- : Trond Westlie - CFO Kjell Johnsen - COO

Alexander Vengranovich - Sova Capital Stella Cridge - Barclays Herve Drouet - HSBC Vyacheslav Degtyarev - Goldman Sachs Igor Goncharov - Gazprombank Sergey Libin - Raiffeisen Bank Alexander Vengranovich - SOVA Capital Simon Cooke - Insight Investment

[Abrupt Start] Apologies for the slight delay, and welcome to VEON's Second Quarter Results Conference Call. Today, I'm pleased to be joined 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 the results overview and outline of our new strategic framework, from Ursula, followed by Kjell for Q2 country review, and Trond will run through the Group results and 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 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 the 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 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. 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 a 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 balance agenda of growth and disciple. 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 and, on July 3rd, we set out the four 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 population 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, that's only 25% in Pakistan. This all amounts to…

Thank you, Ursula, and good morning everyone. I'll start off with a little overview of all the major operating companies, and the good news here is that we see a positive revenue EBITDA trends in the bigger countries here. That goes for Russia, Pakistan, Ukraine, and Uzbekistan, for 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'll 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, to absorb the full integration cost of Euroset, I'm happy to say that we've been able to do that through Q2. This is down to the market dynamics where we see ARPU is growing overall in the markets, 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 mobilization 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% to 6%. So the last year and 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 shouldn't take into consideration that our wholesale services have been centralized, this amounts to around $600 million. If we adjust for this…

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 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 or our CapEx to revenue ratio all 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 with some details on all of these numbers. Going then to the waterfalls on revenue and EBITDA, on the revenue side, 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 11% growth reported on the growth. We're coming then up to the $2.5 almost organic. And then the ForEx and other changes coming down to the reported number. Of the…

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're moving aggressively to fulfill our vision as a lean, efficient, emerging markets focus, 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. Your line is open, please go ahead.

So two 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 in terms of transactions, if there is anything here 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 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 of 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 -- 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 lead with all stakeholders and we believe that we are progressing on our view from the VEON point of view on this to simplify the group structure and get minor 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 results for long time, so it's hard to give you sort of exact date, since we have surpassed our date so far. But both parties are still working. And all issues in - to close after an approval is given [indiscernible].

We will now take our next question from Stella Cridge of Barclays. Your line is open, please go ahead.

I have a couple of questions, please. The first one is actually on the timeline actually, so I know you've given 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 to when a decision might be taken and whether to approve the transaction or not? That would be the first question. And the second would be, so you had highlighted and when you gave out the news on the Italy stake sale, and that you would aim to use some of the proceeds for debt reduction. So, I was just wondering if you could 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 part of it, the maturities? I want to see how you're thinking about how you might apply those proceeds and 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 three approvals from authorities to go ahead, which is a condition precedent in the agreement, two from Italy and the EU. When it comes to Italy, we have got verification from [indiscernible] that that approval is not needed, and as a result we're left with one approval in Italy, and one 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 in early fourth quarter. But if timeline prevails for both of this 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 in 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. Your line is open. Please go ahead.

The first question is regarding Russia, you mentioned some of your competitors campaign and during the call you state the upper growth which been maybe 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 yield, and do you think ARPU nevertheless still has some good potentials from growth coming from especially data monetization? The second question is regarding Algeria. I understand that some of your subscriber numbers now are kind of 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 the EBITDA for Algeria? If you can give an indication, that would be great. And finally, but your guidance on equity free cash flow, I believe this is based on your targeted FX for this full year. I was wondering how much buffer do you have if the U.S. dollar continued 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? Thank you.

I will probably do one and two and Trond will take number three. You asked about Russia and ARPU, right? 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. And 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 three main players have been upping their competencies in that area. The next stage will of course be a step-by-step some of the headline numbers start reflecting the fact that 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-à-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 numbers of load 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. 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. Your line is open. Please go ahead.

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

When it comes to our expansion strategy, what we have been doing the last few years is really to look 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. Your line is open. Please go ahead.

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 as to what does it mean in terms of free cash flow after licenses for the year? That's number one. And number two is just to clarify on the usage of the funds on GTH transaction. If we assume that minorities of GTH do approve the sale of Bangladesh and Pakistan is it correct to assume that you as a major, as a controlling shareholder of GTH will initiate a dividend, a special dividend 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 it in sections on 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 upstream I didn't quite get that.

Yeah, the question is if we assume that minorities of GTH do receive -- don't 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 GTH? In particular would VEON initiate dividend from GTH to other shareholders to distribute those funds?

Our view on that is -- assuming that the GTH board, as well as minority approves our offer, we will 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 test equivalents. While those discussion is ongoing GTH would then be a dividend yielding company.

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 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 two is likely to be a renewal in Pakistan at the fall of 2019.

Our next question comes from Sergey Libin from Raiffeisen Bank. Your line is now open. Please go ahead.

I have 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 right below your target to 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 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 coming down to 1.8x of the GTH. And considering Deodar, we're going to take a slight notch lower than that. Having said that, I do think that these transaction in the first instance, if we consider the discussions 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 European exposure in the operations anymore. So as of now, our target is still the two. And the dividend policy is still in place. And 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 -- 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 policy is still at the same place.

Our next question comes Alexander Vengranovich of SOVA Capital. Your line is open. Please go ahead.

Thanks for the opportunity to ask follow-ups. So, two questions, first one, more like a 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 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 replacement 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 2018?

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 organization structure, are areas that I don't expect that there will be any changes to when we appoint the permanent CEO. These are logical moves, moves that have been thoroughly reviewed and vetted from with our board and obviously with the Management team. So I expect the fundamental strategy 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'd say, add some skills around the edges. Strategy the same, direction the same, strong operating executives focused 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 equity 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. Your line is open. Please go ahead sir.

I just wanted to follow up on the use of proceeds from Italy and also 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 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 that was sort of the same element. We are going into a review, of course, on the capital structure as a result of getting this 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.

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.

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.