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

Good afternoon, ladies and gentlemen. Welcome to VEON's Second Quarter 2017 Results Conference Call. Today, I'm pleased to be joined on this call by Jean-Yves Charlier, VEON's Chief Executive Officer, and Andrew Davies, VEON's Chief Financial Officer. The structure of the presentation mirrors the previous quarterly results, with Jean-Yves starting with the key financials of the group and the business update, followed by Andrew running us through the capital structure improvements, operational results review for both the group and the key countries, ending with comments on the full year 2017 guidance. At the end of Andrew's discussion, we will open the line for the Q&A session. Before getting started, I would like to draw your attention to the disclaimer. Forward-looking statements made during today's presentations involve certain risks and uncertainties. These statements relate in part to the company's anticipated performance and guidance for 2017, including its ability to generate sufficient cash flow, future market developments and trends, expected synergies of the Italy joint venture and the Warid transaction, operational and network development and network investment, the effect of the acquisition of additional spectrum on customer experience, and the company's ability to realize its targets and strategic initiatives. Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risk detailed in the company's annual report on Form 20-F and other recent public filings made by the company with the SEC. The earnings release and the earnings presentation, each of which includes reconciliations of non-IFRS financial measures presented today can be downloaded from our website. I would like now to hand over to Jean-Yves, who, as you can see from the agenda on Page 3, will start talking about the second quarter results before presenting to you the business update on recent strategic achievements. Jean-Yves?

Thank you, Bart, and good afternoon, ladies and gentlemen. VEON delivered a strong set of financial results in the second quarter, with both revenues and EBITDA growing at double-digit rates. We are pleased with the rate of progress we are making as a company both strategically and operationally. We relaunched the company as VEON on the 27th of February, and announced our strategy to be first, a best-in-class provider of connectivity in the frontier markets where we operate; and second, to revolutionize the personal internet experience for customers with the creation of the VEON platform. Since then, we have made further headway with the business turnaround, with solid progress in transforming how we operate and how we serve our customers. Furthermore, we launched the VEON Engagement Platform in 5 key markets, a major milestone on our digital agenda. In terms of financial results, I'm pleased that we have seen a continuation of the positive first quarter trend during Q2. And not just that, but we have also posted solid organic growth on a number of metrics. Total revenues grew by 12.3% to $2.4 billion and by 3.7% on an organic basis. The key driver for revenue growth continues to be data usage, posting 30% organic growth year-on-year. EBITDA improved by 17.1% to reach $931 million for Q2, and benefited from the organic revenue growth as well as from the Warid transaction in Pakistan and positive foreign exchange dynamics in our footprint. Although CapEx increased by 17% year-on-year, this is partially driven by the Warid consolidation process, but also we believe because CapEx in 2017 will be more evenly spread over the 4 quarters than it was in 2016. Underlining equity free cash flow, excluding licenses and spectrum, growth was especially strong during the first quarter of this year, totally $491…

Thank you, Jean-Yves. And good afternoon from me as well. The first half of 2017, we made significant steps in achieving the strategic priorities for our debt structure through the series of transactions that we articulate on this slide. Let me explain broadly what we've achieved. We've transitioned from largely subsidiary to a group financing model, reducing the structural subordination of debt. We've created consistent modernized and extremely favorable bond, bank and other debt documentation across the group. We reduced the legacy capital structure complexity, increasing transparency and diversification. We've shifted the debt currency mix to better match it with cash flows and assets and we've reduced the net cost of the debt as you will see from the next slide. The steps we have taken have allowed us to issue unguaranteed bonds with the same rating as the bonds previously guaranteed or issued by PJSC VimpelCom. The next slide brings together all of the key improvements to our capital structure. By executing these transactions, we have significantly reduced our priority debt and have terminated the guarantees on $1.8 billion of VimpelCom Holdings bonds, which has led to a largely unguaranteed debt structure. The currency mix has then been improved by refinancing maturing US dollar denominated revolving credit facility via a multi-currency term loan, an RCF, and then drawing that term loan in euros. We paid the maturing US dollar debt facilities and we swapped the 4-year tranche of the new U.S. dollar bonds issued in June into euros, which will effectively act as a net hedge against our investment in the Wind Tre joint venture. And we've increased the size of the superior bank loan. Future improvements in the currency mix will continue to be a focus area for us as we further optimize the capital structure. In addition,…

Thank you. [Operator Instructions] We'll now take our first question from Emmanuel Carlier from ING. Please go ahead.

Yes, hi, good afternoon. Three questions, first, on Italy, why did you not yet refinance the debt there? Because I think there was a pretty big opportunity to save a lot of interest costs. Secondly, on Pakistan, so you announced that it's likely to sell 13k towers. Could you maybe provide an update on the amounts you expect to receive from that? And especially what you would do with these proceeds. Would you prefer to do share buyback at GTH or refinance debt at GTH? Or just use it to pay dividends at the fee-on level. And then finally, on the EBITDA margin, so it was down in the first half of year despite this, I would say strong service revenue growth. So that was due to reinvestments. But could you just give a little bit more color why you believe it will be up in the second half of year? Is that because you will do less reinvestments, and, as a result service revenue growth might also be a bit lower? Or is there anything else? Thank you.

Emmanuel, thanks for all three questions. They're rather technical. Andrew, you want to take a shot at them?

Yes, sure. I'll take them in the order that they were asked, actually. So on Italy, first of all, I wish we had the level of control that you implied, but we don't. So this is a decision for the Joint Venture Board, clearly, and not just for VEON in isolation. That's the first important point to note. Secondly, addressing the substance of the question, clearly, there is an opportunity there. And I think as the JV team articulated on their analyst call the other day, they are now starting to actually look at that. So I won't say any more on that topic right now. On Pakistan, it's too premature for us to be speculating about transaction amounts, et cetera, et cetera. I mean, clearly what I would say is that 13,000 towers means that it will be a relatively significant amount of proceeds and it will be value accretive. We've always stressed that we're only going to do genuinely NPV-accretive towers transactions and we're not going to do towers transactions that are essentially just an expensive form of financing. Now, in terms of what we might do with the proceeds, a couple of things to note. So first of all, as I mentioned in the slides, Pakistan has just spent $300 million on spectrum. So the spectrum needs to be funded. Secondly, there's a fairly sizeable amount of debt in Pakistan which has claim on most of the tangible assets in that business. So part of the proceeds will, in the first instance, go towards paying down some of the debt that we have locally within Pakistan. And then, Pakistan can consider paying a dividend to GTH. I would remind you that GTH has got itself the bridge facility that was put in place for it to do its share buyback program to repay, and it's also got interest to service on the $1.2 billion bond that was issued last year. And then finally, but by no means the least, there is a revolving credit facility in place between VEON and GTH which also needs to be repaid before GTH considers doing anything with regard to its own shareholders. On EBITDA margin, I think what we will see in the second half of the year is not so much a deceleration of reinvestment-type activities, but more, as the program matures, you're actually going to see a larger amount of gross savings generated by the performance transformation program. So that's the main reason why we are confident about second half and, therefore, full year EBITDA margins.

Okay. Thank you.

Thank you.

We'll now take the next question from Ivan Kim from VTB Capital.

Good afternoon, two questions for you, both on Russia. So in Russia your mobile service revenue has accelerated in the second quarter. So I was just wondering how do you view the competitive environment right now? Has it improved a lot? We saw increases of on-the-shelf bundle prices in the first half. And so shall we expect even a better second half 2017, which, among other things is also informed by their revisions that you started recently? And the second question on the retail and Euroset. So you say that the medium-term plan is to have 5,500 stores following the Euroset transaction, which doesn't really imply much of the reduction of your network from what I see in the numbers. Do we think is there room to optimize the distribution in Russia? And do you importantly also plan to continue to sell through multibrand stores? Thank you.

Okay. Maybe I can start and then let Andrew add to what I'm going to say. I think the competitive environment remains, I think competitive, if I can use that term in Russia right now. I think what we've seen in the second quarter is that our strategy to move to more data pricing and bundles has been generating good results. And whilst I think it's too early to say that this is going to be an absolutely continuing trend, I think we're relatively confident about the outlook right now in the Russian marketplace. I think in terms of distribution, we'll look at optimizing our monobrand footprint once it's absolutely fully in place. Right now we've got a medium-term objective of about 5,500 stores. I think that longer term, we could operate with a smaller footprint, particularly depending on what happens with multibrand distribution in Russia, and particularly the take-up of our own VEON platform and how ultimately consumers top-up and engage with us. So I think whilst we have a clear vision about 5,500 stores for the medium term, I think depending on what happens in the market place and our own internet strategy, we could very well further optimize that. I think in the short to medium term, we will continue to look at opportunities to sell through multibrand. But clearly, our medium- to long-term plan is predominantly to expand our monobrand presence and certainly focus on digital dimension. Andrew, anything to add on that?

I don't think so, no. You covered it all.

Okay.

Thank you.

We'll now take the next question from Karim Sawabini from Moon Capital. Please go ahead.

Hi, congratulations, guys, on the quarter, just a quick follow-up on the Pakistani question regarding tower sales. As you sort of look to create further value at VEON, how do you guys think about GTHE in terms of buying out or consolidating more of the business? Thanks.

I think I'll start, and Andrew can add. I think the way that we look at it is that we will always look at opportunities of streamlining the structure of VEON, and that includes GTH. Obviously, valuation is absolutely critical in any of our thinking around that. So I think that's the framework that we've set for ourselves. We've addressed, as you know, the balance sheet challenges. Obviously, if these tower transactions and particularly the Pakistan one comes through, it gives us, as management and the board, more optionality to streamline the structure wherever it may be, including GTH.

Yes, I would echo that.

And if I can just do a quick follow-up. I mean, on Pakistan, I know you've been trying for some time to execute that transaction. What's your best sense on timing now, given the move to deconsolidate at the GTH level?

Sure. So let me take that one, Karim. So, look, we've classified it as an asset held for sale. And as I noted in what I said earlier, we are in advanced discussions for the sale of that business. Now, we can't give any assurance that we will reach a sale. But clearly the fact that we have it as an asset held for sale does mean that we feel that a transaction is highly probable in the relatively near- to medium-term future. So I think that's as much as I would say right now.

Great. Thank you.

[Operator Instructions] We'll now take our next question from Alexander Vengranovich from Otkritie Capital. Please go ahead.

Yes, hi, so first two follow-ups on Russia. First one on the reason for strong growth in mobile service revenue second quarter. So I've noted that you had some significant churn decrease in the second quarter, form 16% to 15.3%. Do you think that's the major reason for the improvement of the subscriber base? And do we think such low churn is sustainable for the second half of '17? And the second question also on Euroset. When do you expect to convert all the Euroset stores into your monobrand retail stores? And once the stores are converted, do you think you may make some push on the subscriber acquisitions using the stronger monobrand network you have? And the third quick question, on Uzbekistan. Can you please provide us the update on your position regarding the distribution of the licenses in the country? Do you plan to deal within the court? Or what sort of an impact do you foresee if that decision of the regulator comes into force in September '17? Thank you.

Andrew, you want to take the first part?

I'll take the first two, and you take Uzbekistan.

Yes.

Yes. So first of all, thanks for the questions, Alexander. On the mobile revenue growth, clearly, the improvement in churn for the quarter was an important facet driving that, that growth. As we mentioned earlier, I think the slight lessening of pricing pressure as well played a part in that. In terms of second half of the year, I think we would be broadly confident about being able to maintain roughly the same kind of churn levels. The only caveat I would put around that is, as I think you know and we discussed in the past, churn in Russia tends to be a little on the cyclical side, mainly related to in- and outflows within the migrant segments, right. So end of Q4, Q1, we tend to see a bit of a surge in churn, which then dissipates in Q2 and Q3. But we actually – back to the substance of your question, we do think that we are on an underlying improved trend when it comes to churn. With regard to Euroset, first of all, we anticipate and intend that the store integration will be complete by basically this time next year, right; so by the end of Q2 2018, or thereabouts. I don't think you see us pushing be more aggressive on gross adds, per se. I mean, part of the Russian now for moving towards a more kind of a monobrand store footprint and taking more direct control over distribution is to reduce what people would describe as the washing machine effect in the marketplace, and further reduce churn and also then improve service levels and, therefore, catch of a lifetime and also ARPU improvement through upselling. So I think those are the main reasons why we are taking control of monobrand as opposed to wanting to be more aggressive on the gross additions front.

We now take the next question from Igor Goncharov from BCS. Please go ahead.

Yes, thank you very much, couple of questions. First on the guidance, the equity free cash flow guidance. You clearly provided the guidance for 2017. But in your previous presentation, you also guided for 2018, which was I think $1 billion after license fees, not excluding those. Can you maybe update that guidance, if this is possible? What do you see in terms of free cash flow in 2018? That's number one. And number two, in relation to in Euroset stores acquisitions, is this quite easy to imagine that some of the stores that you acquire from Euroset have suboptimal location by themselves, some might interrupt with existing stores of Beeline. In this relation, what's your view on potential closure of some of the stores that you acquire from Euroset or you already own as Beeline? Thank you.

Okay. I don't know where we dropped off. We're in the London offices, so you'd expect that the lines would be all good. But there was a technical problem. So I was just explaining Uzbekistan, just saying that it's not a redistribution of license, but spectrum, that ultimately we're working with the regulator and the government on these matters on timing of a potential decision and obviously how spectrum would be redistributed if the regulator went ahead with this. And obviously, we're evaluating at the same time the CapEx impact, because with a smaller spectrum portfolio, we'd have to expand our network and the number of base stations and towers to ensure that we continue with the same quality of service in Uzbekistan. I think there's not much more to say on that front for the time-being.

All right. Apologies. I suggest that we move on to the next question, please.

Thank you. We'll now take the next question from Madhi Singh from Morgan Stanley.

Yes, hi, thanks for the call. Just to follow-up on the performance in Bangladesh and I will give you – continue to remain quite weak and volatile. Can you just give some idea about how long it will take before things improve in Bangladesh, especially – and Algeria as well? Thank you.

On Algeria, we've always said that this was a medium-term turnaround. What we've seen I think in Q2 is an improvement in the underlying performance of Algeria, particularly if you strip out the Ramadan effect which was earlier this year. So if we strip all that out, quarter-on-quarter we're seeing an improvement in underlying business trends. We believe that that will continue going forward. And we, I think, see potential improvement in that business in the short to medium term. So I think we are starting to see light at the end of the tunnel in terms of the Algerian operations. Bangladesh is more linked, as Andrew outlined, to the regulatory environment and our spectrum portfolio. We are working with the government on these dimensions. And it seems that the government will hold a series of spectrum options in the next 6 to 9 months. And hopefully that will provide us with a spectrum portfolio to be much more competitive in that marketplace. Andrew, anything else to add on those two points?

I don't think so.

I do want to just follow up on the margins in Algeria. There seems to be some further, I would say dilution of the margins in second quarter. So is the second quarter margin the right place to go forward in Algeria?

No, not really. I think two things driving the margins in Algeria in the second quarter, as well as I noted there has been an impact on margins from the impact of the finance loan, the increased indirect taxes which we're not able to pass on to customers. And I guess you'd argue that is probably now a sustaining pressure on the margins. However, as Jean-Yves mentioned as well, in Q2, we did see the impact from Ramadan. And Algeria, amongst our markets, sees a much, much bigger and more pronounced impact from Ramadan than any other in terms of the almost immediate downturn in all forms of traffic volumes, which obviously translates into ARPU and revenue. So, but our cost base, obviously, there's not, except for a beneficial impact in Ramadan. So the Ramadan impact on margins for the quarter, probably a couple of percentage points. So we would expect margins for the rest of this year to be closer to the 50% mark, yes, going forward 2018 onwards as well.

Just very quickly on Bangladesh as well. The margins there also seem to be quite weak.

Yes. As I noted, margins are weak there, two reasons. We are, first of all, in a very competitive environment for gross additions. So the customer acquisition costs were higher in Q2 than they normally are. And then also we are, as I noted, trying to rapidly increase our 3G network coverage. And obviously, that doesn't come for free. You have to deploy CapEx. But then there's also the operational and maintenance costs associated with having a larger network footprint as well. That acts as a bit of a drag on margins until you start to successfully recover the customer and the revenue market shares that you would hope would lead from the increased network coverage.

That is very helpful. Thank you.

Thanks. Operator?

We now take the next question from Igor Goncharov from BCS. Please go ahead.

Yes. Thank you very much. I was trying to ask a question before the interruption. So maybe excuse me if I'm just repeating myself. But I had two questions.

Well, we didn't hear it, so it's a good thing.

Yes. So I had the questions. One was on guidance. You provided guidance on the free cash flow to equity before licenses payments for the year '17. But previously, your previous presentation, you also guided for the free cash flow, although after licenses for the year '18, which was more than $1 billion. Is it possible to update this guidance? And can you provide indications of what will you expect for the year '18 in terms of free cash flow? And second question on Euroset. Just was wondering what's your plans in terms of closing some of the outlets that you acquire or that you own already? Because it's easy to imagine that some of the outlets now have suboptimal locations by either interrupting with existing ones or maybe just because they have been located poorly initially. Do you plan to close some of the existing ones or some of the Euroset, some of those that you have acquired from Euroset? Thank you.

Andrew, you want to take…

Yes, I'll take both of them. So first of all on guidance, so, yes, you're right, Igor. So we guided previously for this year on equity free cash flow after license costs, and that was $700 million to $800 million, but obviously $200 million of annualized investment in spectrum. And we now guide on basis of excluding spectrum license costs, and that range is now $900 million to $1 billion. Similarly, when we guided towards $1 billion for 2018, that was after licenses and also included the same assumption around an annualized average of $200 million for license cost. So we broadly still think that that's a good number and we're confident about achieving that. Now, if you wanted to kind of wanted me to reframe it in the way that we have done for this year's guidance, I guess what we'd say is that excluding the investment in spectrum, that we now expect equity free cash flow to be at least $1.2 billion for next year. But it's the equivalent number. And on Euroset, I think it's a bit too early to speculate in detail. But clearly, there is an overlap in a bit of the footprint. You've got some stores that are too close proximity to each other. So there will over time undoubtedly be an element of store rationalization. But it is still too early to speculate as to both the quantum and the geography of that rationalization.

Excellent. It’s very helpful.

We'll now take the next question from Olga Bystrova from Credit Suisse.

Good afternoon. I want to ask a question about the dividends. So obviously your underlying equity free cash flow was pretty strong. When you look at sort of your ability, willingness to pay dividends, do you focus only on this metric, so you actually somehow look at actual figures for which was affected by also maybe recurring – on nonrecurring items? And also, can you tell us when you look in the second half how sensitive you will be to your previously announced leverage targets of 2 times net EBITDA? The second question is on your VEON platform that you launched in, let's say Russia, for example, do you have any sort of data that you can share with us in terms of people who have signed up for it? Any sort of signs of such as feedback from customers or indications of usage? And finally, a follow-up on Euroset. When you talk about 5,500 stores as a target, what kind of stores are you taking into account? Are you taking your previously announced X-5 franchise stores as well? And can you remind us – and forgive me if I misheard that – what is where you stand currently with the Euroset decision where you stand in terms of the number of stores? Thank you.

Yes. So thanks for the questions, Olga. So, yes, when we look at dividends, we take account of a number of things. So clearly, the equity free cash flow that we've generated already in the year and expect to generate going forward is an important and probably the single-most important thing that we look at. But we also look at potential uses of funds going back potentially to some of the questions that were asked earlier on today. And also, we look at what do we think is coming up in the way of other major transactions such as a tower disposal. And in doing so as well, we look at what the leverage ratio is, where do we think it's going, do we have any sensitivities to currency, et cetera, et cetera. So it's not just a simple binary decision saying, oh, we've got x-hundred million dollars of equity free cash flow, and, therefore, let's distribute y percentage of that in the form of dividend. It's more complicated. On the question of leverage, I think we've said that being round about 2x over the medium term is where we'd like to be. We remain very comfortable at the leverage ratio of 2.2x, particularly given the success of the refinancing activities that we've completed earlier this year where we've refinanced or restructured 60% of the debt and it made it much more flexible and much, much more affordable, but we also derisked it somewhat in terms of currency. So, yes, 2.2x we're comfortable. And I'm in no particular rush to immediately deleverage slightly down towards the 2x ratio. Jean-Yves?

Look, on the VEON platform, what we've done in the last few weeks is really a soft launch of the platform in 5 of these major markets. We are really focused on the back-to-school campaigns when people come back from holiday. The soft launch obviously enables us to focus on making slight improvements to the platform, addressing potentially certain bugs that would not have been identified during the development phase. So the large scale really rollout comes from September onwards with significant advertising programs, upgrades to the VEON platform from the various apps that are OpCos might be operating in the marketplace. I think once that is completed, that's the point in time when we'll come back to you with more meaningful data at that point in time. So I think that's where we are on the VEON platform at this stage. I think coming back to Euroset, the 5,500 monobrand stores includes both stores owned by ourselves and stores that we will have franchised under the Beeline brand in Russia. And as I said, whilst that is a medium-term target that we've given ourselves, we will look at that going forward, whether there's a requirement to specifically either add on or reduce the footprint and particular how our VEON internet platform is going to perform in the marketplace. So I think if you look at the breakdown to get to the 5,500, we roughly have today about 1,500 own monobrand stores, about 2,200 Beeline franchises. You add on to that the 2,000-or-so stores that we are migrating as part of the Euroset transaction, the rationalization of optimization of about 200 stores, that gives you the breakdown of 5,500.

Operator, in the interest of time, I suggest we take one final question and then wrap up. Thank you.

Thank you. We now take our final question from Alastair Jones from New Street Research.

Yes. I was wondering if I could come back to on the EBITDA side of things, particularly in Russia, the performance there. Obviously, the revenue trends were encouraging. If you look at the OpEx in the last couple of quarters, the OpEx had been declining by around about 3% to 4%, which makes sense given your sort of performance transformation. But then in Q2, the OpEx seem to increase by 6% year-over-year. So there definitely seems to be a bump up. And I was just trying to understand if there was anything one-off related to that, one-off related in those numbers, either in this quarter or in year ago. And to what extent, I mean, given we obviously want to push the VEON platform in September time. I mean, to what extent can you start to see maybe EBITDA starting to grow in the second half of the year? And then just the second question on Pakistan repatriation of cash. If there is a transaction that's successfully completed, how does work in terms of repatriating the cash out of Pakistan in terms of timing challenges and sort of approvals, how long is that supposed to take? That would be great. Thanks.

I think I'll take both those questions. Thank you, Alastair. I think on Russian margins, I think your hypothesis is largely correct, right. So in Q2 of last year, there was a series of what were, in isolation, relatively small accrual cleanups or provisioning cleanups which aggregated up to just in excess of about RUB 1 billion that benefited both the OpEx as reported and the margin last year. And I need to argue that in this year we had a little bit, but only a little bit of the opposite where we needed to true-up some accruals particularly related to compensation schemes from Q1 into Q2. So as I look at it in detail, once I isolate out both of those effects and I look at the true underlying kind of operational performance of that Russian cost base, we continue to see good year-on-year declines, and, therefore, real kind of what I would describe as operational margin improvement. On Pakistan on dividends, it does take awhile to get dividend flows out of the country. I mean, clearly, we need to go through an approval process with the state bank basically to convert the rupees into dollars. We kind of know how that path works now because we've got decent experience over the last 6 months or so, having declared a dividend for the first time in about 11 years towards the end of last year, and then we distributed all of that declared dividend within the first half of this year. So to the extent that we have a dividend declaration from Pakistan, I would not imagine that we would be able to flow all of that money up to GTH in one quarter. I think it'll take a couple quarters to do so. But we remain confident about our ability to do so and to manage the approval process.

That answer your question, Alastair?

Yes, that's great.

Very good. In that case, Jean-Yves, thank you. Andrew, thank you. But especially thank you to all who have listened in, dialed in or on the webcast. Thank you for your interest. If you have any further questions, feel free to contact us, Investor Relations at VEON. And otherwise, for now, I wish you a very nice day. Thank you, and good-bye.

Thanks, everybody.

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