 4G as we expand outside of the main cities. We expect to end this year with 25% to 30% 4G population coverage, which currently stands at 23%, up from 8% in Q1, 2017.

EBITDA increased 4.5% in the quarter, driven by revenue growth, but partially offset by mainly non-controllable costs, like the customer tax increase. Customer tax doubled year-over-year, impacting the EBITDA margin by [8.5 percentage points] year-over-year. And we repatriated approximately $40 million from Uzbekistan in 2 tranches in March and April 2018. This was executed at market rates and we aim to repatriate excess cash in the remainder of 2018. The spectrum was reallocated among all operators from April 2018 and we expect no material impact.

And then turning over, last but definitely not least, to Italy, where the management already have disclosed the results, so we will just do a summary. There's no doubt that the competitive environment in Italy is very tough, also ahead of Iliad's market entry. This is reflected in the results, although this has been mitigated by the delivery of merger synergies.

Looking at the numbers. The revenue from Q1, 2018 decreased by 8.9%, driven by a 7.8% decline in mobile service revenue, due to continued aggressive competition, and to recap, with the launch of MVNO of TIM last year, which drove a customer base decline of 5.5% and pressure on the ARPU, which was down 1.8% year-over-year.

Fixed-line service revenue decreased by 4.2%, mainly due to an ARPU reduction of 3.9%. The good news is that EBITDA increased 5.8% year-over-year. 4.1% of this is driven by accounting, due to the application of IFRS 15, but it is a fact that we realized incremental synergies in Q1 this year of EUR 37 million, and of course, we are starting to see lower integration costs compared to last year.

Let me add a few words on the new entrants. The impact of Iliad will be mitigated by the roaming agreement they have with Wind Tre, which is a company-specific benefit that other competitors cannot benefit from. On our networks, the modernization is progressing and we will enhance user experience and strengthen the market position of Wind Tre. At the end of April, approximately 6,500 sites were modernized in 5 key cities, including, [Milano] were completed. And finally, the leverage ratio at the end of Q1 was 4.4x EBITDA, and the contribution to VEON P&L is minus $130 million.

And then, over to you Trond for summarizing.

Yes, and thank you again. And then we are on Slide 16, on the Q1 income statement. And I will not allude to the numbers that I already commented on earlier. But starting on the EBITDA of $854 million, slightly down from -- on reported numbers from last year and an operating profit of $362 million, slightly up from last year. The net financial income and expenses is the interest expense and the increase of debt was offset by lower interest rate and therefore, it's on the same level as last year.

Next number I'm going to comment is the share of loss from joint venture of $130 million coming from Italy. You see an increase of loss of $30 million. The underlying elements coming from Russia is though positive, because the number coming from Italy in 2018 were $102 million and then we have an accounting adjustment of $27 million, that leads us to a loss of $130 million. Last year, the loss from Italy was $271 million and the purchase price allocation adjustment on accounting was a positive of $182 million. So the underlying development of Italy is Improving, even though the number is slightly increasing in our P&L. That leaves us with a profit before tax of $37 million and taxes of $119 million, a decline from last year, Two elements driving that; less tax in high taxable countries as well as the devaluation of Uzbekistan that drives also this number down. And that is loss from continued operation of $82 million and attributable to VEON shareholder a loss of $109 million in the quarter.

Going on to cash flow statement on Page 17. Good progress in cash flow in Q1. Starting on the EBITDA of $854 million, you see a positive development if you compare quarter 1, '17 to quarter 1, '18, both in provision, net interest paid and income tax paid, and that leaves us with a cash flow from operating activity of $702 million, short of $120 million better than last year.

CapEx is higher, as I've been talking about, due to the quarterly distribution mostly, and then the effect of the working capital related to CapEx not changing too much in the first quarter and therefore, an improvement from last year. And that leaves us at equity free cash flow before spectrum and license acquisition of $334 million. I'd like to point out that please do not use the first quarter cash flow as a proxy for the next 3 quarters, because it has been a good efficiency when it comes to provision and working capital in the first quarter. And as a result of that, we are guiding on a lower number than using this as a proxy.

Going then to the net debt development on Page 18. I think I explained most of the details on previous slides, so I'm not going to go into details. So that the net debt increase is by $225 million, leaving us at a net debt of $9 billion at year-end. That is up from $8,740,000,000, leaving us at a leverage ratio of -- last 12 months of 2.5x. I think it's important to say in this -- on this slide that this is of course an increase due to the fact that we have paid licenses of more than $300 million and paid just short of $300 million out in dividend and -- so that we see this as the peak of this year and we are likely to come downwards on the net debt side going forward. We do not see any new spectrum or license payments the rest of the year, even though that there will be some smaller additional payments on the existing purchases in the next 3 quarters. So all in all, trending in the expected development and seeing this as the peak of the year.

Going then to our targets for 2018. We had a good start to the year, particularly in our largest markets. And I'm pleased to reaffirm our guidance for the year for flat-to-low single digit organic growth in total revenue and EBITDA. We are also reaffirming our expectation for the equity free cash flow, calculated on 2018 target rates, which we set out with our full year results back in February.

Today, we also gave you guidance on expected investment for Yarovaya law, even though that the big number is over a period of 5 years, the RUB 6 billion will come into 2018 and will put extra challenge to our target for equity free cash flow, which we are confirming the full year 2018 to still be around the $1 billion, even though it's put us some pressure on the downward element of the year-round level.

So with that, I'll open up for questions.

(Operator Instructions) We will now take our first question from Irina Idrissova from RBC Capital Markets.

Just a couple from me please. So on Bangladesh, now that you're rolling out 4G and have a better spectrum position, how long do you say would take for you to catch up on network quality to the largest player in the market? And following that, how much longer do you think will take to improve network quality perception to be on par with the market leader? And then in Russia, it looks like your mobile net adds deteriorated compared to last year, but ARPU growth has accelerated. How long do you think you can afford to kind of hold off on promotions and perhaps sacrifice some of the customer base? And also if you could give some color of the net losses in the quarter, how much of that was perhaps on the second SIMs that aren't being used a lot?

Well on Bangladesh, I mean it's a very important change for us now that we have a spectrum situation that allows us to compete in a good way in the market. And we are rolling out the 4G network, so I think we're already seeing a completely different customer experience there. And I think you know as well as me that the real experience comes first, and then of course the perception takes a bit more time to change. But if you look at the verdict of consumers in Bangladesh, we do see a strong relative performance (inaudible) coming from, for the first time in a long, long time. So the early signals are very encouraging. But I'd like to underline that this is not something that is turning around in 1 quarter for 1 specific event, we need to keep this movement going for quite some time before we declare victory that we lined up, but early signs, very encouraging. When it comes to your question on Russia, I think the Russian market is fundamentally going through a change, going away from focusing on customer numbers to focusing on value, ARPU, and profitability. And we also see that distribution is changing a lot and we took leadership on that by phasing out the Euroset Corporation and move towards more monobrand. So I expect that the overall market in Russia will see production of overall sales in the area of 20%, 25% this year for all players. But I don't think the customer base of each individual top 3 operator will change dramatically. We believe that this is the right course of action and we also think it's right to move away from the alternative distribution that has been such a big part of the Russian market to lower sales, more stable customer bases, and driving more ARPU and value in the market.

We will take our next question from Olga Bystrova from Credit Suisse.

A question about leverage. Obviously, your leverage continues to trend up a little bit. Given current level of net debt to EBITDA, are you still committed to 2x target, and perhaps if you can tell us how and over what period of time you're planning to get there? And also under what leverage scenario will you be hesitant to pay interim dividends this year?

When it comes to the leverage -- yes, please.

No, I said Trond why don't you take that question?

Yes. So when it comes to the leverage, we are slightly up this quarter. And as I said, we expect to come downwards on the net debt level towards the remaining part, due to the fact that we do not see any purchases or acquisitions of new licenses. And going forward, we actually do think that the trend line is according to what we planned. So I do think that we have to acknowledge that we have to manage both our dividend as well as our leverage. But having said that, our commitment of paying the -- according to our dividend policy, still remain and we believe that we have the plan to manage both and come closer -- or being towards the 2% -- 2x leverage ratio within the 18 to 24 months, as we said in February when we came with our statement. So on the -- the development is the same, leverage is according to what we have expected and going towards the 2.0x level in 18 to 24-months, but are committed to continue on our dividend policy as such.

Okay, that's very clear. And perhaps as part of this question, Uzbekistan, can you update us on the tower deal in Pakistan, what are your expectations for the timing of completion and cash payment (inaudible)?

When it comes to the Deodar transaction, we are still hoping for closing that before -- in the first half. And still 2 outstanding approvals from government, in our governmental bodies in Pakistan. The rest of the closing procedures is clarified between the parties, so here the really outstanding element is for the government approvals. Having said that, we are depending on the government approvals and therefore, timing is of course a bit more uncertain. But our targets -- or both the parties' target is to have it closed before the first half -- the end of the first half this year.

We will now take our next question from Madhi Singh from Morgan Stanley.

First question is on Italy. Given such significant pressure on revenues, even before Iliad actually has come into the market, just wondering what is the plan to address this revenue base erosion ahead of Iliad entry? I mean, we understand you have protection in place after Iliad enters the market, but what are you doing to address the market share loss right now? And is there a risk actually that if the current revenue trend continues in Italy that you would probably lose a significant portion of your synergy because of the revenue loss there? And secondly on dividends, given the focus on leverage, not only from your side, but also from markets point of view, would you consider cutting the dividend at some stage, just to like deleverage much faster and then maybe come out with a such attractive dividend policy?

Let me start on your Italy question. We're doing a lot of fundamental work in Italy. We have come a long way in terms of consolidating the networks, which gave a completely new user experience for the 3 customers and improved also the user experience for the customers of previous Wind. And I also said in my initial statement that we've come a long way in terms of upgrading the networks, also in some of the main cities. So this, again, helps us a lot with the user experience. We're doing a lot of work with our distribution to optimize the logistics and to make sure that we use these brands in an efficient way. When it comes to the competitive pressures, as I'm sure you know, the launch of the MVNO from TIM came about a year ago and put enormous pressure on the market. The good news for us is that we are very well on track, the management in Italy has done a good job of extracting the synergies that we outlined in the merger and they are definitely coming along and protecting, and even increasing the EBITDA in the beginning of this year versus the situation we had 1 year ago. And we expect, of course, that there will be continued competitive pressures with the Iliad launch when it comes, but I think we are much better prepared now than we were 1 year ago. And as you pointed out, the structure of the transaction that we made also with Iliad, gives us a significant advantage over the other 2 main players in the market. So that gives us time to finalize all these substantial changes we're doing to our networks, our IT systems, and our distribution in Italy.

When it comes to the dividends, it's really coming back to my last answer and say that, of course, we have to manage both our dividend and leverage in conjunction. And that means that we are having focus on both the elements. But as we see it now and the plans that we have going forward, we actually do think that the leverage ratio is going to come towards that [2.0x] level within 18 to 24 months and that is while keeping at our dividend -- keeping the dividend at our dividend policy as such, with sustainable and growing dividend. So we are -- as of now, we are planning to keep at -- both at the helm. But of course, if something significant happens, it's our -- as a management as well as the board's responsibility to look at the overall risks going forward. So it's not sort of carved in stone if something major happens, but as of now, we are planning and going ahead, because we're following the plans as we had it.

Thank you. Just following up on Italy, so the rate of revenue decline of around 8%, 9%, do you think that rate is going to remain at around that level for the rest of the year?

I don't want to give a specific guidance on Italy beyond what the management of Italy said in their own presentation to the market, they went public with their numbers just ahead of us.

We will now take our next question from Herve Drouet from HSBC.

Two questions also on my side. The first one is, your target of reaching 2x net debt to EBITDA in 18 to 24 months, what assumptions are you taking for Deodar, so for the Pakistani network sale and also for GTH minority buyout? I mean, do you include both of them happening to reach that figures, or only one of them. And if one of them or both of them do not happen, could it change your view on the dividend policy? The second question is on the Yarovaya law and the cost associated. I mean you mentioned for 2018 a RUB 6 billion cost to be incurred for that. I was wondering, have you started to incur already a part of it in the first quarter and if you can share that figures, if it is a case?

Coming back to the dividend, when it comes to the leverage expectations, the Deodar, the closing on the Deodar is within the expectations when it comes to the 18 to 24 month part. And the -- any restructuring of GTH is not into that consideration. So that's a very -- I think it should be very clarifying of what comes in addition and what's not. When it comes to the Yarovaya part, there has been no investments or expenses, except for our own internal work on making the estimates available to ourselves as well as you. But there is no investment or expenditures in the first quarter.

We will now take our next question from Stella Cridge from Barclays.

I have a couple of questions please. And the first is on the Egypt situation. So were there any discussions in the last few weeks between the company and the authorities in Egypt? And with regards to taking forward the minority buyout and what's the company's strategy going to be in the coming months with regard to this asset? That would be the first question. And I wanted to ask a second question on Pakistan. Just in practical terms, when the towers deal goes through, does the fund -- do the funds actually have to go into Pakistan, be converted into rupees and then come back out again, or is there an offshore transaction which would just be mark-to-market to the FX rate to the same, just to kind of understand how the cash will actually flow when that transaction is completed, that would great.

Very well. When it comes to the Egypt situation, I do think that as we said when we withdraw the application for the MTO that we needed to come into a more closer dialog with the Egyptian authorities. That still remains and we are embarking on that. Our goal -- our long-term goal is the same as it has been, to clean up the structural situation with GTH. And we believe that that's a right of path going forward. Having said that, the timing, the dialog, and so forth with the Egyptian government have to be on a bilateral basis and we're not going to disclose anything until we have something to disclose in that regard. And coming to Pakistan, it is a Pakistan transaction, so the money is going to flow through Pakistan, and that means that money will come into Pakistan and then we, on our end, will have to agree with Pakistani authorities on taking money out. I do think that we have a good dialog with the State Bank of Pakistan in that regard, but that is of course a part that we need to address, as a -- in combination with closing the transaction. The transaction is rupee-based, even though some part of the transaction will be in U.S. dollars.

Okay, that's fantastic. And do you have any concerns there about the recent FX volatility impacts down there, this may make the transactions in FX a little bit more challenging than in the past?

Well, as a result of the situation in Pakistan and the currency reserves, of course, there is a more challenging dialog between us and our counterparts as well as with the State Bank of Pakistan. I think, we just have to acknowledge the situation and that is part of the discussion.

We will now take our next question from Olga Bystrova.

Sorry for number of questions. But I wanted to follow-up on your assumptions on the leverage, in addition to transaction and GTH buyout. What kind of currency assumptions do you have in there? Are you taking current -- basically, is there any room for Pakistani or Algerian currency depreciation in there, or Russian for that matter? And also on Russia, obviously with the management change relatively recently, what -- how would you describe the strategy the new management will be attempting in Russia? Are there any changes to asset-light strategy there? Also, there has been several 4G license, then there is -- which we own -- did not participate in, if you could update on that, what is your thinking there?

When it comes to the FX assumptions, we are giving our planning assumptions in February when we issue the numbers. When it comes to our guidance, we have sticked to those currencies, which is RUB 60 per dollar on -- in Russia, and the Pakistani rupee is -- our planning base in February was PKR 105. We know it's a bit low, as a result of today's element. but that's the planning assumptions. And our planning numbers and guidance number are based on these and, of course, are exposed to changes when it comes to currency development. When it comes to the other part, Russia, you want to take that Kjell?

Yes, when it comes to Russia, I'm very happy to say that [Rostel] is up and running full speed and we didn't lose them, and (inaudible) in the transition there. So that is moving along very well. The team is intact and the strategy is intact. There is no major change to the strategy. Now always, strategy is a live document, so at some point you make adjustments to it, but the main trends will be in place, where we talk about focusing on value, fixing the distribution, continuing with FMC and of course, we have a job to do within the fixed business to stabilize that and return to growth. And the investments are already for some time going in that direction, so to get that up and running again. So I think the key word is stability and the good progress.

Okay. And your thoughts on 5G licenses?

Well, we do expect that there will be a 5G momentum in Russia, as in every other market, but that there is no urgency in 5G. The market is still absorbing the 4G and there is a rapid rollout, both in terms of coverage and capacities on 4G and we will return to 5G. We have announced that we are doing tests on 5G in Russia, like we do in the other markets. And we are on top of a situation, but we have no more things to communicate on 5G at this stage.

(Operator Instructions) We will now take our next question from Vyacheslav Degtyarev from Goldman Sachs.

Can you elaborate more on the competitive environment in the Russian mobile market, and basically how sustainable are trends in Russia that we have observed over the course of first quarter, and what kind of challenges do you foresee in Russia on the back of the recent ruble weakness?

Yes. I think it's a very good question. I think the market and the main players have moved away from a dysfunctional distribution model, where we saw Russia selling [110 million, 115 million] SIMs every year, we thought a meaningless exercise. I think we're seeing the trends of this coming down, maybe 20%, 25% this year. And probably that should continue with more reductions going forward. I think it's entirely possible for Russia to be a well-functioning market with total sales of SIMs in the region of 40 million to 50 million, which will be less than half of what we saw in 2017. We also see the players starting to focus on the value, rather than gross adds and the SIM market shares, which I think is a normal development that you have seen in multiple markets before. We have, of course, the outlier of Tele2, where I think it was natural for them to take an aggressive approach in an earlier stage of development and also when we were entering the Moscow market. They have now started to reach a size where they are developing a long tail also in Moscow. So at some point it will probably be natural for them to focus more on value than aggressive growth, but that is of course up to their management to consider. We see the other players, at least going in the same direction, which I think is good. And for the sustainability of these things over a long period of time, it's an open market where the people are ambitious to build stronger positions. So the development of time is always hard to predict and the momentum now seems to be good.

Okay, thank you. And with regards to the recent ruble weakness, does it somehow impact the performance?

The ruble weakness has not been that big. Of course, it will impact the overall numbers when we calculate this back to dollar terms, but if you take a 24-month perspective on it, then it's kind of not far off where it was 2 years ago, before appreciating throughout 2017. So that will have some impact on the overall numbers. But for the running operations, so to speak, in the Russian market, it will not have any kind of material impact.

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

Just on -- following up on your guidance, I mean your EBITDA was growing 6% this quarter and your guidance on flat-to-low single digit for the year. I'm aware that you got the Euroset integration costs coming through, but you are talking a fairly optimistic story about sort of the Russian competitive environment; Algeria, Bangladesh turning around; you cutting costs in headquarters. So I'm just trying to understand what sort of pressures you're expecting to see in the second half of the year, aside from the Euroset, to sort of figure out exactly what's sort of driving that -- your expectations that growth will slow down. And then related to that, just in terms your free cash flow guidance, and I see now you sort of indicated that includes the data storage law investment. So it's implicitly a sort of 10% upgrade to your free cash flow guidance, if I'm understanding it correctly. I'm just trying to understand if that is to do with your EBITDA or if you're cutting back on CapEx in certain markets where you don't need to spend as much as you initially thought of, is there anything else within that implicit guidance change?

No, when it comes to the development, I do think that we do not see, when it comes to the rest of the year and the guidance, there is no specific country going either way. I do think that we are still focusing on our turnaround case and we don't see effect until sort of late second half in that context. And that is of course going to still put a pressure on it. Going on other things, I think we are seeing a trend line during the year. If we average it out, I think we see a trend line during this year as we have seen in previous years. But -- so there is no specific comments to whether or not we actually see what kind of development we see. First quarter was a good first quarter. It has a tendency of moving a bit up and down in the markets, and that's the reason why we are still confirming our guidance as such. Going then to the Yarovaya investments that we have to do during the year. Since we have always said around the [$1 billion] level and that means both slightly over and slightly under. And as a result of that, I wouldn't necessarily put it as a 10% increase, but of course, we are seeing that a good first quarter is helping us cater for these elements, but as I also said in my guidance element, the Yarovaya investment will of course put pressure downward relative to the year-round definition, but nothing else than that. And as a result of what you're implying by cutting other elements on CapEx, no, that has not been a part of the planning process so far.

We will now take our next question from Igor Goncharov from BCS Global Market.

Just a follow-up question on the assumptions behind your guidance and behind your targets of -- on leverage and on dividends, in combination it also looks quite optimistic. Just wanted to clarify, when you formulate those targets on growing dividend and decline in leverage, do you assume any M&A transactions, which are there that we are not yet aware of? Or in other words, is it correct to assume that this guidance is based on the organic development of the company, not including any transactions that have not been announced yet?

Well, that is correct. It is based on the organic development with our FX target rates, as we have announced. And there is no additional M&A included or anticipated in this number. So -- and the only one that is anticipated in this number is of course the closing of the Deodar and the receivable money in that -- during that transaction -- or from that transaction. The other element is just according to plan and just to say that the policy on dividend is valid and progressive, does not mean any linear development as such, just to be very clear on that. But of course, there is a small history to go on. So don't do any prognosis on a linear element of what is defined as in a progressive dividend. But as I said earlier, we will manage both leverage and dividend, but within our plans as we see it for today, we are literally seeing that we are going to go forward as planned and deliver on both the leverage guidance as well as sticking to our dividend policy.

We will now take our final question from Anna Kazaryan from VTB Capital.

I have one about the denial order on ZTE. Could you just clarify which countries it might affect, apart from Italian JV and how significant might be the impact on your operations and financial results?

So you excluded Italy, where of course we do the (inaudible). We do have different levels of engagement with ZTE in different markets. In some markets we are -- they are providing the radio equipment. Ukraine is one of those markets, whereas in other markets they do part of our virtualization of the core. So we are, of course, looking into how we will work around these solutions -- these issues with ZTE, unless Donald Trump fixes it for us [set on Sunday]. These issues are manageable, they require some work and we are working on putting in place the solutions that would be needed in case ZTE is unable to deliver on their obligations to our opcos. But again, it's different from market to market. In the first half for Ukraine, it is the radio networks and virtualization, in some other markets they are predominantly doing the virtualization. Within our footprint, ZTE has a relatively low market share on our radio network. Predominantly, we are -- we have a lot of exposure with Huawei in Russia, we also have Nokia and Ericsson into our network. So there is no implication for -- in our main -- biggest market within the radio networks at all. So in short, it's an issue, but it's a manageable issue.

I would now like to turn the call back for any additional or closing remarks.

So the closing remarks for (inaudible), it's a good first quarter for VEON, both on revenue and EBITDA development, good operational performance in Russia, coming back on track, strongholds of Pakistan, Ukraine and Uzbekistan and really the operational turnarounds in progress in Algeria and Bangladesh. In addition to that, we are delivering -- we expect to deliver on our corporate cost reduction. So overall, I do think it's a good trend line from VEON in the first quarter. So with that, thank you very much for listening in and have a very good day going forward. Thank you.

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