May 14, 2018
Executives
Ursula Burns - Executive Chairman Trond Westlie - CFO Kjell-Morten Johnsen - Interim COO
Analysts
Irina Idrissova - RBC Capital Markets Olga Bystrova - Credit Suisse Madhvendra Singh - Morgan Stanley Herve Drouet - HSBC Stella Cridge - Barclays Vyacheslav Degtyarev - Goldman Sachs Alastair Jones - New Street Research Igor Goncharov - BCS Global Markets
Operator
Good morning, ladies and gentlemen and welcome to VEON’s first quarter 2018 results conference call. Today, I'm pleased to be joined on this call by Ursula Burns, VEON’s Executive Chairman; Trond Westlie, VEON’s Chief Financial Officer and Kjell Johnsen, VEON’s Interim Chief Operating Officer and Head of Major Markets.
The presentation will start with opening remarks from Ursula followed by Trond walking us through the group results. Then handing over to Kjell for the country review and finally finishing with Trond who will reconfirm our 2018 outlook.
At the end of the presentation, we’ll open the line for a Q&A session. Before getting started, I'd like to remind you that we may make forward-looking statements during today's presentation, which involves certain risks and uncertainties.
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 target and strategic initiatives. Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risks detailed in the company's annual report on Form 20-F and other recent public filings made by the company with the SEC.
The earnings release and earnings presentation, each of which include reconciliations of non-IFRS financial measures presented today can be downloaded from our website. I'd now like to hand over to Ursula for opening remarks.
Ursula?
Ursula Burns
Thank you, Richard. Thank you for taking the time to join us for the quarter one results call.
My name is Ursula Burns and I am the Executive Chairman of VEON. As you may know, I took over as Executive Chair at the request of the board in March following the departure of Jean-Yves Charlier.
The VEON that Jean-Yves left is much better than the joined. The company has made good progress in the past years.
The board has begun the search for a new CEO and we will let you know as soon as an appointment has been made. Meanwhile, we have a strong and talented management team in place.
Our VEON regional CEOs are well -- all experienced leaders in their markets and leadership team has a wealth of knowledge of telecoms generally and VEON specifically. Joining me on the call are two members of that team: Kjell-Morten Johnsen, our Interim Chief Operating Officer, responsible for the market’s operations and Trond Westlie, Chief Financial Officer who many of you already know.
They will update you on what we consider to be a good start to the year and take your questions on our financial and operational performance. I took the role as Chairman of VEON because I saw an exciting company with strong prospects and real upside potential.
With nearly 0.25 billion customers, VEON operates in some of the world's highest growth telecom markets and -- with great untapped demand for digital services. I look forward to bringing my experience to the role.
Having served as the CEO and Chairman of a major global technology firm as well as my knowledge and experience gained serving on major corporate boards. The telecom industry is going through fundamental change.
When I was at Xerox, we experienced a similar time of transition and I clearly see how some aspects of our successful approach at Xerox can be effectively deployed here at VEON. We need to focus on the future, embrace the digital reality, bring our people with us and stay ahead of the curve.
This means continuing to develop a digitally centered business model by investing in new technology, digitizing the core and developing truly innovative services. The board and the management team remain committed to the strategy, but clearly in this industry, the strategy must evolve in response to market development and customer needs.
It is in pursuing this course that we will meet the expectations of the market and our shareholders. Some good progress has already been made here, although there is of course more work to be done.
One of my first priority is to look at the role of headquarters and to build a simpler, smoother and more operationally effective business that is really focused on delivering sustainable value for customers and investors. We have a business model that is targeting circa USD1 billion of equity free cash flow on an annualized basis from revenues of about USD9 billion.
This is an impressive financial performance and shows that we are successfully doing what public company should do returning cash to shareholders. I should say that I'm very happy to have the opportunity to talk to you today on this call, but this will not be the norm.
As a general rule, you should expect Kjell and Trond to lead on these calls, pending the announcement of a new CEO. I’ll now hand over to Trond and Kjell who will run you through the group highlights and financial results for the first quarter.
Trond?
Trond Westlie
Very well. Thank you, Ursula.
In Good morning, everybody. Going then to the slide deck that you hopefully have downloaded or see in the screen, I’m going to page 3.
The key developments for VEON in the first quarter, we see good organic growth, both in revenue and EBITDA as well as good cash conversion and have an equity free cash flow of 334 million, excluding licenses. And in addition, we all are also confirming the guidance that we gave in February for 2018.
Just short on operation, Kjell will come back with more on that later. Russia returning to trend and saw a normalization in the EBITDA.
And we have continued strong performance in our strongholds in Pakistan, Ukraine and Uzbekistan. The operational turnaround is in progress in Algeria and Bangladesh, but top line as well as EBITDA remain under pressure year-on-year and Kjell will come back to more on that as well.
Pressure on the revenue element in our Italian JV, but synergies is on track offsetting the top line impact on the EBITDA. In the first quarter, we also acquired Spectrum in Ukraine and Bangladesh and we have now launched 4G/LTE in all our operating countries.
In Russia, the Euroset integration and the rebranding into Beeline monobrand stores is on track and while we’re at Russia, we are giving now our current best estimate of total Yarovaya expenditures. We see that the total expenditure over a five year period, we estimate to be around RUB45 billion, of which approximately RUB6 billion will be spent in 2018.
In first quarter, we also withdrew the mandatory tender offer on GTH and the reason for that is the lapse of time and absence of approval from the regulators in Egypt. And the last point on the slide I probably won’t have to tell you since Ursula has given you an introduction on her own.
Going then to the financial numbers for the quarter, the quarter -- on page 4, the total revenue is 2.3 billion in the quarter and it's really driven by Russia, Pakistan and Ukraine, giving us an organic growth of 3.2%. On the reported element, we are showing 1.4% decline and that is driven by the devaluation of the Uzbekistan Som, that is the overriding element of the ForEx change year-over-year in this report.
Mobile data revenue is increasing, a good increase during the quarter of 23% organically and just short of 16% in reported numbers and that leaves us to an EBITDA of 854 million and the organic part is here as well, driven by Russia, Pakistan and Ukraine with the decline in Bangladesh and Algeria. Also here, on the reported element is the Uzbekistan Som that is really the major impact on the difference between organic and reported.
But we’re also delivering a very good margin this quarter of 38%. CapEx is 355, slightly or up from last year.
It’s due to two elements. We have focused on the quarterly distribution, or focusing on having heavier CapEx spending in the beginning of the year to even it more out throughout the year.
That is one of the reasons and that leaves us to an CapEx revenue ratio of 16.4 on the last 12 month average. Having said that, here, we do expect to be around the same level or around the 15% level for the year.
On the equity free cash flow, it’s 334 and I'll allude more to the details of the evolvement and comparables later in the presentation. So overall, a good first quarter for VEON.
Going then to page five on the bridge for the revenue development from first quarter ’17, on the top of the slide, you see that we show an organic growth of 3.2% and that is driven by the growth in data and MFS. Voice is coming down year-over-year with 56 and that leaves us to an increase to organically revenue of short of 2.4 billion.
If we go on the bottom of the slide, you see the country development and it's really trend -- a good trend line on all or most of our markets, led by Russia and Uzbekistan, with an increase of $31 million each and then you also see the trend line of Algeria, Bangladesh trending downwards year-over-year. Coming to the ForEx, it really is for the 107, Uzbekistan negative effect on the ForEx is 108 in this quarter.
And Russia has a positive element of 38 and the rest have a negative element of 39. So it really is the Uzbek currency that drives the ForEx development in the quarter.
Going then to the EBITDA development on page 6. Good traction here as well, 6.3% organic development and that is driven by the increase in service revenue and only moderate increase of 61 – I’m sorry, and only moderate increase of costs, leading us to an organic EBITDA development of 915, and here, you have the ForEx and other, ForEx in the 60s, it’s 51 and that leads to the 854 in EBITDA.
Here is also Uzbekistan that is the overall element with 48 million of negative development year-over-year. On the bottom of the slide, you see the country evolvement and here it is driven by Russia and Pakistan with respectively $29 million and $31 million increase and you also see the trend line on Bangladesh and Algeria with 21 and 20 negative development.
And that leads us to the 854, which is slightly decline in reporting EBITDA. Moving to corporate costs in slide 7.
As we stated in February, in our Q4 presentation, we are very focused on reducing corporate costs and we do expect to realize savings around 20% year-over-year from 2017 level of 430 million. In Q1, corporate costs were $80 million, it’s slightly up from last year.
That is driven -- that increase is driven mostly due to severance costs, which is partially offset by a release of provision for long-term management incentive plans. So all the initiatives to address corporate cost are progressing and in line with expectations.
So with that part of my introduction, I am leaving the word to Kjell.
Kjell-Morten Johnsen
Thank you, Trond and good morning, everyone. I'll try to take you through the operations of VEON, starting off with Russia wherein I’m happy to say that we have reported good results in Russia, with EBITDA returning to the trend after Q4, which was impacted by non-recurring costs.
However, we expect the macroeconomic and market conditions to remain challenging as the result of the recent weakening of the ruble. Total revenue increased by 2.9%, driven by 3.7% growth in mobile service revenue and growth in sales and equipment and accessories, partly attributable to the additional monobrand stores following the Euroset integration.
We continue to see good growth in mobile data revenue of 8% year-on-year without the value added and mobile financial services offsetting the decrease in voice revenue. As a result, we’ve seen a year-on-year growth in ARPU of 4.4%, supported by successful upselling activities and continued efforts to simplify tariff plans, also supported by increased penetration of bundled propositions across the customer base.
Fixed line service revenues decreased by 8%, which is an improvement in the declining trend compared to previous quarters. This decline was mainly due to a decrease of foreign revenue in legacy contracts and a decrease of transit traffic revenue, which were partly centralized at VEON wholesale services, a group division centrally managing the arrangements of VEON group companies with international carriers.
We continue the turnaround of our fixed line services via the modernization and expansion of the fixed line network, improving service quality, reducing connection times and offering superior propositions, such as FMC offering. And the FMC customer base continues to grow, now at 925,000 customers at the end of Q1, 2018.
EBITDA increased 4.7% year-over-year and normalized at a margin of 38%, which is an improvement of 2.3 percentage points quarter-over-quarter and 0.7 of a percentage point year-over-year. The Euroset integration is on track and we completed the integration of around 800 stores by the end of April 2018.
The Euroset integration costs were approximately RUB600 million during the quarter, as we closed the transaction at the end of February 2018 and we continue to expect approximately RUB3 billion of negative EBITDA impact for the full year of 2018. We therefore of course continue to expect negative impact on the EBITDA and EBITDA margin, driven by integration costs and the change in revenue respectively.
We did not advice to extrapolate the year-over-year growth in EBITDA that we saw in the first quarter to repeat for all quarters of the year. As Trond talked about, we have now more clarity on the Yarovaya and the key numbers are total expenditure of around 45 billion, CapEx and approximately 6 of that coming in 2018.
So again, we will learn how to store voice and SMS from the 1st of July this year and data communications for six months as of the 1 of October of this year. Moving then to Pakistan, and Pakistan continues to show the growth, both in terms of revenue and customers, despite competitive market conditions.
Total revenue grew by 5.7% year-over-year, driven by mobile data revenue growth of 34%, supported by growth in data customers as a result of higher bundle penetration and continued data network expansion. After the completion of the network integration with [indiscernible] in Q4, 2017, Jazz is now able to offer 4G to all of its customers.
EBITDA increased by 20.1% year-over-year, driven by revenue growth, OpEx synergies and the phasing out of merger/integration costs, leading to a strong EBITDA margin of 47.5%, which is up 5.7 percentage points year-over-year and 1.8 percentage points compared to Q4 2017. CapEx doubled year-over-year during the quarter, mainly due to the 4G network expansion.
Now, moving over to Algeria, where the operational turnaround of Djezzy continued in Q1, 2018. Despite a challenging macro, regulatory and competitive environment, which remains tighter by inflationary pressure, import restrictions, new taxes and strong competition.
And the telecom share of wallet overall is under significant pressure in Algeria. The result is that revenue is still under pressure, decreasing by 9.3% year-over-year with the customer base reduced by 4.5%.
However, we do see positive development as initiatives start to pay off. We do see good uptake of the new price offers.
We do see an increase in the quarter-over-quarter customer base and we do see strong growth in data revenue, 80% year-over-year, driven by new commercial offers and leveraging on the 4Q network leadership. EBITDA decreased 17.3% year-over-year, however, we have seen quarter-over-quarter EBITDA margin improvement.
So in summary, for Algeria, we are confident that we're in the right path. We had the strongest network performance.
We have coupled that with improved distribution, leading to a good relative performance versus peers, but there's still work to be done and we expect the result of the turnaround to become visible at some point in the second half of this year. And then moving over to Bangladesh.
The market is still pressurized by intense price competition and we continue to see pressure on revenue, which is down 10.6% year-over-year. However, Banglalink is much better equipped for a turnaround after the Spectrum option in Q1 2018.
4G was launched in February with rollout getting paced and now covering 12% of the population. Customers grew 5.6% year-over-year, supported by improved distribution in the form of 11,000 new outlets.
Data revenue grew 8% year-over-year with the acceleration of data customer growth at 21% and double data usage. EBITDA decreased by almost 30% year-over-year, due to the decline in revenue, customers -- increasing customer acquisition costs and OpEx related network expansion.
The increase in CapEx was driven by investments to improve network resilience and the 4Q launch and rollout. So I would say, my final comments on Algeria applies to Bangladesh.
We are making good progress, having fixed a structural disadvantaged and purchase new spectrum. We have also improved our distribution.
We're confident that we're on the right track, but we don't expect results of this turnaround to be visible before at some point in the second half of this year. Then moving on to Ukraine, and I'm happy to say that Kyivstar continued to deliver robust results during the quarter.
We secured a 4G license both in the 2.6 and 1800 bandwidth and launched 4G in April 2018. Ukraine was behind peer countries with respect to the launch of 4G, which they also were on the 3G launch and we expect a strong uptake of these services.
Kyivstar is well positioned to benefit from this. Total revenue continued its double digit growth, up 10.1% year-over-year, driven by continued strong growth of mobile data revenue, which grew 59% as a result of growing data consumers and successful marketing activities, stimulated by the continued rollout of the 3G network and data centric tariffs.
As a result, data consumption per user more than doubled in Q1, 2018 compared with the same quarter in the previous year. The customer base grew by 1.9% year-over-year, driven by improved churn.
EBITDA grew 16.4% year-over-year, driven by higher revenues, leading to a high EBITDA margin of 56.6%. And then to coverage, 3G population coverage is at 74.5%, up from 65% in Q1 2017.
Strong quarter for Ukraine. In Uzbekistan, we also see another quarter of strong revenue performance, despite the liberalization of the Uzbek Som on the 5th of September, 2017.
Total revenues grew 20.1% year-over-year. The company’s tariffs, which were previously related to the US dollar were fixed at the pre-liberalization FX rate of UZS4210 to the dollar, which is the higher level compared to the prior year.
Mobile data traffic more than doubled, driving mobile data revenue growth of 38.9% year-over-year. We see strong uptake in 4Q as we expand outside of the main cities.
We expect to end this year with 25% to 30% 4G population coverage, which currently stands at 23%, up from 8% in Q1, 2017. EBITDA increased 4.5% in the quarter, driven by revenue growth that’s partially offset by mainly non-controllable costs like the customer tax increase.
Customer tax doubled year-over-year, impacting the EBITDA margin by 8.5% year-over-year. And we repatriated approximately $40 million for Uzbekistan in two tranches in March and April 2018.
This was executed at market rates and we aim to repatriate excess cash in the remainder of 2018. The Spectrum was reallocated among all operators from April 2018 and we expect now material impact.
And then turning over last but definitely not least to Italy, where the management already have disclosed the results, so we will just do a summary. There is no doubt that the competitive environment in Italy is very tough, also ahead of Iliad’s market entry.
This is reflected in the results, although this has been mitigated by the delivery of merger synergies. Looking at the numbers, the revenue for Q1 2018 decreased by 8.9%, driven by a 7.8% decline in mobile service revenue due to continued aggressive competition and to recap with the launch of the MVNO obtained last year, which drove a customer base decline of 5.5% and pressure on the ARPU, which was down 1.8% year-over-year.
Fixed line service revenue decreased by 4.2%, mainly due to an ARPU reduction of 3.9%. The good news is that EBITDA increased 5.8% year-over-year.
4.1% of this is driven by accounting due to the application of IFRS15, but it is a fact that we are realizing incremental synergies in Q1 this year of EUR37 million and of course we are starting to see lower integration costs compared to last year. Let me add a few words on the new entrant.
The impact of Iliad will be mitigated by the rolling agreement they have with Wind Tre, which is a company specific benefit that other competitors cannot benefit from. On a network, the modernization is progressing and will enhance user experience and strengthen the market position of Wind Tre.
At the end of April, approximately 6500 sites were modernized in five key cities, including Milan recomplete. And finally, the leverage ratio at the end of Q1 was 4.4 times EBITDA and the contribution to be on P&L, minus $130 million.
And then over to you Trond for summarizing.
Trond Westlie
Yes and thank you again. And then we're on slide 16 on the Q1 income statement.
And I will not allude to the numbers that I already commented earlier, but starting on the EBITDA of 854, slightly down from our reported numbers from last year and an operating profit of 362, slightly up from last year. The net financial income and expenses is the interest expense and the increase of debt was offset by lower interest rate and therefore, it's on the same level as last year.
Next number I’ll comment is the share or loss from joint venture of 130, coming from Italy. You see an increase of loss of 30.
The underlying elements coming from Russia is though positive, because the number coming from Italy in 2018 were 102 and then we have an accounting adjustment of 27 that leads us to a loss of 130. Last year, the loss from Italy was 271 and the purchase price allocation adjustment accounting was a positive 182.
So the underlying development of Italy is improving, even though, the number is slightly increasing in our P&L. That leaves us with a profit before tax of 37 and taxes of 119, a decline from last year.
Two elements driving that, less tax in high taxable countries as well as the devaluation of Uzbekistan that drives also this number down. And that is loss from continuing operation of 82 and attributable to VEON shareholder loss of 109 nine in the quarter.
Going then to cash flow statement on page 17. A good progress in cash flow in Q1, starting on the EBITDA of 854.
You see a positive development if you compare quarter one ’17 to quarter one ’18, both in provision net interest paid and income tax paid and that leaves us with the cash flow from operating activities of 702, short of -- 120 million better than last year. CapEx is higher, as I've been talking about due to the quarterly distribution mostly and then the effect of the working capital related to CapEx not changing too much in the first quarter and therefore an improvement from last year and that leaves us at equity free cash flow before spectrum and license acquisition of 334.
I like to point out that please do not use the first quarter cash flow as a proxy for the next three quarters because it has been a good efficiency when it comes to provision and working capital in the first quarter and as a result of that, we are guiding on a lower number than the -- using this as a proxy. Going then to the net debt development on page 18, I think I explained most of the details on previous slides.
So I'm not going to go into details, so that the net debt increases by 225, leaving us at a net debt of 9 billion at year end. That is up from 8.740 billion, leaving us at a leverage ratio of -- last twelve months of 2.5.
I think it's important to say in this – on this slide that this is of course increase due to the fact that we have paid licenses, so more than 300 million and paid just short of 300 million out in dividend and so that we see this as the peak of this year and we are likely to come downwards on the net debt side going forward. We do not see any new spectrum of license payments the rest of the year, even though there will be some smaller additional payments on the existing purchases in the next three quarters.
So all in all, trending in the expected development and seeing this as the peak of the year. Going then to our targets for 2018.
We had a good start to the year, particularly in our largest markets and I'm pleased to reaffirm our guidance for the year for flat to low single digit organic growth in total revenue and EBITDA. We are also reaffirming our expectation for the equity free cash flow calculated on 2018 target rates, which we set out with our full year results back in February.
Today, we also gave you guidance on expected investment for Yarovaya, even though that the big number is over a period of five years, the RUB6 billion will come in to 2018 and will put extra challenge to our target for equity free cash flow, which we are confirming the full year 2018 to still be around the $1 billion, even though it puts some pressure on the downward element of the around level. So with that, I’ll open up for questions.
Operator
[Operator Instructions] We will that take our first question from Irina Idrissova from RBC Capital Markets.
Irina Idrissova
So on Bangladesh, another two rolling out 4G and have better spectrum position. How long do you think it would take for you to catch up on network quality to the largest player in the market and following that, how much longer do you think will take to improve network quality perception to be on par with the market leader?
And then in Russia, it looks like your mobile net adds deteriorated compared to last year, but ARPU growth has accelerated. How long do you think you can afford to kind of hold off on promotions, perhaps sacrifice on the customer base and also if you could give some color of the net losses in the quarter, how much of that was perhaps from the second since that are being used a lot?
Kjell-Morten Johnsen
Well, on Bangladesh, very important change for us, now that we have a spectrum situation that allows us to compete in a good way in the market and we are rolling out 4G network. So I think we’re already seeing a completely different customer experience.
And I think you know as well as me that the real experience comes first and then of course the perception takes a bit more time to change. But if you look at the verdict of consumers in Bangladesh, we do see a strong relative performance versus [indiscernible] for the first time in a long, long time.
So, early signals are very encouraging. But I'd like to underline that this is not something that is turning around in one quarter or one specific event.
We need to keep this movement going for quite some time, before we declare victory. But early signs very encouraging.
When it comes to your question on Russia, I think the Russian market is fundamentally going through a change, going away from focusing on customer numbers to focusing on value, ARPU and profitability. We also see that distribution is changing a lot and we took leadership on that by phasing out the Euroset operation and moved towards more monobrand.
So I expect that the overall market in Russia will see production of overall sales in the area of 20%, 25% this year for all players, but I don't think the customer base of each individual top three operators will change dramatically. We believe that this is the right course of action and we also think it's right to move away from the alternative distributions that has been such a big part of the Russian market to lower sales, more stable customer bases and driving more ARPU and value in the market.
Operator
We will take our next question from Olga Bystrova from Credit Suisse.
Olga Bystrova
Question about leverage. Obviously, your leverage continues to trend up a little bit.
Given current level of net debt to EBITDA, are you still committed to two times target? And perhaps, if you can give us how and on what period of time you are planning to get there?
And also on the leverage scenario, will you be hesitant to pay interim dividends this year?
Ursula Burns
Trond, why don’t you take that question?
Trond Westlie
Yeah. So when it comes to the leverage, we are slightly up this quarter and as I said, we expect to come downwards on the net debt level towards the remaining part due to the fact that we do not see any purchases or acquisitions of new licenses.
And going forward, we actually do think that the trend line is according to what we plan. So I do think that we have to acknowledge that we have to manage both our dividend as well as our leverage.
But having said that, our commitment of paying the -- according to our dividend policy still remain and we believe that we have the plan to manage both and come closer or being towards the 2% -- two times leverage ratio within the 18 to 24 months as we said in February when we came with our statement. So on the -- development is the same, leverage is according to what we have expected and going towards the 2.0 level in 18 to 24 months, but are committed to continue on our dividend policy as such.
Olga Bystrova
Okay. That’s very clear.
And perhaps as part of this question, Uzbekistan, can you update us on the tower deal in Pakistan, what are your expectations for the timing of completion and cash payments.
Trond Westlie
When it comes to the Deodar transaction, we are still hoping for closing that before in the first half and still two outstanding approvals from government -- in all governmental bodies in Pakistan. The rest of the closing procedures is clarified between the parties, so the really outstanding element is for the government approvals.
Having said that, we are depending on the government approval and therefore timing is of course a bit more uncertain, but our targets or both the parties target is to have it closed before the end of the first half of this year.
Operator
We will now take our next question from Madhvendra Singh from Morgan Stanley.
Madhvendra Singh
First question is on Italy. Given such significant pressure on revenues even before Iliad actually has come into the market, just wondering what is the plan to address this revenue base erosion ahead of Iliad entry.
I mean, we understand you have protection in place after Iliad in the market, but what are you doing to address the market share loss right now? And if there are risks actually that if the current revenue trend continues in Italy that you would probably lose a significant portion of your synergy because of the revenue loss there.
And secondly on dividends, given the focus on leverage, not only from your side, but also from markets point of view, would you consider cutting the dividend at some stage just to like de-leverage much faster and then maybe come out with such attractive dividend policy.
Kjell-Morten Johnsen
Yeah. Let me start on your Italy question.
We’re doing a lot of fundamental work in Italy. We have come a long way in terms of consolidating the networks, which gave a completely new user experience for the three customers and improved also the user experience for the consumers of previous wins.
And I also said in my initial statement that we've come a long way in terms of upgrading the networks, also in some of the main cities. So this again helps us a lot with user experience.
We’re doing a lot of work with our distribution to optimize the logistics and to make sure that we use these brands in an efficient way. When it comes to the competitive pressures, as I'm sure you know, the launch of the MVNO from about a year ago, that put the numbers pressure on the markets, the good news for us is that we are very well on track to manage that in Italy.
We’ve done a good job of extracting the synergies that we outlined in the merger and they’re definitely coming along and protecting and even increasing the EBITDA in the beginning of this year versus the situation we had one year ago. And we expect of course that there will be continued competitive pressures with the Iliad launch when it comes, but I think we are much better prepared now than we were one year ago.
And as you pointed out, the structure of the transaction that we made also with Iliad gives us a significant advantage over the other two main players in the market. So that gives us time to finalize all these substantial changes we're doing to our networks, our IT systems and our distribution in Italy.
Trond Westlie
When it comes to the dividends, it’s really coming back to my last answer and say that of course we have to manage both our dividend division and leverage in conjunction and that means that we are having focus on both elements, but as we see it now and the plans that we have going forward, we actually do think that the leverage ratio is going to come towards the two point level within 18 to 24 months. And that is while keeping our dividend, keeping the dividend at our dividend policy as such with sustainable and growing dividend.
So we are – as of now, we are planning to keep at -- both at the helm, but of course if something significant happened, it’s our, as management as well as the board’s responsibility to look at the overall risks going forward. So it's not sort of carved in stone, if something major happens, but as of now, we are planning and going ahead, because we’re following the plans as we had.
Madhvendra Singh
Just following up on Italy. So the rate of revenue decline of around 8%, 9%, do you think that rate is going to remain at around that level for the rest of the year.
Kjell-Morten Johnsen
I don’t want to give specific guidance on Italy beyond what the management of Italy that in their own presentation to the market, they went public with their Numbers just ahead of us.
Operator
We will now take our next question from Herve Drouet from HSBC.
Herve Drouet
Two questions also on my side. The first one is your target of reaching two times net debt to EBITDA in 18 to 24 months, what assumptions are you taking for that -- so for the Pakistani network sale and also for GTH minority buyout, I mean, do you include both of them happening to reach that figures or only one of them?
And if one of them or both of them do not happen, could it change your view on the dividend policy. The second question is on the Yarovaya low and the cost associated, I mean you mentioned for 2018, RUB6 billion cost to be incurred for that.
I was wondering have you started to incur already a part of it in the first quarter. And if you can share that figures if it is a case.
Trond Westlie
Coming back to the dividend, when it comes to the leverage expectations, the Deodar, the closing of the Deodar is within the expectations when it comes to the 18 to 24 month parts and any restructuring of GTH is not in to that consideration. So that's a very – I think it should be very clarifying of what comes in addition and what's not.
When it comes to the Yarovaya part, there has been no investments or expenses, except for our own internal work on making the estimates available to ourselves as well as you. But there is no investment or expenditures in the first quarter.
Operator
We will now take our next question from Stella Cridge from Barclays.
Stella Cridge
I have a couple of questions please. And the first is on the Egypt situation, so whether any discussions in the last few weeks between the company and the authorities in Egypt and with regard to taking forward the minority and what’s the company's strategy going to be in the coming months with regard to this asset.
That will be the first question. And I wanted to ask a second question on Pakistan, just in practical terms, when the tariff still goes through, does the fund – do the funds actually have to go into Pakistan, be converted into rupees and then come back out again or is it an offshore transaction which would just be mark to market to the FX rate at the time.
Just to kind of understand how the cash will actually flow when that transaction is completed, that would be great.
Kjell-Morten Johnsen
When it comes to the Egypt situation, I do think that, as we said, when we withdraw the application for the MTO, that we needed to come into a more closer dialog with the Egyptian authorities. That still remains.
And we are embarking on that. Our goal -- our long term goal is the same as it has been to clean up the structural situation with GTH and we believe that that’s the right path going forward.
Having said that, the timing, the dialogue and so forth with the Egyptian government have to be on a bilateral roll basis and we are not going to disclose anything until we have something to discuss in that regard. Coming to Pakistan, it is a Pakistan transaction, so the money is going to flow through Pakistan and that means that money will come into Pakistan and then we, on our end, will have to agree with Pakistani authorities on taking money out.
I do think that we have good dialog with the state bank of Pakistan in that regard. But that is of course a part that we need to address in combination with closing the transaction.
The transaction is rupee based, even though some part of the transaction will be in US dollars.
Stella Cridge
And I mean, do you have any concerns about the recent FX volatility impacts that this may transactions in FX a bit more challenging in the past?
Kjell-Morten Johnsen
Well, as a result of the situation in Pakistan and the currency reserves, of course, there is a more challenging dialog between us and our counterparts as well as with the state bank of Pakistan. I think we just have to acknowledge the situation.
And that is part of the discussion.
Operator
We will now take our next question from Olga Bystrova.
Olga Bystrova
Sorry for a number of questions, but I wanted to follow up on your assumptions on the leverage in addition to transaction and GTH buyout. What kind of currency assumptions do you have in there?
Are you taking current – basically, is there any room for Pakistan or Chilean currency depreciation for that matter. And also on Russia, obviously with the management change relatively recently, how would you describe the strategy the new management will be attempting in Russia?
Are there any changes to asset light strategy there? Also, there has been several 4G license standards, which we did not participate and if you could update on that, what is the thinking there?
Kjell-Morten Johnsen
When it comes to the FX assumptions, we are giving our planning assumptions in February when we issued the numbers. When it comes to our guidance, we have stick to those currencies, which is RUB60 a dollar in Russia and the Pakistani rupee is, our planning base in February was 105.
We know it’s a bit low as a result of today's element. But that's the planning assumptions and our planning numbers and guidance numbers are based on these and of course are exposed to changes, when it comes to currency development.
When it comes to the other part, why don’t you take that Trond?
Trond Westlie
Yeah. When it comes to Russia, I’m very happy to say that Russia is up and running full speed.
And we didn't lose, hardly a billion of transition there. So that is moving along very well.
The team is intact, and the strategy is intact. There is no major change to the strategy.
Now always, strategies like documents are at some point, you make adjustments to it, but the main trends will be in place where we talk about focusing on value, fixing the distribution, continuing with FMC and of course we have a job to do within the fixed business to stabilize that and return to growth and investments are already for some time going in that direction, so to get that up and running again. So I think the keyword is stability and good progress.
Olga Bystrova
And for 5G licenses.
Trond Westlie
Well, we do expect that there will be a 5G momentum in Russia as in every other market. But there's no urgency in 5G.
The market is still absorbing 4G and there is a rapid rollout, both in terms of coverage and capacities on 4G and we will return to 5G. We have announced that we are doing tests on 5G in Russia like we do in other market and we are on top of the situation, but we have no more things to communicate from 5G at this stage.
Operator
[Operator Instructions] We will now take our next question from Vyacheslav Degtyarev from Goldman Sachs.
Vyacheslav Degtyarev
Can you elaborate more on the competitive environment in the Russian mobile market and basically how sustainable are trends in Russia that we have absorbed over the quarter, the first quarter and what kind of challenges do you foresee in Russia on the back of the recent ruble weakness.
Kjell-Morten Johnsen
Yeah. I think it's a very good question.
I think the market and the main players have moved away from a dysfunctional distribution model, where we saw Russia selling 110, 115 million SIMs every year, which was a meaningless exercise. I think we’re seeing the trends of this coming down, maybe 20%, 25% this year and probably that should continue with more reductions going forward.
I think it's entirely possible for Russia to be a well-functioning market with total sales of SIMs in the region of 40 million to 50 million, which will be less than half of what we saw in 2017. We also see the players starting to focus on the value, rather than gross adds and the SIM market shares, which I think is a normal development that you have seen in multiple markets before.
We have of course the outlier of tele2, where I think it was natural for them to take an aggressive approach in an earlier stage of development and also when they were entering the Moscow market. They have now started to reach a size where they are developing a long tail also in Moscow.
So at some point, it will probably be natural for them to focus more on value than aggressive growth, but that is of course up to their management to consider. We see the other players at least going in the same direction, which I think is good.
For the sustainability of these things over a long period of time, it’s an open market where people are ambitious to build stronger positions. So the development of time is always hard to predict, the momentum now seems to be good.
Vyacheslav Degtyarev
And with regards to the recent ruble weakness, that is somehow impacting the performance?
Kjell-Morten Johnsen
The ruble weakness has not been that big. Of course, it will impact the overall numbers when we calculate this back to the dollar terms, but if you take a 24-month perspective on it, then it’s kind of not far off where it was two years ago before appreciating throughout 2017.
So that will have some impact on the overall numbers, but for these running operations, so to speak, in the Russian market, it will not have any kind of material impact.
Operator
We will now take our next question from Alastair Jones from New Street Research.
Alastair Jones
Just following up on your guidance, your EBITDA was growing 6% this quarter and your guidance on flat to low single digits for the yeah. I'm aware that you got obviously the Euroset integration costs coming through, but you’re talking a fairly optimistic story about sort of the Russian competitive environment, Algeria, Bangladesh turning around, cutting costs and headquarters.
So I’m just trying to understand what sort of pressures you're expecting to see in the second half of the year aside from the Euroset to sort of figure out exactly what's driving that -- your expectation of the growth to slow down. I mean, related to that, just in terms of free cash flow guidance.
I see now, you indicated that includes the data storage law investment. So it’s implicitly a 10% upgrade to your free cash flow guidance, if I'm understanding it correctly.
I’m just trying to understand if that is to do with your EBITDA or if you’re cutting back on CapEx in certain markets where you don't need to spend as much as you initially thought of this anything else within that implicit guidance change?
Trond Westlie
When it comes to the development, I do think that we do not see -- when it comes to the rest of the year and the guidance, there's no specific country going either way. I do think that we're still focusing on our turnaround case and we don't see effect until sort of late second half in that context and that is of course going to still put the pressure on it.
Going on other things, I think we are seeing a trend line during the year, if we average it out, I think we see a trend line during this year as we have seen previous years. So, there is no specific comments to whether or not we actually see what kind of development we see.
First quarter was a good first quarter. It has a tendency of moving a bit up and down in the markets and that's the reason why we are still confirming our guidance as such.
Going then to the Yarovaya investments that we have to do during the year, since we have always said around the 1 billion level and that means both slightly over, and slightly under and as a result of that, I wouldn't necessarily put it as a 10% increase, but of course, we are seeing that a good first quarter is helping us cater for these elements. But as I also said in my guidance element, the Yarovaya investment will of course put pressure downward relative to the year round definition, but nothing other than that.
And as a result of what you're implying by cutting other elements on CapEx, no, that has not been a part of the planning process so far.
Operator
We will now take our next question from Igor Goncharov from BCS Global Markets.
Igor Goncharov
Just follow-up question on the assumptions behind your guidance, and behind your target, on leverage and on dividends, in combinations, it looks quite optimistic, just wanted to clarify when you formulate those targets on growing dividend and decline in leverage, do you assume any M&A transactions or debt ratios that we are not yet aware of or in other words, it assumes that this is guidance is based on the organic development of the company, not including any transactions that have not been announced yet.
Trond Westlie
That is correct. It is based on the organic development with our FX target rates as we have announced.
And there is no additional M&A included or anticipated in this number. So -- and the only one that is anticipated in this number is of course the closing of the Deodar and the receiver money in that -- during that transaction or from the transaction.
The other elements is just according to plan and just to say that the policy on dividend is valid and progressive does not mean any linear development as such, just to be very clear on that. But of course there is a small history to go on.
So don't do any prognosis on a linear element of what is defined as a progressive dividend. But as I said earlier, we will manage both leverage and dividend, but within our plans as we see it today, we are literally seeing that we are going to go forward as planned and deliver on both the leverage guidance as well as sticking to our dividend policy.
Operator
We will now take our final question from [indiscernible].
Unidentified Analyst
I have one about the denial order on ZTE. Could you just clarify which countries it might affect apart from Italian IV and how significant might be the impact on your operations and financial results?
Thank you.
Kjell-Morten Johnsen
So you excluded Italy where of course we do, we do have different levels of engagement with different markets. In some markets, we are -- they are providing the radio equipment.
Ukraine is one of those markets whereas in other markets, they do part of our virtualization of the core. So we are of course looking into how we will work around these solutions, these issues with the ZTE unless Donald Trump fixes it for us as he said.
These issues are manageable. They require some work.
And we are working on putting in place the solutions that would lead it in case ZTE is unable to deliver on their obligations. But again, it’s different from market to market and for Ukraine, it is radio network, utilization.
In some modest markets, they are predominantly during the virtualization. Within our footprint, ZTE has a relatively low market share on our radio network, predominantly we are -- we have a lot of exposure with Huawei.
In Russia, we have Nokia and Ericsson into our own network. So there is no implication for biggest market within the radio networks at all.
So in short, it's an issue, but it's a manageable issue.
Operator
I would now like to turn the call back for any additional or closing remarks.
Trond Westlie
So the closing remarks from our end, it’s a good first quarter for VEON, both on revenue and EBITDA development, good operational performance in Russia, coming back on track, strongholds of Pakistan, Ukraine and Uzbekistan and really the operational turnarounds in progress in Algeria and Bangladesh. In addition to that, we are delivering -- we expect to deliver on our corporate cost reduction.
So overall, I do think it's a good trend line from VEON in the first quarter. So with that, thank you very much for listening in and have a very good day going forward.
Thank you.