Earnings Call Transcript - VEON Q3 2021

Operator, Operator

Good afternoon and good morning, everyone. Welcome to VEON’s Third Quarter Results presentation for the period ending 30 September. Nik Kershaw here, VEON’s Group Director of Investor Relations. I'm pleased to be joined in the room today by Kaan Terzioglu, our Group CEO, along with our Group CFO, Serkan Okandan, and Alex Bolis, Group Head of Corporate Strategy Communications Investor Relations. Our country CEO is on the line with us today as well. Today's presentation will begin with the key highlights and the business update from Kaan. Following this, Serkan will discuss the detailed financial results. We will then hand it back to Kaan to discuss our outlook and priorities for the full year 2021. As ever, we will ensure there's ample time for your questions, but we would ask that you save these for the end of the presentation. Before getting started, I would 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 2021, particularly in light of the COVID pandemic, future market developments and trends, operational and network development and network investment, and the company's ability to realize its targets and commercial and strategic initiatives including current and future transactions. Certain factors may cause our 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 includes a reconciliation of non-IFRS financial measures presented today, can be downloaded from our website. With that, let me hand over to Kaan.

Kaan Terzioglu, CEO

Thank you, Nick. Good morning to all and welcome to the presentation of our third quarter results. Today we are reporting a second consecutive quarter of double-digit growth. On a local currency basis in Q3, group revenues grew by 11.2% year-on-year, bringing growth for the first nine months to 9.7% at the top end of our guidance. Local currency EBITDA in Q3 was up by a very solid 9.1%, given the ongoing strong focus on cost efficiency. Normalizing for one-off items, which Serkan will discuss in more detail, our EBITDA like-for-like was up 13.6% year-on-year. This strong performance was visible in reported currency as well, where revenues grew by 10.2% and EBITDA increased by 8.6%. In this quarter, we started the value crystallization of our infrastructure assets with the announced tower sale in Russia. We accelerated the transformation of our operating companies into digital operators, expanding our multi-play and double-play 4G base by 38%, and we expanded the reach and scope of our digital services including JazzCash and Toffee. Given this better than anticipated performance, we are increasing our full year EBITDA guidance to a minimum of 8% local currency growth, while maintaining our current revenue guidance at high single digit local currency growth. Moving on to slide 6, I want to give you a country-by-country detail of our local currency performance. This shows revenue growth across all of our markets with double-digit growth in five of our countries. These are positive EBITDA trends across all our markets, other than in Pakistan, where the growth was impacted by a one-off in the prior year. Adjusting for this one-off, Pakistan's EBITDA was up 24.6% year-on-year. Ukraine, Pakistan, and Kazakhstan, our core growth markets, all showed strong double-digit underlying growth in both revenue and EBITDA. Russia, with 8.2% revenue growth in Q3, was the largest nominal contributor to our group revenue increase. Let me now take you through the individual performances of our largest markets during the quarter. I will start with Russia. Beeline recorded another quarter of accelerating growth with total revenues rising 8.2% year-on-year. This quarter, we also saw mobile service revenue growth of 4.5%, marking the second consecutive quarter of growth. It's good to see continued acceleration in revenues through the quarters with total revenues up 10.2% and mobile service revenues growing 5.3% in the month of September as we closed the quarter. 4G users are now at 25.4 million, up 17% year-on-year with growth rates nearing 30% over the past two years. They now account for more than half of our total customers in Russia, supporting net promoter scores getting higher, ARPU growing, and churn lowering. In Moscow, where we invested heavily to improve customer experience, we have seen year-over-year improvement in net promoter scores of 8 points, while our competitors' NPS scores declined over the same period. Going forward, we expect similar improvements in other regions where we are actively investing. We have also seen encouraging trends in mobile number portability. Again in Moscow, year-to-date, there has been a more than doubling of net porting, and in Russia as a whole, we have seen a 90% reduction in net promoters. Let us now turn to Ukraine. Kyivstar delivered another quarter of strong performance with double-digit growth in both revenue and EBITDA. Revenues grew by 12% year-on-year in Q3, showing consistent growth over the past two years. This has been supported by an equally strong and consistent rise in 4G penetration across our subscriber base. We added 2.8 million 4G subscribers year-on-year and 5.3 million over the past two years, corresponding to 84% growth. It is supported by our continued focus on network improvement, including better coverage on mobile and fixed networks, and increased focus on coverage on the main highways of the country. A look at Pakistan on slide nine shows 13% growth in revenue, with EBITDA after adjusting for the one-off item in the prior year, growing 24.6%. Revenue has accelerated strongly over the past year, enabled by more than 50% in 4G subscribers, and 4G penetration has now reached 47%. Customers who use at least one of Jazz's digital applications, such as JazzCash, on top of voice and 4G now represent 27% of our one-month active customer base and account for half of our subscriber revenues, demonstrating the revenue generation potential of this strategic segment. On slide 10, Kazakhstan delivered another period of outstanding performance. Revenue was up 25.5% in Q3 as our 4G subscriber base grew 27% year-on-year, reaching 62% penetration of our total subscriber base, the highest in our portfolio. Our data revenue growth was an impressive 40%, with our ARPU growing by 22.7%. Revenue growth has accelerated over the past 12 months supported by the growth in data revenues, which in turn is enabled by the high 4G penetration of our subscriber base. Fixed mobile conversion products continue to contribute to this success, with 23% of the broadband base also using our mobile services. Finally, on slide 11, despite challenges in Bangladesh, including partial and full lockdowns during the quarter, Banglalink delivered 7.2% revenue growth, 32% growth in data revenues, and 61% 4G subscriber base expansions as we continue to gain market share in this critical market. Engagement rates for our digital services continue to trend higher, and the double-play 4G and multi-play customer base grew 89% year-on-year. The recap of our other markets is summarized here on slide 12. Growth in our 4G subscriber base in these markets continues to increase as population coverage ranges from 61% to 93%. This has contributed to encouraging data usage growth ranging from 26% to 33%, with corresponding data revenue growth ranging from 3% to 24%. In early July, we announced that we had exercised our put option to sell our stake in Jersey, in Algeria. The process to determine the fair market value at which this transaction should take place is continuing. Algeria does not contribute to operational consolidated results due to being accounted for as a discontinued operation. We continue to manage Jersey on a standalone basis and recorded growth in revenues of 3.6% in EBITDA and 6.3% in EBITDA, with the 4G subscriber base growing by 29%. Let us now look into some of our digital products. JazzCash has increased its active user base by 44%, serving 14 million customers. In addition to consumer customers, it is also serving 89,000 merchants, tripling over the past year. A new service to simplify in Kazakhstan reached 455,000 users following its launch in June 2021. Banglalink's entertainment platform Toffee reached 6.3 million users, with over 70% of Toffee’s users being non-Banglalink customers. Toffee subscribers who are also Banglalink customers using our 4G services have nearly three times higher ARPU, a quarter of the churn rate of the total subscriber base, while consuming six times the average data. Lastly, big data AdTech revenues across Russia, Kazakhstan, and Ukraine more than doubled year-on-year, recording 2.3 times, 2.2 times, and 2.6 times growth respectively in these countries. Slide 14 shows and summarizes how our digital products, built on the backbone of our 4G network, are driving higher levels of customer engagement. The double-play and multi-play 4G customers are demonstrating materially higher engagement across ARPU, churn rates, data usage, and minutes of use. Our multi-play and double-play 4G user base across the group reached 34% of our active one-month subscriber base and accounts for 61% of our subscriber revenues. Let me pause here and hand the call over to Serkan to discuss our third-quarter financial results in more detail.

Serkan Okandan, CFO

Thanks, Kaan. Good morning and good afternoon to all participants. In the coming slides, I will elaborate on our financial results for the third quarter in more detail. Before turning to the numbers summarized here on slide 16, it's important to note the one-off items that impact year-over-year comparisons with the third quarter of last year. These are set out in the appendix of this presentation deck. To summarize, there are some key items to bear in mind. In Q3 last year, there were two items, both impacting EBITDA. First, a reversal of a provision of $52 million in Pakistan, and second, the recording of a tax provision of $15 million in Uzbekistan. In Q3 this year, there are three items to note. First, we recorded a government grant on radio frequency fees of $6 million above EBITDA in Kazakhstan. Second, triggered by the court decision, our export license in Pakistan is now capitalized as an intangible asset and is now amortized above EBITDA rather than previously reported as an operating cost above EBITDA. This uncertainty around accounting for this has now finally been resolved. Lastly, our Algeria business is now accounted for as a discontinued operation given the ongoing sales process. I should explain how these impacts certain reported numbers as we look at revenues and EBITDA in detail in the following slides. However, setting these aside, Q3 was another quarter with strong results for the group. Revenue rose by 10.2% year-over-year on a reported basis, and 11.2% in local currency terms, driven by an acceleration of growth in Russia, and double-digit growth rates in all our other key markets. The results overall demonstrate that investment in 4G networks is clear, reflected in another strong quarter for data revenue, which grew by 18.8% year-over-year in local currency terms, supporting local currency service revenue growth of 9.4%. Group EBITDA increased by 9.1% in local currency terms, and 8.6% reported, corresponding to a reported EBITDA margin of 44.4%. The year-over-year decline of 60 basis points is largely due to the provision reversal in Pakistan recorded last year, as I mentioned earlier. Operational CapEx rose by 17.1% as we continue with our network investment program, resulting in a last 12-month CapEx intensity ratio of 25.2% for the group. If Algeria was included, the last 12-month CapEx intensity would have been around 24.4%. The group reported $195 million in net income in Q3 versus a net loss in the same quarter last year. Finally on this slide, equity free cash flow was $308 million for the quarter, supported by double-digit revenue growth and, in turn, stronger EBITDA. Looking at revenue in more detail on slide 17, the quarter was strong across all our markets, with particularly high growth rates in Kazakhstan, as a consequence of 4G subscriber growth, and then encouraging performance from Beeline Russia, where positive momentum continued. Once again, this performance was supported by strong 4G adoption and customer growth, along with a further increase in data usage. Slide 18 sets out our EBITDA performance in greater detail. As I mentioned earlier, Pakistan's year-over-year EBITDA growth rate is impacted by last year's provision reversal. Excluding this, Pakistan's normalized EBITDA growth would be 24.6%. Additionally, the large year-over-year rise in Uzbekistan EBITDA primarily reflects the one-off tax provision recorded in Q3 last year. Adjusting for this, Uzbekistan's EBITDA still grew by an impressive 31% year-over-year. Furthermore, Kazakhstan's EBITDA this quarter is boosted by $6 million due to a government grant on radio frequency fees. Adjusting for these one-off items in both years, our EBITDA margin would have expanded year-over-year rather than the reported 60 basis point decline. A key element in this underlying improvement is the contribution now being made by Project Optimum. To remind you of our mission here, we aim to achieve a one to two percentage point improvement in group cost intensity ratio by financial year 2023, although the greatest impact of Project Optimum is likely to be seen in 2022. Our continued success in reducing our corporate overhead also made a positive contribution to group profitability this quarter, with HQ corporate overhead further declining by 39% year-over-year to only $26 million in Q3. Over the past two years, the reduction has been an impressive 65%. Looking now at CapEx and operational cash flow on slide 19, 4G network investment remains a top priority for group expenditure during the quarter, reflected in the 17.1% rise in reported CapEx to $381 million. This corresponds to a reported last 12-month CapEx intensity ratio of 25.2%. Although on a year-to-date basis, the ratio is 22%. Russia was again the primary focus of this investment, accounting for around 60% of our operational CapEx, the same proportion reported in the second quarter. Continued investments in our digital capabilities and services remain a key strategic focus throughout the quarter and helped us to grow our digital user base significantly. Operational cash flow continues to strengthen in Q3, reflecting the strong EBITDA performance in our markets. For the quarter as a whole, operational cash flow amounted to $509 million, a significant rise from the $374 million reported in Q2, with Russia, Ukraine, and Pakistan accounting for around 80% of this. Turning now to group debt and equity free cash flow on slide 20, at the group level, net debt was around 6%, lower than in Q2 at $8.15 billion which primarily reflects the appreciation of the Ruble against the U.S. dollar during the quarter. Our leverage ratio was 2.5 times, which is lower than 2.7 times in Q2 after the impact of Algeria is accounted for, and is in line with our internal level of comfort. We made a further drop down under our global medium-term note program during the quarter, issuing 20 billion Rubles in five-year notes, which is our third Ruble bond issue under the program as we continue to focus on diversifying our debt while managing FX risks. This resulted in a small 20 basis point year-over-year rise in our average cost of debt to 6.3%. However, we also extended our average debt maturity to 3.2 years. Group liquidity remains strong with total cash and committed credit lines amounting to $3 billion. All cash inflows from our tower transactions and the sale of Algeria will be used to reduce group debt. Turning now to equity free cash flow, which is summarized on the right-hand chart of the slide, the group recorded a strong result of $308 million in equity free cash flow in the quarter. This reflects our strong EBITDA performance, as well as lower operational CapEx than last quarter and improvement in working capital management. This improvement leaves equity free cash flow at $321 million for the first nine months of the year. This brings us to slide 21 and our financial guidance for the full year 2021. With operational momentum that has been building throughout the year, we have continued to perform ahead of our guidance. As a consequence, we believe it is appropriate to revise our 2021 financial guidance once more to reflect the likelihood of stronger EBITDA performance. We are therefore raising our group EBITDA guidance from mid to high single-digit growth to a minimum of 8% local currency growth. Our group revenue and CapEx intensity guidance remain unchanged. Regarding dividends, our dividend policy remains unchanged, which is at least 50% of equity free cash flow after licenses, while at the same time ensuring group leverage is managed within 2.4 times. With that, let me pass back to Kaan for closing remarks before we turn the call over to your questions.

Kaan Terzioglu, CEO

Thank you, Serkan. Let me close our presentation with a reminder of our priorities for 2021 and our progress to date. One, we are progressing well on the path to increase our 4G subscriber penetration. With a 10 percentage point increase year-on-year, we have now reached 46%. Our target over the medium term is to reach 70% penetration. Two, we remain focused on delivering growth in Russia as we accelerate total revenue growth with further progress on subscriber growth, most notably in 4G. Maintaining this is a top priority in the months ahead as we strengthen our market position. Three, Ukraine, Pakistan, and Kazakhstan continue to deliver double-digit growth. We are also encouraged to see good revenue trends in Bangladesh, a market which offers good structural growth opportunity. Four, our digital operators strategy is being executed through deepening customer relationships with our subscribers, supported by the growth of our multi-play base. With the encouraging growth rates in JazzCash and Toffee, crystallization of value for these products remains an important focus. We maintain discipline in managing our portfolio. The acquisition of minority shares in Georgia and restructuring of the ownership of Beeline Uzbekistan are examples from the quarter. We remain ambitious on costs and continue to improve the group's cost efficiency under Project Optimum, at both the country level and in our headquarters. Finally, we remain committed to realizing the value of our considerable infrastructure portfolio. We announced the sale of Russian towers, and we have established separate tower entities in Ukraine and Pakistan. In Bangladesh, we are considering various options to crystallize the value from our infrastructure. On December 7, we will be hosting our Capital Markets Day, where we will discuss our strategic priorities and high-level financial outlook for 2022. With that, I would like to thank you for your attention and turn the call over to the operator for your questions.

Operator, Operator

Thank you. Yes. And your first question comes from Henrik Herbst from Morgan Stanley. Your line is open. Please ask your question.

Henrik Herbst, Analyst

Great, thanks very much and congratulations on the turnaround in Russia. I was just wondering if I could ask you on Russian questions.

Kaan Terzioglu, CEO

Coming from the system? Your operator is not operating. Can we get the questions? Yes.

Henrik Herbst, Analyst

Can you hear me? Hello?

Operator, Operator

Henrik Herbst, please continue.

Henrik Herbst, Analyst

Yes. Can you hear me? Hello?

Kaan Terzioglu, CEO

We can hear you.

Henrik Herbst, Analyst

Great, thank you very much and congrats, again on the strong set of results. Can I ask you about the margin progression in Russia and how we should think about the much slower EBITDA growth, I guess in service revenue growth. I know that you've had sort of prioritized network investments and turning the top line around in Russia. But I was just wondering if you could talk a little bit about what you're investing OpEx at the moment. And as we go into 2022, should we see the gap between service revenue growth and EBITDA growth closing, with hopefully EBITDA growth picking up, I guess? That was the first question. And then the second question, I guess, is just if you can talk a little bit around the ARPU growth in Russia as well. It seems like ARPU growth is slow, although you're seeing very impressive growth in 4G, and as you point out, the ARPU on 4G customers is a lot better. So just your thoughts around that, I guess. And then where we are in terms of potentially adjusting prices upwards? Thanks very much.

Kaan Terzioglu, CEO

Thank you. And I guess Alex is on the call as well. I will give the word to him. I share my thoughts on. First of all, I'm extremely satisfied with what the team is doing in Russia, executing our turnaround. It's been really remarkable. And I get your question about the EBITDA and why the EBITDA growth is less. As I have mentioned numerous times over the quarters, this year was a critical year for us and our network management functions. I actually visited our technology campus last Friday and I saw that this presentation was almost 95% completed with excellent results in terms of what the team can provide to our customers. Of course, there's an impact on the cost base. On the second side, as we expand our network and as Serkan mentioned, we have allocated almost 60% of our CapEx to Russia, every single engineering and construction team in Russia is running out to rollout base stations, of course, also impacting the run rate. Now, you also asked about ARPU growth, the situation in terms of network quality, pricing, and the NPS where we are coming from. Until late July, we have deliberately stayed away from making upward price adjustments, which the market actually is quite justified to make, and you will see us more active on that side. May I ask if Torbakhov Alexander is available to take the calls and provide further color? Can we unmute Alexandra? Alexander Torbakhov is our General Manager in Russia, Beeline.

Serkan Okandan, CFO

While waiting for Alexander, maybe I can comment about margin because you asked about the long-term EBITDA trajectory. I would suggest looking at EBITDA in absolute numbers going forward, especially in Russia. Why I'm saying this? Because first of all, the revenue composition is transforming in Russia, and in each and every revenue bracket, we have different marginality. On top of that, with the closure of this Russia tower deal starting next year, the cost structure will also transform to a different model. So both of them will impact the EBITDA margin, so probably the margins will not be apple-to-apple comparable next year to this year. I would suggest that in the long term, keep an eye on the EBITDA in absolute terms rather than margins, specifically for Russia.

Kaan Terzioglu, CEO

Again sorry, it looks like we have difficulty unmuting Alexander. But I want to use this opportunity to congratulate Alexander on a successful rebranding of our operation Beeline with the new logo and customer value proposition saying we are on your side. Thank you, Alexandra. Please, let's take the second question.

Operator, Operator

Thank you. Our next question comes from the line of Cesar Tiron from Bank of America. Your line is open, please ask your question.

Cesar Tiron, Analyst

Yes, hi, everyone. Thanks for the call and for taking my questions. So I'll go with the first one. Going back again to the Russian outbounds. I think there were in the past some different layers that you did mention to improve the efficiency of that business and that would have included, for example, closing down more stores. Is that still on the cart right now?

Kaan Terzioglu, CEO

Cesar, thanks a lot for the question. We are continuously optimizing our distribution network. We have almost reached a thousand in terms of store closures and digital optimizations. But as we do that, we really look into the business model as well. And note your question, and I'll definitely ensure that Alexander can talk in the next quarterly call and we will provide further color on these issues as well.

Cesar Tiron, Analyst

Great, thank you so much. I just wanted to ask a second one if that's okay. I wanted to understand the potential unlock of the balance sheet dramatics. Obviously, we've seen the Russian tower deal. Are you guys also looking to monetize towers in other countries? And what progress have you made on this team? Thanks.

Kaan Terzioglu, CEO

Cesar, thanks a lot. As I mentioned numerous times, I think there is no telco in the world that has the luxury to have exclusive towers. Network sharing is a must and it will, of course, start with the passive side of the equation. So, our commitment to value our tower assets across our portfolio remains strong. We have already established standalone entities in Pakistan and Ukraine. In Bangladesh, the regulation doesn't allow us to own our company, and we are in various different strategic alternative talks with independent operators there as well. So this objective continues, but please keep in mind that the way we are going to crystallize the value of towers and unlock the value from the balance sheet is not only a sales and leaseback transaction. When we look to tower deals, we look to sustainable operational cost reductions, CapEx reductions as well as a healthy portion of future multi-tenancy revenues coming our way. That's how we managed to secure a very good deal in Russia. If you look from an upfront consideration perspective, it is now slightly above a billion dollars. But in terms of the net present value that this operation will bring to our company, in terms of CapEx, OpEx savings and the ability to offer future tenancy increases has been remarkable, and we are very satisfied with that.

Operator, Operator

Thank you. And our next question comes from the line of Ondrej Cabejšek from UBS. Your line is open, please ask your question.

Ondrej Cabejšek, Analyst

Hi, thank you for the presentation and congratulations on the positive results. I have a follow-up question regarding Russia. Can you provide a breakdown of the 4G and non-4G ARPU in Russia and your view on the future share of 4G subscribers? It seems you're trailing some market leaders in this ratio, even though it's growing rapidly. Could you explain the structure of your ratio being lower than that of the leaders and how quickly you anticipate closing that gap? Additionally, regarding free cash flow, could you give us a list or risk assessment of one-offs, specifically for spectrum over the next four to six quarters? What is your outlook for working capital in the short to medium term? Lastly, what minimum levels of free cash flows would make you comfortable proposing a dividend towards the end of the year? Thank you.

Kaan Terzioglu, CEO

Ondrej, thank you very much. Let me take the 4G ARPU question. I will leave the free cash flow question to Serkan to answer. First of all, the choices that have been made in the past, I don't think it's productive to go back and analyze why we were so late in picking up the 4G penetration so low. In 24 months, what I can tell you is we moved the 4G penetration among our subscriber base from 22 to 46. The part that I liked the most in the last three months, every single month, we increased this by one full percentage point. It means we are accelerating and catching up with the 70%. Now, this is very critical because if you look at the presentation page 14, as customers move from being a single play customer, meaning that they only consume one service from us, either being data or voice, versus a customer being double-play and being on double play with 2G or 3G versus 4G, there is an incredible ARPU uplift impact. It is not only visible in the ARPU uplift, but it is also visible in the churn reduction, even in minutes of use. So the more smartphones, the more 4G consumed, actually even usage of regular voice services has a positive impact up to two times. This is why we are critically looking into this. And the other issue, why it is so critical is that now we are at almost 50% in terms of 4G penetration, the real accelerated part of our strategy is going to come into play. That is the digital operators, and making sure that we move away from selling numbers of minutes, numbers of SMS, numbers of gigabytes to selling digital lifecycle bundles. Every operator who has done this transition has been able to increase their growth rate by further tens. That's really what we are focused on now that we are in the territory of 4G base, getting stronger and stronger you will see us moving into the digital operators strategy at various speeds in different countries. Maybe Serkan to you on the cash flow.

Serkan Okandan, CFO

As far as I could follow up, you asked three questions, like you start with Pakistan EBITDA one-offs, and then free cash flow, and then dividends. So I will try to follow the same sequence. First, Pakistan, as I mentioned in the presentation, there are one-offs both last year and this year. But I think this year's one-off is more important than last year's because last year it was one-time. This year, since we have clarified the accounting of this renewal of rights expiring license, there will be an ongoing positive boost for the EBITDA in Pakistan. Going forward, amortization of the license will go below EBITDA than amortizing line. That will give a quarterly boost to Pakistan's EBITDA, depending on the FX, of course, $5 million to $6 million per quarter. That’s a permanent advantage that we are going to enjoy in Pakistan. Having said that, when I look at the numbers in Q3, in Q3 we generated roughly $60 million EBITDA, sorry, $115 million free cash flow in Pakistan, and that's a very strong number. We believe that despite there are lots of investments coming in Pakistan, we can continue this free cash flow generation in the coming quarters as well. That's about Pakistan. The second one was overall EFCF expectations in Q4 and going forward. Of course, Q3 was remarkably strong in terms of EFCF, we generated more than $300 million cash in one quarter, almost more than $100 million per month. Historically, Q4 is not as strong as Q3 because it’s end of the year and everybody's trying to close their accounts. Vendor payments are probably increased compared to Q3, and the capitalization of CapEx projects will increase towards end of the year. So we are not expecting as strong as Q3 EFCF, but it won't be as weak as Q1 and Q2 this year. It will be somewhere in-between, in our opinion. We will close the year with a strong EFCF number with good results in Q4 as well. Then linking this to dividend, as I mentioned, our dividend policy is unchanged, still a minimum of 50% of EFCF after license payments, and we need to keep an eye on our leverage ratio, which is a maximum of 2.4 times. That’s what we are trying to do and in Q3 it was 2.5 times. But having said that, we expect to close the asset in the second half of the year before the end of the year and by closing this project, we will get proceeds, as Kaan mentioned, hopefully more than a billion dollars with the help of the appreciation of the Ruble. We want to see the closure of the project and where we are going to end in terms of leverage because the intention is to deleverage the balance sheet. We want to see the outcome of these two actions and, of course, the results of Q4. Even without any further EFCF generation in Q4, we are positive to distribute dividends based on 21 numbers. We will see it in the first quarter of next year hopefully. It was a long, long response.

Ondrej Cabejšek, Analyst

Thank you if I may, just two quick follow-ups. In terms of the one-offs I was specifically asking about what is in the pipeline for spectrum? What visibility do you have, especially in some of the markets such as Pakistan and Bangladesh where we've been seeing headlines around potential options in the short term? Do you have any visibility on those one-offs? And then in terms of the outlook, I was specifically interested in working capital. Do you think the levels of working capital that you have today are kind of stable going forward or do you see some major changes in the short term? Thank you.

Serkan Okandan, CFO

So, I missed it. In one sentence, working capital, and I hand over to Kaan for spectrum. Working capital, we see that there are improvement areas in working capital. We can do better working capital management in the coming quarters, but probably Q4 will not be one of those because it's end of the year. But if we take a longer trajectory, we can improve our capital further.

Kaan Terzioglu, CEO

Thank you, Serkan. With regard to the spectrum question, you have probably noticed how disciplined we are when it comes to making spectrum investment decisions. In Pakistan, we actually decided not to bid. It was a principal decision. We will never make mistakes of making money in rupees and Rubles and investing in dollars for spectrum. That was the driving force. Now naturally in markets like Pakistan and Bangladesh, the population and the opportunity that population will bring will always require additional spectrum. We feel very comfortable in Pakistan for the next two years, with also some reforming and shutting down 3G over time to meet our needs. Of course, if there are changes in regulatory environments allowing local currency tenders, we will consider that. Next year, we are going to have a renewal of our license as well, which we are planning in our financial projections. With regard to Bangladesh, we have acquired additional spectrum this year. We now hold 25% spectrum in Bangladesh, and the 25% spectrum compared to our current almost 18% market share shows the upside that the country represents to us. Again, we will always be looking for additional opportunities in this area as well.

Operator, Operator

Thank you. And your next question comes from the line of Ivan Kim from Xtellus Capital. Your line is open. Please ask your question.

Ivan Kim, Analyst

Yes, good afternoon. Two quick questions for me. Firstly, on Moscow leasing. Any further thoughts on that? And then secondly, on the Russia growth in 22. The recovering third quarter is definitely better compared to the second. So there is sequential improvement. But then I'm just wondering, given the current LTE penetration runway, what sort of growth should we be expecting ballpark in Russia in 22? Do you think it's going to be a high single digit? So you think it's going to be mid-single digits, very roughly? Thank you.

Kaan Terzioglu, CEO

Ivan, thanks a lot for the questions. Let me start with the Russian 2022 outlook. I think I made this comment in our last quarterly call as well. My desire around this time next year is to see high single-digit to double-digit growth in Russia. I made a special disclosure on Q3 announcement giving you a little bit of a glimpse on what happened in September this quarter. In September, we actually reached a service revenue growth of 5.3% year-on-year for the month, and 10.2% overall. This indicatively tells you that what I'm saying is not that far from possibility given the LTE penetration increases, and this year, we will see more discipline in inflationary pricing in our operations. In terms of Moscow opening up for trading opportunities, we will keep you updated about the progress. As we have indicated, we are very focused on making sure that the expectations of our shareholders are met in terms of wider coverage of different time zones and currencies, and hopefully we'll keep you informed of that progress over the next couple of weeks. Alex, do you think you would like to?

Alexander Torbakhov, General Manager, Russia Beeline

Yes. Absolutely yes. On the general listings point, of course, we appreciate that investor desire to follow us more from relevant local markets where we are active and, of course, from different time zones. So absolutely, whatever we can do to facilitate to encourage it's obviously our priority. So as Kaan mentioned, we'll keep you posted, but we are extremely geared to any opportunity of this kind.

Operator, Operator

Thank you. And your next question comes from the line of Alexander Vengranovich from Renaissance Capital. Your line is open. Please ask your question.

Alexander Vengranovich, Analyst

Yes. Good afternoon. Very quick clarification question on equity free cash flow you've generated over the first nine months. So basically, before last quarter, I think you showed before the deconsolidation of Algeria, you showed roughly around $50 million of equity free cash flow, which transformed into kind of a zero equity free cash flow after the deconsolidation of Algeria for the first half of 21. So I'm just wondering whether this difference really comes from Algeria? And the second question here, whether you will consider this equity free cash flow generated by Algerian operations when you will be calculating the equity free cash flow eligible for the dividend payments this year? Thank you.

Serkan Okandan, CFO

Firstly, the contribution of Algeria to free cash flow is positive. In overall, if you talk about ballpark figures, it's generating roughly $100 million EFCF every year. So we have excluded Algeria in our numbers. So this impressive performance of EFCF in Q3 is not coming from Algeria. Genuinely the EFCF performance in Q3 was much better than the first half of the year. The second part of the question is whether we will include or exclude Algeria EFCF. We have received the dividends from Algeria from 2020 results. So we received the cash from Algeria based on our shareholding. When we assess the dividend distribution at the beginning of the year, we will take into consideration the reported EFCF numbers, which is 321, year-to-date September. So, we will add Q4 and take that into consideration.

Operator, Operator

Thank you. We do have a follow-up question from the line of Henrik Herbst from Morgan Stanley. Your line is open. Please ask your question.

Henrik Herbst, Analyst

Yes. Thanks very much. Sorry, I wasn't I didn't really sort of guess what you meant that the revenue mix is shifting. But your comments around thinking about EBITDA in Russia in absolute terms. But do you mean EBITDA? Does that mean that the revenue mix is worsening and we shouldn't expect much growth or if you can just clarify that. And then I just also wonder when it comes to the tower disposal. Shouldn't that be positive for EBITDA margin if anything, I mean, I guess I thought you wouldn't be much of a change to EBITDA given that the under IFRS 16 lease costs are going outside of EBITDA. So yes, if you could just sort of clarify what you mean. And Kaan, maybe when you talk about high single-digit growth next year in Russia, is that top line or is that EBITDA or both? Thank you very much.

Kaan Terzioglu, CEO

Let me start with the question about the double-digit growth side. I would expect that these would converge to each other, both on mobile service revenue top line. Top line actual is, of course, affected by the revenue composition that Serkan and I will clarify. But as we enter into new markets, including more device sales driving our 4G, more system integration type projects, AdTech projects, hosting projects, which we will be entering, these will be accretive in terms of nominal EBITDA but might come with less margins in some areas, and definitely for devices. So that's the clarification I would make.

Serkan Okandan, CFO

Actually, my comment was there are a couple of developments in Russia which will impact the EBITDA margin, both on the revenue and the cost side. Let me elaborate a little bit more. As Kaan mentioned, we have different revenue streams in Russia. We have traditional core telco revenues. We have device business. We have digital services, and we look at them segment by segment, and the growth rates in each segment are different from the other. That's number one. The second, the margin, EBITDA margin for each segment is different as well. Some segments have high margins, and other segments, for example, device segments, we have single-digit margins. So the composition of this revenue will impact the EBITDA margin. The second thing which is specific for Russia is that after closing the tower sale deal, the cost structure of Russia will also change because of this tower deal. That will also impact EBITDA margin from a long-term perspective; if you look at two to three years' time—so the combination of both means you may not see a stable trend in EBITDA margin. And in any case, since we don't have any margin business at any rate, the trajectory of absolute EBITDA will give us more stable indication about growth in the business.

Operator, Operator

Thank you. We do have a follow-up question from the line of Ondrej Cabejšek from UBS. Your line is open. Please ask your question.

Ondrej Cabejšek, Analyst

Yes, thank you. Two follow-ups for me, please. In terms of the towers, again, you mentioned some of the impacts on your margin. Do you have a bit more clarity now after some assessments about what exactly the impact on your net leverage could or should be once that is closed? And then you also mentioned the potential for active sharing. I'm wondering if this is something that you are already exploring and whether this is kind of the next step after you finalize all of the passive deals that you would like to do and whether do you see this currently becoming more topical with your peers in various markets because of rising energy costs? Thank you.

Kaan Terzioglu, CEO

Ondrej, first of all, let me answer the parts regarding active sharing. We are already in active sharing agreements in certain regions with more than one of our competitors in Russia. As I mentioned earlier, for me, network sharing of all options—passive, active, spectrum sharing—these are always things that we will look at from an open-minded perspective. The moment we see opportunities, we will engage. In some markets, like Kazakhstan, and especially in Russia, we are already doing this and we look forward to increasing the scope of these activities as well. Regarding the impact of leverage from towers in Russia, please go ahead, Serkan.

Serkan Okandan, CFO

For EBITDA at the group level, the impact will be slightly positive. At the leverages, we believe that we can de-leverage the balance sheet around $350 million. Why it is less than $1 billion? Because we have to book the lease liabilities in our balance sheet when we close the transaction. Net-net, we believe we can decrease leverage by $350 million.

Ondrej Cabejšek, Analyst

Thank you, and in combination with the EBITDA plus, what kind of impact would that have on the net debt to EBITDA? You mentioned there are two positive effects.

Kaan Terzioglu, CEO

You mean leverage multiple, you mean?

Ondrej Cabejšek, Analyst

Yes, exactly.

Kaan Terzioglu, CEO

0.1, 0.2 times positive.

Operator, Operator

Thank you.

Kaan Terzioglu, CEO

No more questions. Thank you very much. We appreciate your time and trust in our company, and looking forward to seeing you in London at the upcoming Capital Markets Day. Thank you very much.

Serkan Okandan, CFO

Thank you very much.

Kaan Terzioglu, CEO

December 7. Thank you so much.