VEON Ltd (VEON) 2018 Q2 法說會逐字稿

Good day, and welcome to the VEON Q2 2018 results conference. 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.

Good morning, ladies and gentlemen. Apologies for the slight delay, and welcome to VEON's second quarter results conference call. Today I am pleased to be joined by -- on the call by Ursula Burns, VEON's Executive Chairman; Trond Westlie, VEON's CFO; and Kjell Johnsen, VEON's COO. Presentation will start with a results overview and outline of our new strategic framework from Ursula, followed by Kjell for Q2 country review, then Trond will run through the group results and reconfirm our 2018 outlook. (Operator Instructions)

Before getting started, I'd like to remind you that we may make forward-looking statements during today's presentations, which will involve 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, network development and network investment, and company's ability to realize its target and strategic initiatives in current and future transactions.

Certain factors may cause actual results to differ materially from those in the forward-looking statements, including risks detailed in the company's annual report on Form 20-F and other recent public filings. The earnings release and earnings presentation, each 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. And thank you all for taking the time to join us for this Q2 results call. VEON's performance year-to-date has been very strong. In the second quarter, we sustained the solid organic revenue and EBITDA growth that we achieved in the first quarter. This growth is driven by growing consumer demand for mobile data across the emerging markets that we serve and underscores our strategy of focusing our efforts in these markets.

VEON is a highly cash generative company. This funds the substantial investment that we are making to support our future growth and results in significant equity free cash flow generation for our shareholders amounting to more than $0.5 billion in the first half of 2018. Based on this solid performance and our confidence in our business, I'm pleased to announce the increase of our ordinary interim dividend to $0.12 from USD 0.11 in the equivalent quarter last year, and we are reaffirming our guidance for the full year 2018.

Turning now to our strategic framework which will guide our balanced agenda of growth and discipline. Over the last several months we completed a comprehensive review of our operating model and corporate HQ structure with a goal of delivering a simpler, lighter and more efficient organization. To that end, on July 3rd we set out the 4 key priorities.

Many companies talk about emerging markets as a key driver of growth. The potential in mobile telecom in emerging markets is truly outstanding. These are markets with young and fast-growing populations, and consumers in these markets are at the earlier stage in adopting the digital lifestyles that the developed markets now take for granted.

Mobile phone penetration remains relatively low and smartphone penetration lower still, for example, at only 25% in Pakistan. This all amounts to a significant opportunity for VEON as consumers adopt the services enabled by the roll out of 4G LTE which is still at an early stage in most of our markets. The potential for ARPU growth is also attractive.

You will have noticed from our announcements over the last few weeks that we are executing on all aspects of our strategy. The sale of our Italy joint venture to our partner CK Hutchison is a great transaction for us. We will exit at an attractive multiple and will use the proceeds to strengthen our balance sheet by reducing leverage, supporting our dividend policy and investing in growth opportunities.

The sale of Italy is expected to close in the third quarter or early fourth quarter. It will, of course, sharpen our emerging markets focus and simplify our group structure. And the cash proceeds of USD 2.9 billion will have a significant effect on our financial position. More about this on the next slide.

Our offer to GTH to acquire its business in Pakistan and Bangladesh will concentrate our ownership for these key emerging markets' telecom assets and also simplify VEON's structure. We expect this transaction to complete in the fourth quarter of the current year subject to both regulatory and shareholder approval. It will have only a minor effect on our financial position. Again more on this in a moment.

As we announced on the 19th of July, we have also established a new lean operating model. This eliminates regional groups and the associated layer of management and costs, creating a flatter, more efficient structure that will give greater operational autonomy while maintaining robust compliance and internal controls.

Our operating company CEOs now report directly to our Group Chief Operating Officer, Kjell Johnsen. HQ will focus on the delivery of logical shared services and governance functions. On digital, we are in the process of searching for a new commercial -- Chief Commercial and Digital Officer to replace Christopher Schlaeffer who will depart later this year.

I want to be clear, digital is and will continue to be a core part of our strategy. We will continue to invest in our technology platform to deploy services from our core to our customers and will continue to evolve these services.

VEON's digital investment started last year with a heavy focus on back-end technology investments which is visible -- which is invisible to our customers but nonetheless vital to the successful deployment of new digital services in the future. The investment in our platform is well advanced and will enable us to deepen our engagement with customers through various digital services in local markets.

Our search for a new CEO is also progressing and we will, of course, update you when we have something to -- else to announce. Meanwhile, there is no leadership gap. The leadership team and I are operating with a keen eye on operational excellence (technical difficulty) strategy and assuring that we have a great team that is able to deliver.

Now turning to capital. We have a strong balance sheet and this is the foundation of the long-term sustainability of our business and it is, therefore, a top priority. At the end of the second quarter, our net leverage stood at 2.5x EBITDA, above our target of 2x. This is too high. On a pro forma basis, receipt of the proceeds from our Italy joint venture will take us to 1.7x. And the completion of our offer for GTH will take us up only to 1.8x, still comfortably below our 2.0 target given that we steadily -- that we already consolidated GTH.

A strengthened financial position, of course, underpins our other strategic priorities which are to support the payment of a progressive dividend based on the evolution of the company's equity-free cash flow. Reflecting the solid performance of the business and our confidence in our prospects we are therefore increasing our interim dividend to $0.12, which is progressing from $0.11 in the same quarter of last year.

I'll now hand over to Kjell for a few -- for a review of country results. Kjell?

Yes. Thank you, Ursula, and good morning to everyone. I'll start off with a little overview of all the major operating companies. And the good news here is that we see positive revenue EBITDA trends in the bigger countries here. That goes for Russia, Pakistan, Ukraine and Uzbekistan. So giving us positive organic year-on-year revenue growth -- with a similar pattern on EBITDA impacted in Uzbekistan sales by taxes and termination rates. I'll get back to that.

We have also seen yesterday the results from Wind Tre. Wind Tre's management has already commented on these numbers. I will largely focus on our operating companies.

Starting off with Russia, we're happy to see that Beeline delivers good results in the second quarter. We are growing both in revenue and EBITDA, and that is despite the Euroset integration costs. When we announced the first quarter we warned that we would not potentially be able to absorb the full integration cost of Euroset. I am happy to say that we've been able to do that through Q2. This is down to the market dynamics where we see ARPUs growing overall in the market, a relatively benign competition picture, although we do see some heavy campaign activity especially by MegaFon.

Overall, this gives us a revenue increase of 6% and coming largely from mobile service revenue growth, so this is digital service -- this is the modernization of data coming through.

6.2% growth in data revenues is exactly what we would like to see, resulting in an ARPU of plus 5.6%. So the last year-and-a-half the industry has been able to come back to focusing on driving ARPU growth.

The headline number on fixed lines is negative by 10%. We should then take into consideration that our wholesale services have been centralized. This amounts to around $600 million. If we adjust for this on a like-for-like basis we do see a fixed line revenue decrease of 4.4%. And measures are in place to turnaround the fixed in Russia and actively being developed.

Overall, an EBITDA increase of 1.2% in nominal terms despite the cost we've taken on to integrate Euroset into Beeline. Euroset integration is on track and the plan to integrate 1,600 stores by August 2018 will be delivered upon. By the end of June, we saw already around 1,400 stores fully integrated and rebranded in Beeline.

Looking at the overall distribution, we see a medium-term target of 5,500 stores that includes franchise stores. With the inclusion of these stores into the Beeline system we are able also to turnaround what used to be negative margins in devices, to positive. So the bigger volume is helping us to drive a more profitable handset distribution.

The forecast for integration costs remain unchanged at around $3 billion. And of course one of the consequences of going more in the direction of smaller brand distribution is we reduce our dependence on alternative retail. We believe this is positive for us, we believe it's positive for the industry. The alternative retail has been one of the reasons why there has been, so this washing machine effect in Russia with high churn. And we don't think that that has given lot of value neither to customers nor to the industry.

When it comes to the rest of the year, we are cautiously optimistic. We had a very strong third quarter last year. We had a little bit softer fourth quarter. So we expect current trends to continue, but we do think we should caution again expecting the same ARPU growth going forward. It will take -- it will take a huge effort on the part of the industry to keep up those trends at the same pace given the competitive pressures.

Going to Pakistan. We are in the middle of a fast rollout of 4G and Jazz is benefiting from that. We are leveraging our market leadership, and we see good revenue growth of almost 5%, and we see even stronger EBITDA dynamics at 16.8% year-over-year.

We do see of course a lot of activity in political and currency markets, although we expect these things to stabilize somewhat after the elections are now finished.

Also here we are happy to see that the revenue growth is driven by mobile data. This is exactly what this industry needs to do and what we need to do. We need to be able to monetize data going into the 4G universe.

We have increased our customer base by around 400,000 the last quarter, this shows that we have a good uptick of our 4G expansion.

The EBITDA comes partly from the increased sales and from the data revenue growth and also from OpEx synergies. We are now of course at the tail end of the integration of Warid into our Jazz operation.

So overall, I would say strong margin expansion now at 48.2%. And of course, Pakistan becoming a very profitable market in EBITDA terms for VEON. CapEx is slightly down but we are allocating the CapEx that is needed to fuel the 4G development of Pakistan and overall a pretty strong story from Pakistan.

In Algeria, I'd like to divide my comments a little bit into 2 areas. First of all, we see the trends are improving vis-à-vis other players in the industry. We see a management that handles the competitive situation really well. Unfortunately, the overall industry trend is still towards a downshifting in that market.

We do see Mobilis operating with a quality level that you will not find in the European markets overall. But Jazz is doing a good job at competing with Ooredoo and Mobilis in that market. Overall, despite doing well versus peers, revenues are still decreasing as the overall industry is under big pressure.

We are now getting into also in Algeria a significant growth of data revenues. And of course, we're going to fuel that going forward. The network investments we did in 2017 are paying off. We see 81% growth in data revenues, which is exactly what we would like to see. Still not being able to turnaround the EBITDA trends, but we do see an increase in the customer base.

So continued focus on driving the customer base and the data revenues is the remedy that we will prescribe for Algeria to return to stability going forward. Obviously, a big country with a good potential for growth if the industry gets back to a bit more rational behavior.

In Bangladesh, we have bought more spectrum. We have also rolled out 4G which has given us a stronger position relative to peers. We are driving that momentum quite actively. Overall Bangladesh is, however, a challenging market. We do see a massive pressure in the -- competitive pressure in Bangladesh. So Banglalink going forward will have -- will continue with a strategy to acquire new customers based on the spectrum and the 4G resources that we have deployed despite the negative overall trend in the markets.

The short-term results on customers is that we are growing 4.1% year-over-year. So the strategy in that sense works. We also see some sequential growth of service revenues on the back of data revenue growth. The overall picture is still that EBITDA is decreasing, and that is due to the -- primarily to the decline in revenue and some increased OpEx due to the bigger networks that we are now deploying.

The network rollout is gaining pace. We've had a very good rollout in the first 6 months of the year. So we have invested into driving the customer acquisitions. But I have to warn that the regulatory environment is challenging in Bangladesh and it's probably going to remain challenging going forward. So we are working towards stabilization in Bangladesh but it is a tricky market.

Turning over to Ukraine, very strong story, doing very well. We see good results during the quarter and still being a very strong market for VEON. We have strengthened our market position also here due to a substantial growth of mobile data at 69%, which is double-digit growth. We see growing data usage and we are about to deploy LTE 1800 based on the spectrum that we already possess in Ukraine. 8% growth year-over-year, high EBITDA margin in the mid-50%s, which is the highest in the Group, very positive numbers.

We have also very a competent CEO in place running the Ukrainian operation, and I'm devoting a significant amount of time to the Ukrainian operation.

Uzbekistan has embraced 4G. Going out of the main cities into rural areas we'll see a major pickup of 4G, leading to a revenue growth of around 10% year-over-year and of course mobile data traffic doubling. This is now turning into a data revenue growth of 53%.

The fundamentals of the company is pretty good. We have a couple of external factors that take down the EBITDA. I would then point out the tax changes that have come into force and also the termination rates that have changed in the Uzbekistan market. We are generating cash in Uzbekistan and we have also been able to repatriate money after the change in the currency policies of OpEx now. We will continue to repatriate cash for the remainder of 2018, which is a pretty good news. Let me then handover to Trond for the financial results and guidance.

So going to the group numbers, we see in second quarter a good revenue and EBITDA organic growth, leaving us at $2.3 billion in total revenue, that's a 3% organic growth and a negative 6.1% reported development year-over-year. On the currency element, Uzbekistan is accounting for 4%, approximately 4% both in revenue and EBITDA effect of that difference between organic and reported revenue.

It is the countries that Kjell has alluded to, Russia, Pakistan, Ukraine and top line Uzbekistan driving this organic growth. So the good countries are driving the good development. On EBITDA $857 million reported. It's a 4.8% organic growth and a negative 8% reported. And compared to the difference of countries driving the top line Uzbekistan, as a result of the tax issues, is not contributing on the -- on the positive note on the development year-over-year on the EBITDA. But other than that, a good progress organically on all countries.

On CapEx, we're a bit higher than last year, $400 million, due to the fact that we are pushing CapEx forward in the year. We are looking at the year-over-year CapEx to revenue ratio of around the 15% level, excluding the Yarovaya investment as we have said before. Cash flow even to last year of around $200 million, and I'll get back to some details on all of these numbers.

Going then to the waterfalls on revenue and EBTIDA. On the revenue side the trend line is continuing, voice coming down and data, MFS coming up. Looking at the strong data growth as Kjell were alluding to, we have almost a 25% growth organically that leaves us 11% growth reported on the growth. We're coming then up to the $2.5-billion-almost organic. And then the ForEx and other changes coming down to the reported number.

Of the ForEx of $220 million -- it's about $250 million in FX elements and a positive note on the Euroset element that counters that at least as the $220 million.

Going then to EBITDA. Coming from $931 million reported last year, we see revenue is driving this mostly. And you see the 4.8% organic growth coming up from the revenue development. But I think it's important also to note that organic cost is almost flat year-over-year and that leaves a better cost intensity for the operations going forward. ForEx now there is $102 million on the ForEx and approximately 15% -- $15 million on the Euroset, in fact, Kjell were alluding to that was taken in the second quarter.

Going then to corporate costs. Corporate costs were low in the second quarter of $54 million. The trend line is due to that we see personnel cost and external cost coming down. But it was also release of a provision of around $15 million, and as a result, running cost in second quarter were about $70 million. And that gives us the clarity that we are en route to deliver on our cost decrease for the year of 20% down to the $350 million level.

In addition to that, as Ursula were alluding to by the changes and the decisions to change the headquarter and the structure of the operational structure going forward, we have also set a new midterm target on the cost expectation for headquarter going forward. And that is to half the 2017 level which were $430 million at the end of 2019 going into 2020 and that is to half the $430 million, so basically around the $250 million level going into 2020.

If we then go to the income statements, I'm not going to spend time on numbers down to EBTIDA. I think we covered that. On the finance expenses, no significant development going on there. On net ForEx, it declined due to the fact that in '17 we have a repatriation of certain amounts of debt that led to a cost of $124 million and as a result of that, you don't see this -- that this year. Most of that were in Russia, and I'll come back to that on the tax line.

Then on share of joint ventures, Italy has now become held for sale and as a result, Italy is not in his number. The only number you see here is on the second quarter of '17, and that was the full impairment of the Euroset in 2017. That leaves us a profit before tax of $171 million, and that's an increase of [$278 million] from last year.

That leaves us with a tax line increasing on 2 elements of that, one is the effect of the repatriation last year that was a taxable event that took the cost down also in Russia as a result of that. And the second thing is that as a result of improved profitability in Russia, Russian taxes is coming up, and that's the 2 main elements of the changes of increased tax cost from last year second quarter. That leaves us a profit for this quarter on $32 million. And you can see profit for the discontinued operation, which is Italy, is negative of $130 million (sic -- see slide 21 - $170 million), and that leaves a net loss for second quarter 2018 at $138 million.

Going then to next page on cash flow. We have just wanted to show you the breakdown of the cash conversion in the group. And as you can see, the major contributor is Russia, Pakistan, Algeria and Ukraine. You can also see the total effect of the group operating cash flow and slight improvement in working capital, I'll come back to that. And then, interest and taxes and others having a payment of almost $300 million, leaving us an equity free cash flow for this period of around $200 million.

If we then go to the reconciliation table on the cash flow, I'd like to allude on changes in working capital. It is positive this year. It's 2 elements driving development and cash flow of which both are planned and anticipated. One is the increase in some inventory as a result of Euroset or going monobrand and having inventory that we expect to come down later this year, and then it's a few settlements that has come in that also were planned that has come into the second quarter. And as a result, upon -- even though we have inventory increases, we do see a positive development in the working capital.

Going then to provisions, it really is severance being paid, that is the majority of the negative outflow of this quarter. And then cash flow from operating activities is same level as last year on $600 million. $400 million coming in -- going out to CapEx and therefore equity free cash flow is in line with last year on $200 million.

If we turn to the net development, I think we have covered all of the different elements in the waterfall, so I'm just going to say that we're going from almost $9 billion in net debt, down to $8,645 million, that's a decline of $331 million in the quarter. And our debt ratio last 12 months is then on 2.5x.

And as we said last quarter, we expected first quarter reporting to be at the highest level of net debt during the year. And we see that that is still progressing.

Then the full year targets for '18 this year is progressing well, particularly in Russia, Pakistan, and Ukraine. And I'm confirming our guidance for the year, from flat to low-single-digit organic growth in total revenue and EBITDA.

We are also confirm -- reaffirming our forecast for the equity free cash flow before licenses, calculated on the 2018 rates to be around $1 billion. And as last quarter, I -- I will confirm that that also includes the Yarovaya investments going in for this year. I'm also going to say that as a result of that we are of course more pressured and then want to focus on the word around $1 billion.

And with that, I'll hand over the final remarks to you, Ursula.

Thank you, Trond. In short, our businesses are performing in line with our expectations. And we're on track for 2018. Our strategic priorities are clear. We are moving aggressively to fulfill our vision as a lean, efficient, emerging markets focused connectivity and Internet services business.

I would like to thank all of our colleagues for their support in realizing this vision. I'm pleased by what we have already managed to achieve, and I am confident that we will continue to deliver. We will look forward to updating you over the upcoming months and to realizing the financial benefits of our actions and our results in the 2019 financial year.

Operator, Can you please open the Q&A session now?

(Operator Instructions) We will now take our first question from Alexander Vengranovich from SOVA Capital.

So 2 questions, if I may, so on the transactions you announced basically before. So first, can you please update us on the progress with the approval of the GTH (inaudible) transactions, if there is anything new you can communicate with regards to the initial response from the regulators and how they see the transactions?

And second question is on the tower sale transaction in Pakistan. As far as I remember, it should have been closed in the second quarter this year, can you please update us what's going on there? And whether you still expect it to close this year?

On the -- of the GTH transaction, it's progressing as it's supposed to, in our view. We have given our view which we think is a fair value of the assets of GTH for Pakistan and Bangladesh. It's now within the hands of the board of GTH, and they are evaluating and as -- they are also obliged to get a fairness opinion from one local bank that they are in the process of obtaining.

When they then have reviewed the offer then we'll then take a decision whether or not to proceed and go to a general [exam]. But to our knowledge, that decision has not taken yet and they are still deliberating on the process. So it's very difficult for us to give you more insights since this is probably taken by the independent directors in GTH.

And as a result of that, we are and have been in dialog with both GTH. We've been in dialog with different minority shareholders as well as Egyptian authorities. So we are [still meeting] with all stakeholders, but we believe that we are progressing on our view from a VEON point of view on this to simplify the group structure in a good manner to stakeholders. So it's hard to say the timing of these events, but I guess GTH board will update the market as we go along.

When it comes to the Deodar transaction, yes, we were expecting that to close earlier this year. We're still missing the approval from Pakistani telecom authority. And as result of that, we are -- both parties of the transaction are still working on closing of that transaction. And we're still working actively for that.

But as a result, this has (inaudible), so long time, so it's hard to give you sort of a clear date since we have surpassed our date so far. But both parties are still working. And all issues in (inaudible) will close after an approval is given (inaudible). So, (inaudible).

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

I have a couple of questions, please. The first one is actually on the timeline actually. So I know you've given a kind of broad indication, but I was just wondering, what is the kind of specific events that we can look out for. And is there any specific date when a decision may be taken, whether to approve the transaction or not? That would be the first question.

And the second would be, so you had highlighted when you gave out the news on the Italy stake sale that you would aim to use some of the proceeds for debt reduction. So I was just wondering if you can give us an idea about how you're thinking about this. Would the priority be to reduce the cost of debt? Would it be to perhaps look at maybe the shorter-term part of the maturities? Just see how you're thinking about how you might apply those proceeds if the deal actually goes through? That'd be great, thanks.

When it comes to the Italy transactions, we have previously said that we need 3 approvals from authorities to go ahead, which is a condition precedent in the agreement, 2 from Italy and the EU. When it comes to Italy, we have got verification from (inaudible) that that approval is not needed, and as a result, we're left with 1 approval in Italy and 1 in the EU.

All of this is filed. So we expect still that -- so there's a timeline process for all of them, so we still expect to close in third quarter or early fourth quarter. But if timeline prevails for -- on both of these applications, we should be able to actually close late third quarter.

On the proceeds part, we are in the midst of that and we are working our internal planning relative to finding the structure and the capital structure going forward. The euro exposure part is going to be reduced as a result of that, so we are working different angles relative to how to reduce the exposure or the currency exposure we have from U.S. dollars relative to others and whether we can use the euros as a counter in that.

But we're also looking at potentials of increasing local currency, specifically ruble exposure as a result of that. So we are working many angles in trying to think about our capital structure but we just have to come back to you on the overall element because we are in the midst of it.

(Operator Instructions) We will take our next question from Herve Drouet of HSBC.

I've been as well disconnected so I apologize if I'm asking questions which have already been asked. The first question is regarding Russia, you mention some of your competitor's campaign. And during the call you said the (inaudible) may be potentially less high than what we've seen maybe in Q2.

I just wanted to see -- I mean looking forward for Russia do you believe we still have more data monetization than what we've seen in the past deal? And do you think ARPU nevertheless still has some good potentials from growth coming from especially data monetizations?

Second question is regarding Algeria, I understand that some of your subscribers' numbers now are kind of the stabilizing, but there's still a lot of pressure on revenue and EBITDA with still quite significant decline. When do you believe you can start to stabilize as well the revenue and then the EBITDA for Algeria? If you can give an indication that would be great.

And finally, about your guidance on equity free cash flow, I believe this is based on your targeted FX for the full year. I was wondering how much buffer do you have if the U.S. dollar continue to become stronger, that may put maybe a bit of pressure on the targeted equity free cash flow. Will you be, in your view, okay to increase debt to follow your increased dividend policy if currency is not moving the way you were expecting?

Okay, this is Kjell. I will probably do 1 and 2 and Trond will take number 3. You asked about Russian and ARPU. I think the term we would like to use around that is that we are cautiously optimistic. There is room for the industry to work on continued data monetization and through that drive a positive ARPU development.

A lot of what we have seen now has been driven by customer value management becoming more important in Russia rather than chasing gross adds, that is a positive development. And all the 3 main players have been upping their competencies in that area. The next stage will, of course, be step-by-step some of the headline numbers start reflecting the fact that the data is still very cheap in Russia compared to very, very many other markets.

So yes, I think there is a reason to be cautiously optimistic about the potential for driving ARPU in Russia. It will of course at the end of the day depend on the competitive dynamics. The good news is that the industry over the last 12 to 18 months has understood and has acted in a way that shows that the understanding of the need to monetize data is there.

When it comes to Algeria, yes, we do see an increase in the number of subs, that is due to a quite well-coordinated effort where we improved our networks in 2017 substantially and had a concerted effort with the retail approach, especially in Algiers where we had a very good approach to the market which took us back into a much stronger position vis-a-vis competition.

I think what will define whether the industry is able to drive revenue growth is whether we see that downshifting continue. DZD 1,000 is a very important price point in Algeria. If we see campaigning around the 500 price point, it's going to be hard to drive the revenues up for the industry as a whole. The moment we settled back into driving a 4G strategy with bundles and up-selling on bundles, there is clearly room for improvement overall in Algeria.

When it comes to the target for the year of the $1 billion or around $1 billion, as we say, to be precise, we do say on the target rates that we have percentage. The target rate is not too far off and so the deviance is not that great. So, in general, we do expect that we will deliver on the (inaudible) but of course, we have to cater for significant currency changes going.

We have disclosed very clearly in our report on Page 30 the different target rates, average rates and closing rates for -- that is used. So there should be no difficulty in understanding the sensitivity and the currency effect.

The -- we have worked very hard on the hedging on different currencies, specifically for the local currencies, specifically on CapEx in hard currency going into countries and exchanging that to local currency contracts. And as a result of that, there is more limited effect on the cash flow than on the top line relative to the currency effect on reporting, just to be very clear on that.

When it comes to the dividend, our dividend policy remains the same. We do have a policy of progressing dividend supported by the underlying development in the equity free cash flow. As we see the world today, getting the transactions that we have going and expect to close Italy, we see no reason for changing that policy or the certainty of continuing with that policy.

We will now take our next question from Vyacheslav Degtyarev of Goldman Sachs.

Can you describe your commitment towards the emerging markets? Do you see interest in M&A opportunities in the region beyond the countries of your current [operations]?

When it comes to our expansion strategy, what we have been doing the last few years is really to look at potential in in-market consolidation more than expanding our footprint. And we have been successful in that in many countries and we have been focusing on that. So as of now, we do not have any more plans than we already have. And when it comes to country-by-country strategy, we will update you on our next capital market or our next overview. And there is no news in that regard.

Our next question comes from Igor Goncharov of Gazprombank.

I have a couple of follow-up questions on GTH deal and free cash flow. On the free cash, you obviously reiterated your guidance, you forecast $1 billion for the year before licenses. Could you maybe give us some indication of what does it mean in terms of free cash flow after licenses for the year? That's number 1.

And number 2 is just to clarify on the usage of the funds for non-GTH transaction. If we assume that minorities of GTH do approve the sale of Bangladesh and Pakistan assets to VEON, is it correct to assume that you as a major -- as a controlling shareholder of GTH will initiate a dividend, special dividend on the -- to distribute the proceeds of the transaction between the shareholders of GTH?

Well when it comes to GTH, I do think that I previously have explained the transactions and the overview. I didn't quite get what you wanted to elaborate about dividend.

Sorry, should I repeat the question? I didn't understand...

No, on the dividend flow and the money flow from the GTH and the upstream, I didn't quite get that.

Yes, the question is -- if we assume that minorities of GTH do receive the -- do give the approval on the sale of Pakistan and Bangladesh and they receive the funds from VEON, what would be the VEON -- VEON's strategy with regards to those funds as a majority shareholder of the GTH? In particular, would VEON initiate dividend from GTH to other shareholders to distribute those funds?

Well yes, our view on that is -- well, assuming that the GTH board, as well as minority, approves our offer we will, okay, of course, go ahead by distributing the prefunds of GTH to the shareholders. What is left in GTH after that fact, after the additional dividend coming out of GTH is then the ownership of Jazz.

Jazz is a dividend yielding company and the remaining part of GTH will be without debt. So the remaining company of GTH will be a holding company getting upstream dividend from Algeria, which is sufficient both in substance and in capital to settle the potential tax claims from -- from Egypt.

And as a result of that, we do think that the transaction caters for both upstream new money to dividend -- dividend to shareholders as soon as possible or a major chunk of the value of GTH and retain the necessary value in GTH for cash settlements. While those discussion is ongoing GTH would then be a dividend-yielding company.

Okay. Thank you very much. And with regards to the free cash flow to equity after the licenses, what amount should we -- do you anticipate for the year?

The licenses this year is really the one happening -- happened in the first quarter, which is Bangladesh and Ukraine. It's approximately -- yes, a bit more than $400 million, $440 million, that is going to be paid for Bangladesh in Ukraine and has already been paid. So very little for the remaining part of the year. And the next one after these 2 is likely to be a renewal in Pakistan at the fall of 2019.

Our next question comes from Sergey Libin from Raiffeisen Bank.

I have a bit of a forward-looking question. So assuming your transactions are closed after Italy and GTH you are down to 1.8x net debt to EBITDA and our transaction in Pakistan takes it even lower. So do you have a longer-term plan of what you're going to do at quite below your target leverage ratio?

So you said you do not really plan to do any external M&A, so maybe is there a potential for additional cash distribution or any other thoughts on that? Maybe you'll be comfortable with leaving at a lower debt level? So what do you think on this issue?

Well assuming that we are closing all this going forward, you're right in your questions. So we're going down to 1.8 after GTH and considering Deodar, we are going to take a slight notch lower than that.

Having said that, I do think that this transaction in the first instance if we consider the discussion that we have been having with the shareholders of leverage until now, I think that we are going to close these transactions. We are going to look at the capitalization and the structure of the capitalization of the group.

As of now, either the board or the management had revisited the dividend policy or the leverage policy as a fact of not having a European exposure in the operations anymore. So as of now, our target is still the 2. And the dividend policy is still in place. I do not expect any significant changes to those numbers in the immediate future.

But of course if currency evolvements, other evolvements and changes is occurring, it's -- I'm not saying it's not going to happen, but as of now, we are still comfortable with 2.0, around the 2 gearing level. And the dividend policies still stay in place.

Our next question comes from Alexander Vengranovich of SOVA Capital.

So 2 questions. First one more like strategic one. So once you hire the new permanent Group CEO, what do you think in the -- in your new management like strategy and paradigm of the business how do you think the role of the new group CEO might change?

Do you like expect any subsequent changes, significant subsequent changes to the company's strategy following that or should we assume that your current strategy should not be affected by the placement of the permanent Group CEO?

And the second question is a follow up on equity free cash flow, sorry, for bothering you again. Can you disclose the size of the equity free cash flow in constant currency terms in first half '18?

Let me take the CEO and strategy question, if I may. The move that we're making in the company, the strategic direction that we have set both in portfolio, as well as organization structure, are areas that I don't expect that there will any changes to when we appoint a permanent CEO.

These are logical moves that have been thoroughly reviewed, embedded from -- with our board and obviously with the management team. So I expect the fundamental strategy to stay, to remain the same. The skillset or type of CEO, we have a very good set of operating executives in the field. Kjell Johnsen is an outstanding COO, we've made him a permanent COO there. So I think that we have an operating model that will allow the new CEO to focus a little bit more on growing the business in new areas and new ways, adding different or additional revenue streams to our businesses around the world. But the core business of us being a telecom company, strong and leading from a tech perspective will remain the same, and the new CEO will, like I said, add some skills around the edges. Strategy the same, direction the same, strong operating executives focus on emerging markets. And Trond, why don't you take the second part of the question?

I'll do that. When it comes to the organic element of the free cash flow, we don't disclose that as such. And the reason for that is that we don't disclose the working capital changes, interest payments and so forth in local currency. So we aggregate that into one. So you -- probably the best way you can get a proxy on that is really just use the proxy on EBITDA minus CapEx, but working capital interest and so forth we are not disclosing. So, I'm sorry, I cannot give you that number.

We will now take our final question from Mr. Simon Cooke from Insight Investment.

I just wanted to follow up on the use of proceeds from Italy and obviously net from the GTH transaction. So if I'm thinking right, you're getting around $2.8 billion, $2.9 billion from Italy, and you're going to spend net around $400 million buying out Bangladesh and Pakistan. I think you've flagged optimizing the balance sheet is one of your considerations with the remainder of the proceeds. Could you just talk through exactly what you're trying to achieve there and the kind of buckets of debt that you might focus on if you're I guess doing liability management or something else?

I have to revert to my previous question that was sort of the same element. We are going into a review of course of the capital structure as a result of getting these proceeds in and also that we are then taking out our exposure to euro on operational -- in the operational exposure. So we're in the midst of that, and we are elaborating on opportunities of how to optimize the capital structure going forward. But we have to get back to you on how we're going to optimize it.

So this concludes today's question-and-answer session. I'd now like to turn the conference back over to you for any additional or closing remarks.

Ursula?

Yes. So thank all of you for joining and for asking your questions. And we will continue to execute on the strategy that we've spoken about and on an aggressive plan to continue to transform the company and to participate and serve customers in the emerging markets area. We'll see you at the next -- or at least hear you at the next earnings call. So thank you for joining.

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