Earnings Call Transcript - VEON Q2 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the VEON Second Quarter 2020 Results Webcast and Conference. As a reminder, today's conference is being recorded. I would now like to hand the call over to Nik Kershaw, Head of Investor Relations. Please go ahead, sir.

Nik Kershaw, Head of Investor Relations

Hi. Good day, ladies and gentlemen. Welcome to VEON's second quarter results presentation. I'm Nik Kershaw, Group Head of Investor Relations. I'm pleased to be joined on the line today by Kaan and Sergi, our group co-CEOs, along with our group CFO, Serkan. Today's presentation will begin with an overview of our second quarter results from Serkan, followed by an operational review from Kaan and Sergi, who will cover how the COVID pandemic has affected our business during the last quarter. We'll then hand it back to Serkan to discuss our outlook and our new financial guidance for the full year 2020. There will be ample time for your questions at the end of the presentation. Just before getting started, I'd like to remind you that we may make forward-looking statements during today's presentation, which involve certain risks and uncertainties. These statements relate in part to the company's anticipated performance and guidance for 2020, particularly in light of the COVID pandemic, future market developments and trends, operational and network development, and the company's ability to realize its targets and commercial and strategic initiatives. Certain factors may cause our actual results to differ materially from those in the forward-looking statements, including the risks detailed in the company's annual report on Form 20-F and other recent public filings made by the company with the SEC. The earnings release and the earnings presentation, each of which include reconciliations of non-IFRS financial measures presented today, can be downloaded from our website. With that, let me hand over to Serkan.

Serkan Okandan, CFO

Thanks, Nik, and good morning and good afternoon to all participants. Thank you for joining us for this presentation of our second quarter results. I hope you have all managed to stay safe and well during this unprecedented period for all of us. Q2 saw the full impact of the COVID-19 pandemic on activity across our operating markets as lockdowns intensified before some easing towards the end of the quarter. Our financial performance was impacted as a consequence, although I'm pleased to say that continued progress on cost control provided a degree of offset. Let me go straight to the headline numbers, which are summarized here on Slide 5. Group revenue for the quarter declined by 6.9% in local currency terms year-on-year to $1.9 billion. On a reported basis, the year-on-year change in revenue was minus 16.3%, after accounting for the negative impact of currency movements amounting to $178 million. Lockdowns across our markets explain the scale of this revenue decline, given the requirement to close stores, which significantly constrained top-ups and device sales. The loss of migrant revenues, particularly in Russia, and the sharp fall in roaming income due to travel restrictions also contributed. Together, this more than offset the positive impacts of increased demand for data and fixed-line services, which we have seen across our markets since lockdowns were introduced. Despite these headwinds, we were pleased to deliver solid double-digit local currency growth in data revenues during the quarter, up 14.4% year-on-year or 5.2% on a reported basis. This reflects the underlying strength in data demand that characterizes our markets as well as the rapid uptake in digital services that lockdowns are encouraging. EBITDA declined by 7.7% in local currency terms to $809 million. On a reported basis, this corresponds to an 18.7% year-on-year decline. Note that for comparative purposes, in our local currency numbers, we have excluded the one-off payment of $38 million booked in Q2 last year in respect to a special compensation received by our subsidiary in Kazakhstan following the termination of our network-sharing agreement in that market. Our group EBITDA margin was 42.7% for the quarter, a decline of 1.2% year-on-year or minus 0.4% in local currency terms. Although this is a weaker outcome on both measures, our continued focus on reducing costs offset the margin impact of the quarter's revenue decline. Key here was planned downsizing of our headquarters, as well as a reduction in HR-related and G&A expenditure, which together more than offset higher network OpEx from our investment in 4G infrastructure in Russia. Operational CapEx was 9.5% higher in the quarter, which also reflects our investment activities in Russia. This brought the group's CapEx intensity ratio to 20.8%. More on this when I talk about our financial outlook later. Finally, our leverage ratio stood at 2x net debt-to-EBITDA for the quarter, up slightly from 1.9x in Q2 '19 primarily reflecting the fall in EBITDA we experienced as a consequence of lockdowns. These numbers exclude lease liabilities and express EBITDA on a rolling 12 months basis. Looking at our financial results in greater detail. Slide 6 sets out the impact of Kcell on both reported EBITDA and EBITDA margin in Q2 '19 and illustrates the year-on-year change in each, if this is excluded. You will see that the declines in EBITDA and EBITDA margin are minus 15.4% and 0.3 percentage points, respectively, excluding Kcell. The right-hand side illustrates the impact of another one-off item that was a feature of the first half of 2019, the $350 million payment from Ericsson, which along with Kcell, we have excluded in adjusted values for reported EBITDA and EBITDA margin. The group recorded a net profit of $156 million in the quarter, an increase from last year's figure of $69 million. The rise in profits reflects a fall in financial expenses following our refinancing activities and two non-operating gains, which reached a combined value of $86 million, namely a revaluation gain on a liability related to our acquisition of Warid in Pakistan back in 2016 and the gain related to a settlement regarding the sale of one of GTH business back in 2014. Moving to Slide 7 and a more detailed breakdown of our revenue during the quarter. The general pattern is one of lower revenues across our operations as lockdowns continued, with the exception of Ukraine and Kazakhstan, where growth in data demand enabled us to grow our top line in each market despite these challenges. Weakness in Russia reflected the disruption to our retail channels as a consequence of store closures, as well as a new absence of roaming revenues and a smaller migrant customer base because of lockdowns. Pakistan's reported performance was affected by lockdowns as well as the accounting impact of last year's tax regime changes. If we adjust for the latter, Pakistan would have seen revenues rise by 0.5%. You will also see last year's Kcell payment and second quarter FX headwinds as separate components in this waterfall at the left- and right-hand side of the chart, respectively. Turning now to EBITDA on Slide 8. We continue to reduce costs across the group, which enabled us to record a broadly stable margin performance compared with Q2 last year, once the impact of Kcell is adjusted for. Further downsizing of our headquarters function, which was planned before the pandemic and additional savings in HR and staff costs were key contributors here. Together, those more than offset a rise in network-related costs in Russia, which reflects our accelerated network investment there. Without these network expenditures, our Russian EBITDA margin would have been around 300 basis points higher. We believe making the necessary investments in our networks in Russia now is the right core selection, both for our customers and also for our shareholders. Finally, in Pakistan, it is important to point out the impact of last year's tax regime changes and the reclassification of license amortization expense on our reported performance, which taken together account for around three-fourths of the EBITDA decline there in Q2. Turning now to our capital structure on Slide 9. Our priority is to ensure that we have the capital and liquidity strength to navigate the group successfully during this volatile period. This has meant active management of our debt, including hedging of our U.S. dollar liabilities versus our ruble revenues to insulate us from adverse currency movements. You can see the impact of our hedges on the two right-hand pie charts, which show the currency mix of our borrowings, pre and post hedging. Our ruble liabilities are well matched to our ruble revenues as a result. On a net currency basis, adjusting for our cash holdings, which are shown in the left-hand pie chart, our U.S. dollar and ruble liabilities are broadly similar at 50% and 48%, respectively. Group debt was broadly similar to Q1 levels at $7.6 billion. This was an active quarter for the management of our balance sheet during which we successfully issued RUB 20 billion in senior secured notes at 6.3%, representing the lowest coupon ever for a ruble Eurobond offering. The quarter also saw us negotiate near bilateral loan facilities with two of our key banking counterparties in Russia, which has since reduced borrowing costs and increased maturities on over $1.9 billion of debt. Taken together, these activities enabled us to reduce our average cost of debt further to 6.4% at the end of Q2, 100 bps lower than Q2 '19. The group continues to have access to considerable cash and undrawn credit facilities, which together amount to $2.5 billion. We have also managed to mature to all of our borrowings proactively, refinancing near-term maturities and pushing out the average tenor of our debt to 2.8 years compared to 2.3 years at the end of Q1 this year. Moving to Slide 10. The full year EBITDA we experienced in the second quarter resulted in a modest rise in our group leverage ratio, which stood at 2x at the end of Q2, excluding these liabilities. This remains in line with the internal guidance of around 2x we have set ourselves, and reflects what we view as exceptional quarter's trading given revenues that will inhibit loss because of lockdowns. In summary, the measures we have taken to enhance our balance sheet and secure our liquidity position, place us in a strong position financially to navigate this challenging period. With that, let me hand over to Kaan to discuss our operational performance during the quarter in more detail. Thank you.

Kaan Terzioglu, Co-CEO

Thank you, Serkan, and thank you all for joining us on the line today. In early May, at the time of our first-quarter results, many of us were adjusting to remote working, which we thought at the time would be a temporary measure while we awaited the peak of the pandemic to pass. Three months on, the majority of us are still facing at least some limitations on our ability to return to our places of work. This is one of many challenges that is driving an ever greater dependency on telecommunication services and redefining the role of our industry in the daily lives of our customers and the markets we operate in. However, adapting to this new normal has been tough in a number of ways for our industry, just as it has been for the broader economy and for our customers. Let me summarize what it meant for our group in the last quarters and what it will mean going forward over the next two slides. The second quarter showed the full impact of lockdowns on our operational performance. These trends, which intensified in April and May, showed signs of abating in June and July as restrictions on store closures and movement of people were eased. As a consequence, roaming revenues fell substantially to 0.4% of group revenue compared with 2.1% in financial year 2019. Store closures had a significant impact on our gross additions and airtime sales. While travel restrictions also meant a loss in migrant customers from our subscriber base, particularly in Russia. We also observed a migration in data traffic from mobile to fixed networks, as well as a shift in network usage away from urban centers to suburbs and rural areas. We saw the positive impact of this in our fixed networks, where daily volumes peaked in Q2 at levels of 35% higher than in the first quarter. Lockdowns accelerated the growth in our 4G customer base during the quarter, including Russia, where our 4G subscribers grew in number by over 20% year-on-year. We also experienced faster adoption rates for our self-care applications, for which our multiactive users have almost doubled year-over-year. The trend was similar for our digital services, such as TV, where our customer base is now 50% larger than in Q2 last year. Overall, increased demand for 4G and faster adoption of digital services have enabled us to report another quarter of double-digit year-on-year growth in data revenue. Moving to the next slide. Looking ahead, in the second half and beyond, we anticipate a gradual improvement in operational trends and expect some of the more positive dynamics of customer behavior to outlast the pandemic. Specifically, we expect a slow recovery in roaming revenues and migrant customers as travel resumes. We also expect a partial, more gradual shift in urban populations back to metropolitan centers as workplaces reopen. In-store sales are expected to recover steadily, assuming local lockdowns are not reimposed. We expect some degree of remote working to remain a feature of professional life. We are positioning for these changes through investments in both networks and services for our new business-to-home, B2H customers. Lockdowns have also placed a greater emphasis on digital sales channels, which we are positioned to serve given our ongoing investment in customer self-care applications and the digital business support systems that enable them. Throughout, we will remain focused on mitigating the impact of the pandemic on our financial performance through strong cost control to ensure that we capture the margin benefits as revenues recover. Next slide. Turning now to the individual performances of our major markets. Our Russia business, Beeline, was particularly impacted by lockdowns, which denied us in-store sales for much of the quarter and significantly reduced our roaming and migrant customer revenues. These temporary interruptions did not distract us from our program of accelerated network deployment, which is a vital component of our turnaround strategy for the market. Progress here in the second quarter was sound with our number of 4G base stations increasing by 24%, enabling us to grow our 4G customer base by 22% year-on-year. We also saw good growth in the adoption of digital services, including Beeline TV, where our customer base grew over 50% year-on-year. We continue to optimize our retail footprint as we increase our emphasis on digital channels, and we have now closed 627 stores over the past nine months. Next slide looks at the year-on-year comparisons for Beeline over the quarter. Total revenues fell by 9.7% after we were required to close over 1,400 stores due to the COVID-19 pandemic and experienced an almost 90% fall in roaming revenues as travel came to a halt. The shift from mobile to fixed networks we observed at the group level was clear in Russia's performance. With mobile services revenues falling by 9.8% and fixed services revenues rising by 8.9%. Helping this fixed line growth was our growing base of B2B customers, many of whom are currently working remotely, which we are serving with products like BeeFree, which provides a suite of services in a single workplace as a service bundle. Similarly, the rise in data demand benefited Beeline, which recorded a 4.9% increase year-on-year in mobile data revenues. This was also driven by solid growth in our 4G customer base, which grew over 20% year-on-year, and now represents 43% of our subscribers. Success in attracting 4G customers partially offset the loss of subscribers elsewhere, particularly among our migrant user base, where a sharp decline in numbers contributed to an 8.4% fall in total subscribers for the quarter. That said, we began to see positive subscriber trends return in June and July, which we anticipate will continue. As well as the revenue impact, the 20% decline in EBITDA we recorded for the quarter also reflects higher levels of network OpEx, resulting from our continued investment in 4G infrastructure and customer experience. We believe this is vital to restoring growth through positive gross additions, lower churn and higher ARPUs. Next slide talks about Kazakhstan. Alongside Ukraine, which Sergi will discuss, Kazakhstan is one of the two markets in which we have enjoyed positive revenue growth during the quarter, a rise of 9.2% on an underlying basis. Data revenues, once again, drove this growth, rising by almost 40% year-on-year. This was enabled by more than doubling our 4G base stations and expanding our 4G user base by over 20%. Our team in Kazakhstan has been successful in driving digital adoption through their digital operator brand, Izi, which provides a flexible range of prepaid bundle services on an OTT basis to customers via a dedicated smartphone app. Rapid digital adoption is also evident in the team's success in driving both mobile financial services, where they now have close to 2 million users. Turning now to the numbers of Beeline Kazakhstan. The impact of Kcell is illustrated in the left-hand charts by the shaded component of our second quarter bars. Adjusting for one-off related to Kcell payments, revenue grew by 9.2% and EBITDA grew by 13.4%. The charts illustrate the steady growth we have enjoyed in 4G users, up 24% year-on-year, and the substantial rise in data revenue has contributed to up to 40% year-on-year. You will see that our subscriber base declined by 6% year-on-year, but this reflects the impact of IMEI registration where requirements were enforced last November, as well as the store closures and lack of gross adds. Our subscribers are spending more with us, demonstrated by the 11.9% rise in ARPU. The 10 percentage point increase in the share of 4G users in our customer mix contributes to this rise. Kazakhstan is a market with a bright digital future. It is one of the first markets in which we successfully trialed 5G services back in November 2019. While 5G investment remains a distant need for now, the nation's rapid digital adoption provides us an opportunity to offer our customers a wide variety of latest digital services. With that, let me pass the floor over to Sergi to take you through our other markets.

Sergi Herrero, Co-CEO

Thank you, Kaan. I will begin by discussing Pakistan, followed by Ukraine, and then share some observations and key highlights from our other markets. Jazz had another strong quarter, managing to keep our revenue stable despite the challenges posed by lockdowns. Our ability to grow data revenues and increase our 4G customer base was crucial to these results. This growth was supported by significant investments in our networks, allowing us to boost our 4G base stations by 17% and raise our 4G penetration to over 30% of total subscribers. The growth rates were impressive, with data revenues increasing by nearly 28% due to a 72% expansion of our 4G base and strong demand for our growing range of digital services. Jazz exemplifies how fast digital adoption and a diverse service ecosystem can lead to remarkable growth in products like JazzCash, our leading digital financial services platform, which surpassed 8 million monthly active users in Q2. We’ve also seen remarkable growth in our self-care app, now hosting over 6 million users, four times the number from last year. Moving to our financial numbers, the year-on-year revenue decline displayed here is influenced by last year’s tax policy changes, affecting operational comparisons. After adjustments and despite lockdown impacts, revenue grew by 0.5%, driven by a robust 27.6% increase in data revenue and a 5.6% rise in our total customer base. EBITDA, influenced by the tax changes and a shift in accounting for our ex-Warid license amortization expense, would have decreased by 6.4% instead of the recorded 20.6% drop for the quarter. The right-hand panel of this slide presents some data and 4G KPIs that highlight the ongoing 4G opportunity in Pakistan. Smartphone adoption and our 4G subscriber base are still at around 30%, despite achieving a remarkable 11.7% growth in our 4G base in Q2. In summary of our Pakistan overview, I'm excited to share details on our progress with JazzCash and the opportunities ahead. Over the last year, our users completed 900 million transactions totaling PKR 1.7 trillion (over $10 billion). By the end of Q2, our active user base stood at 8.1 million, with mobile wallet usage growing year-on-year by around 41%. In April, we began issuing global standard QR codes for merchants to accept digital payments, which are more cost-effective and easier to implement than conventional point-of-sale systems. In mid-Q2, JazzCash introduced a fully digital merchant onboarding process in Pakistan, allowing merchants to create secure accounts online in just a day, compared to up to two months before this process was digitized. During lockdown, we enrolled nearly 7,000 merchants using this approach and have successfully attracted self-employed individuals, with JazzCash now serving as the largest financial provider for Pakistani freelancers, boasting over 76,000 registered users and a transaction value exceeding PKR 1.2 billion. Shifting focus to Ukraine, Kyivstar experienced positive growth in revenue and EBITDA during the quarter despite lockdown challenges. Its success stems from continuously evolving its product offerings to meet customer needs, supported by ongoing investments in our 4G network. We’ve seen a 50% year-on-year growth in base stations and customer base, ending the quarter with over 80% 4G coverage in the country. A recent network-sharing agreement with Vodafone further enhances our 4G capabilities in Europe and rural areas. Kyivstar also offers a diverse range of digital services for both consumer and business customers, partnering with Microsoft to leverage IoT, big data, AI, and cloud computing, positioning us for growth in a rapidly maturing market. Revenue increased by 6.8% and EBITDA rose by 11.5% in Q2, aided by tight cost management. The lockdowns increased the adoption of our digital services and heightened demand for data and fixed-line services, contributing to a 13.1% rise in data revenues and a 9.4% boost in ARPU. Although demographic trends and a decline in multi-SIM users resulted in a 3.1% drop in total customer base year-on-year, our 4G customer base grew by 51%, now accounting for over 30% of total subscribers, increasing by 11 percentage points year-on-year. This positions us well for overall growth as customer needs evolve alongside Kyivstar's expanding service ecosystem. Finally, I’d like to touch on key trends in our other markets. The primary theme is the long-term growth potential we see in 4G services. In markets like Algeria and Bangladesh, we are seeing strong data revenue growth as a larger share of the local population gains access to our 4G networks. However, these markets have felt the operational impact of the pandemic, interrupting their growth momentum. Our focus remains on the long-term potential, and we will continue to invest in some of these exciting early-stage markets. I will now pass it over to Serkan for a summary of our outlook for the rest of the financial year.

Serkan Okandan, CFO

Thank you, Sergi. Let me now turn to financial guidance, which we have reintroduced for financial year 2020 following an assessment of the impact of COVID-19 on our performance. This is set out on Slide 25. We have been encouraged by a gradual recovery in revenues across the majority of our markets since the middle of Q2 as lockdowns were steadily eased. We expect this revenue trend will continue in the second half and will enable a steady recovery in group EBITDA as well. As a consequence, we now expect a low to mid-single-digit local currency decline in both group revenue and in EBITDA for the full year 2020. This compares with a 3.4% local currency decline in revenue and a 4.8% decline in EBITDA at the interim stage. Our guidance implies we expect to see the pace of EBITDA recovery accelerate at the group level in the second half, as lost revenues return and our cost control measures continue to make a positive contribution to our margin. Our new guidance also illustrates the steady operational improvement we saw in May and June. Given that last quarter, we observed that April had seen a high single-digit decline in local currency revenue and a mid-teens fall in EBITDA year-on-year. I would caution that this new group guidance assumes a continued gradual lifting of lockdown restrictions across our markets. There remains some risk that we can see lockdown restrictions reinstated, which would have a negative impact on our outlook. I would also draw our attention to Russia, where Q3 is likely to remain challenging given the underlying performance issues we are tackling. This assumption is captured in our new 2020 group guidance. Investment in our network in Russia continues, and we expect that the results of this and our broader turnaround strategy, which is well underway, will be evident in Beeline's performance during the first half of 2021. We have also reinstated guidance for group CapEx intensity given the importance we have attached to investing in our 4G networks to realize the considerable growth opportunity we enjoy in data. This is now set at 22% to 24% for the full year, up slightly from the 21% to 22% level we guided to at the full year 2019 stage, which primarily reflects the lower revenue expectations we have set for 2020 as a consequence of COVID-19. Regarding dividends, our policy remains as previously disclosed, to pay at least 50% of equity free cash flow while maintaining net debt to last 12-month EBITDA at around 2x, and taking into account medium-term investment opportunities. Cash flows generated in the first half of 2020 were weaker compared to last year. Given that in the second half, we may potentially face a number of uncertainties, we currently believe it is unlikely that we will pay a dividend for the full year 2020. With that, I'd like to thank you for your attention and pass the call over to the operator for your questions.

Operator, Operator

And your first question comes from Vyacheslav Degtyarev at Goldman Sachs.

Vyacheslav Degtyarev, Analyst

A couple of questions. Firstly, can you elaborate on the dividend outlook for 2020? Basically, is the outlook for not to pay is more about higher than 2x net debt-to-EBITDA that you envisage by the end of the year, or outlook for the leverage to potentially worsen further throughout 2021? Or any other potential uncertainties that you can elaborate on that you take into consideration? And secondly, can you share some thoughts on the level of the equity free cash flow for this year that you envisage for the company? Any thoughts potentially on the upside and on the downside going into the second half?

Serkan Okandan, CFO

Okay. Thank you very much. Regarding your first question about the dividend, as I mentioned in the presentation, our dividend policy stays the same, which links the dividend payout to net debt to last 12 months EBITDA and also Q2 free cash flow. As also, we mentioned our current, at the end of June, net debt-to-EBITDA is around 2x, which is quite at the edge of the policy. In the coming quarters, second half of the year, the uncertainties that I was referring to were related to the COVID-19 and potential lockdowns in different jurisdictions and their potential impacts on our results, basically EBITDA and the cash flow. Apart from that, of course, we are looking at certain M&A transactions as well. So the realization and the timing of those transactions also may impact the equity free cash flow, which will in turn impact the dividend payout. That's the outlook that we can share at the moment. Regarding free cash flow, as I mentioned again, first of all, free cash flow is lower than last year, the same period. But however, we should also note that last year, first of all, we had a couple of positive one-offs. The main one was an Ericsson payment of $350 million. But if you exclude the one-offs from both years, still, this year, our free cash flow in the first half is slightly lower than last year. Having said that, again, the uncertainties around the COVID-19, potential currency fluctuations in the emerging markets that we are operating in may impact our EBITDA and the cash flow in the second half of the year. So that's what I can say. And for the free cash flow, I think we don't give any guidance. So I think I should pause at this moment.

Vyacheslav Degtyarev, Analyst

Okay. By February next year, if you have around 2x leverage, do you think a dividend payment is likely or not? If you could comment on that.

Serkan Okandan, CFO

Of course, the final decision is to the Board of Directors, but if we satisfy all the conditions as per the policy, I think that the Board of Directors will take this into consideration in their decision in February 2021.

Ivan Kim, Analyst

Two questions, please. Firstly, it's clear that this year's capital intensity will be high. So for how long do you think your CapEx will stay elevated? That's the first question. The second question on the Russian market. So in terms of the customer loss in the second quarter, can you split out what percentage of the customer loss were migrant workers? And in general, apart from the network investments, what are other measures in Russia that you'd take to turn the business around? How well your family tariffs are going? So any color around all that would be great.

Kaan Terzioglu, Co-CEO

Thank you, Ivan. This is Kaan. Regarding capital intensity, we are still in the phase of increasing 4G penetration across all our markets. We anticipate capital intensity around 18% to 20% as we aim to achieve at least 70% 4G penetration in the coming years. This can vary by market, but we expect this trend to last for some time since we are currently sitting at about 40% penetration, and there's still a considerable distance to cover. In the Russian market, lockdowns and store closures led to nearly a 50% decrease in gross additions and new customer inflow. Typically, we would expect around 6 million new additions due to significant migrant traffic; thus, we saw nearly a 3 million decline in overall subscriber numbers. This is a key aspect to consider. Despite this, our 4G subscriber base in Russia has grown from 32% to 42% penetration of total subscribers, which has been the primary driver we've noticed in the market. Considering the COVID impact and the impact on gross additions, as well as top-up, I think it would be unfair to make a comment about the family tariffs and their performance. But overall, what I can tell you is our modernization of value propositions for the Russian marketplace are already being worked on for the second half of the year.

Ondrej Cabejšek, Analyst

I have two questions. First, regarding OpEx, could you provide more context about which part of the OpEx decline was driven by the top line? Also, what percentage of that could be structural? It would be helpful to relate this to the program the company had last year, which aimed to reduce cost intensity by about 1 percentage point annually under U.S. new management. My second question is about distribution in Russia. Some of your competitors have initiated distribution partnerships and noted that consumers are increasingly engaging in digital customer journeys, suggesting a potential to reduce the number of stores further. Do you also see this as a temporary situation, considering that losing market share is something you would prefer to avoid doing too quickly or aggressively?

Kaan Terzioglu, Co-CEO

This is Kaan. Let me answer the second question on distribution, and I will leave the OpEx and the EBITDA impact to Serkan. In Russia, the COVID-19 pandemic showed us that the future of distribution is all about digital and alternative channels. With that in mind, we are significantly upgrading our customer self-care application capabilities and self-registration capabilities, and we are already seeing the impacts of those. Again, for the future, we see franchise-based models and alternative distribution channels balancing out significantly the physical inefficient cost structure of the distribution network. We have already closed permanently 627 stores in Russia. And for the future, we will further optimize these numbers with franchise, alternative partnerships and alternative channels.

Serkan Okandan, CFO

Thank you. Regarding OpEx, 2020, and specifically Q2, are really unique periods regarding OpEx and the cost-saving initiatives. However, if you refer to Page 29 of our presentation, you can see where we focused and where we delivered during the quarter. If I just elaborate a little bit on that. In this quarter, obviously, we managed to reduce our G&A and HR and staff costs, which you may say that partly structural, partly quick wins in our cost structure, but we have delivered in total, $26 million year-over-year savings in the quarter. Apart from that, there is an ongoing program in the HQ, which started before the pandemic actually, to reduce the costs year-over-year. We see that this program is delivering good results, and it will continue for the rest of the year as well. Significant cost reductions are coming from there as well. In the same slide, you can see that compared to last year, the same quarter, we reduced the cost at HQ by $69 million, which is quite significant. If you look at the group's structural costs, which I believe, personally, are more important because if we improve our structural cost, we can benefit from those cost savings in the long-term as well, not only temporary in the long-term. And if you compare Q2 to Q2 last year, as a group perspective, our structural costs decreased by 15% in Q2. That's coming from many initiatives, and we will continue to focus on those as well. The only thing that is different from this trend is the network-related expenses. We continue to invest in our main 4G networks. That is also very critical for us in the long-term sustainability of the growth and profitability of the group. So that increased investment in networks, and we want to continue those investments, which is obvious from our CapEx intensity guidance as well. Currently, year-over-year, we don't have any network cost savings because we are growing the network. But in time, we believe that with the optimizations in the network as well, we will start to get some benefits from that area too. So it's difficult to give you an absolute number how this will impact our cost intensity, as you mentioned in your question. From a trend-wise perspective, we are reducing our OpEx in general. We are also reducing our structural OpEx, which is more important in the long term.

Kaan Terzioglu, Co-CEO

And Serkan, this is Kaan. Just to add to what Serkan just mentioned because he mentioned already that there was a 300 basis point impact in Russia EBITDA, impacted by all these actions. Our new turnaround strategy and execution are focused on customer experience. To make sure that our customers are experiencing world-class service, we are taking actions, as we speak, to deploy a 4G network for the subway system. As part of these exercises, we are providing free Wi-Fi access for all our customers on the subway and increasing our capacities on transmissions, which are having a direct impact on our operational costs. I think these are all the investments that we are doing for the right ambitions and the right direction.

Ondrej Cabejšek, Analyst

I may have a follow-up question for each. Kaan, can you provide an outlook for the next couple of years regarding store closures? What do you think is a realistic percentage, like 5% or 10% per year? And Serkan, could you please comment on the OpEx program the company had? I'm unsure if it's still valid, but can you confirm if the management is currently targeting a percentage point per year for the OpEx intensity program?

Kaan Terzioglu, Co-CEO

Sure. If you remember, we have previously provided guidance of 600 stores to be closed over time. We already are at 627. Frankly speaking, I wouldn't believe if somebody told me that 1,400 of our stores in Russia would be closed due to the COVID pandemic. That happened. Now we have a much better understanding of our potential with our digital interaction with our customers. But before giving a new number, I really would like to see a little bit more about how the pandemic goes on and how the closures of our stores are impacted. But clearly, optimization in this area is further possible through franchises, partnerships, alternative channels, and most importantly, the digital penetration increases.

Serkan Okandan, CFO

If you allow me, I don't want to give any specific numbers for the OpEx improvement. But what I can say is this COVID pandemic changes lots of things. Because of this, after the COVID pandemic returns back to normal, we think that many things will not be normal as we defined them before the pandemic. So because of this reason, we look into and deep dive each and every cost item. We are trying to think outside the box on how we can improve the cost structure, not only with short-term wins, but with long-term structural changes. I believe that sometime at the beginning of next year, we will be in a better position to guide you on what kind of impact, definitely a positive impact, we can achieve in the OpEx structure.

Stella Cridge, Analyst

I have a couple of questions. First, earlier in the call, you mentioned that mergers and acquisitions might be a consideration for the rest of the year. Could you provide more details on that, specifically regarding any particular geographies? I'm especially aware that some important dates related to the shareholder agreement in Algeria are coming up in 2021. Have there been any further discussions about the future of that business? My second question is about funding. You've clearly been active in refinancing and managing debt costs, but the average maturity is still under three years. What are the main next steps you're considering for your funding strategy? Thank you.

Sergi Herrero, Co-CEO

Thank you, Stella. I will address the M&A question first, and then I’ll let Serkan handle the second part. Regarding Algeria, as you noted, we have a potential deadline in July 2021, so there are no actions on that front for now. We see significant progress in the country, and our team has effectively deployed capital expenditures. Thus, we feel confident that things are on track there. On the topic of M&A, we are exploring various opportunities both in our traditional connectivity business and in non-connectivity areas. While there are no announcements to make at this time, it's a key focus for us for the rest of the year.

Serkan Okandan, CFO

Thank you, Sergi. I can outline our funding strategy in four key areas. The first area is reducing the cost of debt. We will keep focusing on lowering our overall cost of debt for the group. The second area is extending the maturity of our debt. We have increased the average maturity from 2.3 years to 2.8 years, and we believe it can be extended further. The third area involves our operations in ten different countries, predominantly in emerging or frontier markets, where we face potential currency depreciation. Therefore, we aim to strengthen our balance sheet by utilizing local currencies in these markets. Finally, the fourth area is diversifying our funding sources. We want to broaden our sources of funds from debt capital markets, banks, and local markets. In summary, our strategy focuses on reducing the cost of debt, extending maturities, increasing leverage in local currencies, and diversifying funding sources.

Stella Cridge, Analyst

That's great. I was just wondering if I could follow up on a couple of points. Could you explain a little bit more about what you mean by a connectivity business and the non-connectivity side? And regarding the currency mix, I noticed that you have been doing hedging particularly on the dollar side. Does this suggest that you want to have a lower amount of Eurobonds in dollars outstanding in the future, all else being equal?

Sergi Herrero, Co-CEO

Sure. Happy to provide more color. What I was referring to for non-connectivity is the things that you mentioned, like Algeria. Of course, Pakistan, as you know, there's a new situation where we can put a call option there and acquisitions that we could do perhaps in the B2C or B2B area. When I say non-connectivity, I refer to the area that we've been calling ventures, and this refers to financial services, content, and potentially some big data properties.

Serkan Okandan, CFO

Regarding the currencies, as you know, slightly lower than 50% of our business is in Russia, so we were exposed to ruble depreciation or appreciation. So we always keep focused on making a natural hedge, if possible. If not possible through derivatives, we want to keep the ruble exposure under control. Apart from that, of course, we will always have probably U.S. dollar debt as well. Because as you know, our U.S. dollar debt market is the deepest market between the currencies. In some cases, we can leverage the balance sheet in U.S. dollars with proper conditions. So we will look at both. Whatever is beneficial for the company, we will leverage that. But having said that, we will always keep our eye on hedging because we don't want to get exposed to sudden currency fluctuations.

Maria Sukhanova, Analyst

I have a follow-up on dividends. If you could just clarify your message here a little bit. So are you saying that there is a risk if you can't meet your guidance for the full year, that then there will be no dividend? Or what you are saying is that in the base case, if financial performance is in line with expectations and M&A plans are in line with expectations, this is when you would not still recommend a dividend for the full year? Just to have more sense direction-wise.

Serkan Okandan, CFO

Thank you. Again, I want to refer to our policy. Our policy says that we will distribute or we will consider distributing a dividend minimum of 50% of the free cash flow after certain items, and we will maintain our net debt-to-EBITDA around 2x. As you know, our numbers are close to that guidance. Our net debt-to-EBITDA is around 2x as of the end of June. So as we discussed and as we all know, the second half of the year has lots of uncertainties which may materialize, which may also impact our guidance as well. That's why we said that when we look at the future, there are uncertainties around the operational results coming from the COVID lockdowns, currency depreciation, and there are some elections. There are many aspects that are still uncertain. Apart from that, as I said, we have an M&A transaction that may be realized in this year or early next year as well. So a combination of all this, we think that a dividend payout early next year based on 2020 is unlikely. But of course, we have to see the final actual numbers, and that will be evaluated by the Board of VEON beginning of 2021.

Sergi Herrero, Co-CEO

Sergi Herrero: Regarding the license payment, we have done 50% of the license payment in protest. In Q2, we also paid $57.5 million as well, again in protest. Currently, because of the COVID lockdowns and most government authorities in Pakistan being closed, courts are closed, so because of all these reasons, the negotiations, I cannot say that they are ongoing as they should be. But after reopening all the authorities, the government agency, etc., I believe that again, the discussions with the government authorities will be a big start.

Ondrej Cabejšek, Analyst

It relates to the fixed business in Russia. So in that particular business, you're doing very well. I think you have one of the highest growth rates from the big operators. So if you could elaborate a bit, please, because this is quite a saturated market, I think, especially where you are focused in the urban areas. If you could elaborate a bit on where that growth is really coming from and what potential to sustain these single-digit growth rates you see over the medium term? And connected to that, could you please elaborate a bit on whether there has been any change to your fixed-mobile conversion strategy?

Kaan Terzioglu, Co-CEO

Sure. Thanks for the question. As we mentioned, the customer behavior due to the lockdowns really pushed some of our customers to consume more fixed networks. Now of course, COVID's impact has been attributed to that. However, this is not the only trend. Actually, our strong B2B business is also a key driver of that as our customers work from their home locations. We have to understand that fixed networks are normally much more sticky, and I do not expect these customers going back to only mobile. Mobile and fixed are not substitutes, so they will be consuming mobile as they keep their current fixed networks. The average tenure of a fixed customer is much longer than that of a mobile one. So I think this surge is a reflection of our strength in the B2B business and our customers' preference to consume on networks and their choice of operators being Beeline. I do expect that these customers will continue consuming this even after COVID. Therefore, we will see, in addition to that, of course, then returning to mobile network utilization as well.

Unidentified Analyst, Analyst

So the first one would be, could you please give us some color on whether you reached any decision on the acquisition of the remaining 15% in the Pakistan business from your partners? The second one is, could you please update us on your current listing strategy, whether you're still looking for the secondary listing or not?

Sergi Herrero, Co-CEO

Happy to take the first one on Pakistan, and then maybe Serkan or Nik or Alex can comment. So we didn't make any decision. As you know, there's a period of time to make this put option. So we are evaluating the options, and we'll come back with updates when it's required.

Nik Kershaw, Head of Investor Relations

Just regarding the listing and alternative listings, this topic, as we mentioned last time, has been raised by a number of investors. Clearly, we obviously take investors' concerns to heart. It has been discussed internally, and we are evaluating this. As soon as we're in a position to give feedback to the market, we will do so.

Operator, Operator

There are no further questions at this time. Please continue.

Nik Kershaw, Head of Investor Relations

If there are no further questions, we'd just like to thank everyone for taking time to dial into our call. If you do have any further follow-up questions, please feel free to reach out to us. Take care, everyone, and we'll speak again soon. Thanks very much.

Kaan Terzioglu, Co-CEO

Thank you. Stay healthy.

Operator, Operator

That does conclude the conference for today. Thank you for participating. You may all disconnect.