Earnings Call Transcript - VEON Q2 2022

Nik Kershaw, Investor Relations

Good afternoon and good morning, everyone. Welcome to VEON's Second Quarter Results Presentation for the period ending 30 June 2022. I'm Nik Kershaw of VEON's Investor Relations. I'm pleased to be joined on the line today by Kaan Terzioğlu, our Group CEO; along with our Group CFO, Serkan Okandan. Today's presentation will begin with the key highlights and business update from Kaan. Following this, Serkan will discuss the detailed financial results and then hand it back to Kaan to discuss our outlook and priorities for the rest of the year. Before getting started, I'd like to remind you that we may make forward-looking statements during today's presentation, which involves certain risks and uncertainties. Certain factors may cause actual results to differ materially from those 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 includes reconciliations of non-IFRS financial measures presented today can be downloaded from our website. With that, let me hand over to Kaan.

Kaan Terzioğlu, CEO

Thank you, Nik. Good morning everyone and welcome to the presentation of our second quarter results. This quarter has highlighted the significant impact of current geopolitical challenges. Our teams have demonstrated exceptional focus, and our business overall has shown impressive resilience, which we will share in today's presentation. Before we discuss the numbers, I want to express my gratitude to all our team members, especially those in Ukraine, for keeping Kyivstar's customers and communities connected. I also want to thank our shareholders and investors for their continued trust in our business. We remain committed to protecting and enhancing the value of our company for all our stakeholders. Now, let's take a look at some key figures for the quarter. Group revenues increased by 6% year-on-year in local currency, with service revenue rising 7.5%. Reported revenues in U.S. dollars grew by 5.6% for total revenues and 7.1% for service revenues. I am particularly pleased to report that local currency revenue growth for markets, excluding Russia and Ukraine, was 13.3%. EBITDA for the quarter was up 14.1% year-on-year in local currency and 13% on a reported basis. Local currency EBITDA growth for markets, excluding Russia and Ukraine, reached 22.6%. CapEx amounted to $382 million, a decrease of 21.5% year-on-year. As we mentioned in Q1, full-year CapEx will be lower than initially anticipated. Importantly, we maintain a healthy cash position, with no operational funding currently needed from headquarters and $1.9 billion in cash at headquarters. Let's now discuss operational performance in 4G and digital growth. We achieved balanced growth in the quarter, expanding our total customer base by 2.7% while increasing ARPU across all markets by 5.7% year-on-year. Our 4G users grew by 3.2% year-on-year, and with 102 million 4G subscribers, we have surpassed the 50% penetration milestone. We are making progress towards our target of 70% penetration for the group. With higher ARPU and lower churn, 4G users are central to our growth. Data and digital revenues increased by 17% year-on-year in local currency, nearly three times the rate of overall local currency revenue growth. Our continued investment in 4G is crucial for this growth and our digital operator strategy, which I will elaborate on in the next slide. Regarding our digital operator strategy, our multiplay subscribers grew by 25% year-on-year, totaling 31 million customers. These customers represent 19% of our overall base and contribute 38% to our subscriber revenues. In the second quarter, ARPU for multiplay customers was four times that of single-play voice customers, and their churn was one-third of that of voice-only customers. Looking at each country, we achieved service revenue growth across all operations, supported by a larger subscriber base, increased 4G penetration, greater engagement with our digital applications, and disciplined pricing amid inflation. We also saw strong momentum in terms of EBITDA, with four markets—Uzbekistan, Kazakhstan, Pakistan, and Russia—reporting double-digit local currency EBITDA growth. Let’s go over the individual performances of our major markets, starting with Ukraine. The efforts in Ukraine have been remarkable, with the safety of our employees being our top priority. We are saddened to report the loss of a second Kyivstar employee due to the ongoing conflict. More than 90% of the Kyivstar network sites are operational, with over 4,100 base stations repaired. Since the start of the conflict in February, 3,000 base stations have been upgraded to 4G, and 230 new base stations have been built nationwide. Network sharing among domestic operators is ongoing, and the government has allocated additional frequencies to support service quality. Millions of Ukrainians remain outside the country, and we continue to provide roaming services to support them, with nearly 6 million customers benefiting from our offerings in the last four months. I want to thank our roaming partners, especially fellow operators in Europe, for their support in making roaming services accessible and affordable. Despite current uncertainties, Kyivstar continues to grow its 4G customer base as part of our 4G Everywhere strategy. We are focused on supporting customers with mobile education and health platforms. In this challenging environment, Kyivstar has delivered solid results with revenue growth of 3.9%. However, due to exceptional costs related to our employee support programs and changes to our revenue streams, EBITDA decreased by 4.8% year-on-year. Moving on to Russia, the Beeline team is dedicated to providing essential connectivity to our 47 million subscribers. A significant portion of our Russian revenues comes from humanitarian telecom services. Beeline experienced year-on-year growth in both service revenue and EBITDA, though total revenues were impacted by lower handset sales, with service revenues rising by 2.4% and EBITDA increasing by 11.6%. Beeline's extensive network rollout over the past two years has been critical. Currently, Beeline has 25.5 million 4G users, a 5.4% increase year-on-year, making up 58% of its total subscriber base. The recent volatility of Russia's currency has affected reported revenue, which increased by 12.2% year-on-year in U.S. dollar terms. Now, in Pakistan, we continue to gain market share. Jazz's total revenues grew by 11.1% year-on-year, doubling the overall market growth rate despite challenges like a 5 percentage point increase in withholdings tax and a 30% cut in mobile termination rates. In Q2, Jazz achieved a 50% penetration rate for 4G customers. Eighteen percent of our subscribers are multiplay customers, contributing 37% to our subscriber revenues. Local currency EBITDA rose by 19.8% year-on-year; after adjusting for some one-off items, including SIM tax reversals and Warid license charges, normalized EBITDA growth was 13.8%. Additionally, Mobilink Bank also contributed positively to EBITDA performance. JazzCash continued to expand, with monthly active users increasing by 23% year-on-year to 16.2 million. The ARPU for JazzCash users is 36% higher than the average Jazz ARPU. Tamasha also saw significant growth, with monthly active users jumping 96% year-on-year. We reached approximately 2 million active users by the end of July, significantly increasing total watch time. Moving to Kazakhstan, Q2 was another successful quarter, with both total revenue and EBITDA growth exceeding 20%. Beeline Kazakhstan has now seen five consecutive quarters of over 20% growth and continues to gain market share. With 69% 4G user penetration, we are nearing the group target of 70%. Strong 4G penetration has driven exceptional revenue and EBITDA performance. In Q2, data and digital revenues grew by 35.8%, boosted by our digital applications and an increasing number of multiplay customers. Our financial services offering, Simply, reached 115,000 monthly active users since launching in June 2021, while our digital-only brand izi now has over 122,000 monthly active users. In Bangladesh, our decision to speed up network investments is paying off, as Banglalink recorded double-digit quarterly revenue growth of 11.1%. Competitive analysis shows Banglalink's leadership in revenue and market share growth, and we anticipate continued growth. Banglalink’s revenue increased at twice the market average, and our 4G subscriber base rose by 36.3%, reaching 13.5 million, with more than doubling of our 4G penetration rate. With increased revenue generation from our 4G users, data revenues surged by 22.5%. Banglalink's video platform, Toffee, and our MyBanglalink self-care app, have helped develop our multiplay base to 9%, which now accounts for over 20% of total subscriber revenues. In Uzbekistan, Beeline's remarkable turnaround continues, with further solid results. Beeline Uzbekistan is gaining market share and remains the leading operator, with revenues growing by 25.2%. While EBITDA was affected by some one-off items, normalized EBITDA was up 4.5% year-on-year as we build capacity for sustained growth. Our 4G subscribers reached 4.8 million, a 62% penetration rate, an 8 percentage point year-on-year increase, supporting a 39.2% rise in data revenues, a key performance driver. I want to emphasize the significance of growing our multiplay customer base and the revenues they generate, aligning with our Capital Markets Day strategy. Now, let’s take a look at our infrastructure value. We are making progress across various markets, presenting opportunities to unlock more value for our stakeholders while supporting group liquidity. Our actions regarding our tower base are not solely driven by liquidity needs; rather, no operator today can afford exclusive networks. Towers should be managed by independent companies serving multiple operators within a country. We have established legal entities in Pakistan, Kazakhstan, and Ukraine, and processes are underway in Bangladesh and Uzbekistan, with plans to announce several tower deals in the coming year. Now, regarding our digital products, JazzCash's active user base increased by 23.2% year-on-year, serving 16.2 million customers and 157,000 merchants, more than doubling within a year. The total number of transactions processed by JazzCash in Q2 reached 512 million, representing a 35% increase year-on-year, with gross transaction value totaling nearly PKR3.7 trillion, up 29.3% year-on-year. We also offer microfinance products through Mobilink Bank, and our application for a digital banking license is expected to enhance our mission for financial inclusion in Pakistan. In terms of entertainment services, Banglalink's Toffee, the country's top entertainment platform, grew by 36.8% year-on-year to 6.8 million users. Daily active users, an important engagement measure, almost doubled to 2.9 million. More than 75% of Toffee's user base consists of non-Banglalink customers, with an average daily watch session of 19 minutes. Tamasha in Pakistan now has 1.6 million active users, a 95.5% year-on-year increase, and we reached approximately 2 million monthly active users by the end of July. I will now pause and hand the call over to Serkan to discuss our second quarter financial results in greater detail.

Serkan Okandan, CFO

Thanks, Kaan. Good morning and good afternoon to everyone. In the following slides, I will elaborate on the financial highlights for our second quarter and first half year results in more detail. For the first half of 2022, we reported solid local currency growth in both revenues and EBITDA. Service revenues and EBITDA were up by 8.2% and 9.9% year-over-year, respectively. As we noted with our first quarter results, CapEx for this year will be lower than we originally anticipated and also lower than last year. For the first 6 months, CapEx was USD750 million, down by 14.7% year-over-year. The higher reported EBITDA and lower CapEx compared to last year resulted in USD550 million unlevered free cash flow whereas EFCF for the first six months was approximately breakeven. Moving to Slide 20, which covers the same metrics, but for the second quarter alone. Similar to the half year results, we saw strong local currency performance in both revenues and EBITDA with the same trends in CapEx and cash flow. On the coming slides, I will discuss the quarterly performance in more detail. Moving first to revenues on Slide 21. The second quarter showed solid service revenue performance across all our markets especially with Uzbekistan, Kazakhstan, Bangladesh and Pakistan, all delivering double-digit growth. In Ukraine, we achieved 3.9% year-over-year revenue growth despite the current operating environment. And as mentioned by Kaan, this is a testament to our team in Ukraine. In Russia, reported revenue was negatively impacted by lower handset sales due to supply chain issues while service revenues were up by 2.4% year-over-year. Our non-telco related revenues in Russia constitute 8% of total group reported revenue. In Pakistan, revenues were up by 11.1% year-over-year. The strong revenue growth in Pakistan comes despite changes in taxation legislation and the reduction in mobile termination rates, which impacted revenues negatively. The overall revenue performance for the quarter was supported by strong 4G adoption, a continued increase in data usage and various pricing initiatives. Moving on to Slide 22, which outlines our EBITDA performance in greater detail. Local currency EBITDA was up by 14.1% year-over-year although this was impacted by a number of one-off items, which Kaan has already covered. The underlying performance remains strong and adjusting for these one-offs, normalized EBITDA would be up by 10.7% year-over-year, which is a very solid result. Uzbekistan, Kazakhstan, Pakistan and Russia, all reported double-digit local currency EBITDA growth. It is important to note that the double-digit EBITDA growth in Russia now marks the fifth consecutive quarter of growth. Similar to the first quarter, energy costs remain a challenge in multiple countries. Energy costs rose around 21% year-over-year, which is a significant increase for this expense line. However, we remained focused on cost control and as a result, EBITDA margins were up by 3 percentage points year-over-year. Turning now to Slide 23, I will cover some important balance sheet metrics. Our total cash position stands at USD2.3 billion with USD1.9 billion at the headquarter level. This position is held in both U.S. dollar and euro and highlights the group's continued strong liquidity position. Regarding the Algeria put option, we have completed all of the steps and the deal has been signed. The payment is also guaranteed by the Algerian government. The transaction will officially close upon receipt of the USD682 million. Our leverage ratio was largely impacted by the appreciation of the ruble against U.S. dollar during the second quarter. At the group level, gross debt was similarly impacted by the stronger ruble. I would point out that at the headquarter level, our net debt is around USD4.1 billion. Moving to Slide 24, which shows our debt and liquidity positions in more detail. Our gross debt excluding leases increased to USD8.7 billion with a total cash position of USD2.3 billion. As I previously mentioned, USD1.9 billion of total cash is at the HQ level. Our net debt currently stands at USD6.4 billion excluding leases and USD3.6 billion in capitalized leases. Looking at the currency breakdown, 41% of net debt before leases and 78% of our leases are denominated in ruble. Turning now to Slide 25, which summarize the debt and liquidity of our operations in Russia. Gross debt excluding leases is USD2.8 billion, of which USD900 million represents intercompany debt to HQ. The leverage excluding leases is 2.27x. After adjusting for capitalized leases of $2.8 billion, the leverage ratio is 3.2x. Moving to Slide 26 where we outline the group's debt maturity schedule. As you can see from this chart, we have a favorable maturity schedule for the near term with no further material repayments at the HQ level for the remainder of this year. The revolving credit facility can be rolled each period until final maturity in '24 and '25. Our next upcoming obligation is a USD529 million bond maturing in Q1 next year followed by a $700 million bond in Q2 next year. You may also see on the left side of the slide that our current cash position is USD2.3 billion. It is important to note that we continue to meet all our legal obligations for all interest and principal payments due on our debt in a timely fashion. Turning to Slide 27, which details changes in our cost of debt and average debt maturity. The increase in our cost of borrowing through to Q1 this year was due to increase in our local currency funding focusing to align currencies of our debt with revenues in respective operations. In the second quarter, we completed the drawdown of the RCF in U.S. dollar, which led our average cost of debt to reduce to 7%. However, the rising interest rates globally will put further pressure on our cost of funding in local currencies, which have floating interest rate portions as well. Meanwhile, our average debt maturity remains stable at 3.2 years. Let me now hand back over to Kaan for closing remarks. Thank you.

Kaan Terzioğlu, CEO

Thank you, Serkan. Let me close our presentation with a reminder of our priorities. Protecting our people continues to be the number one priority for our group. Keeping our customers connected is our second priority, and we are the providers of an essential humanitarian service helping to keep 218 million customers in 8 countries connected. Third priority, cash generation and preservation. Throughout these challenging times we will continue to protect the good standing of our company, providing appropriate liquidity and capital structure. Number four, driving growth. We are not compromising on our growth aspirations as we shared with yourselves in the November Capital Markets Day. All our businesses continue to deliver growth as we transition to becoming an asset-light digital operator. And finally, managing our portfolio. Our active portfolio management remains focused on monetization opportunities in line with the strategy of growth that we have shared with yourselves. With that, I would like to thank you for your attention and I will hand over to Nik so we can move on to Q&A session.

Nik Kershaw, Investor Relations

Good afternoon, everyone. Thanks very much for your time again. We've received a number of questions ahead of time and also a number have come through on Zoom while we've been talking. The one question that has come up multiple times, including actually from Snowcap, from Barclays and also a number of people on Zoom, Serkan capital decline. Just confirm again the status on the Algeria put option and really just an update on timing there?

Kaan Terzioğlu, CEO

Thank you for the question. As we have informed you in the last call as well, the evaluation process of our stake in Djezzy has been totally completed in line with the shareholders' agreements and we are waiting to receive cash, as of now which we have not received, but there are no open issues or conflicts as we speak. We hope to complete the transaction once we receive the cash in our accounts.

Nik Kershaw, Investor Relations

And then Serkan, a question for you from Cyrus. I mean, would you consider buying back the 2023 bonds given the current pricing and any plans around those bonds?

Serkan Okandan, CFO

Since the beginning of this year, our focus is to keep a strong liquidity position at the HQ level and as a result of this focus, we built up USD1.9 billion available liquidity at the HQ level as of now. Having said that, in the meantime we are also currently evaluating various options around our total debt structure in a holistic manner.

Nik Kershaw, Investor Relations

Then from Monika Asset Management. Kaan, what is the current position of VEON given the statement we've seen on Bloomberg around sanctions?

Kaan Terzioğlu, CEO

Let me be very open. VEON is currently not the target of U.S., EU or U.K. sanction laws. We are aware that Bloomberg has opined that our securities might be subject to U.S. sanctions or restrictions. We did not receive advanced notice on this and our legal team is assessing the impact of Bloomberg's opinion. We are fully committed and we are in compliance with all applicable sanction laws and we are looking into this issue with our legal team to carefully review the full range of options to enable VEON to address this matter.

Nik Kershaw, Investor Relations

And then a question from Prosperity again for you, Kaan. What is the situation with the CapEx rollout in Russia, particularly given that we've seen some of the other operators have commented that they've procured a lot of CapEx ahead of time? Can you maybe just update us on the CapEx plans around Russia?

Kaan Terzioğlu, CEO

I cannot, of course, comment on other operators. But the last 2 years for us were heavy investment years in terms of modernizing our network, which allowed us to have the most modern and new network available. The current export controls will be impacting all operators equally. So I do not see this as a potential competitive dynamics changing issue.

Nik Kershaw, Investor Relations

Then a couple of questions from Shark Capital. The first one is what can VEON do to unlock further value for the group?

Kaan Terzioğlu, CEO

And my sincere thanks to Shark Capital and their continued support for us. Let me maybe take point by point. First on Algeria. As I mentioned, the final closing of the transaction will happen on the receipt of our cash settlement. We are expecting $682 million and the procedure is on track and hopefully will materializing soon. I have also mentioned that our strategy in terms of becoming an asset-light company and our towers that we hold in multiple jurisdictions represent a serious opportunity for us to monetize certain sleeping assets in our balance sheet and we are on track with these transactions and hope to report news in the next 12 months. We also consider optimizing our portfolio based on the criteria we have in terms of markets that we want to be operating. As you noticed, we are specialized in large population, significantly low penetration of 4G and smartphone penetration and access to adjacent markets like financial services, entertainment services, health care and education is in place. And we will be looking to optimize our portfolio for the markets that do not fit into that. So you might see also certain portfolio changes as we progress and we will of course keep you up to date. As also we look into our markets, the digital assets that we own represent significant opportunities. Whether in fintech area or entertainment area, the businesses that we have like JazzCash, like Tamasha, like Toffee represent significant values and we will also be looking for strategic partnerships in these areas that will generate liquidity for our company. We also continue to consider strategic options in relation to our portfolio to unlock value that will benefit our stakeholders. We would like to highlight that it is our ultimate responsibility and accountability and we are committed to creating value for our shareholders and protecting the rights of our creditors and continue executing on our strategy of growth. At this point, I would like to stop there.

Nik Kershaw, Investor Relations

Kaan, could you also maybe comment around the ability to increase prices, particularly if you look at a market like Pakistan where the inflation is so high?

Kaan Terzioğlu, CEO

I'm glad to report to you that about two days ago we had special approval also from the regulator in Pakistan to adjust our pricing reflecting the increases in the cost structures. An overall average price increase of 14% will allow us to catch up with the inflation. But I would like to highlight that we are extremely disciplined on inflationary pricing and we consider pricing power as one of the key criteria to stay and to function in the markets that we operate. From that perspective, I take that news very positively in Pakistan.

Nik Kershaw, Investor Relations

Serkan, this is from XO. Have you been able to make coupon payments from Russia on the intercompany debt?

Serkan Okandan, CFO

Yes, Nik. We have been able to receive the interest payments from our Russian subsidiary when they became due and this is being done by following the official process in Russia, which means by applying a license from the Ministry of Finance in Russia. But so far, we haven't experienced any problem with that.

Nik Kershaw, Investor Relations

And then, Kaan, back to you. Question from a number of people as well and also from Barclays. Can you just maybe comment on the process to separate out Kazakhstan?

Kaan Terzioğlu, CEO

Sure. As we discussed in Q1 update as well, our operating subsidiary in Kazakhstan is indeed currently held through our company VimpelCom in Russia. As we have been simplifying our group structure, we have already taken ownership of Armenia, Georgia, Uzbekistan and Kyrgyzstan from VimpelCom and we are already in the process of also doing the same for Kazakhstan.

Nik Kershaw, Investor Relations

Thanks very much. I think for now that's all we have time for. I know there have been a number of other questions that have come through on Zoom. I will get back to everyone individually. And if there are further questions, please feel free to reach out. Thank you very much, everyone, for dialing in and thanks for your time.

Kaan Terzioğlu, CEO

Thank you.

Serkan Okandan, CFO

Thank you.