Feb 22, 2018
Executives
Bart Morselt - Head, IR Trond Westlie - CFO Jean-Yves Charlier - CEO Kjell Johnsen - Head of Major Markets Jeffrey Hedberg - CEO, Wind Tre Stefano Invernizzi - Director of Finance, Control & Procurement, Wind Tre
Analysts
Ivan Kim - VTB Capital Stella Cridge - Barclays Herve Drouet - HSBC Vivek Khanna - Deutsche Bank Irina Idrissova - RBC Alexander Vengranovich - Otkritie Capital
Operator
Good afternoon, ladies and gentlemen and welcome to our London Office. I'd also like to say welcome to those joining on the webcast and the audio call.
Before we start with the agenda, I just need to read out something from the disclaimer that's on the screen. Forward-looking statements made during today's presentation involves certain risks and uncertainties.
These statements relate in part to the company's anticipated performance and guidance for 2018, future market developments and trends, operational and network development and network investment, and the company's ability to realize its targets and strategic initiatives. Certain factors may cause actual results to differ materially from those in these forward-looking statements, including the risks detailed in the company's Annual Report on Form 20-F and other public filings.
The earnings release and earnings presentation, each which includes reconciliation of non-IFRS financial measures presented today can be downloaded from our website. Let me now run through the agenda and the speakers today.
We'll start with Jean-Yves Charlier, our CEO, who is going through the 2017 achievements and our 2018 strategic priorities. We'll then have Trond Westlie our CFO run through the 2017 financial results and the 2018 targets.
There'll be a break of 20 minutes, after which Kjell Johnsen, Head of Major Markets will give an update on the situation in Russia. And followed by Jeffrey Hedberg, CEO of Wind Tre, who'll give an update on the Italian joint venture.
Jean-Yves will then come back and make a few final remarks. There will be an opportunity for people here to have refreshments and further discussions with the presenters after the presentations.
And with that I'd like to hand over to Jean-Yves.
Jean-Yves Charlier
Thank you, Richard. I just need the clicker.
Perfect good afternoon everyone and welcome to VEON's 2017 investor presentation. My apologies first and foremost for my voice but three days ago I had no more voice left.
So, I'm going to try to make it through this presentation. In fact, earlier today I was looking up for some quotes around losing your voice but it seems that there are no quotes for the matter; people don’t have words left.
So, I'll try to make it through this presentation. I think we've really got an interesting agenda for you today.
I'll be covering as Richard said, not only the highlights of our financial results as well as obviously progress on our strategic initiatives. But we'll also have deep dives obviously in these financial results but deep dives in Russia and Italy which contribute to a very significant part of VEON's value today.
But I'll also do a deep dive on the progress of our digital strategy. Overall, 2017 has been a good year for VEON once again.
I think we've delivered on most of the matrix that we set out to grow. We saw solid topline growth at 1.9% organically; 6.6% in actual terms.
In fact, in 2017, we really had some tailwinds from a currency point-of-view and total revenues reached 9.5 billion. That was really fueled by a very significant growth in our data revenues across the board.
They grew organically by 25.7% in the natural terms by over 30%. We are reported EBITDA growth of a 11% to reach a $3.5 billion; that was a 7.5% organic growth rate.
Our EBITDA margins, underlying EBITDA margins were slightly below what we had guided for to tune of about 0.9% points mainly due to the underperformance in Algeria and Bangladesh. Will do some deep dives on those two specific countries and the underperformance that we saw in Russia during the fourth quarter.
We continue to deliver on our CapEx guidance as you recall. We had guide and took a number of initiatives to really drive CapEx from roughly 21% to 15% over the medium term.
We delivered during the course of 2017 CapEx number of 15.4%. What's very interesting about this is that we had as many upgrades in our network in 2017 than 2015 when we were spending 21% of revenues or CapEx to revenues.
So, we've done this much more efficiently, we've done this by centralizing purchasing and we've done this by moving to both Lari and ZTE as main providers of our network technology. I think what we're particularly proud of, obviously is the very strong underlying equity free cash flow number that we've delivered close to $1.1 billion well above the guidance that we had provided.
And that's really been the driver of this whole transformation strategy to really drive cash flow to generate shareholder value. On the back of that, we're pleased to announce today that the supervisory board yesterday declared a final dividend of $0.17 a share bringing the total dividend for the year 2017 to $0.28 a share, that's a 22% increase in dividends for shareholders.
And I think that is very much in line with our dividend policy of having a progressive and sustainable dividend policy for our shareholders. In 2015, we set out a three year strategy really to on one hand revitalize VEON's business across the world and I think we're really delivering on that agenda today.
But we also set out a medium-to-long-term agenda to reinvent this business. Because ultimately at the end of the day we feel that we need to find new levers of growth, we need to find new levers to be able to make our cost structure more efficient, we need to find new levers to engage with the 240 million consumers or so that we serve across the world.
And obviously this is very much at the heart of a medium-to-a-long-term strategy but we feel that we're starting to make progress and I'll deep dive into that later today. At the heart of both revitalizing and reinventing VEON is really this key objective of substantially increasing equity cash flow for our shareholders to be able to obviously provide the appropriate dividend policy and appropriate dividend levels that may get meaningful for our investors and shareholders to own VEON stock today.
During the course of the year, we've really seen an improvement in all of our key matrix and this has now been two years in the row that we've been delivering on all these dimensions. And as I said, the elements were particularly proud as obviously the 31% or so of growth in our underlying equity free cash flow which has allowed us and allowed our board to declare a dividend of $0.28 of share for 2017; and increase of 22% or so.
During the course of the year, I think we've accomplished a lot. Once again, we've really delivered on these strategic initiatives particularly in terms of world class operations.
We said we would increase a free flow three years ago and I think we've delivered and substantially increasing the free flow which is just shy today of 30%. We said we would improve our capital structure and during the course of the year, we really have improved our capital structure and in Q4 I think we undertook a very successful refinancing of Wind Tre in Italy delivering a very significant savings in terms of our interest cost on the joint venture.
We continue during the course of 2017 to fundamentally improve corporate governance with the employment of Ursula Burns as our Chairman and today we have more unaffiliated directors on the board than ever before. And during that time, we've continued to improve and strengthen the control and compliance environment which had been a fundamental weakness of the former VimpelCom for some time.
We also, during the course of 2017 really delivered consolidating our portfolio and moving progressively more towards of an asset light type of telecommunication model. We did the GTH share buyback, we announced a mandatory tender offer for GTH just before Christmas, that's taking longer than what we originally expected.
I'll come back for the reasons for that. We agreed to dispose of our tower portfolio in Pakistan for over $900 million and we expect to close on that transaction in the near future.
Just before Christmas, we unlock the Uzbekistan situation, we were able to upstream $200 million of cash back to headquarters and I think really unlocking complex structural issue that the group faced. In fact, Trond will talk about this but I think we've made substantial progress in the last 12 months in ensuring that every one of our up course is contributing to a dividend flow back to Amsterdam to support the dividend back to our shareholders.
And finally, we've continued on our journey to dispose a nonstrategic assets with the disposal of loss during the course of the year. Really also been focusing on accelerating the growth opportunities in our portfolio.
Mobile data is growing very fast close to 26% year-over-year. But in other areas that we highlighted to you in the past, our B2B business is growing faster than our B2C Mobile business.
It grew during the course of the year close to 4%. Our FMC strategy across the world revitalizing the fiber assets that VEON has is also gaining traction a 265% growth there.
And in certain markets we're really seeing significant traction, such as in Ukraine; in Kazakhstan; in Uzbekistan; and in Russia. And Kjell will talk more about the Russian opportune.
We've made a bold move in Russia during the course of 2017 by announcing the split of Euroset and right now we're in the course of really owning the destiny of our distribution strategy in Russia; which we believe over the medium-to-long-term will make a very significant impact in terms of our business. We've recently strengthened our spectrum portfolio in Ukraine and Pakistan and Bangladesh and the strengthening of our spectrum portfolio in Bangladesh has been very critical for us as it has been structural issue that we faced against the other two main competitors in the marketplace and we're very pleased with the results of that spectrum auction in the last few days or by restrenthen both our 3G and 4G portfolio.
When we look at this strategic initiative, it's really of accelerating our growth rates key to this unshed and now is really unlocking the issues in Algeria and Bangladesh. This is what we've got to get right during the course of 2018 to behave or to deliver better topline growth for the group.
And we've continued transforming our cost base. I think we've been immensely successful in terms of taking to the appropriate levels our CapEx spending and investments.
And many of the detractors are saying easily we're just cutting for the sake of cutting. As I said, during the course of 2017, we upgraded more sites in our network when we're spending 15.4% of CapEx than we did in 2015, when we were spending 21%.
And that's all down to smarter investments, it's all down to having centralized our purchasing, it's all down to transferring our network preferred partners to Lari and ZTE there allowing us to have much more efficient price points in terms of our investments. We also have reduced our cost base internally.
That's allowed us really to keep it relatively flat while propelling our investments in digital. And we recognized today that just keeping our cost base flat going forward is not going to be good enough.
We've got to be able to invest in the future, invest in digital but at the same time we got to be able to take our cost base down year-over-year and that's one of the key objectives that we're setting for ourselves going forward. But we've made a lot of changes here, right, and investments such as purchasing and consolidating purchasing on a worldwide basis.
In 2015, less than 20% of our purchasing was done on a centralized basis. Today, over 80% of our purchasing is done on centralized basis allowing us for very significant efficiencies.
We're right now on the process of consolidating all our roaming wholesale type services across the world to drive exactly the same type of efficiencies. There are multiple initiatives of this type within the VEON group to really drive a much more efficient cost structure than what we've had in the past.
Let me now turn to giving you an oversight of our portfolio and what we're doing well and in the areas that we need to focus on. Obviously, we have quite a number of our up course that are performing exceptionally well.
I certainly would put in that category; Ukraine; Pakistan; Kazakhstan; and Uzbekistan. These are businesses that have very solid positions in our marketplace and have a historical track record, a very solid performance and we believe that we can fundamentally continue those type of trajectories even in countries such as Uzbekistan where we have pressures from a tax point-of-view that obviously weigh on our results or currency devaluations which we can't do much about that obviously weigh in terms of our actual dollar reported results.
I think what we've seen during the course of 2017, is a much better performance overall in Russia in spite of the underperformance in Q4, Kjell will talk about that. What we've got to get right is continue that trajectory, we've got to get right our fixed line business in Russia and we've got to make it a success of the Euroset monobrand integration which really we feel can make a difference over the medium-to-long-term.
The areas that really need our focus and our attention, first and foremost; Italy. We have to defend our position in Italy, right.
And we've got to continue delivering on our synergies. We are very committed to delivering our synergies and as Jeffrey will talk about, I think we've been doing a very good job from that point-of-view in taking cost out of the organization.
What we haven’t been doing so well is in terms of the topline. And we've seen a very competitive Italian marketplace over the course of the last 12 months probably more competitive than what we had expected and we're putting in place the appropriate initiatives to ensure that we defend our positions with the fourth entrant coming into the marketplace later this year.
The black spots really have bid in our portfolio; Algeria, because of the macroeconomic issues as well as the structural issues; and Bangladesh in terms of the structural issues. We believe that 2018 could be a turning point for those two businesses.
I've always said that turning around these two businesses would be a medium terms type of turnaround. There was no quick fix in these two countries.
But we feel that as you'll see in a minute, we have fundamentally fixed the basics in both those countries and we hope to be able to start delivering better results more in the short-to-medium-term than sort of the medium-longer-term of what we have said a year or two ago. Let me maybe do two deep dives at this point, both on Algeria and on Bangladesh to give you a perspective of what we've been doing.
Two big issues for us in Algeria. First big issue has been the regulatory environment.
A government that was against this assets some three years ago. It took a long time to resolve these sort of structural issues and create a real partnership that we have today with the Algerian government.
We've also had to deal with macroeconomic environment that is weak and perhaps weaker than any of our major assets that we have across the world. We believe today that we've addressed most of the regulatory issues.
The last one that we need to address is in terms of MTR symmetry. We've made progress during the course, lot of part of 2017 but we're not in full symmetry today and more progress needs to be made in terms of 2018 to achieve that.
But also we need to work with the regulator and the government to ensure that there is a modern regulatory environment not just an acceptable one in Algeria. A modern environment that allows for network sharing, a modern environment that allows us to pursue our asset light strategy and to dispose of our towers there in the environment.
We have to do a lot to fix the network in Algeria. This was a network where we couldn’t invest for years.
And we believe that we now have the best performing network in Algeria. We cover 75% of the population from a 3G point-of-view and 25% of the population from a 4G perspective.
And all of the recent studies indicate in Algeria that the Jazz's network is by far the best network today in the Algerian environment. We also needed to address our commercial performance.
Our offers were too complex, they were old. I think we've restored completely new sets of offers of tariffs of products in the marketplace.
We're revamping our monobrand distribution. In the course of the last 12 months, we've opened 52 new flagship stores in Algeria.
And ultimately we've had a strong focus on the new growth opportunities such as B2B where we've been growing in Algeria by 7% year-over-year. We believe today that we have a very strong management team in Algeria headed up by Matthieu Galvani.
All the key positions today are filled and we've really been working on making this organization much more agile over all. In the last two years, we've taken out of the organization, six management layers to make this business much more agile.
And from a cost point-of-view, we've reduced the workforce at the same time by 25%. These are substantial moves to reposition this asset so that it's competitive again in this Algerian marketplace.
And whilst we've done on this and in spite of the competitive pressures, you've seen that we've held up in Algeria some pretty healthy margins around 47.5% for the year, bit lower in Q4 but we've really been lost under attack and also we're restructuring really taking cost off very effectively out of this business. We're also beyond traditional toggle side really starting to invest in the future in creating a digital future for Jazz.
We implemented in the course of 2017 the group wide DMP platform in Algeria, we're going to deploy the new DBSS Ericsson system during the course of 2018 and our self-care app and our move to simplifying and enhancing our customer journeys has been the number one downloaded app recently on the Google Play Store in Algeria. And these are I think the first create shoots of what we want to make of this business for the future.
Very much of the same we've been doing in Bangladesh. We've had to address a regulatory environment that's not been the most modern.
And there's still work obviously to be done there, I think in two areas certainly to be able once again to do network sharing type of arrangements and disposing of our towers. So, we move towards more of an asset-light model but we fundamentally believe also that in this three player market there are SMP issues that need to fundamentally be addressed by the Bangladeshi regulator and government and that's part of our agenda for 2018.
Structurally, we had a neat one, a week that worked, and a weak spectrum portfolio. During the course of the year, we've addressed both.
We believe today that we've got a network that will perform well and will perform well particularly during the monsoon season where there are electrical shortages across this country. We've made substantial investments in upgrading the network, substantial investments in terms of batteries and alternative power sources so that the network is up and running during the forthcoming monsoon season.
But more importantly, we had a spectrum deficiency which we've addressed by investing $345 million and creating a spectrum portfolio that is today competitive for 3G and 4G. And in fact, it is the most competitive spectrum portfolio on a spectrum per customer basis today in Bangladesh.
So, we believe that we've ticked all the boxes there for business to perform once again. We've been really repositioning Banglalink as a digital attacker brand in the marketplace.
We've recently launched new simplified offers, we're also like in Algeria revamping distribution. We've just in the last few months increased the points-of-sales by 50% in Bangladesh.
We also believe like in Algeria, we have a strong management team in place that is led by Erik Aas and once again all the key management positions in that marketplace are in place. And we've done the same thing.
We've cut management layers, we've streamlined the organization. We have taken out close to 50% of the workforce in the last two years in Bangladesh to make that organization to streamline to be able to continue maintaining reasonable margins and you see during the course of the year, they were just north of 40% in spite of being slightly down in Q4 as we made these investments.
We're doing the same thing in terms of our digital agenda, we're really putting the green shoots for the future, we deployed our DMP platform during the course of 2017, we will launch our Ericson digital BSS platform during the course of 2018. And again, we're making the same investments to digitalize the core, to digitalize our customer journeys to create engagement with our customers with new self-care and new digital platforms.
Let me now turn to where we are on the GTH mandatory tender offer. As we announced in December, we believe that this is important strategic milestone for the VEON group to be able to directly own these assets in Pakistan; in Bangladesh; and in Algeria.
This tender offer remain subject to approval by the appropriate Egyptian authorities. We believe that we have taken all actions required for such approval and that the matter is currently held up by the authorities in conjunction with some disputed GTH tax issues.
We've been working with the authorities, and our desire is to find a path forward with the Egyptian authorities to basically unlock this mandatory tender offer. But at the same time, we are prepared to consider all other options that allow us to achieve this long term objective of owning more of these assets for the future of VEON.
It's probably not a lot more than we can say today when we are working closely with the authorities to unlock as soon as possible this set of matters. Let me now turn to our digital agenda.
And what I'd like to focus on today is really how we are driving a profound set of initiatives to really reinvent VEON. Unless you know this is no easy matter to reinvent a telecom operator.
I've always said that this was a long term strategy and during the course of that strategy we'd have a few setbacks but that ultimately our vision is very clear. It's a vision where we have to reengage with the consumer.
It's a vision where we have to offer due services beyond connectivity with consumers. It's a vision where journeys need to be digital.
It's also a vision about reinventing our own business model moving away from a brick and mortar model to much more of a digital model that allows us to continue to streamline our own business, that allows us to take more cost out of the organization that work we've been doing up to now in a traditional matter. So, today we are basically focused not only on transforming our business model, moving it away from brick and mortar, but we're also very much focused on creating the new services for the future.
And what we are doing in the course of 2018 is making these two initiatives very separate from one another. So, we can really boost these two programs within the organization.
And within that, we have five supporting initiatives. Obviously, the VEON platform remains key to this strategy and delivering on this vision of engaging with consumers in a different way and creating new revenue streams.
But our digital transformation is much more than just a VEON platform. And I want to make that clear for all investors and analysts today.
We're obviously very much focused on creating a big data layer within our organization so that we can personalize our offers, whether there are new digital services or our traditional connectivity offers. We want to be able to operate like an internet company and have all our data collected in such a way that we can personalize these type of services.
But in order to do that, and that's sort of third key initiative, you can't do that with the traditional legacy BSS systems of operators. We have over 300 different systems within VEON today.
Some of these systems are still fine. Some of these systems are not real time.
No one can create a digital strategy without fundamentally changing the BSS architecture of a top core. And this is complex.
Very few people have been able to fundamentally change profoundly the BSS infrastructure on a global scale. We're so fourth initiative, during the back office, we're changing our ERP systems, going to cloud based systems to have the agility from an end-to-end point-of-view and we're virtualizing our networks.
Because fundamentally we're prepared for 5G, we believe that there needs to be a split between the hardware dimensions of our network and the software dimensions of our network and I believe that VEON today is leading the industry. I will touch on a few of these strategic initiatives today to ensure that everyone has a better understanding of what we're doing.
The VEON platform, we are more than ever committed to its success. And this is a medium-to-long-term strategy creating a platform that can compete in the marketplace against the best of the internet platforms.
And during the course of 2017, we launched the VEON platform in a number of countries, we've seen a number of green shoots. But we've seen that we've got to do a lot more to make it immensely successful.
And one of the key elements that we are announcing today is that the platform was specifically focused on the elements of messaging and marketplace. And that we are going to take out the platform all the self-care components and put that with it our whole strategy to focus on digitalizing the core.
That ensures that customers better understand the value proposition of both components and both platforms that we are offering on the marketplace. The second element that is absolutely critical then for us is that we are accelerating the marketplace dimensions.
We were expecting to launch marketplace two to three years out, we are now expecting to trial marketplace during the second half of 2018, because we've seen real interest from both global brands and local brands to really be part of such a platform in the markets where we operate today. During the last few months, we've had over 8 million downloads of the platform.
We today have more than 3 million monthly active users and we've seen a number of green shoots. In Pakistan, the app was rated number one for a number of weeks on the app store, in less than 90 days we had close to 3 million downloads in Pakistan alone.
In Georgia, what we're seeing is that the messaging elements is what the consumers like. In Pakistan and Russia, the in-app offers and the content element is what is being core to the platform.
So, the further we move on, the more we'll start reporting and some of the key matrix of the platform. But this gives you to date some of the highlights of both the strategy and the green shoots that we've seen in the marketplace.
What we've also seen is the interest and the momentum that the platform is gathering in terms of partnerships and brands that want to promote their products and their content on this platform. During the course of this year, from the start of zero, we signed over 200 partnerships for the platform.
A 120 content partnerships; 97 offer partnerships; 28 payment partnerships. And today, we're working in the first quarter on over a 100 new partnerships to add on to the platform.
So, a lot of interest, a lot of momentum and that's why we are absolutely positioning this as a WeChat like in the markets that we are operating today. And let me turn to how we are going about digitalizing our core business.
It really has at the heart, three main components. Everything that's customer facing.
We believe that at the end of the day, all customer touch points should be digital. There should be no need for any customer to have to walk in a store or call someone to get support.
Everything should be done online. Everything should be done at the touch of a button on an app within two or three clicks.
That's our vision. And that is what we are building today from our customers alongside the VEON platform.
But in order to do that, we've got really fundamentally rethink our networks; rethink our IT; rethink our IT architecture to be able to deliver both for our self-care app and the VEON platform personalize offers, personalize services. But more importantly on a real time basis with no lag.
Customers in this world are not ready to wait 30 seconds to get a response on a click of a button. Everything has to be instant and easy and simplified and transparent.
But we believe fundamentally at the same time we've got to reengineer completely our administrative systems and processes within the company. So, the customer facing side it's about taking a clean sheet and really rethinking all our customer journey's and making them end-to-end digital.
It's about offering new channels; improve self-serve; and as I said - real time response. On the networks, it's making them ready for more data growth; making them ready for 5G; taking the cost out fundamentally of our network; and revamping our systems to offer these new services but revamping our systems at the same time to take cost out of the organization.
And all these things flow together, this is not about recreating a stovepipe architecture, as all the Telco's have done in the past. We have to have data flow, real time data flows between our networks and our BSS systems, our ARP systems, and in ultimately our data mining systems to offer real time 1000s, millions of different offers on a personalized basis every day of the year for our customers.
So, a very much focused on this integrated strategy. TMP is absolutely core.
And what's very new for a Telco operator is to be thinking big data, currently and you see this type of new office, this is a type of standard that we're rolling out across the world. Because we are recruiting software engineers, we are recruiting data scientists.
And so having modern offices like these where nobody has an office where the technology is the best, where people work on some of those compelling projects is what is at the core of our transformation. We believe having a DMP platform is essential.
It is set to personalize our services to understand every one of our customers' requirements not just doing what the industry did in the past, to send an SMS to 10s and millions of customers and to ultimately have very slow return rates. Those models are absolutely models of the past.
But we believe DMP needs to be used on how we upgrade our networks; how we invest in our own organization. And ultimately we believe that at the end of the day, this should enable us to probably drive a 1% EBITDA impact over the medium-to-long-term in our business by allowing us to decrease our sales cost; our marketing cost; and make more efficient investments in our networks.
Obviously, the bigger piece of all is whether or not we can succeed in changing the 300 or so staffed fine systems that are non-real-time that VEON has across world. And we believe that this strategy is absolutely essential to not only offer real time data, an impressive data that all Telco's have around the world but also leading to a substantial impact on our cost structure.
Our objective is to take our BSS cost and to have them basically as a result of this strategy. Be believe that we can take our BSS cost from roughly 2% today of revenue to 1%.
And at the same time we believe that we can fundamentally improve customer engagement, fundamentally improve customer service, to customer touch points at the end of the day. And we've partnered as you know, with Ericson.
And we're very pleased to stand today here in this presentation to announce that we've implemented the first country with this new systems stack on time within spec and that's Georgia. And we have a large number of countries to go during the course of 2018; Algeria; Ukraine; Bangladesh.
And we expect with Ericson to have completed the whole spectrum in 2019. We're doing exactly the same thing in Italy.
Jeffery will touch about talk about this and so is Kjell in Russia with very aggressive agenda's in terms of really transforming our architectures. So, what are some of the first results in Georgia to give you a perspective there?
We've gone in Georgia from 27 systems all stovepipe multiple vendors, one integrated system. We've cut 49% of our tariffs in our products in doing so to simplify completely our offerings to our customers.
We are now real time, we can launch an offer of any type in a few hours or less than an hour in Georgia, it took us weeks to prepare an offer in the past. So, this is the platform to start operating like an internet company ultimately.
And it offers us a sea opportunity to provide our customers with much better self-care tools digital touch points along everyone as a journey's and it greatly improved customer satisfaction we believe at the end of the day. But we're also achieving at the same time the cost cutting as a result.
Our BSS stack in Georgia cost us 1.9% of revenue, today our new stack is 1% of revenue; massive savings ultimately as a result of this strategy. We're doing the same thing ultimately in terms of our networks.
We want to decouple hardware and software. The industry is just at the beginning of this.
We've already done this on most of our backbones across the world. It's very important long term strategy because we believe again that will now only prepares for better services, it prepares our networks for 5G but ultimately it also drives much more efficient cost structures in our business.
To put it in perspective, we recently launched a vEPC tender which is virtualized Evolved Packet Core network backbone tender. We reduced by a factor of five the TCO compared to the legacy architecture that we had in place.
So, this isn’t about 5% to 10% to 20% cost savings. The magnitude of cost savings of virtualizing the network and modernizing the network are absolutely significant, we believe.
So, I think this gives you an overall first perspective on the results where we see our business going. Some of the deep dives are things that we're working on.
I think we're particularly proud of continuing to accelerate on this digital transformation. Because we think it matters for the future enhancing investments that we're making here.
I'd like to end my presentation really on the six key priorities that we as a management team have set for 2018. Give you a perspective of what is our agenda.
The first and foremost, this is a year where we have to start delivering on the transformation of Algeria and Bangladesh. And I don’t mean delivering on fixing the problems.
We've been fixing the problems, we have to start seeing the results. And I think that in the second half of the year, I hope that we'll start seeing the type of results that show improvement but as a management team, we are very committed to fixing those two dimensions in our portfolio.
The second one is front and middle. Although Italy is not consolidated, we believe it's a big driver in terms of our potential growth of evaluation and it's absolutely critical for us to defend our positions in the marketplace with a new entrant but perhaps equally as important is to drive the synergies and perhaps even deeper cuts and what we had originally envisioned around this business.
We got to continue performing in Russia, and Euroset integration as well as fixed line or core to that agenda; Kjell would address that. Fourth real priority is that we got to do more in our cost structure.
And a number of investors have challenged me and Kjell and Trond and our wider management team about our corporate cost. And over the course of last two years, we've had to increase those corporate cost really to get VEON performing better.
Performing an world class. We've had to consolidate a number of functions.
But 2018 is a year where we feel we can start taking our corporate cost down and as I said, our objective ultimately is to have an agile operating model within the organization and not just keep our cost structure flat throughout the whole group but attempt to take it down whilst we invest in the future. The fifth strategic priority is obviously to continue accelerating our digital agenda.
We think the vision is right. There'll be a number of setbacks along the way but we want to continue driving that agenda because we believe it can fundamentally deliver value for our shareholders.
And the six key priority is really to unlock the MTO in Egypt. We think this is a critical value driver for our shareholders and our investors and as management team we're very committed to doing whatever it takes to unlock the Mandatory Tender Offer of GTH.
Now the underpinning of all this is ultimately to continue to grow cash flow. That remains maybe our ultimate number one objective and Trond will take you through guidance.
We expect to grow substantially once again cash flows during the course of 2018 because we want to fundamentally continue to underpin that progressive and sustainable dividend policy for our investors. Thank you very much for your attention.
I'll now hand over to Trond who will take you through the numbers in much more detail. And whilst I lost my voice at the beginning of the week but I had no flu, unfortunately Trond had flu over the weekend and beginning of the week, so like me he might not be in the best of shape but we're here to deliver this presentation.
Trond?
Trond Westlie
Very much so. Thank you, Jean-Yves.
And good afternoon to all of you as well from me. So, I'm going to take you through the some of the financial results and the targets for the year.
And I will first start to give you a few reflections from my point-of-view, from non on VEON. Coming in the end of last year, I had the opportunity to have a view and to give you some reflections.
I do think that VEON has come far in the restructuring of the company itself. I do think that the only real outstanding item on the restructuring part is the GTH as I mentioned in both number three here.
And from there on the corporate structuring is really a settled situation. And then when we come to the capital structure, I go through that in a bit and you think that we cover far way in actually doing a lot of things on the corporate structure part and the corporate structure on the capital with the guarantee structure and refinancing elements.
So, all that has come far. Coming to the governance control and compliance, and Jean-Yves mentioned that with the new Chairman having set up of independent board making sure that we have the process; procedures; control elements in place; and the compliance as a result of focusing on that for the last few years.
I think we have come far in that; we've been Sarbanes Oxley compliant for many years. So, over the year controls on financial reporting has been there for quite some time.
So all-in-all, I actually think VEON is on reasonable good shape there as well. Cash flow has improved significantly.
We have I think VEON have managed to make the statements a bit opaque around the cash flow relative to the adjustments and so forth. I try and don't try to clean that up a bit and make sure that we can go straight from the numbers that we actually can report and see.
So, I think I'll take you through that. But even there, you actually see the development and the improvements year-over-year of coming to a more normalized company in the cash flow area.
And the last point is of course the focus on the general and corporate cost. I do think that as Jean-Yves has said some of those investments in headquarter cost has been needed to actually come to quality to a process to have the company be as it are where it is today.
But having said that, I do think that we cannot have that levels. So, we need to come down.
I will address that as well. So, I do think that my coming and my mindset in coming into this now is really that we are in the matured industry.
We are in the middle of the value chain. We have to recognize that as a sort of a Telco industry with the digital agenda.
That digital agenda is going to be important for your future and capitalizing on the future where we actually see the future. But we also have to drive the Telco part on the continuous improvements on underlying improvements going forward.
So, that's my overriding mindset or going into this. And then going a bit more into details on the numbers.
This is the 2017 full year numbers. The reported numbers of '16 were close short of 8.9 billion going up to the sort of 9.5 million.
So, on the reported numbers, we're going up with 6.6% this year. Voice coming down.
The 155 you see to the left of the top, you actually see that it's the borrowed first half year that we do not consolidate. So, it's just to show that year-over-year the 6.6% is also taking the benefit of borrowed having a 12 months consolidation and not the six months consolidation.
Voice revenue coming down and Data and Mobile financial services coming up. Data -- so, that sort of driving the overall together with via ForEx that leaves us to a 6.6% per head growth.
If you then take that and decompose it down to the company's, the business units, you see that the Russia; Pakistan; Ukraine; and Uzbekistan; is developing is delivering the growth aspects underlined in the organic terms. And then, as Jean-Yves have already mentioned Algeria and Bangladesh is the one that is the challenging points that we will addressing there during 2018 and hopefully will then see a turnaround.
If you then see the EBITDA evolution, I do think that the growth in EBITDA coming from before ForEx 240 million. It really is three buckets of the six companies divided in three buckets.
It really is Ukraine and Pakistan delivering the growth aspects that's driving the pickup. It's Russia and Uzbekistan basically being flattish slightly negative and it's Algeria and Bangladesh taking the numbers down in evolution.
So, that's really the trend line that we are looking at. If you then look at the year-over-year trend line, if you go from the left on Russia, I'm not going to say very much because Kjell is going to cover that later.
But we see a slow growth year-over-year in fourth quarter, organic terms and then a decline in the EBITDA level and there's a few elements going into that. It's slightly weaker trend line, some cost pickup and so a launch of VEON, but I said Kjell is coming more into that.
Pakistan is doing well; 4.2% growth year-over-year. So, a good growth and you also see that the synergy effect and the effect of having a combined network is also driving itself into the results as you can see of having an EBITDA increase of almost or short of 40%.
Algeria and Bangladesh coming down 10% year-over-year but as you can see we are better at compensating on the cost efficiency side in Bangladesh even though Bangladesh is coming even more down as a result of the network cost and the structural OpEx that we have in the fourth quarter as a result of the outage in the network as we had of course coming in. Ukraine market leader doing very well; 10% growth in revenue year-over-year; and also an increasing EBITDA.
And the EBITDA is increasing dramatically because it has a 40% increase in there. So, coming up to a high 50% margin which is really a very good result.
And then Uzbekistan did revenue topline organically. The tariffs there have been linked to U.S.
dollars for a long, for the first nine months. So, as a result of that, of course it's trend line but in the fourth quarter sort of flattening out as a result of liberalization and tariff been fixed.
On the EBITDA and the cost side, a lot all taxes have come in and increased the tax base. So, a lot of the increase in taxes or cost side in Uzbekistan is really non-controllable.
On the controllable cost size, we have done a good job and have actually year-over-year improvements on the controllable cost side level in Uzbekistan. When it comes to the corporate costs.
The corporate costs in 2017, which is then consisting of Amsterdam; London; cost for digital; and also cost for services and projects specifically M&A; legal costs; the enterprise service system; the ERP system; global procurement and so forth. We see that gross cost is actually getting up with approximately 2.5%; so, not growing much year-over-year from 2016 to '17.
Having said that, as both Jean-Yves and I have been saying this cost has been needed to grow and remember year-over-year from '16 to '17 we have also upped the digital part of this cost. So, all the cost has been coming down but in total our ambition is actually to take down this cost with 20% year-over-year; next year or this year.
Sorry. Going then into the quarterly numbers.
We have a revenue number $2.3 billion down from 1.4%. Most or all of that is really relating to the respect courtesy elements because the underlying organic element is a slightly growth.
And then you see the service revenue of $2,214,000,000, leaving us at seam 753 in the EBITDA. The EBITDA is a decline reported decline of almost 4% as a same here Uzbekistan currency is actually giving us a 6.6% decline as a result of the reporting currency there.
Underlying the EBITDA has a small organic growth. Coming to the net financial income and expenses.
The same level as last year except for the option the third option that they have in the Lari transaction, that has a pricing element that needs to go through the P&L and that creates P&L effect of 38 million. ForEx and other gains is the ForEx loses of HQ and Russia mostly, plus the $49 million of charges we actually took from taking $200 million out of Uzbekistan during fourth quarter.
The $156 million of joint ventures is Italy and that leaves us with a loss before tax on $285 million and from continued operation of $378 million. Just to be finished, when we're finishing on the technical numbers, I'll finish on the technical elements of VEON, IFRS nine and 15 will be implemented beginning of '18.
IFRS nine is going to do us a $20 million pretax charge in the retained earnings and IFRS 15 is actually going to give us pre the one-off gain in retain earnings at $90 million -- at $95 million, sorry, at the beginning of the year. The significance of those numbers on the running course, we don't believe is going to be significant but of course we need to do that evaluation every year every quarter.
Coming then to the cash flow element, I'd put up here cash flow reconciliation table. And starting with the EBITDA cash flow from operating activity and then equity free cash flow.
This 804 as you can see on the middle of the page with a yellow brick around it is really going to be the basis of where we're going to start guiding from that one. The difference between the 804 and the billion 67 is 263 million which we have disclosed to you every quarter with in the attachment to our report every time, which is then exceptional cost in different shapes and fashions that we have sort of adjusted just to give you the elements of where we want to go.
I think the major point in actually this involvement in cash flow is to just go from 2015 in these numbers on equity free cash flow; you see that the number is negative with more than $800 million. In '16, it's negative with almost $300 million.
And this year, we're actually coming up to almost $800 million. So, you see the trend line of cleaning up a lot of different elements that has been there, that has been paid through both P&L and balance sheet items during the course of the year because the underline free cash flow has been quite a difference because of the major adjusting factors.
So, here we are going to go with this equity free cash flow because now we actually do think that we're coming to a much normalized fashion and I have normalized both the structure and the operation going forward. When it comes to the cash upstream developments, there had VEON hand structural constraints but I think both Ukraine and Uzbekistan has sold or opened up, so that we're actually not going to see too many challenges for that going forward.
It is of course going to be restrained on how much at the certain point in time we can actually extract from many of these countries. So, there will be a continuous dialog with all the central banks in these countries.
But as of now, we have seen that the improvements both in Ukraine of the cap increased overtime is now we are not able to upstream an amount close to our annual profit. And for Uzbek, we see that upstreaming capabilities will continue as we can see it now.
And when it comes to the voluntary restrictions on Kazakhstan and Kyrgyzstan that has also been removed. And then it's of course the DTH structure and Airtel and Tele for DTH which is more a technical structural challenge on the upstreaming more than the control of upstreaming cache as such.
So, all-in-all I do think that a lot of the challenges that has been there in cache upstreaming has been removed as such and as a result coming back to Jean-Yves' statement that now many of the countries are contributing the upstreaming cache as compared to couple of years back where it was very limited mostly limited to Russia. If we then go to the net debt evolution, we're coming from $7.2 billion in 2016 up to $8.7 billion.
There is a few elements going into this and of course the EBITDA and the working capital finance charges and taxes, CapEx, and then of course dividends, both our own dividends to our shareholders but also minority dividends in DTH as well as in Pakistan. The ForEx element is mostly the translation of the Uzbek devaluation that we announced in the third quarter.
So, most of that is coming out there and then we're coming up to the $8.7 billion and as a result of the top as a result of doing the MTO, we had to make a collateral for the guarantee of the MTO and as a result of that in our accounts at year end even though the MTO was not finished or not yet launched, we're actually going to show you a net debt of $9.7 billion at year end. The rebalance capital structure.
As you can see on the top here, the level of guaranteed and PGA's C-loan is actually coming down quite dramatically. And we have left in now most of your debt structure up to the headquarter level.
And as a result of that, we are more flexible and we can also fund ourselves cheaper than we have been doing before. If you look at the lower part, you see that the current mix and the currency structure is no roles or better combined than balanced, than as a result of that we actually think that we are current in mix relative to the VEON coin is better aligned than before.
We're not going to be good as a result of being in the portfolio -- as a result of having the portfolio we have, we're not going to be able to mix that currency mix in an ideal fashion due to the fact that is almost impossible. But I do think that we're coming much closer to a less risky currency mix than it was before.
Going into the financial targets. And on the total revenue and underlining free cash flow, we deal it bring in excess of what we have expected.
But when it comes to the underlining EBITDA margin, as a result of challenging fourth quarter, we are not able to actually deliver on flat to single digit accretion on the margin side. Going then to the guidance for or the targets for 2018.
VEON here made a small bridge and the reason for that is that during 2017 we had made certain strategic decision and that is the deal doctrine section, the Euroset, and also the $106 million we received from one of our vendors. That has a fairly significant effect year-over-year.
And as a result of that, we have developed a pro forma baseline just to show that on the continuous basis year-over-year to like-for-like, these pro forma numbers is the baseline starting numbers. So, to give you the best perspective of how our operations are developing, that was our best way of showing it to you.
And the pro forma is then starting point, this 9.350, the 3.2 in EBITDA and for close to four -- 500 million in equity free cash flow. And then our guidance comes from and from there on the guidance is flat to single digit organic growth on revenue; flat to single digit growth on EBITDA organically; and then cash flow and equity free cash flow of around $1 billion in 2018.
And to name, I've just have said it. So, the board decided on a dividend of $0.28 per share for the fiscal year of 2017 and we have paid $0.11 in an interim dividend and that leave $0.07 per share for the final dividend to be paid in March.
And when it comes to the statement the policy as such; the policy remains the same. So then, I'll finish my area of part of this presentation and I'll leave it for a short break before we head on to Russia.
Kjell Johnsen
Okay, welcome back from the coffee break. Since you're all younger than me, you look younger than me, we can all remember that when we were students or when we go into conferences, we have a big lunch and then we come back and we struggle to stay awake.
So, that's why we kept the food service very limited, so that you would be able to focus on discussing Russia with me. Because I've been looking forward to that.
To those who don’t know me, I'm Kjell Johnsen, I'm the Head of Major Markets, which means that I'm looking after Russia and Italy in this system. And I also spent the last 14 months as the CEO of Russia and not by design but it was a fantastic experience, then I'll get back to the management changes in Russia that we have now successfully executed on.
But let me take you through some of the strategic priorities of Russia. This is a well-known illustration for the management team and the employees of Beeline.
They have seen of quite some time. One of the key elements that we have focused on at least in my time has been the ARPU turning around the topline, starting to drive positive revenue growth.
And the key element that we have been successful is with is to drive Mobile service revenue growth and change to the pricing paradigm in Russia. Moving away from our limited price plans to data centric pricing which is absolutely a fair approach because you should pay more when you consume more and it's also the right approach in terms of the spectrum efficiency and network efficiency.
Then we made a big analysis one-and-a-half two years ago, looking at the distribution in Russia. And my clear opinion on that is and was that Russia was caught in a multi-brand and alternative channel system that does not help us move into the future.
Very much focused on selling SIM cards, driving volumes, but not driving value, not driving customer experience. So, we set out to change that and that has resulted in the Euroset transaction that I will talk a bit more on about later on.
Where we have had issues and that we have still not come to the final stretch is on fixed line. We are doing a lot of positive things within the fixed line, but lead times are big.
So, 2018 is the turnaround year. I'll take you through some of the initiatives that we have taken and what that gives us already now.
Then I'll start to talk about what's the right CapEx level for Russia. Should it be higher, should it be lower, most people are wondering what's the optimum level of CapEx.
And obviously like Jean-Yves and Trond have talked about, it's not just a number in itself, it's how you spend it, and it's how you structure your procurement. We are very comfortable with the CapEx level in Russia today, where we say that 15% is enough.
We can run Russia at 15%. What has been much more important over the last year or so, two year's maybe is how we structured it the work with our vendors; our logistics; and these kinds of things.
That has limited us more than a CapEx in pure Ruble numbers. Then of course to talk about digital.
Digital is an area that encompasses lots of things. What I will take you through today is I was thinking around the self-care; the marketplace; and how we are taking the initial steps to become a leading digital operators.
And I'm not going to talk only about things that's going to happen in Rome two or five years, I'm going to talk about things that we're doing as we speak. Let me start by first things first; revenues.
If your revenues are not there, you could do whatever you like; you'll be in trouble. And that was a simple starting point that I took in Q3, Q4, 2016.
What did we have at that time? We had a data pricing that was completely open ended, people had a limited tariff plans and it's a fundamentally wrong principle to build a business.
It's also a wrong way to build a society which is a bigger issue. We see now that we're moving away from having a huge proportion of migrants in our customer base to going out towards people on bundled tariff plans; which is a big shift in the market.
We were also a very vocally talking about the need to go to data centric pricing plans. There was a little bit of hesitancy in the market.
But as of the beginning of 2017, we can saw that all operators have start to embrace this approach. We had a hiccup in November, when MTS made some moves in 10 regions of Russia.
We do believe that this is a temporary should I say fluke. And our response to this has been absolutely surgical.
Only in those areas, time limited reactions meant to show that we're responding but that we are not trying to start a price war. And I think we'll get out of the woods on that one.
I also think that Tele2 will have to focus more on value going forward that made the big splash of try to drive a position in Moscow. Again, moving away from migrants, high churn over to bundled type of plans, data centric pricing.
This is not rocket science, we have seen it in other markets and some of us have been for that journey before. And that is the platform for future growth in Mobile.
Then fixed line. I had more troubles and issue.
If we go back to 2007, there was a company called Golden Telecom; very successful; growing very fast; double digit growth every year; and profitability of around 40% at EBITDA levels. This part of business has not been given the attention that it deserves.
We do see that connection times for new customers have gone all the way up to 60 days and nobody want to wait 60 days. So, the first step we set to ourselves is that we need to revamp the whole business; we need to build new city rings; we need to fix our provisioning; we need to get out of having SDH networks; we need to build new IP networks everywhere.
That's the only way we can drive this business. And we want to connect customers as a first step in 10 days, not in 60 days.
Not saying that's the ultimate objective, we want to be even better. This is happening as we speak.
The first new city rings were built end of last year, October November and it's ongoing throughout this year. So, 2018 is the year of really revamping fixed.
And this is important for us. Obviously, Mobile is much bigger but the decline of 10% in the fixed, dragged down the whole business.
We can't have that going on forever and we won't. While we've had success in this area, is by using the capacities we have for an FMC offering.
We have had a very successful FMC offering, now with 870,000 customers connected, we want to expand that to over a million by the end of this year. And we have taken the lead position on FMC.
Very successful also in terms of the go-to market and the way we have been campaigning out there. Happy to report on that million coming up.
And then, slide deck I think is super important because this is a paradigm shift of the Russian Telecom market. We had a lot of our sales going through Euroset; just now alternative channels; mom-and-pop stores; all these kinds of things.
That was nice in 2005. Maybe it was okay in 2010, it was wrong in 2015.
And by 2018, we will finish a complete integration of not 2000 stores that would take over but around 1650. We will shut down around 350 for geographical proximity.
So, that's just a rationalization of the market. And then we will have built the perfect distribution for 2017.
And why do I say 2017? It is because we will then have the capacity that we need with the current model of distribution in telecommunication in Russia.
Going down a couple of years down the road, we need to accelerate the sales through digital channels, the online channels. And I foresee that the trend when we get to 2020 and onwards will be that we'll see all operators deescalating in distribution.
There has been a war on gigabytes in terms of the advertising. There has been an escalation and a war on having distribution capacity; both of them dysfunctional.
This will in turn and I see MTS already starting to reduce the number of stores. As we progress, I think that the number of stores we have will year-by-year be reduced.
We need 4.2 people for each store on average to keep it operating. So you can do the math.
We are integrating 1600 stores that's close to 7000 people and we are very happy to do that. But down the road we need to go to a more efficient model.
And I think the whole industry is probably getting there if we listen to what my colleagues and other companies are saying. What we are doing now in integrating Euroset that has probably not been done anywhere else in the world and I don't want to look at China because China is so big in all kinds of respects but this is a huge project.
I am very happy to say that the team is confident that most of this is done by the end of Q2. Maybe not everything but most of it.
And I have booked a table in Moscow on 11 of July to sit down with a guy who is responsible for integrating Euroset for dinner. The reservation is in his name and he has to pay for dinner, so he has every incentive in the world to make that happen.
More important than the timeline is the quality. We see the people working in shops now are not very motivated.
Why would you be super motivated to sell a B line product if the only thing that drives your decision is the amount of incentive you get for doing so. We want to have people working with our products, mobile, FMC, whatever we choose to sell in that shop I want him to be trained and want him to be proud of working for B line staying longer with us than the attrition rate that we see in this industry today.
They need to smart investing. There are couple of things that formed the platform for smart investing.
One thing is that we need to know where our biggest consumers are, our most valuable customers. And the smart way of doing so is of course to have bundles where you see where the biggest consumption is and that people actually pay for the amount of data they use.
When we have data centric pricing and DMP in place I will get back DMP, Data Management Platform, we can see these things. And we can allocate our investment resources in a good way.
This is also an efficient way of building networks. We don't want to just through our base stations and repeaters everywhere because people like to consume data.
No, we want to build networks in order to serve profitable customers of B line. And I think we have been pretty good not perfect by in its [structurally] imagination but pretty good at that so one of the ways that we are enabled to keep the CapEx levels at an acceptable level for us.
In 2016 we had major issues with a couple of vendors. And I am not going to blame the vendors for that.
This always takes through to tangle and the reality here is that some of these could have been avoided. We had some very tough discussions.
We have reallocated market share and in 2017 we doubled the number of base stations we built. It was absolutely necessary.
And I am happy to say that by and large we have a good [swap] and roll out operation going on now. There are few issues but they are much smaller than they were 12 to 18 months ago.
For 2018 you can expect more of 2017, not 2016. We have pretty good control over the network rollout.
A side effect of cleaning up these logistics that we have there is of course also that we have been able to reduce our working capital quite substantially which is always a nice bonus to bring with us. Then to addressable costs, we work and operate in an industry that has a lot of pressure from authorities and countries -- most countries like to fill up their [coughers] and there have been some tough times in many countries.
In Russia, I would say by and large the regulatory regime has been pretty good for this industry but we do see pressure on certain taxes, spectrum fees are going up, property taxes are going up, there are always these elements that come and push our cost base. So the only way to counteract that is of course to work with the government to explain the consequences, but to control our addressable costs.
In 2017 we saw an increase of 2% which is still significantly below inflation, but not good enough. 2018 we need to get to flat or reducing addressable costs, so if we could end up producing addressable costs by 2% it will be a good starting point and we will drive these programs and this initiatives throughout the organization.
One effect after changes we have done in terms of redesigning B line is that many people have moved over to other relationships. We are now working with Nokia and with Huawei on what we call internally the Phoenix project.
So lot of our technical capabilities have moved out. 3300 people got a new home through 2017 at least a new place to work if not a new home.
So meaning that a bigger part of our employees are customer facing, are meeting employees talking to customers every day. So we say here 72% will be directly in contact with customers in their everyday life.
And of course people who work a little bit further from the customers have less high frequency of this. One thing we have worked on quite a lot is to interconnect.
The interconnect system in Russia is out of sync with the rest of the world. We still have the same interconnect rate as 10 years back in time and paying in 95 [CapEx] to terminate the call in this day and age makes absolutely no sense.
It's much higher almost in every way you compare to any country in Europe. And it leave to the strange situation where the wholesale cost between the operators is higher than the end-user cost.
It doesn't make more sense. We are – we have tried to address that from a regulatory point of view but instead of waiting for that we have also optimized our packages and our pricing to the point where we have been able to half that leakage primarily towards MTS.
So where are we now? I am pretty happy with what's going on in the mobile business.
We do see we have turned around starting to increase [indiscernible] driving so many growth. We see a relatively flat customer base and I will predict that the total sales of this industry in Russia will go down dramatically.
It's absolutely dysfunctional to sell 115 million or 110 million sim cards every year. So I think in stages we will see that coming down.
That doesn't have to affect the number of mobile customers in each of the operators. It's just a way of taking away that meaningless churn of using.
When we look at the fourth quarter you look at our EBITDA margin. They are down year-over-year adjusted for our launch in VEON and a couple of HR issues that our one offs they are still marginal down but more or less on track.
There is one anomaly on that EBITDA that I would point to, that is actually the month that made a difference was October. We launched Veon with a huge ATL back to school campaign in September.
We did see some weakness going in October. We took some corrective actions and redistributed and we picked up again in December was a pretty good month for us.
So that's the granular view of this quarter. So adjusted for that I think we are more or less on a flat development for EBITDA and of course going forward as [indiscernible] talked about we will have the Euroset integration temporarily of course interesting that.
on CapEx we keep to a very tight CapEx management so that when you combine EBITDA and CapEx you see the cash flow from the business is increasing and if you add up then also the working capital improvements there has been a fairly substantial increase of the money coming out of the Russian business. This is more just a picture for the full year.
We will see we get increase in revenues driven by mobile but of course held back by fixed that's why this absolutely important that in 2018 we come back to a point where fixed is not a drag on performance but starts to contribute. Again mobile customers more or less flat year-over-year and for the full year you will see that the numbers are down to the decimal point on EBITDA.
So you could say the full year delivered a pretty healthy EBITDA percentage and absolute return. CapEx coming down a bit even though we are building much more.
So it shows that the procurement argument is [unused] is a good one. It shows how important the logistics are and again producing more with less CapEx is not [indiscernible] money itself that was the biggest limiting factor, it was the way it was executed.
Then back to digital. And as we talked a lot about our launch of Veon and we have extracted a lot of learning from this.
So one of the steps we are taking now is that we are going to develop the self service platform based on the B line platform which is a good one. It has won lots of awards.
It's consistently rated very well in the app stores and we feel that we have the best offering in the Russian market today but that's not the standard we want to live by. We want to run my B line as something that is at the world trust level and the team is now working hard on this.
We will see significant improvement and upgrades of this platform during the next 6 to 9 months, will be very tangible. What we have at the bottom here is the data management platform and you have been listening to executives in mobile companies for many years talking about the wealth of data that we have and how we have more data than Google and we have more data than Facebook and the name all these guys to make a lot of money, but what people have been talking about is the potential.
This is reality now. We are in a situation where we are actually able to use this platform today for our own purposes and for working with partners.
So there are tangible decision, business decisions that we make that come from the data management platform and there are partnerships. We see some priority used cases.
This is obviously at an early stage and we have been through some iterations. This is starting to get pretty stable and these relationships are pretty solid.
We are working with X5 the biggest retailer of Russia for a year, very good relationship, very good cooperation initiated by [indiscernible] and me after we had a meeting a year ago. So what does X5 get?
Well, they get a lot location data. They get a lot of information about customers and they want to use this kind of information so that they can tailor make their offering.
So when a customer goes on his mobile phone or her mobile phone to buy a product from them it could be something as simple as the people for dinner suggestion. You use the information about where they are.
So you know if that shop is close to a discount retailer or to an upscale retailer. You use the location based on the social demographic data to tailor make your offer.
The pricing for them can be different from store to store based on the information they have which is not unusual for a retail stores. The thing here is that you can do it real time.
We work with GetTaxi. We have more accurate location data than what you normally would get from the GPS.
There are certain areas where the deviation is pretty big. I have seen it myself many times and we have a good developed relationships with the insurance companies and others.
Now how do we extract – how to get money from this? Well, depending on what the transaction is we can get the few percentages or we can get even 30%-40% of a specific transaction.
We help these companies in their goal to market by taking down their advertising and the customer acquisition costs substantially. They share that with us and boost their business.
This is not going to be a 100 billion rubles next year. Don't get me wrong but it's already delivering tangible money to us and we are going to drive these kinds of models quite actively going forward.
And then to regulatory. I touched upon how governments in many countries are increasing the cost base for the industry.
We are [by a law] it's of course an extremely important element in the Russian business. I think the industry and B line has worked pretty good on this.
We go back in time two years and we have this apocalyptic predictions of having to store 3-4 years of the data and even streaming and that kind of capacity for storage doesn’t exist in the world, so the industry has worked and our GR people have worked effectively to take up that down now to six months of storage for voice SMS and one month for video and we are going to continue to work with the government. There are many people who have a deep understanding of these problems and who I shouldn't say support our case but are open to listen to our arguments and I think we just need to push -- continue pushing that to drive down the cost of it.
We want to work with the authorities to ensure public safety. No doubt about that, but we don't have to do it in a very expensive way.
We expect more info to be available after the presidential elections, but of course the outline is starting to become more clear. When it comes to national roaming on net roaming, I personally spoke out at the first telco executive in Russia in December 2016 that Russia is one country and of course when the telecom industry in Western Europe offers you free roaming, when you go from one country to another you can use your voice data, SMS, these things when you move between countries it is strange that within one sovereign states you would have multiple different systems in place.
There is a history to it but I felt that this is natural and we are moving in that direction. We have been among the first to take those steps.
Customers like that a lot. What we have asked for an addition then is that the interconnect rate is reduced to a meaningful number.
That would be beneficial to us no doubts. Now we have taken out half of the cost but we couldn't be sure about that in 2016.
So we wanted to hedge our bets but it's any way the right thing to do and we will continue pushing for that. Then spectrum.
Spectrum is of course a scarce resource and if it hadn't been scarce there will be no pricing power in this industry. So it's called the good and the bad thing.
Where we are now, it depending on the region you are in, some regions we are absolutely happy with the spectrum situation. Others we are tight.
So we are maximizing the use of our spectrum. We are reforming actively moving spectrum bands from 2G to 4G, from 3G to 4G and doing everything we can to rationalize that.
Going forward when we look into the 5G world we will need to free up new spectrum. The current spectrum available in Russia will not deliver an efficient 5G experience or rollout.
So of course the 3.4, 3.6 and these kinds of spectrums need to be made available. Now the good news is that when we change our networks in Moscow we all get ready for 5G.
But we don't desperately need 5G in ‘19 or in ‘20. So I see this more as a ‘21 exercise.
Time will show but spectrum is of course a message to the regulatory bodies. You need to work to free up the space.
Then few words about the management changes. Those of you who have been analyzing B line for many years will know that there have been too many management changes there.
CEOs come and they stay for 18 to 24 months and they move on and that is not good for any company. So when I came in there in September I said from day one I'm going to sit, September ‘16, I going to be here until I find my successor.
This is going to be an orderly transition. I am not going to stay in this role which is not optimum but that was the case and it took a bit longer than I thought that we have found an excellent CEO for Russia.
Vasyl Latsanych who knows the business in a very good way after many successful years at MTS. He has a broad experience as a leader and of course we have had the change on the CFO also for [indiscernible] coming out of Veon was always destined to work with me with major markets but stepped in the CFO of Russia in the interim.
Beyond talking about [Russell] and Andrei, Andrei [indiscernible] new CFO who came from the insurance industry a very, very talented and smart guy, the good news is that is not all about them, about me, or [indiscernible] there is a very strong team in place and people who have started getting to know working with each other we have been through a couple of programmatic things together and now are seeing success. So what we have in place in Russia now is probably the most coherent and strong management team we have had in many years.
And that gives me a lot of hope going forward. That was basically what I was trying to say about Russia and as I alluded to when it says major market that means Russia and Italy so now we are kind of moving the focus towards Italy.
Having stepped out off CEO role of Russia I am obviously going to spend more time with my friend Jeffrey in Italy and I look forward to that. A little update on this situation there we have a very well ongoing relationship with our partner Hutch who own 50% of the company.
Both are shareholders and in the board where we have equal representation and we have been led now by [indiscernible] as the CEO of Hutch being Chairman of Wind Tre and in accordance with the agreements that we put in place when we set up the company that chairmanship would will go over to an nominated board member as of April. So after the April meeting I will take over as the chairman of Wind Tre and dedicate quite a lot of time to the Italian operation.
Of course working in a very, very closely with Jeffrey and the team we have in Italy. So Mr.
Hedberg?
Jeffrey Hedberg
I'm actually delighted to that [indiscernible] will be our chair because that many of the issues that he's just articulated we will be confronting in the Italy whether it's fixed mobile convergence what we need to do in terms of allocating our capital in a far more disciplined fashion, what we need to do in order to revamp our distribution efficiency, leveraging digital both internally and externally [indiscernible] will bring a lot of that experience to bear. So it will be good partnership.
I think what I would like to do today is really to after my seven months on the job to give you a sense of the market dynamics in 2017. I’d like to give you a sense of what we did to address those markets challenges in 2017, share with you the results of 2017, and then really spend some time giving you a sense of what strategically and tactically we will be doing over the course of 2018 to address many of the challenges that are confronting the business, and in that spirit let me start with the market.
It's been tough and I think consistent probably with many of the presentations that you've heard from our competitors that Tim and Vodafone in Italy it's been a very challenging year in Italy. I think a lot of that is a little inconsistent with what we learned in our microeconomics handbooks where you would think that if the market goes from 4 to 3 that there would be more of an irrational behavior particularly with the new entrants on the horizon.
We didn't see that. You also would've thought that after the years 2012 to 2013 when there was a pretty substantial price war in Italy which reflected about 15% drop in value that a lot of the competitors would have learned the importance of rational behavior.
So 2017 we saw neither of those phenomenon and it has been a quite challenging year in terms of pricing. Clearly, and I will come to that in a moment what we are trying to do is not continue to lead on price because I think maybe and I have lived and worked across many different geographies when I got to Italy it was pretty really likes whose market share is bigger than the others, and it wasn't about value.
It was about volume. It wasn't about net adds and retention.
It was about gross adds and acquisition and so what we will be doing is giving you a sense of what that dynamic is but also share with you some of the philosophies that we are changing in order to position ourselves for the future. Just a couple of points on the consumer mobile space which obviously continues to drive the preponderance of the revenue in our business and in the industry it was very aggressive in terms of underground attacks, below the line offers, even the most rational and I think in the past Vodafone over the period of 2017 reduced its pricing and generosity by about 33%.
A lot of underground activities to outbound logistics, selling services at a substantial discount and not just generosity that was part of it but price and a washing machine mentality I think it's reflected here 20% MNP versus 2016 increase. So 12.7 porting requests in 2016 and it went up to over [15] million porting requests.
So churn washing machine competition on pricing. Obviously as we bring our networks together, our systems together, our channels together, our processes, our structures quality wasn't great as we did that and so we were forced to compete not only for competitive reasons but also that the quality that we had was not really a differentiator but you see again price per gigabytes and not just generosity, it's a fraction I know but price was really the key campaigning tool.
Not only in the consumer mobile space but also in the consumer fixed space we see a huge requirements and I'll speak to that in more detail as we move forward, to move from this focus on consumer mobile to a focus on fixed and fixed mobile convergence but very competitive pricing there as well as you see 15% to 30% discounts that were being offered as the race to move from mobile to fixed to provide fixed mobile convergence as a differentiator was a key facet within the market in 2017. Business similarly very price driven not much around quality, not much around new security, clouds, number of other IoT applications but largely price driven in 2017.
Tim had an offer called Tim Europe which basically was providing for [€25 5 gigs] to small and medium business customers what they did is they gave discounts and incentives that brought that down by 60% to around €10. Regulatory impacts we had of course the 30 million roaming impact but that affected of course all of the players at the same time and then of course there was a requirement to renew our licenses again as an industry which hit us as well.
So but you can't moan and groan that the markets is a challenge and what are we going to do, what we tried to do again with the team over the first seven months is really trying shift the philosophies, a shift again away from volume to value, a shift from retention is more important than acquisition particularly given that about 23% of our customers represent over 50% of our revenues. So what we did of course as part of that shift philosophically and in practice was looking at a number of things to harmonize what we were doing between winds and between [indiscernible].
One of the first things that we did was really focusing on retention again, improving tied or proxy for postpaid offers in first half of 2016 and was around 48% of the base was tied offers. And similar period we moved it up in 2017 the second half to 58%.
So more focus on tied offers retention locking the customer in rather than just continuing with this washing machine philosophy. The second thing we did was that with this sort of my market share is bigger than yours I think there was a lot of use of the handset and so the scoring criteria for providing a handset to get that offer, to get that [closet] at was pretty lax and so we tightened that up pretty substantially over the course of the other latter half of 2017 which had an impact in terms of our handset revenue, our CPE revenue fell as you will see by 83 million which affected of course, the year-on-year comparison with the pro forma company.
The other thing was restoring confidence and that's effectively being far more transparent with our customers providing a lot more simplicity as Kjell spoke to you and Jean-Yves spoke to earlier to our customers that they know what they're buying and so we harmonized a number of the things that were doing just beyond the customer base, the definition of that customer base, which was a harmonization nor cleanup of around five 600 million, 600,000 customers and over the course of Q2 and Q3 of 2017, but the other thing that we did of course was to harmonize the offers making them far more simple and transparent, taking out some of the costs that our customers were not happy with because we were very focused on NPS now from a network perspective. It was a big detraction as we brought the networks together but also it was a big detraction in terms of offer, fairness, transparency, etc.
And so we've been doing a lot of cleanup in that area which similarly had an impact of around netted out 60 million on our revenue but it is the right thing to do particularly given and I'll speak to that a little more detail with the [indiscernible] coming in there going to be the Robin Hood. It's about transparency.
It's about simplicity and if were sitting there with offers that no one understands or offers the people did not believe are transparent those high-value customers will wander. The next thing we did of course fixing the operations as we bring the networks together, as we bring the systems together, as we continue to merge these two entities and that's easier said than done.
It's tough. I've done it before.
Bringing the businesses together I think the networked detraction I noted earlier was very high 50% I think in anticipation of the merger. There was investment but there wasn't a lot and of course when you bring the networks together, when you bring the systems together there are going to be impacts on that and so we've done a lot of our work on that looking at our NPS scores and I think we're seeing some good improvement which I will speak to an in a moment both in terms of the quality of where were swapping our network as well as making sure that we have a lot more efficiency and less manual and intervention, a lot more automation in terms of bringing our systems together.
You had the play systems, you had the wind systems, you needed to bring them together and we've now been in a position to consolidate and manage over 60 of those systems. Financing, Jean spoke to as well we were able to at the end of October and closing on the 3 November reduced the cost of debt that we have within the company from 5.5% to 2.7% which represents the annual savings of €270 million.
So tough markets but these are some of the things that we started to do in order to address some of the challenges confronting our business. With that in mind these are the numbers that we disclosed yesterday.
You see obviously as a result of the tough market challenges as some of the handset tightening on the credit that we did reduction in CPE some of the harmonization that we did around our offers and how we are presenting those offers to our customer, you see a revenue erosion. We've been able to pick some of that up partially because that's a pretty substantial topline erosion through better management of our costs, through better extraction and accelerating the extraction of our synergies, and you see that our EBITDA margin basis points improved by 200.
You also see that we were able to pretty much keep our cash flow intact. One of the reasons that affect that of course and I will speak to that later is that in 2017 we invested 1.3 billion in integrating and modernizing of the network and we will be spending another 1.5 this year but getting back to what Kjell said smart CapEx we are going to make sure that that's allocated in a very disciplined way.
I think the one thing that may jump out of you is the leverage ratio. Let me give a little color to that.
As a result of that refinancing there were a number of costs associated with that refinancing that represented a reduction of our cost of €759 million. We also had as I noted earlier the renewal of the spectrum for 435.
On the more positive side we sold 10% of the ownership that we had in [indiscernible] which is the tower company that we created and we sold that, got 77 million for that and on the positive side as well we received as a result of the agreements with the new entrant 440 after the receivable million in terms of the spectrum that was paid by the new entrants to us, but the interest costs were needed to incur in 2017 and that led to a clear increase in our leverage ratio but let me be clear as I stand seven months after to you it's going to be about free cash flow. It's going to be about delevering and it's going to be about giving some clarity as on the event and [indiscernible] suggested clarity on a path to dividend capacity.
So in the spirit of being externally minded because I think there has been a lot of internal focus within the company over the last few quarters. Let's start with the market and how we see that markets evolving.
I noted earlier it's been tough in 2016, 2017 you'll note here that it will continue to remain tough particularly with the new entrants coming in and we see continued erosion of voice and while we see some growth on the data side we are going to see continued erosion on the market expectations and in mobile. That's why we don't want to chase price and chase gross ads down if we are seeing sort of that is sort of what the impact will be on our revenue and why it's important to retain rather than simply to acquire.
I think at the same time we see good opportunities to grow data. 4G LTE is only 37% penetrated.
We will be complete up to 95% by the end of 2018 and providing that coverage to our customers. We also see as I noted earlier, albeit more of a proxy with tied offers is going to be more of a focus on locking customers in particularly the high-value customer and we've been in a position to increase our tide offers as a percentage of our total customer base pretty substantially over the latter half of last year.
Our market share fell a bit but a lot of that market share that we lost was the washing machine mentality and we are starting to see some improvement in terms of both the margins of our customers because we are losing the lower margin customers. Fixed obviously very important particularly given the underdevelopment of broadband as compared to some of the European and other peers in Italy.
We see fixed is not only an opportunity for growth within the markets because of its relative underdevelopment in terms of just fiber penetration but if you look here you'll see that only 23.2% of the markets has speeds of greater than 13 Mb per second. So not only is there a growth opportunity but there's also a quality advantage that can be derived from broadband.
At the same time while there is a growth opportunities perhaps even more importantly a defensive requirements because as people are running into providing fixed and providing fixed mobile convergence and given the 23% of our customers represent over 50% of our revenues we need to lock in those customers. We need to provide that fix capacity for defensive reasons as well.
You see some slight increase in the fix market expectations and we basically retained our market share more or less over the course of 2017 on the fix side. I will speak in more detail about fixed and some of the defensive requirements there in a moment.
The new entrant in the roadshow that we did in October was probably question number 1, how do you see the impact of the new entrant. I think as I noted earlier they will be coming in with a lot of marketing around trusts, simplicity, the Robin Hood, the new 29 year-old CEO and he is shown with a picture of Jeffrey [indiscernible] is going to be the new kid on the block.
He will be Robin Hood and in giving back to the people. So of course it's very important why we took a lot of the initiatives that we did despite the revenue impact and driving a lot of more transparency and simplicity into our offers.
We expect them to launch in the first half of as it says here, of 2018 probably end of March early April is the latest expectation. We also expect them to be not only aggressive in terms of their Robin Hood positioning but also pricing and generosity and they will largely leverage a digital approach to the markets which I think is in one way a good thing because it will help us educate the market because digital particularly from a selling from a top up and a market sort of acceptance perspective is not as advanced and so I think from one perspective they will help from an educational standpoint to digitize some of the thinking which I think can only be good for us.
Of course we are not just sitting and wondering and waiting and when will it happen but preparing ourselves accordingly. I spoke earlier about some of the things that we are doing in terms of transparency, simplicity.
Of course where we have an ability to differentiate is around the fixed, the mobile convergence they will not have a fixed base so that's clearly something that we need to do with our high-value customers is to leverage that capability that we will have. Obviously, bringing handsets but with the right credit scoring criteria the best in class handsets.
We have very good relationship with Apple, with Samsung, in fact we were the bestseller I think in the top three in Europe in terms of the Apple 8 and Apple 10 sales cells, so we doing a number of things there. So we have a strong partnership to leverage in that space and the dense distribution footprints we will have 1.5 million mono brand stores which compares well with what not only Vodafone and Tim have at around 800 and 900 but also clearly will be in this world of digital it's great but sometimes you need to have the brick-and-mortar stores where people are coming into to see the latest handset, understand the latest offer and to ensure that they're getting the right advice and so were putting a lot of focus on training there as well.
So we are ready. We have a mentality that were not going to chase down on the basis of price.
We will seize marketshare. I think in the experience of three and while I know there's been a number of 10% floated out in the markets so what they want to achieve the new entrant in terms of market share it took three, how long [indiscernible] 10 years to get to 10% and I think the margins were little better.
We also have an MV&O called [indiscernible] who has a very large it's the post office large distribution network. They are roaming on our network is an MV&O and they have been around for about four or five years and don't have anywhere close to 10% of the market share.
Nevertheless, we have obviously despite their ambitions a remedy contract in place. It is a binding and irrevocable for five years.
It's been well negotiated and I think the access is a pretty much a natural hedge in terms of -- and in some ways maybe better than some of the margins and the commissions we were paying to some of our channels in the past but if I look at the terms of trade that we have as a result of that contract there will be an opportunity for Elliott to sell 8000 of or to buy, sorry, acquire 8000 of the towers that we would have as part of our decommissioning process. They do not need to select all of them but they are available that will give us some revenue on the basis of the ones they choose to select.
Obviously, I noted earlier that they paid us money for the spectrum that we booked in 2017, 450 million and after the receivable 440, but I think most importantly beyond the terms of trade in terms of spectrum and towers we have a contract in place that will provide us with both a floor both caps in terms of what they can put into the market in terms of volumes both on a national as well as a regional basis. So they can just go dump in Milano and say well nationally we are under that cap.
There is a cap both nationally and regionally to ensure that they are not able to come and overwhelm the network that they will be roaming on. Obviously we are paid for any activation that we do on our network, not only activation from us but also any activation from our competitors and then finally we would obviously be compensated for any traffic that they would be generating over our network.
So while we believe that there is still an opportunity for them to come in and disrupt, while we believe that they have great experience and we respect them very much in terms of what they have done in the past, we believe Italy is a little different than some of the other markets but we sometimes it's good to have an external enemy to rally the troops in terms of doing a number of the things that we need to do to reinvent the company. This next a series of slides again as noted in some of my earlier comments will give you some insights into the strategic and maybe at times more tactical things that were doing over the course of 2018 and I'll do some deep dives you may note some of the little shaded areas, I will do some deep dives specifically into those areas but as you see we have a lot to do and it's very important that we prioritize and focus on the priorities but there's a lot to do in reinventing this business not only in merging it and extracting the synergies and reducing costs and leading at customer touch points rather than in marketshare but also in delivering on a number of things as this company was largely focused in the past on consumer mobile.
So just give you a sense on the integrate. We obviously need to bring our network, our systems together as I spoke to that earlier.
We need to make sure that if you we are talking about fixed mobile convergence, we need to make sure that we have the right contractors because we are not investing a lot of CapEx into the fixed line but we are working on that fixed mobile convergence capability through partnerships with several players specifically of course open fiber, fast web, Tim as key partners that we will need in order to be able to accelerate the rollout to fixed mobile convergence which I will speak to in a moment. Fixed operational processes as you provisioning assurance getting a handset or a modem out to the customer.
A number of these things are coming from the two different systems. We are working on and improving and of course really making sure again that we are very maniacally focus on our high-value customers.
Differentiating I spoke to earlier fixed mobile convergence B2B digital and making sure that similarly as we move to the right we become in the spirit of free cash flow and delivering extremely focused on taking costs out of the business, identifying areas where there is overlap, eliminating poor performing channels, consolidating processes both in the sense of really ensuring a lot better speed but a lot more efficiency and then finally making sure again that were being very disciplined in how we are allocating our capital. So moving into each of these areas in a little bit of detail.
In Italy we will have the largest and most modernized network. We will have 21,000 sites.
There will be 5G enabled sites. It will be the largest network, Tim and Voda have somewhere between 18,000 and 19,000 sites.
We obviously see that as a huge source of our ability to differentiate ourselves on that quality. We are putting a lot of money into that.
I think you will see in the CapEx slide to come. We committed to 6 billion euro over the next five years to invest in this new business and so quality is going to be a key differentiator for us moving forward.
We've done 5000 of those sites already. 95% population coverage I noted earlier and we are seeing really by the end of 2018 that going to 98% and fully consolidated the whole network down to 21 sites by the end of 2019, 5G enabled.
I'm pleased to say that out of those 5000 sites we are getting very good scores P3 is a testing company that looks at sort of network promoter scores and given that it represented network in the past 50% of our detraction we are seeing some really good results out of some of the areas that we have swapped both on data speeds, voice quality and so I'm extremely pleased that the things that we are doing ZTE is our single vendor. We will be the biggest network.
They are doing a good job. It's a lot of work but we are seeing in the areas that we have swapped substantial improvements in the network quality which I'm very pleased about and we will need to continue to do that because over the course of 2018 we are going to be ramping up that modernization substantially of about four times from what we saw in the – with the 5000 in 2017.
Similarly on the IT side I noted earlier the 60+ systems that are consolidated. Rossini on the finance side a number of things we are doing in automating HR, internal admin processes as we bring these two companies together and make sure the systems are getting integrated, modernized and made far more efficient as [indiscernible] was noting we are putting a lot of focus on data analytics through the DMP capabilities.
We are using Google in that space and really using that. It's not only means that we can collect a lot of data but what are we doing with that data in terms of term prevention, understanding where our high-value customers are, what are their requirements, how are they likely to evolve and what we need to do to anticipate those requirements.
50% of our infrastructure and apps have now been consolidated and modernized. Fixed mobile convergence; a huge opportunity again as I noted earlier on growth as well as defensively and this just gives you some of the facts here looking at our base and where we put some things in the market that are doing quite well, I mean again it's from a low base but we are seeing from September.
We put a new offer in the market. We've recently launched one at the end of January.
We are seeing some very good growth in terms of our convergent customer base on top of the 2.7 that we have. 60% of our base on the fixed side is convergent that means that fixed customers have both fixed and mobile that means 40% of our customers we can go and provide mobile services too.
Similarly and more notably given the size and the revenue contribution from mobile -- consumer mobile I spoke to earlier 10% of our mobile customer base is converged 90% opportunity that's just within our world not even looking at the opportunity outside and some of the our competitors taking away from them as our network improves and our service quality improves with the different touch points. What we see is that if you can provide that fixed mobile convergence capabilities you see a reduction of 50% in churn.
So while we see given the underdeveloped as compared to some of the European peers on fiber, on broadband, what we see that in Italy there is a pretty low I think it's about 20% fixed mobile converged bases compared to 50% in Germany and in France and Spain. There's a big growth opportunity but also a very defensive opportunity that we need to take advantage of to cross sell both ways between our mobile and our fixed customer base which will help us reduce churn.
It is probably the – we have many strategic priorities or tactical things that we need to get right in 2018 that is a very, very important one. To do that of course you can't just put an offer in the markets and we are putting some things in the market that we are seeing quite good traction with on the wind side with the family-family sharing of the data that we are providing along with the mobile and the handsets and being able to share that gigabits through the family doing a number of things and on the [tray] side as well more for the youth, the techies, the data centric type of customers that we have but you need to get the modems out, you need to get the handsets out, you need to make sure that you're providing the service that they need so there is a huge focus now on simply fixing the basics in terms of provisioning and insurance that will be essential for us to move from volume to value and to get this right.
B2B, so while fixed has been a bit of a stepchild and in the past I think B2B has also been a bit of a stepchild. There has been a lot of focus both in terms of management attention resourcing put on the consumer mobile base.
Again as compared to other markets we see particularly in the [soho] small office, home office and small-medium enterprise space a good opportunities in Italy and that's growth. I think a lot of focus has been on the high or the big companies, large enterprises.
So again whether it's fixed mobile convergence, whether it's providing better quality, whether it's working with partners like we are doing now with Google and IBM to provide more than just price and reselling of airtime to the small office, home office and SMEs we are really focusing on this. This is an opportunity to differentiated an opportunity for us to grow in a similar space.
Businesses are not only driven by price so the washing machine is less there. They are going to be very powerful buyers.
They are going to expect a lot. So obviously as part of that reinvention and focus on this area network quality, capability to deliver the provision the systems and the product on time will be key elements of what we need to do to succeed in this part of our strategy for 2018 and beyond.
Digital I think Jean-Yves and [indiscernible] have spoken about that in some detail. We similarly see digital as the opportunity to improve our efficiency, responsiveness, reduce our costs, make sure that we are actually leveraging digital as an enabler to drive a cultural change within the organization.
So we are not just the old-school telco heads but we're really leveraging digital as a way internally that we can do a number of things both to improve our efficiency and speed but also putting a lot more power into the hands of our customers to self-serve whether that's on buying, topping up, whether it's on answering any queries, reducing the frequency of calls coming into the call center and the good news is that we have in Italy already quite a good I think similar to what [Shaw] noted in Russia we have my winds which has 18.4 downloaded apps within the customer base and we have my pray which similarly has 17.3. So we have two entities that are also very well thought out in terms of net promoter score within the company that we’re really going to leverage in order to put more power into the hands of our customers.
And very importantly, and I think that's another yet another advantage of having Kjell overseeing Italy and Russia, some of the things that he's done with his team in Russia on the marketplace, some of the things that we are obviously be doing with the Veon team will be critical in terms of us developing more of a marketplace. I think that's an area that we are not as developed as what they have in Russia and elsewhere, and for us right now the focus is on digital efficiency within the organization, obviously ensuring that our customers have a self-care capability with my Wind and my Tre.
And we are doing some things in the marketplace but we are certainly going to leverage a lot of the learning coming from Russia and Veon in that space. Efficiency is probably a word I've used too many times over the past minutes.
But it's very important. As you know we as part of the first initiatives with this merger, we took 2200 employees out of the company, largely through a voluntary severance plan that represented about 24% of the total employees.
I think it went very well, but there's still quite a bit of opportunity within this business to eliminate overlaps, to ensure that we are driving a lot more of a streamlined right sized organizational structure, process, simplification as well. So this will be an area that we will be -- continue to be very focused on.
We are in the process now of reviewing our organization, taking a number of layers out, taking a number of ensuring that what was in Italy a very hierarchical structure is becoming much flatter and I see within our budget as well as beyond our budget I see a continued opportunity to improve and right size and drive organizational efficiency within the business. Now that's just one side of the V curve, on the other side where you're taking people out, we need to retrain the people, we need to bring in more digital talent, data scientists, number of the challenges that each of the companies in this space speak to that you've heard.
The good news that I'm very surprised and very happy about, is there's been a lot of work done in Wind Tre, particularly in Wind on developing young talents and working with partnerships, with universities, with the business schools people within our company the high pose. We are doing a lot in that area.
So I think the other part of the V curve is we are bringing costs down and efficiency, it means rightsizing it means people. But at the same time I think we have a very good base of good talents within the organization but they are young, we need to bring in a lot more capability, managerial capability and I am in the process, as he has already done in strengthening the leadership team because one of the things I've learned over my many years is the ability to attract and develop and retain people and partnerships is simply critical to any reinvention of any business.
Last two slides or three, yes, this gives you a sense on the far left of the ambition and how we are driving the market's commitment that we made of 700 million synergies that we've committed to. It gives you on the ambition side where those are coming from, from network and IT, from commercial, from sort of the admin and on the OpEx side, I'm pleased to say that as we break it out we have achieved by the end of 2017, 167 million which corresponds to the run rate you can read it, read it yourselves that we have there of 260 million and given that we are targeting to complete everything by the end of 2019 we are more than halfway there in terms of our OpEx synergies.
I think similarly on the CapEx side of things, we see an opportunity to take out €210 million as part of that. And so if you add those two numbers together, and John [ph] you’ve spoke about synergy acceleration, synergy extraction I'm comfortable in recommitting to the guidance that we've given on that 700 million and if you add on top that was not contemplated as part of the value effects of the merger between Wind and Tre, the refinancing that we've done we come up to 970 million of the value that we expect and are committing.
Some of it already banked, some of it’s still to do, but comfortable with what we are doing in the space but a lot more needs to be done. And the reason is that you know we focus on free cash flow and that's why it's very dangerous to play the pricing game with the new entrant if you're focusing on free cash flow.
We need to modernize the network, which is also an impact on free cash flow, but to delever you need to have cash and you need to have obviously a good delivering ratio which I will come to in a moment on what we have is a path to deliver dividends to our shareholders. The top left gives you a sense of I have spoken to a couple of times already the CapEx profile that we are contemplating over the course of the next five years, some of it done.
The 1.3 in 2017 and then looks to the right gives you a sense of what both the bonds as well as the banking maturity profile looks like. Again with the note to the fact that we've been able to get to a 2.7% average interest rate over that period of time.
The bottom looks on the basis of the agreements what we see as our targets. So while there was an expansion in terms of our net debt EBITDA leverage ratio because of the reasons I suggested, the cost that we needed to incur as part of the refinancing and others it has expanded but we remain committed to bring that down over that period of time and it gives you a sense in the far right bottom of what that shareholder distribution capacity could look like.
So final slide, certainly after the seven months it's been challenging from a top-line. It's been challenging in bringing these businesses together.
There have been some things that we have needed to do to harmonize that has had a revenue impact, but I'm hopeful I was doubting may be a while back when I first got there. I don't yet believe that I've moved from doubt to hope that there will be more rational behavior within the market around pricing and looking more value rather than volume.
I think we have a clear plan in place. We understand the challenges.
We have qualified. We've quantified them.
We have a clear plan and set of initiatives in place to deliver on those challenges. We are going to be measuring it like mad you've heard from the bosses here that they have a lot of expectations for Italy but simply so do I.
So I think we are looking at bringing these businesses together. The next few months are going to be tough.
We are going to I think continue to be very focused on costs, synergy, being more rational in terms of how we are approaching the market, but I'm intrigued and encouraged by some of the things that we are starting to see as a result of this change of philosophy. We know we need to do and it's simply now that doing it and again it's about free cash.
It's about deleveraging and it's about giving a clear sense of capacity for us to pay something back to the shareholders. Thank you.
Jean-Yves Charlier
Thank you, Jeff. So I think just in summary if my voice can carry us little bit more, well I hope that you have found useful today the deep dives that we have done on Russia, and Italy and on the digital side as well as giving you a perspective of our 2018 guidance, and the priorities that we have set for 2018.
Above and beyond that, those six priorities our focus and our story at Veon is really to continue propelling that equity free cash flow, growth story. We have an ambitious target at $1 billion for 2018 in order to ensure that we continue to deliver on the progressive and sustainable dividend policy that we announced last year.
Now on that basis, I’d like to re-invite my colleagues up front to be able to take your questions. I'll try to answer as few questions as possible myself fielding them out to Trond, Kjell and Jeffrey.
First question, you get mikes.
Q - Unidentified Analyst
Thanks, very much. Nikita Khrushchev [ph], Red Band.
It's a question for Jeff on how pricing is going through the base in Wind Tre. So, we can see the churn rates and then that's we'll work out the grow sets.
But how many of the rest of the customer base is being repriced in the last six months let's say. So, how is retention activity working and how do you anticipate that changing if at all in 2018?
Jeffrey Hedberg
Yes. I think clearly one of the key things that we need to get right is network quality making sure that we are simplifying and making our offers far more transparent.
Changing the perception within the markets because I think in the past both Wind and Tre have been largely around value or price respectively. We're seeing good progress as I've noted in terms of the number of those key customer touch points because again it's more about leading at those touch points than rather leading in customer market share.
Seeing some reduction in churn certainly over the last few weeks leading to better performance in net ads; I think we see a better value or better margin. We track sort of the value of customers moving outer margins, moving out versus margins improving in our base.
So, I'm seeing some good improvement not great. Good improvements; our NPS scores are coming up a bit on the network side clearly where we've modernized.
So, it's not we are not repricing; we are basically fixing some of the things that we've seen are key detractors within our customer base. So, network performance; transparency of the offer; capability within the channel; capability within the call center; and we're seeing that this approach and it doesn't just happen I don't have a magic wand and I can say as of tomorrow we're going to be value rather than volume.
There is also a philosophical shift that we need to drive not only in the minds of the board and the investors and myself but within the company. A lot of the market has been driven by gross ads are important.
I have a number of gross ad junkies in the company that I need to also cure. But I'm starting to see very importantly because that sustainable improvement in some other things that we're doing in fixing the basics of the processes and starting to see that we're not suffering substantially from our shift from volume to value in terms of revenues.
We're improving on that ads. And some of the revenue impact is the market but also some of the decisions that we've consciously taken to improve transparency and to tighten up some of the credit score.
Unidentified Analyst
Is there a portion of the market of your base has been repriced over the last 12 months other than the gross ads, obviously you've come in on a fresh price. So, I'm just trying to gauge what sense?
Jeffrey Hedberg
There was some repricing that had been done in the course of before my time I think in the early part of 2017 and some before then but we have no ambition now on repricing. I think we need to first get our network.
You don't want to reprice and you don't want to rebrand until you get some of these things fixed because I think otherwise you're coming out with a new idea whether it's a price or whether it's a brand before you fixed a number of these basics.
Unidentified Analyst
Since you mentioned brand, actually is your target to have a single brand in the long term?
Jeffrey Hedberg
Our target at this point in time is to re-position the brands. I think they were a little cluttered sort of competing with one another.
We've seen our play on the medium-to-higher income segments as being very important positions. There are techie's, youth, more data savvy device driven types of entities and re-positioning Wind more to the lower-to-the-medium income segments around value; around transparency; around family; and that's how we're positioning some of the offers that we're bringing into the market.
What's very important is that we don't have two structures and that gets to sort of process simplification and efficiency. Two structure supporting the two brands and I think we want to before we met again make a brand decision which I think ultimately is probably what we need to do for cultural and other reasons, we want to make sure that we're fixing the things.
You never want to launch a new brand until you've fixed the things that are going to be relevant and tangible for a customer.
Unidentified Analyst
Okay. Thanks, very much.
Ivan Kim
Yes, hi. Ivan Kim from VTB Capital.
I just have two question. So, one just high level.
It looks like in many markets use revenue; you respond by cutting costs; you respond by reducing CapEx; which leads to more revenue loss and since there is this loop which I do not really see yet that you're breaking out of it. So, if you can just tell us high level, what can be done to fix this; would be very helpful.
And then secondly, on the HQ costs, there is a 20% reduction plan for this year. But longer term, what's the optimal amount there and how exactly we get to that point.
Thank you.
Jean-Yves Charlier
We try to take the first part of the question if I can.
Jeffrey Hedberg
I can help you a little.
Jean-Yves Charlier
Sorry?
Jeffrey Hedberg
I can help you a little.
Jean-Yves Charlier
Yes good, you'll take Russia. I think, look in many markets we are maintaining if not improving our market share.
Right, we're not losing market share in most of our markets. The big issues have been in Algeria and in Bangladesh.
In all the other markets I think our businesses have been performing well or very well ultimately. I think when you look at the macro level in these markets to 20% CapEx level is unsustainable; the math does not work for investor returns.
These markets growing at 2% to 3% per annum, 4% per annum, at a 20% CapEx level, I don't see that equation returning any cash to shareholders. So, the industry has to fundamentally change.
These emerging markets are no longer in most markets where we operate high growth markets particularly if you factor in inflation. So, the industry's got to get to levels of CapEx that we've seen in Europe or in other places and that's why we've given ourselves a 15% CapEx level.
Now in Algeria or in Bangladesh I don't think we've been underinvesting in those markets. Algeria the issue has been a structural issue and a macro issue and I think we've solved those problems without over investing.
In Bangladesh, we've invested where we needed to which was ultimately around the spectrum. So, we don't believe that we're at all in a model where we are still in high growth models and you've got to invest to sustain that model.
Those days are gone. We are in models of an industry that is at maturity and we've got to manage these businesses for returns in cash and not try to pursue non-quality growth at all costs ultimately.
I think that's what we're doing across the portfolio. You want to add, fresh?
Kjell Johnsen
Okay. It’s okay, you took it.
It sound like you're completely out of voice.
Jean-Yves Charlier
Yes. On the headquarter side, I do think that it's going to be a view of continuous improvement here.
I do think that as a result of coming to the level that we are now on the 400+ level; we have set ourselves a target for 2018. It's not going to stop there.
We're going to have a continuous improvement there as well but we haven't set a target of where the final game is going to be.
Kjell Johnsen
So, over here.
Jean-Yves Charlier
From way across the room.
Jeffrey Hedberg
He was sitting first, lost it several times.
Jean-Yves Charlier
Go ahead.
Unidentified Analyst
Ugor Sanchov [Ph] from FAREonline. First one, I just if we could drill down a bit on cost.
So, a couple of years ago embarked on the performance transformation plan we deployed quite-a-bit of cash to get that done. We haven't seen that really comes through in the last quarter especially in Russia.
Could you walk us through what exactly has been the reason why revenue has gone up but underlying EBITDA has gone down? Regarding, VEON.
The second question on VEON. Could you walk us through how we should think about the improvement that will bring in terms of as a customer value, is it cash flow?
You mentioned the 1% but can you just elaborate on timing for that. And the third question is could you just walk us through top management ownership of shares in VEON?
Kjell Johnsen
VEON, and I can start a little bit on the Russian side; I'll try to get into that bit. If you look at the whole year, as a whole the EBITDA is flat basically.
And that and there are two major components. One of them is that we're growing in Mobile.
We are also for the last four quarters for the first time till since 2007 growing our revenue market share in the big three. It's never happened in last 10 years.
But we do have a drag from fixed. These fixed contracts some of them going back many years are actually quite lucrative and profitable.
They are denominated in many of them in dollars. So, we have two effects.
1) is that they are renegotiated. 2) That those who are in dollar terms become less worth when the ruble appreciates.
So, that's why I said it's critically important that we are able in 2018 to come back to stabilize that business because it makes the whole Beeline look worse than the performance in Mobile will dictate. On the cost side, I didn't want to get into very much granular detail here but there are a couple of things that come in 2016 -- sorry 2017.
One of them being they launched out with it, which was a conscious choice in which we have talked about. And we also had some reclassifications that we on the HR side that had to do with accruals that should've been done earlier.
They are not enormous amounts and they are not recurring. So, these things will not come back in 2018.
That's why I said that by-and-large if you look at it, even the fourth quarter was pretty much flat; even given the specific weakness we saw in October. November was pretty good and December was good.
So, when you go into a team without me getting too much into guidance here, you should not necessarily see the Q4 as a front break. There is no reason to do that.
Jean-Yves Charlier
Cost over.
Trond Westlie
If you take the cost overall element and the project transformation and as they have been running now for three years. I do think that it's two elements going to this.
When it comes to the total cost side for the group, the data the efficiency of the total nominal number has not come down year-over-year. There is a couple of reason for that.
One thing was that when we embarked on this, our view was that the government control tariff costs; meaning the fees; the taxes and so forth; the growth in that the last couple years has grown much more exponentially than we have expected. So, what we've done on selling cost on what we call the addressable cost side, has really gone to cater for the additional cost on the tax side on different types of taxes.
In addition to that, the actual administration of the project itself has also come been a part of this. So, as a result as I said during the course of the way, the nominal cost has not really come down in total but the reinvestments meaning that the money that we spend on digital; the money that we spend on that cater for the increasing cost in taxes has been done to actually do that.
And that's why we are pretty sort of at least over a period of time maintain mostly when you look at country-by-country. We relatively perform on the EBITDA market share and the revenue market share, reasonably stable over a period of time except for Algeria.
Jean-Yves Charlier
And I think we recognize that our efforts on cost are not good enough and we have to do more from that perspective overall. And hence, some of the program such as new systems and others are really going to kick in next two or three years to really help us continuously drive down the cost structure of the business.
I think just on the share ownership, all our chief executives have long term incentive plans that are linked to share price performance. There are some 200 people, executives in the company that are linked to these long term incentive plans.
So, completely aligned with shareholder value creation and I myself own close to 0.5 million shares.
Stella Cridge
Hi, there. Stella Cridge from Barclays.
I had two questions if that will be okay. The first of all, on the Egypt tax dispute.
Could you just actually run through factually the background to that dispute; the history; timeline; what some of the key points are on both sides; and was there any particular reason that that came back into focus towards the end of last year. That would be great.
And the second question is just about the net leverage. You're standing at about 2.4 right now when you say the cash that you have for the mandatory offer sit 2.6.
So, just what are you thinking in that sense in terms of where you would like to be over the next one to two years? That would be great.
Bart Morselt
Well, when it comes to the tax claims on the DTH, it's basically long lasting cases and they have been through the administrative court and are in the court system as such and we are on the process on normal course of business through the court systems. The reason why the Egyptian authorities now have raised that and basically are trying to then escalate these situations, you basically have to ask them.
It is easy to come to a conclusion that what's going on and that we are giving our tender offer but then again there is no, I cannot say that this is the reason or that is the reason for doing that. So, when it comes to these cases, I think that they are disclosed in the disclosure in GTH nothing new, nothing revolutionary; so nothing has been filed from our side.
Nothing has been requested on their side for new discoveries or a new documentation. So, nothing has really happened except for just an acceleration in the Egyptian system.
When it comes to the ratio there the debt level, I do think that when it comes to debt level I fully agree that we have escalated higher than we have seen and also the statement that we have been saying before. Long term, we would like to come down to the two level on the giving layer ratio.
When we look at 2018 as we see it now, we see that the cash estimate the cash flow estimate that we have during this year, the net debt is likely to come some down. But I do think that when it comes back to coming closer to a giving level of two, we probably have to look at the longer range in time of the 18 to 24 months to actually get down there.
Stella Cridge
And if you don’t mind I make a following-up. So, net is a billion and also cash which is obviously separated or year marked.
And do you feel you had the need to do any financing at the moment or do you feel the undrawn credit facilities you have are sufficient? And just, because I note the maturities are just slightly under what the remaining cash balance as for 2018.
So, just to get a sense of what you're thinking there?
Bart Morselt
No. well, the element is we have enough liquidity and the facility is to actually to cater for what we have right now.
But having said that, as a result of drawing down on our RCF, on the billion that we put in escrow for the MTO, of course we would look at how to deal with that when we actually see how the MTO pans out.
Jean-Yves Charlier
At front tier. It's me.
Herve Drouet
It's Herve Drouet from HSBC. A couple of questions.
The first one is how much room do you believe you have to protect your EBITDA in case of revenue decrease, ongoing revenue decrease I mean it looks like some of the countries are still being challenged; you hope for some turnaround. I was wondering how much room for maneuver you have.
I mean you talk about systems you can put but potentially it's rolled out on all countries, you can gate 1% EBITDA margins. But either any other things you can put in place to protect this cash flow generation?
The second question is regarding the guidance just to ensure especially on the cash flow. So, the comparable of the 1 billion is your equity free cash flow that on pro forma you put back to a 804.
I was wondering what do you expect these year to come in come up cash outflow for licenses. I mean we know Ukraine is a potential there and any other investing activities that can draw cash out and if you can quantify or at least given a kind of a board figures what you expect there.
And finally, on the Italian interim of protecting those 50% revenue and 20% of your customers; I was wondering have you upsell some of the contract to lock them in or are you shifting prepaid into postpaid? I'm a bit more curious about in a bit more detail technically what you are doing to protect these revenues.
Thank you.
Bart Morselt
When it comes to the sort of the cushion of flexibility of the sensitivity of the guidance numbers, I mean we are disclosing all the countries; all the major countries; all the major numbers. So, I would actually suggest that you have to do your sensitive data relative to actually how to find that balance because it's very easy.
We also disclosed the portfolio exchanges that we are actually looking at this time. So, I do think that when it comes to that kind of pushing, I think it would be wrong to actually give us any guidance relative to how much there's now how less pushing we actually -- the mindset our mindset relatively give you that guidance.
The guidance we're giving you is our best belief relative to that we within reach the amount of certainty will deliver these kind of numbers the way we'll look at the world right now. If the world change, the world change.
When it comes to the licenses and the -- I do think that the only plan that were understood, licenses we have in addition to the one in Ukraine that is already happened and the one in Bangladesh is the upcoming up in Ukraine. I really don't think that we have any other envisaged spectrum issues coming ours or auctions coming up this year.
Jean-Yves Charlier
Italy.
Kjell Johnsen
Yes. Thank you for the question.
I think the first thing that is a requirement is simply making sure that we're not giving customers a reason to turn whether that's a bad network performance our high value customers particularly. Whether that's some things that are making them call into the call center and not enabling them to have the self-care capability to resolve the issues.
I will put in the right incentives in the channel so the customers aren’t just going in and then being told to go for this new pricing model but rather are and centered in order to be able to upsell. So, I think a lot of the call them the basics we're working on and seeing some good improvement.
Because I think in the past there were lot of reasons why the customers had a reason to turn, whether that was network performance, simplicity or transparency within the offer, looking at some of the incentives within the channel which were similarly driven around gross ads rather than retention and then finally not really having the capability for customers to resolve their queries when they needed to call into the call centers. So, that would be sort of the basics throughout.
The second is we have a much better understanding of that customer base. Now who they are; where they are; we're tactically approaching them, particularly in advance of the new entrants and making sure that we're really leveraging the data analytic capability not just to sort of understand future requirements but understand where the money is and how we're allocating resources into those particular areas so that we could retain them.
A lot more focus on tied offers now and as I noted we are moving and that's really up selling, I will give a couple of specific examples in a moment but a lot more focus on tied offers. We've substantially improved our percentage of the total bases being tied offers through handsets, through some of the things that we're doing in advance.
That an upgrade is not forthcoming for the next three months, so how do we get them to upgrade their handset before they have a reason to start to think about turning. Who are the -- using turn or propensity of turn models coming out of the data analytics as well as all things; that I think we've had a pretty blunt acts in the past to really understand our base because again it's been more around acquisition rather than retention.
Specifically, some of the things that we're doing beyond just handsets and beyond sort of understanding our base and where the money is, one of the things that we're doing now is part of our fixed mobile convergence opportunity and as I noted that's a very defensive requirement as well. It's really going into that base and going to them with a family.
So, we give a gigabyte package that can be shared by the family; a 100 gigabytes. So, you basically lock in not just the individual but you lock in the family.
You give them some handsets as part of that lock in as well. And again its early days, we haven't really focused on that but we're seeing some quite good traction particularly with the new offers that we've put around fixed mobile convergence into the markets.
Seeing some good traction over the last couple of weeks and the more, particularly since we launched the offer in January and also what we've done in September earlier this year. We're seeing and again from a low base 75% increase in terms of the fixed mobile convergent uptake.
And they're not just doing it for pricing or withdrawing handsets because again I like we are being more stringent there. It's really putting offers in the market by anticipating before our customers going to leave but I think maybe most importantly now is making sure that the key customer touch points in the provisioning and insurance processes are being much better managed.
Alexander Vengranovich
Hi, Alexander Vengranovich from Otkritie Capital. Two questions from my side.
So, the first one is a follow-up on frequency question I guess. So, we all know that 5G is coming to Russia and Italy.
I think that should be like one of the first markets among your portfolio to implement this. How does looking at the spectrum you have right now in this countries, what do you think about the potential additions to the spectrum as a response to 5G it allowed as far as I understand you don't plan any new acquisitions this year but maybe you can expect something next year.
In sort of the licenses, how your interest about. And also here, do you think some 5G sharing on these markets really works.
Are you ready to share 5G network, maybe it's going to be more efficient for all the shareholders if you do that. And second question on the retail network in Russian, based on their presentation I understood that basically have your own agenda on the retail network first expansion and then potential optimization.
What do you think about their steps from your competitors? How reliant you are on the steps, what you will continue to execute on your own plan and there is no connection between the actions from MTS and MegaFon on their retail network.
Thank you.
Jean-Yves Charlier
Well, I'll take 5G in.
Kjell Johnsen
Yes, I can take this; it's fine. When you look at the 5G for Russia, clearly there will have to be more spectrum as I said in my presentation.
In the recent meeting with the industry Prime Minister Medvedev indicated that to be a 2019 discussion and expressed a great deal of understanding with the fact that this spectrum need to be made available at a fairly reasonable price. I think this goes much more beyond than the discussion with the Finance Minister because at the end of the day here we saw on 4G; Europe falling behind the US and China; and in Russia the same way as Europe.
And I think it will be a huge mistake for Europe, Russia to make that same to do the same thing one more time. The new business models that emanate out of the new capacities and the new opportunities in the IoT area specifically will come will first be developed in those countries where you implement a properly functioning 5G.
So, you don't want to be too far behind. Now, that contradicts a little bit what I said we don't this is 2021 exercise.
I don't think that is crazily late. So, the government is aware of this and I expect that that will be a discussion in 2019 and then we can revert to your question about what it will cost and these things that is too early to say.
When it comes to the retail, yes we are going our way. We're going our way because it's the right way.
But if you look at what Andrei Dubovskov has done in MTS for many years and I would say quite correctly so. He has built up a monobrands store system that allows him to drive good performance in the market fully inside his own system not being too dependent on multi-branch stores.
And he has publicly been saying that he expects to reduce the number of stores in his system, in their system, is not his company. They were at some point I think at above 6000 monobrand stores.
I believe they can run that business easily with 4000 stores in a more rational market and I would expect us also gradually to reduce our capacity. The little unknown factor here is what will MegaFon do because it seems like they want to go through at least an intermediate step with integration of Euros half of Euroset and see as now.
I believe it's intermediate and I think they will change their mind down the road but they will see that the cost of running that distribution when we move to digital channels also will not be a sustainable. So, that's where we are.
And I think it's fully possible for us if like-for-like that MTS could run their whole business for the 3000 stores maybe also 2005 and MegaFon something similar based on where we are now with a little bit of digital development. And that's a lot of money to take out.
Jean-Yves Charlier
5G in Italy.
Kjell Johnsen
Yes. 5G in Italy, the government has put it into the budget but there's a different government dynamics going on here but it is in the budget.
We expect it to happen in 2018 but again in the terms and conditions of how that's license will be awarded or how the bands are going to be looking like, how the allocations will be done are not clear but my sense is that they will would like to proceed with it in 2018. We're obviously geared up to understand sort of what that looks like because we don't need to have too much spectrum.
I think through the merger of the companies we were able to develop quite a strong spectrum position and we are in discussions about where do we need to have that spectrum consistent with what's going on with Russia. But to do that is a little academic until we understand the terms and conditions of that spectrum allocation.
We're doing two trials of 5G in Prato and L'Aquila which are two smaller cities in Italy. I think that we're doing with open fiber and we're partnering with Qualcomm and ZTE to really understand to inform our case what the applications could be; what's the CapEx; what's the OpEx.
So, I think that will help us to inform that decision on what we need to look for but we're also exploring other parties within the market. And to your question, I certainly will be open to looking at sharing with others.
And we've already started at least on the pilots with a couple of entities sharing as a way to reduce CapEx and again drive free cash flow. So, there is an ambition, we will know who the new government is on the 3rd of March, I would imagine that I'm visual be consistent.
We have a team that's sort of looking at and using some of the learnings from Prato and L'Aquila to sort of make an informed decision. We don’t need to have, we hope it's not just too big lots that are being allocated.
Because we don’t need to have that and we don’t want to pay for that but we're going to need to have a little spectrum to sort of round out some of the areas that we don’t have it after the merger of the two entities.
Trond Westlie
And I'm sorry, I forgot to talk about the sharing part. You asked that question was absolutely.
So, we are doing a lot of sharing now, with MTS on 4G as you know. We're doing a bit less sharing with the MegaFon.
And that's a little bit down to their internal thinking around that. MTS is open for it.
Now, the thing here is sharing in theory is fantastic but we also need to work with the vendors because those features that you need to share these around capacities, the prices of this feature is used to be almost zero when I did my first sharing some years ago. Now they cost lot of money.
So, it's not as lucrative as it used to be. Going into 5G for Russia.
I think you can see that in many places, many areas in Russia, there will only be two networks. There was in some areas will have three.
I think it'll be a complete mistake to do like growth telecoms proposes to have one network for the entire country; from a security point-of-view; from a redundancy point-of-view; and from a competition point-of-view. But I think you will see that operators will be keen to sharing the expenses, the CapEx for billing out the 5G networks.
Vivek Khanna
Hi, good afternoon. It's Vivek Khanna from Deutsche Bank.
Thank you, for your time and for the questions. So, I have three related to Italy and then one related to VEON, if I may.
So, with regards to Italy, I'm just wondering how has the not promoter score changed over the last couple of quarters and how that's changed and how each of the different brands has been impacted. So, that's the first question.
The second question again in Italy is just can you remind me again, I think there's been a change of network provider, you moved away from Ericson and you got somebody else, you just remind me as to what the timing of that it and are there any issues with that transition because I think I agree with you, Jeff, I think the network improvement is going to be the most important thing and to reduce market share loss. And then the final thing is just on IFRS 6, in Italy, just wondering as to what the potential impact could be with regards to profitability going forward.
What sort of impact you could have. Thank you.
Jeffrey Hedberg
Thank you for the question, Vivek. Let me, I can speak to NPS specifically on network.
Where we've modernized the network and then I'll come to the other two. But I'll go quickly because it's Italy show today.
We're seeing some really substantial improvements on both our NPS for data and voice in the areas that we've swapped. And one of the areas we actually saw a 35% increase in NPS on the data side and 20% on the voice.
In Rome and Milano, let me be more specific where the volumes are we saw an improvement. And we are still going through the swap, we're almost complete in Milano when we set the little bit of the ways to go in Rome.
We saw over 10% improvements in the net promotor score interims. And this isn’t something that we do, calling our customers this Q3 that goes and looks at that.
So, I'm very encouraged by what we're seeing there. On the two brands, I think its early days in terms of some I think there is on the Wind, on the Tre side, because of some of these harmonization, let me call them that, we've seen a 13 point improvement in NPS on the Tre, albeit from a low base.
They were last there. What I can also say is that NPS as long as our new Chairman of the Ramco and the new Chairman of the Boards going to agree NPS will be a very important component of our STI and our LTI moving forward.
But it's probably a little early to say other than the 13% and other than the network and largely within three it's because of transparency and it will obviously be for both brands on the NPS score. On the second question, we have chosen ZTE to do the swap of the radio access network.
They've been the other one driving this integration modernization or swap integration modernization process. They were that's a single vendor, they were Greenfield.
So, when I arrived I was a little sort of single vendor Greenfield. We're putting a lot of focus on that, so I think it’s going well as it's reflected in NPS scores.
They're building up quite well the team there. My former CTO of Pakistan I was able to lure back, he's Italian to run that whole project, now within ZTE.
So, I'm encouraged by what's going on there. I think there are obviously the wrinkles sub cons because we obviously need to have the sub cons doing a lot of those things.
We need to get paid on time and those are things that we're solving but it's moving in a very good way. There's presently we're reviewing options around or modernizing our core as well and the usual suspects are involved in that but there has been no decision taken on that.
What I can say and I didn't say in the presentation is that we're really saying and Jean-Yves Charlier spoke to that a lot more capability to reduce costs by aligning our procurements and not just get but total cost of ownership. So, both in the context of the ran as well as what we're hoping to see coming out of the core modernization.
We're seeing substantially better terms which hopefully will allow us to generate again that free cash flow. On IFRS I'm very fortunate because he's had a very comfortable afternoon for Stefano to answer that question; our CFO.
Stefano Invernizzi
I assume you were making reference through your press 16. These, so the --.
Vivek Khanna
I like talking more about the bad debt potential.
Stefano Invernizzi
The bad debt, okay. So, on the bad -- it's IFRS 9.
So, yes. We implemented it, we are implementing it passing from 2017 in 2018.
We adjusted our way to recognize bad debt also considering the fair, the expectation of recovery, the receivable, even if they are not still due. So, that inception in order to be much more compliant with the requirements of the IFRS.
And we let's say take the occasion at the beginning of this year for let's say at the first implementation of the IFRS for adjusting and reassessing all the provision already done for our old receivable that are sitting in our financial statement. And so now we are let's say happy and satisfied with the level of reserve that we were able to include in our financial statement.
Going forward, the way in which we are going to write off receivable is based on the edging of that that and the expected possibility of cashing them in.
Vivek Khanna
Okay, thank you. And I guess my final question is a little bit on VEON.
At the time when this merger in Italy was announced, one of the big advantages obviously over above improving your strategic position in Italy and the consolidation was the consolidation of debt and also the ability to start paying a dividend which clearly as you've announced today, you're paying $0.28 for the full year. One of the things that was talked about was as you've highlighted in your presentation, the ability to dividends out of Italy once leverage ratios get towards a certain level.
Now just because we're cut out from the markets got little bit more difficult than expected and I guess getting to that leveraged level is going to probably take a little longer in order to pay a dividend. So, I guess from VEON perspective, if Italy doesn't pay a dividend, what are your views with that asset going forward?
Stefano Invernizzi
Well, the assumption is that we are going to paying dividends. So, now it's just a question of delivering on the transformation journey that we have there in terms of doing the network.
Remember we have a big bump in CapEx for doing a huge swap of the entire network in the whole country on top of consultation we had to do before we could do that. We are also changing the entire IT stack, which is big enterprise to go through and we are resetting the whole organization.
So, I think that there aren't many examples of this kind of transformation in the Telco industry these days. And the fact that team in that situation chose to launch an MVNO one year before the launch of the audio quality other player.
It was an unwelcome surprise for everyone, maybe even for themselves. They do have some covenants they should probably be watching but that's hey that's where we are and that's what we're going to deal with.
So, the ambition of this joint venture was to move from two, number three and four, who didn't have any prospect of paying dividend. To making one player debt overtime can deleverage and start paying dividend.
Simple as that.
Vivek Khanna
Thank you, very much.
Jean-Yves Charlier
One more question from the audience?
Irina Idrissova
Hi, Irina Idrissova, RBC. So, just on guidance, what you see as the biggest risks to guidance for 2018 and what are you assuming in terms of competitive environment in Russia?
And if I may ask a second question on Bangladesh. You mentioned issues with SMP in the market, can you give us more color on what are the key issues there and what sort of outcome will you be looking for from the regulator?
Jeffrey Hedberg
No. As I said on the guidance, I don't think there is any more or less critical elements.
I do think that we have taken into consideration the starting point of 2018. We know what kind of speed we are coming out of '17 with and I think we have taken into consideration both our expectations, our ambition relative to turn around both in Bangladesh and Algeria.
But of course also that we are actually looking at not losing any market share in any of our markets. So, I wouldn't really be more specific than that in sort of trying to granulate the sensitivity in the guiding.
Trond Westlie
On the outlook for Russia, I would say what you can expect is that we will stabilize fixed because this is not something that we are talking about now. And actually I approved the plan already in July or August.
So, it's in implementation and like I said the first suturing's are already up and running. All the technical plans are in execution and we're going to make it much easier to be a client of Beeline going forward on the fixed side.
We're going to continue the FMC where we have success and I think then you can help me in answering the question yourself, what do you think MTS instead of two are going to do with their positions in the market. I think given the debt situation of Tele2, if they care about their balance sheet which I think is a good idea for B2B to do, then they will be more rational.
And I think for the management team that is also more interesting way to do the job rather than just increasing their debt. When it comes to MTS, I must say that I find Dubovskov to be a very competent leader.
He has shown good results for many years and reading the picture of how to run MTS going forward is not very complicated. You follow the trends, you cut your number of stores and the have cut their CapEx quite a bit, so their civil costs are going down.
He should have an okay EBITDA right; it's not that complicated.
Jean-Yves Charlier
I think on Bangladesh if my voice carries sufficiently. Look, I think we're in a market three player market with a very dominant number one player in that marketplace.
Capturing the bulk of the net ads last year. We believe that the government needs to address this through the regulators.
As you know, there are always a series of SMT SMP type of measures that can be taken and we have encouraged the government to look into this matter so that this doesn't become a one plus two player market but is really a three player market overall.
Bart Morselt
So, with that and on behalf of Jean-Yves without a voice and the rest of the management in VEON as well as Jeffrey coming from Italy. I like to thank you all for attending very much and very much the activity on this Q&A session.
So, thank you very much for attending and safe returns.