Feb 25, 2019
Richard James
Well, good morning, ladies and gentlemen, and welcome to VEON's 2018 results presentation. Today, I'm pleased to be joined on the stage by Ursula Burns, VEON's CEO; Trond Westlie, VEON's CFO; Kjell Johnsen, our COO; and Vasyl Latsanych, the CEO of Beeline Russia.
Ursula will start the presentation with a brief review of 2018, Kjell will then give a digital update and a review of individual country performances then Trond will provide more detail on the group results and our outlook. Then, we'll hand over to Vasyl, who will provide an overview of the Russian market and more detail on Beeline strategy.
And then, we will ensure that there's ample time for questions at the end. Before getting started, I'd like to remind you - 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 2019, future market developments and trends, operational and network development, and network investments, and the company's ability to realize its targets and strategic initiatives including current and future transactions.
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.
The earnings release and earnings presentation, each of which include reconciliations with non-IFRS financial measures presented today can be downloaded from our website. I would now like to hand over to Ursula, to review our achievements of 2018.
Ursula Burns
Thank you, Richard. Good morning.
And for all of you on the line, welcome and thank you for joining us, to you in the room as well, for our 2018 presentation. Let me start today's presentation by reflecting on the year, on 2018.
It was a transformative year for the company. 2018 saw large scale movements in geopolitics, in currencies around the world and in economics in general at a global level and it actually impacted VEON very directly.
It was also a year of significant change in our company. We implemented a new operating model and executed a major disposal to streamline our operation and focus them on emerging markets very narrowly.
VEON's portfolio of leading emerging markets' mobile communications operators offers exciting prospects for the future success of the Group, as these are markets that are attractive and have attractive opportunities in population growth, in prosperity growth, and in this very important area of smartphone penetration. Each of the markets presents distinct challenges as well, not least of which is foreign exchange exposure, which both Trond and Kjell will get into a little bit.
This is one of the reasons that we implemented a new operating model at the center that helps us to reduce cost that gave our operating companies more flexibility to operate locally and to make the most of the local market opportunities and address the challenges very directly. It is the balance of these opportunities and challenges in these exciting markets that led me to accept the Board's offer to take on the role of VEON's CEO on a permanent basis.
Now, as a reminder, we set four immediate strategic priorities when I came on board in last July. We focused on creating greater value for our shareholders.
And we have delivered on all four of these. We've implemented a new lean operating model for the Group.
As I mentioned earlier, this puts VEON in a better position to act locally, to focus on cost to be very dynamic in the marketplace. We've also invested in digitizing our core that helps us to improve the customer experience and to drive operational excellence and efficiency across all of our markets.
We've shifted our focus from a HQ-driven central approach called the VEON Platform to investing at the operating-company level, and developing solutions and opportunities in the local markets. Our new operating model has also played a significant role in helping us to meet our corporate cost target.
And we are firmly on track to half our 2017 run rate by the end of this year. We are also committed to simplifying the group structure.
In July, we launched an offer to acquire GTH's assets in Pakistan and Bangladesh. This was not successful, but we remain committed to working our way through the strategic relationship with GTH and its minority shareholders and have recently submitted a mandatory tender offer for GTH, which is ongoing.
Second focus area was on increasing VEON's operational focus on emerging markets. We sold our 50% stake in the Italy joint venture.
We did that in September. It was a standout success.
We did it in a timely fashion, reinforced our focus on emerging markets. It helped us to realize value immediately for the shareholders, which was really good.
And we're not stopping there. We have shifted our investments to local digital offerings, as I said earlier, and expanding our digital services on a global basis.
Third, we strengthened the Group's balance sheet with the sale of Italy we got US$2.9 billion. And we used almost all of that to repay debt and helped us to improve our leverage and to lower our interest cost.
And finally, with an improved leverage and strong cash generation we announced the payment of a US$0.17 dividend for 2018. This maintains our record of giving a dividend as long as the company's cash flow turns out to be strong.
And we'll continue to do that as we go into the future. And before Trond runs through the Group financials and then Kjell goes into detail by country, and I'd like to draw your attention to the highlights for 2018.
You can see them on this slide. We delivered our organic revenue growth for the year.
And we delivered EBITDA for the year that were ahead of our targets. As you know, we updated our projections in the third quarter.
And we met those updated projections as well. And we delivered a strong equity free cash flow performance in U.S.
dollars, notwithstanding significant headwinds in currency. Although the headwinds in currencies are not things that we can control directly, we can do a lot to mitigate their impact.
For example, we hold cash at the headquarters in U.S. dollars.
We have better aligned our debt currency exposure to our cash flow exposure by reducing the U.S. dollar debt.
We use the proceeds of Wind Tre to do some of that for us. And we've increased our ruble debt over the quarters.
We further worked with our vendors to share the risk and opportunities that are presented with currency movements. We did all of the typical things that you do to try to hedge yourself against negative currency movements.
We've done that pretty well. Again, in quarter four, it was a solid quarter as we reported strong organic growth in both revenue and EBITDA.
And we have been able to move our leverage down to 1.7X below our 2X target. And we intend to keep it in that range.
And by doing that, we were able to also deliver full year dividend of $0.29. So now, building on the momentum and the immediate priorities we addressed in 2018, there are four things we're going to focus on in 2019.
The first is enhancing our core. We're committed to digitizing the core of our operations, because we want to actually provide better service to our customers and lower our cost of operation, and be swifter in the way that we address opportunities and challenges over time.
So as you know, we've installed a new digital business support system in Georgia and Algeria that was provided to us by Ericsson. And we have pleasing early results.
I'm pretty impressed with the way that that was went in and how they're operating. And in Russia, we recently announced a partnership with Amdocs to essentially do the same, to modernize our business support system there.
And today, if you read the news earlier, today we reached a revised agreement with Ericsson that will help us to deploy this to more countries. We've actually narrowed the scope a little bit, definitely pointed Ericsson to a set of high priority solutions for us.
And we renegotiated contract and received $350 million or will receive $350 million for that. A good win-win I think solution for both us and Ericsson.
Second is cost efficiency. We have more than - more to do in HQ.
We've done quite a bit in HQ, fundamentally changed the operating model there and reduced the cost significantly. But we still have more to do.
And as I mentioned, we are on track to meet the targets that we gave to the markets in reducing our run rate by 50% by the end of this year. At the same time, we know that all of the costs don't sit at the center.
We have to do the same thing out in the operating companies. And we are doing just that.
We're really focusing on reducing cost, streamlining operation, using technology to move faster and to do it in a more cost effective manner. Third, it's called portfolio management.
And we put the world actively there because as the center, we are managers and owners of a portfolio of operators around the globe, and we will continue to manage this portfolio in order to deliver greater value for our shareholders. This means continuing to simplify our structure, i.e.
GTH. This also means adopting different levels of asset intensity, very specifically, based on the assessment of returns in local markets, so not a peanut-butter approach, but very specific investments by market.
It may also mean working through partnerships, which it will mean that and also transactions that help us optimized value and returns of our assets and drive higher returns for our shareholders over time. Fourth, and but not least is what we call new revenue stream.
Here we intend to progress at the operating company level through the development and deployment of local digital services, focusing on meeting the needs of underserved customers, very locally. Now Kjell will take you through some examples of both these strands in a moment, the cost side, the growth side, and we'll come back to you on all four of these areas in more detail in our Investor Day, which is currently - we're currently planning for around summer - mid-summer this year.
With that, I'll hand it over to Kjell, who will take you through digital services before summarizing the country's very specifically. Kjell, over to you.
You're welcome.
Kjell Morten Johnsen
And good morning to all of you. Thank you for joining us today.
I'll start off with the digital part and then I'll try to take the main operations in a kind of summary fashion. But looking into the digital side, there's been a lot of talk about the digital ambitions of VEON and our approach to it.
The main thing that we have adjusted is we are now putting more responsibility with our OpCos, and that has been a success. In several of our OpCos, we have competencies that are top of the line, really at a world-class level, and we see that bringing more responsibility to the operations also creates a motivation and an excitement that we are building on.
Within digitizing the core, it's all about streamlining, it's that in the future you are more likely to be in touch with a bot than with a person, which is the way many industries are going. We announced today our new agreement with Ericsson, so that lays the foundation for building what is still going to be a world-class BSS system in the telco industry.
So the adjustments we make are made because Ericsson is not pursuing the revenue-manager model. The rest of the systems will be very good, we have them in place in Georgia, have them in place in Algeria, and we're continuing to develop this in a partnership with Ericsson.
Due to the work of Vasyl and Yogesh, our CTO, we have also landed a great agreement with Amdocs. Amdocs has been our partner in Russia for many and many years, we are now taking that corporation to the next level.
And I think that brings a good balance to our portfolio. We have two very strong names that are committed to building excellent services for systems, for VEON going forward.
Within our OpCos, we have developed DMP platforms, data management platforms, over the last two years that are absolutely at a top level in the industry. We are using those actively for analysis of building out networks, Vasyl will speak more about that.
We are using it for our customer value management activities, securing that, we are not only focusing on driving gross adds, but we're also focused on driving up ARPU. The industry has for many years been very focused on the next quarter and the gross add numbers but not on enough value, and I'm glad to say that in several markets we see that it's changing, maybe it's because when you run out of the easy pickings of new people coming on board, you have to focus more on value.
We're also successfully developing internal digital services. Also with partners, sometimes that means that we bring content in from partners, other times we are helping other value chains to build their own business.
For example, like we do with credit scorings and other things that - so that when you go to the think of and take a loan. It's quite likely that some of the credit scorings that are done there come from us, actually, helping them build their business, which is absolutely fine.
And I like to take you through a couple of examples of where we see interesting opportunities. Pakistan, a country with secular population growth, growing by a couple of million people every year, huge banking opportunity, still 80%, 90% of the population more or less unbanked in the traditional sense.
JazzCash is building on Jazz being the strongest brand in the market, without any doubt, five million active customers, and we see opportunities to continue driving growth within that dimension. Beeline TV has taken us out from a situation where we have old refurbished setup boxes to now we have a sleek product that looks like it's designed in California by Apple or someone else.
It's not anywhere near what you saw a couple of years ago. Introduced in Russia, moving on quite well, the intention is to move that to other countries, and I think, we'll spend a lot of time on that during 2019, so we can secure a reuse of the learnings we have here.
And then we are moving on from being a telco with a self-care platform to focusing on creating B2C ecosystems. I think the industry has underestimated the value of our interaction with the customer base here.
We see messengers getting - we're getting high valuations. If you look into our B2C ecosystems, we have almost as many people - monthly active users in Russia as Viber has over our networks.
We have more than some of the well-known messengers out there. So clearly, by putting more opportunities there for our customer base, we can drive growth and a better and more exciting customer experience for our clients.
So full speed ahead, much more focus on the local part, OpCos is responding with enthusiasm and competence. So I'm quite bullish about our digital services going forward.
So if we turn to the business, I think there is one word that captures it and that's growth. We're back to growth again, we see it almost over the board and it's not unnatural.
Many of our countries have young populations, they have growing populations, and we have strong positions that capture that growth. The only country here that comes out as negative is Algeria, but if you look under the surface, you'll see that we are actually increasing our market share quite significantly.
So on the relative performance basis, I'm very satisfied with that development. I will not speak too much about Russia, we have Vasyl here today, he knows the Russian operation from A to Z, and we'll also answer questions around it.
We have integrated Euroset, on-time, on budget, we are transforming the Russian retail going from a joint venture in Euroset, where we really couldn't add very much value in the interaction with our customers, to a controlled channel that helps us getting out of the gray markets that everyone wants to see hopefully closing down over time in Russia. This leads to growth, it means that our handset - our devices business is now twice as big as it was two years ago, and also it's becoming profitable.
We now have a scale that makes us very exciting for the device vendors. So we have turned that from being a loss-making business to now being a profitable business.
Again, Vasyl will take you more through these things. Just very happy to see that in terms of network development, we are now best-in-class in Russia.
We have the highest rollout speeds of the operators, and we will have a strong network underpinning our business in Russia going forward. Pakistan has had a tremendous performance.
Headline numbers are very, very strong. And we are of course reminding you that the Supreme Court of Pakistan issued a suo motu, but even if we adjust for that, we are talking about double-digit growth at 9.9% here.
We see good profitability, we see customer numbers increasing, so at - already at 56 million customers in Pakistan, they are neck-and-neck with Russia, when it comes to being the biggest operation in our group from a customer point of view. We are very well on track with our 4G rollout.
We think we have timed it very well. We see around 25%, 30% smartphones 4G enabled, and we have already LTE on the majority of our base stations, closer to 60%, 65%.
That's a healthy development, and I think, we are very well placed for competing with Zong and the Telenor in Pakistan. Algeria has executed really well on the turnaround it.
The management has followed a consistent strategy from the end of 2016 of investing into network quality, especially in Algiers, taking a more aggressive stance in the market, because it was clear that a couple of the other players were not at all focused on building value, just focusing on gross adds. We have pushed it back.
We have been gross add winners for big parts of 2018. And we see that we have been able to increase our market share.
We have launched the business support systems with Ericsson in Nigeria. It's up and running.
So it's not something that's going to happen in the future. And if I should highlight challenges, it will be more about network rollout.
We see from international studies that Algeria is quite far down the list on Internet speeds. So I would hope and expect that in our dialogue with the authorities, we would get an even better momentum on building out our base stations, but also our trunk lines and the intercity networks that are crucial for the industry in order to deliver the speeds that we would like to deliver.
Bangladesh has stabilized. I think that's a quite good achievement.
It's not the easiest market to operate in, but Erik and the team have now been able to come to a small growth. And I think we should be satisfied with it.
Still some things coming along that could be helpful for us. The SMP regulation is kicking in, that will have an effect on the dominant player, who takes most of the profitability out of that market.
Meanwhile, we are focusing on changing the way we roll out networks. We're rolling out much earlier in the year, so if you see this number falling off a cliff, it's basically because we have decided that we want to do most of the network rollout in the first part of the year and reap the benefits throughout.
Overall, a good stabilization effort by the Bangladesh team. In Ukraine, what else can we say, Kyivstar is a very well-run company, clear market leader, taking very mature decisions in terms of its go-to-market strategy.
And we see a very stable and healthy development. We had a setback with ZTE, when they had their Denial Order, set us back a couple of months.
That was fixed an arrangement by the end of September, were completed, back on track on our 4G rollout. So the pace in terms of network rollout is as it should be.
And we see that we are ready to take the wave of 4G-enabled smartphones also in the Ukraine in our stride. In Uzbekistan, we talked a bit about last time, has gone from being a difficult country, closed, to having now a government that is committed to opening up.
And we see that we are able to extract our profits from the market. And we also see, which I'm very glad to notice, that the foreign currency balances are not going down.
So this looks to be sustainable. And the dialogue with the government is centered around what's the next move that can drive performance going forward.
We are a market leader. We are rolling out 4G also at a very good pace.
There are no critical hurdles at this stage. Ideally, we would have liked to see a bit more opening up in terms of international gateways.
But that will be the icing on the cake. So Uzbekistan has gone from being slightly problematic to being a quite great story for us at VEON.
That's basically what I wanted to touch upon when it comes to the operating companies. And we'll do Q&As afterwards.
I hand it over to Trond, please.
Trond Odegard Westlie
Thank you, Kjell, and good morning from me as well to everybody here, as well as the ones online. So, Ursula were alluding to the year as such, so I'm going to focus on the fourth quarter results.
Delivering good results in fourth quarter $2.25 billion of revenue and $714 million in EBITDA, that's 5.3% growth on the top-line, and we see 10% year-on-year growth in EBITDA, specifically helped by Pakistan and Ukraine, delivering $230 million of equity free cash flow in the quarter. Of the $2.2 billion of revenue that is $550 million of mobile data revenue, which is slightly more than 30% increase year-over-year in mobile data.
I'll come back to that as well. The net leverage ratio is 1.7 after selling off Italy and has come down significantly from last year, and is well below the 2 times that we have said that we're comfortable with.
On the corporate cost, fourth quarter is slightly higher than the previous quarters, due to the fact that we have some severance provisions in that quarter of $52 million. If I exclude that $52 million, we have a year-over-year decrease of more than 34%, fourth quarter over fourth quarter.
So we're very much in line with delivering on the cost intensity or the cost improvements. When we go to the revenue and the EBITDA development, not going to spend too much time on it, but on revenue side, you see that the development is very much driven by Pakistan and Ukraine.
I think that's the overall drivers for this quarter. Russia is picking up slightly, and when you look at the EBITDA, that's the same element.
In addition to that, I think the year-over-year development is also influenced by Bangladesh and Algeria flattening out. So if you look at the fourth quarter over fourth quarter compared to year-over-year, you see they're much flatter and the decline or Bangladesh slightly improving and Algeria is still slightly declining due to the fact of the market situation that Kjell alluded to.
ForEx in the fourth quarter, you see that it has an effect of $285 million on the revenue side and $111 million on the EBITDA side. If you look at another way of composing the revenue development, the equipment and accessories slightly up with $20 million, voice coming down and data coming up.
The data growth in specifically Ukraine, Pakistan and Algeria is actually fairly high. Ukraine as a result of rolling out the net in second half, and as a result of that data is actually growing with more than 80% year-over-year, and Pakistan has the same amount of data growth as well, so a lot of growth coming on in those two countries.
And when it comes to on the EBITDA, you see that the service revenue element is higher than the total cost development, and that means that the cost efficiency that I'm going to focus on later is starting to show even though not as much as we would like and I'll come back to that. The foreign currency effect is the same as previously mentioned on the $285 million and revenue at $111 million on EBITDA.
On the corporate cost side, the corporate costs in 2018 were $360 million, including the additional severance cost in the fourth quarter of $52 million. Having said that, there is more severance cost in there, but some of that were anticipated when we gave you the guidance for the year.
So I'm not sort of specifying the other elements of that. So all overall, 20% increase year-over-year as we said is delivered.
Going in to 2019, we expect to take another 25% out from the $360 million down to the $270-million-ish level in 2019. And, of course, that will enable us to come to the $215 million going rate, going into 2020 as we have been saying.
So we're on track on delivering our corporate cost development. But we are not only interested in our corporate cost; we're also interested in the operational efficiency going forward.
And as a result of that, we're also introducing the cost-intensity ratio improvements going forward. And the reason for talking about cost intensity instead of talking about nominal numbers is because we are in a growing environment.
And that means that, even though we have a saving target, we still see that revenue is going to grow in the future. And that means that cost will grow in the future, but the ratio is going to be different.
And that means that our ambition is to reduce by at least 1% a year, over the next three year period. 1% is about $85 million, if you take nominal numbers out of 2018, times 3 is around the $250 million.
So that's our ambition over the next three years. We started this project way in 2018.
The activities that we have in plan is sketched in the circles in the middle. So we have a lot of initiatives going on service and technology cost.
We have initiatives on commercial and we have initiatives on G&A. And these are the elements that we're going to focus on to drive that intensity going forward.
Just to end up in the numbers. Q4 numbers, starting on the EBITDA of $714 million, you see the depreciation coming down from $560 million to $506 million this year mostly as a result of FX, no substantial elements to it.
That leaves an opening profit of $208 million, $160 million in that financials coming down as a result of less debt effectively. ForEx do not have the same negative effect this year, so we're coming up much better than last year on profit before tax of $57 million.
Tax is coming down around to $24 million, a big reason for that is withholding tax and most of that is residing in Pakistan, due to the challenges of up-streaming cash from Pakistan as a result of central bank not having enough dollars basically. So until we've seen that solve itself and opening up for better currency situation in Pakistan, that part is also going to challenge or reduce the tax burden for a period.
And having said that, last year we also had a big dividend upstream in the fourth quarter. Profit and loss from continued operation of $33 million, that results in the VEON shareholders element of $19 million of loss in the fourth quarter.
This is just to show you the continued strong cash flow generation on Russia, Pakistan, Ukraine, driving that, all positive numbers on operating cash flow from the countries, and then ending up in the equity cash flow of $230 million. Not going to be very detailed on this slide, just showing you that you see the elements of working capital and provisions changing in the fourth quarter leaving us more than $200 million of free cash flow if you compare it to fourth quarter this last year.
Net debt development, an improvement of $270 million in the quarter, starting out of 5.7%, ending up at just lower than 5.4%, so we see that the cash conversion is actually being effective and reduction of that is happening, still at the 1.7 times level, and as we have said before that's a level where we are comfortable. After receiving the money from the Italy sale, we have used all the proceeds for repaying debt, $2.8 billion have been paid in 2018, $800 million were paid in the third quarter and then $1.3 billion have been paid in the fourth quarter.
The fourth quarter, we made a tender on our bonds and we're successful on that. In addition to paying out all our euro debt and dollar debt, we have also entered into agreement on some debt swaps to rubles, and that means that we did $900 million in the fourth quarter and that means that if you look at the debt-currency mix going from third quarter 2008 of 25%, gone up to 42% in rubles.
And we have done another $300 million in first quarter of 2019, and that means that we're not mixed in the currency set up on the ruble exposure relative to our ruble - or the debt structure relative to how we see the cash flows coming from ruble or ruble denominated currencies. Costs slightly up as a result of it, going from 7.2% to 7.5%.
As a result of IFRS 16's coming in, we are of course as well affected. We will track those numbers every quarter and specify them so that you can follow them, so that you can put them in the way you want to.
On balance sheet elements, it's approximately $2 billion in assets and $2 billion in debts. On the income statement, EBITDA effect is going to be approximately $450 million and the profit before tax is going to be negative with $100 million.
It will also affect cash flow statement, both on operational cash flow and equity free cash flow with approximately $300 million and then financing activities in the cash flow will have a negative of $300 million. So that's the annual effect and we will, of course, follow it quarter-by-quarter and specify each number to make sure that you can track the bridge from previous to the coming numbers.
So for 2018, we are delivering on our targets that we slightly have revised upwards in third quarter, so 3.5% revenue growth, 6.2% EBITDA growth organically, and an equity free cash flow of $1 billion, so all in all, a good year in that sense. On the final dividend and the dividend policy, we are committed to paying a sustainable and progressive dividend.
Our continuation of progressive dividend policy is dependent on the evolution of the group's equity free cash flow, including development of U.S. dollar exchange rate against VEON functional currencies.
And as a result of this, the board has decided that for the year 2018, we intend to pay a dividend in the aggregate amount of $0.29 and that is comprised of the $0.12 we paid as an interim dividend in August in 2018, and is then going to pay $0.17 per share in March 2019. Going then to the development of equity free cash flow.
I like to spend some time on this and before we get into the guidance for the year. And if we start to the left, we are delivering above - slightly above $1 billion in equity free cash flow.
Of that, I had a discussion during the year with many of you relative to what is sort of the normal course and what is specifics, and been very clear that of the $1 billion, it's about $200-ish million of nonrecurring cash flow income. And that means that the underlying element, if you take away too much of balance sheet improvement elements, it's about $800 million.
What we see coming in, in 2019 is that the CapEx, including the Yarovaya, that means Yarovaya is the biggest portion of it, but we're also going to spend more money on CapEx, both in Russia as well as in Pakistan. So we're going to slightly up the ordinary CapEx from it.
In addition to that, the severance payment, there were the severance provision that we did in the fourth quarter is going to be paid and that means that the $250 million is going to be an additional spending of cash in 2019. Counter to that is of course the ordinary business improvement, which we have estimated to around $280 million for 2019, which is then of course countered by the FX effects when we use the FX rates from last week.
So as a result of that, we have good improvements in the business, but of course, we have spending on Yarovaya as well as some severance payments in 2019, and that's why we're saying that the ongoing underlying is going to be around the $700 million. As you also probably have seen this morning, we have an agreement with Ericsson on $350 million, and that means that our equity free cash flow is going to be at the same level in 2019 as it was in 2018 of around the $1 billion.
Going forward, we see that the Yarovaya and the severance, of course, that's going to be there for a long time. In addition to that, coming into 2020, we see that we have continuous ambitions on the cost-intensity improvements as well as business improvement.
This is of course dependent on the FX development, but when we look at the change of ambitions that we have had during 2018 with the improvement of cost intensity, the drive of the operations that we have been managing, as Kjell has been alluding to, coming back to growth, coming back to the development of the margins. We actually see that coming up to a run rate of $800 million and probably higher in the course over the next three years is likely, and that is clearly the ambition, if not more, of this administration.
So, when it comes to the guidance on 2019, we see a low-single-digit organic growth on the revenue side. We see a low- to mid-single-digit organic growth on the EBITDA, as a result of the efficiency measures and so forth that we're putting in place.
And as a result of the Ericsson settlement, we also see that the equity free cash flow guidance is going to be around the $1 billion. And I usually told you during last year that it was a pressure downwards, as a result of $350 million coming on top on the $700 million.
We see a slightly upwards potential in that $1 billion but not significantly. So all in all, I would say that summary for 2018, we have the 2018 targets and guidance that have been achieved on.
Dividend on the $0.29 is a 4% increase year-on-year. Good organic growth, revenue and EBITDA expected in 2019.
And we see that the run rate on the cash flow expected at un-hurdle-ish level over the next three years, underpinning our commitment to dividend distribution. So with that, I want to hand over to Vasyl to take you through the Beeline Russia.
Vasyl Latsanych
Thank you, Trond. Good morning, ladies and gentlemen.
After that very scientific presentation, I feel like I should give a little blockbuster or some real action going on in the market of Russia. So let me start with the Russian market overview.
My name is Vasyl Latsanych. And I'm responsible for Russian business of VEON, which has always been called VimpelCom in Russia, and the brands that we are using in Russia for many, many years, is one of the most renowned brands in the country, which is Beeline brands.
Russia is a huge country with huge potential that you have heard many times, why is that so in our industry? It is because the population of Russia of 140 million is rapidly getting online, rapidly going digitalized.
And now, we have about 90 million of monthly Internet users across the country. Of 140 million, we understand that some old people, some very young people that probably comprises all of the active population of the country.
Our task is to make that usage more than a monthly usage, by the weekly usage, a daily usage. And that's why we are there, working on penetration of the devices, of the technologies, of the networks, to enable people to go online anytime and anywhere.
Actually people do. The average number of social accounts in Russia is about 4 per person.
And it's not all about the Facebook, there is Facebook, there is Vkontakte, there is Odnoklassniki, so only the social networks in their pure essence is represented by three different players that competes with each other. Their proliferation of different messengers, you've probably heard about Telegram, but there is also Viber, WhatsApp, Facebook Messenger, Skype messenger, everything is present in the market.
People are using it very actively. Except for the social accounts and besides the messaging, video is gaining the momentum as all over the world.
And people are getting more and more on the video consumption on the go. Smartphones, tablets, computers, smart TVsj and that's where we have to be, and that's why we have to build the network for them.
Well, that is all, given us a clear sign that there will be more consumption of this network access, so we have to build more robust and more available networks for our customers. Well that's not only about the watching, playing, messaging.
It's about business too. So there are more and more people going online and doing their shopping online.
55% of people who go online do some shopping. And that's not only shopping in the Internet shops, and let me remind you, Amazon is not present, eBay is hardly present, but there is a number of local players who become big, who become very professional in servicing the online shopping industry.
But it's also interestingly enough, people get to watch something online and pay for that. That was not the case in Russia several years ago, people would hack the content, people would use some pirated content.
They would never be able and ready to pay for a movie to be watched on their computer. It's not like that anymore.
More than half of people who go online to watch something are ready to pay for that and about a third of them is actually paying money. So the business is rapidly changing - I mean, not the business, something as a behavior is rapidly changing to become a business.
And we have to be there, because we are not only enabler of the connectivity but also a player in getting their services built, delivered and performed. Now if you're talking about the devices and how people consume, the two-third of the population are using the smartphones.
The number is decent, but it's far away from being where we want it to be because the smartphone user is normally bringing us twice the ARPU, so the revenue of the ordinary phone users. And while there is still more than 30% of people who don't use smartphones and they represent the potential to sell the smartphones to them, to sell the services, about a 40% portion of the people who have smartphones don't use the cellular networks.
This is ridiculous. To me at least, why would you have a smartphone if you wouldn't use the cellular network?
You'd only use it for the Wi-Fi connectivity at home or at work, but actually, this is kind of strange, to me at least. So we work very hard to get the penetration of the connectivity to those people who already have the smartphones.
And for that, we need very high-quality channels of communication with people, mind. They don't have the applications that we can work with them through, so we need to go not online but mostly to go on feet to talk to them.
And that's why we open up the shops, it's one of the reasons we open up so many shops, because we need the connectivity with those people to be established through a direct physical contact in the first place. And they do come to our shops.
We have a lot of visits of those people who don't have the connectivity in their smartphones. And we work hard to give them the trial periods, to give them the special tariffs and the discounts to enable them to use our network for the connectivity, because when people do so, they use some five hours per day of smartphone interactions and that's quite a lot as you understand.
And that is not for professional use, so the people are using their smartphones for very many reasons, and the connectivity has to be there, and actually, we have to give them more reasons to use the services that we provide through the phones and through the network that we have built. What else?
Above that, the technology goes very rapidly forward and the country is quickly developing into a full-fledged 4G country. And believe me, that this is probably the most difficult country to cover with a 4G signal.
If you consider the 4G network that is initially built in the 2.6 gigahertz frequencies, those are the frequencies with a very small footprint. In order to cover the largest country in the world with vast lands in Siberia, you'd have to plant millions of base stations more than Chinese do.
But luckily, we have a very well-regulated area with the frequencies which we can shift between the technologies, so we use the LTE on basically any available frequency, we use it on 26, we use it on 18, we use it on 900. We start to use it on 21.
So we use everywhere LTE signal, because we are fully commitment to LTE development. And we think that the 3G will be quite rapidly decommissioning out of the market, the 900 and the GSM will mostly be used for the voice in the vast areas, but the LTE will be the carrying signal for all mobile connectivity in the nearest future.
Not to mention that 5G is going to come, but that's a different conversation. The 35%, so the third of the population that ever goes online is only going through the mobile connectivity online.
So though Russia is one of the most best connected countries in terms of the home broadband, it actually is better than the United Kingdom at least in the quality and the speeds, but - in the metropolitan areas, for sure. But people prefer to use their smartphones.
Why is that so? Also because it's very cheap.
Indeed, our ARPUs are un-comparable to those in the Western Europe, but that enables people not to really minimize their consumption, but in order to expand the consumption. And we are glad that we can deliver that consumption on a high quality and well penetrated into the populated areas of Russia.
When we are talking about Russia, we should mention certain regulatory environments. And I wouldn't call those restrictions.
I would say that every country has an environment in its regulatory approach and Russia has its own. First of all, there used to be an intranet roaming in Russia, which is very rudimental and it has been there for many years and it had to go away and it did go away last year.
The industry was in quite big fears about this wiping up quite significant portion of the revenues. Well, we have played the game around it and we have minimized the damage, so effectively, if you look into our statement of last year, you would not find a big impact of the internet roaming cancellation on our financials.
Yes, there was some, but we have managed to compensate with different activities for those negative trends that the intranet roaming cancellation brought us. The SIM cards, Russia with a population of 140 million people is annually selling about 100 million SIM cards.
There are four carries, there is fierce competition, but it's still not enough to substantiate a sale of 100 million SIM cards per annum. We think that's too much definitely, and we are glad that the watchdog, the regulator in Russia is trying to put a control over the SIM cards distribution.
And it comes very good as a tailwind to our activities in the retail when we opened up new shops, and now we are presence in virtually every meaningful place in Russia with our own sale, with our own controlled distribution, rather than relying on someone else and distributing our SIM cards in many ways that we would not always consider in a proper quality. The - mentioned several times by Trond, couple of minutes ago, Yarovaya Law.
Yarovaya is the lady that actually exists, I've just seen her recently and she has been a forward men - or forward woman of a regulatory that's imposed certain costs on us by installing certain equipments to record and store the online traffic. That is quite massive indeed.
The assumption of our costs spread over three years as we said before will be going on invested and maintained, but the good - so far, the good news is that it has been lower in the last year than we anticipated, and its spread over the time and it's going a little bit in the future without increase. So luckily, we see that there is a managed approach, well, we have to go through that and that is embedded in our assumptions for the future P&Ls and the cash flow as you've seen.
And the 5G thing in Russia, as we understand, there is not enough of frequencies to run a full-fledged tender between the four carriers of Russia to allocate the frequencies, so there are attempt to arrange the launch of the 5G and that - to make that available to most people possible in Russia. We support the efforts of the regulator, and we will be fighting for having the equal access to those frequencies and that technology with all of the rest of the players.
And we definitely do not like if anyone wanted to privatize it and wants to make it exclusive to anyone, and that's quite openly said to the public opinion and to the regulator in Russia. There were several happenings back in 2018 that we considered to be very important for our development and that laid the cornerstones of our future success, both in 2019 and 2020 and further on.
Of that, the most important one was - probably - or the biggest one was the retail development in 2018. And yes, there are many questions like why do you develop the physical retail in the time when everything goes online?
And I should tell you, we go both physical retail and online. And the numbers here are self-explanatory, we have doubled the number of the shops and the previous 1,500 to 1,600 shops were capped with a Beeline monobrand retail network for about 20 years in the past and then we have doubled it in a course of one year.
And as Kjell said, just a couple of minutes ago, that was a very well carefully planned and executed activity. Actually, even I had some doubts that we would be able to construct so many shops in such a short period of time and at a good quality.
And I might say that I'm amazed at how our people worked on constructing the new shops, sometimes from the scratch, sometimes received in a very poor condition after Euroset has moved away, and we had to very quickly - update it very quickly, stuff it, we have just taken onboard about 7,000 people that were coming into our shops, we've trained them, we've put them online - on the service and we have purchased, procured and distributed the equipment to those shops. We have increased the control of the sales up to 50% of our total SIM card sales, so we rely less and less on those retailers and resellers that we have less control of.
We do want our shops to be selling more as a portion of the SIM cards, because we are not only controlling the sales, but we are ensuring the quality of the sales. And as a result of that, we have dramatically decreased our churn in the previous year, but we also have increased the money flow by doubling the amount of the smartphones and the volume of the sales of the devices and the accessories through our shops.
Not only doubled because that was not a difficult task, the more difficult thing was to make it profitable. And yes, back in 2017, we have lost about RUB100 million on the devices sales, that was not really a profitable business for us.
Then after increase of the shops, after revision of our relationships with vendors, with the suppliers, after margin management, we have managed to earn RUB1.7 billion of pure margin on device sales, and that is not a big, in terms of the margin, business for us, but it's very important that it doesn't suck out the money out of the business - by big business anymore, it actually contributes. The mobile network, another big, big undertaking last year.
Again, our record's high was the mobile network. We have built more base stations and launched more sites than ever in the history of Beeline.
Actually, within the three quarters of 2018, we were set to be launching most base stations in Russia amongst all of the carriers. I think that is reflecting our commitment to building the superior network that would be catering for the smartphone users.
And the goal and the idea is to be the carrier of the choice for the smartphone users not only in the big cities, but everywhere where the people are ready to consume the services and where they are ready to go online through the smartphones and develop their usage. It actually was supported by the CapEx increase by 16% year-over-year with a total increase of the CapEx by 20%, including the fixed line and the retail development.
But interestingly enough, we have built most of these 16,000 base stations with LTE capacity. And that was the 18,000 base stations LTE built on existing and new network outlets.
The territories with the 4G parity increased by 75%, which means that we are competing more head-to-head with our competitors in the markets after we have, unfortunately, lost a couple of years where the investment was not sufficient to keep up with the competition. Fixed-line was a very cherished business in the past from the times of the merger with Golden Telecom, Corbina and Southern Tel.
But unfortunately, in some years in the past, it has not been as well funded and as well taken care of it, because the company was concentrating on the mobile development. Now we have turned that around.
And first of all, we have put a lot of focus, a lot of efforts and some money into it. And we built more than 5,000 new houses, which means about half a million households in Russia last year alone.
When we say we built, that means we've delivered the network to those households and we are ready to sell it. Effectively, that not only increased our network, but that increased the total number of activities we do for the fixed-line in Russian business.
And it ended up with us, finally. And actually, I mean, we are super proud and glad about that.
We have turned that back into the growth. That is also important because we have been many times discussing whether this business is available for the growth, is able to grow anymore.
There is a high competition, there is a lot of fragmentation in the fixed business in Russia. And we think that we still can cherry pick those areas where we should invest, should build, and we can progress and we can make money.
And interestingly enough, last year, the B2C business of Beeline on the fixed-line part grew by more than 7%. And that is year-over-year the record growth of several previous years.
In fact, as you can see on the graph, finally, in the end of 2018, both B2B and B2C businesses started to grow again after I think more than five years of decline. The FMC base of decline is when we are selling both fixed-line and mobile in one package in one billing cycle to the people has increased to more than one million, and we still see quite a lot of potential to grow.
And the last but not least, we have launched a very new technically and very new market wise offer of Beeline TV Everywhere, which Kjell has mentioned in the past. And we have traveled away from that old-timer's IP television to totally flexible OTT-like network agnostic television that is probably one of the most right for the contemporary users at the moment.
And some of our interesting endeavors in the digital are showing that there is quite a good potential of using the tools that we have developed for development of our own base and for producing and selling the new offerings to the market. First of all, the My Beeline ecosystem, my Beeline is an application that you may use to control your account, to talk to us basically to learn about the special offers.
The total ecosystem of that is comprised of more than 8 million users per month and more than 1.7 million users per day. How much is that?
Just for a comparison, something like Viber, one of very well populated messengers in Russia, has a monthly user base of around 8 million users. And we are with this around the same number.
So we are talking about massive penetration into the existing active users of the mobile devices and the tools that the mobile devices present. We believe that this is not only the right thing to check your balance, but this is actually a communication and potentially, a selling channel.
And that's why we developed the partnerships and we developed the offers that we sell through the My Beeline app to the people. And as you can see, there are some big brands and there are some local brands that are joining the ecosystem that was built in order to promote and to sell their services using the Beeline My Beeline ecosystem.
Apart from that we have developed quite a significant big data system within Beeline. And we are using big data for very many activities, including those when we want to place a new store, we would use big data to check the traffic patterns of the people, where when we want to run an advertising campaign for ourselves, we would check it through the big data enablers how we would want to catch the same people online, offline, outdoor and on television.
We would use that tool to refine our own activities, but we would also sell it through. Just last year, we have produced almost $14 billion of the additional revenue or savings using the big data tools.
And we started to sell it to other people, to other businesses. Those are including the geo-analytics, the marketing ecosystem, the financial ecosystem, the data application tracking.
That is all that we started to sell to the outsiders of our business, to the customers. And we believe that, that will represent some of the digital potentials for our business for the future.
That's all in all is on the slide representing our financial results for the last year. We have increased our revenue by 5.7% year-over-year.
The mobile service revenue increased by more than 2.5%, and actually, in the fourth quarter increased by more than 3%. So we're on an upward's trend.
We believe we can continue the trend in 2019. This is what we work on.
The service margin has grown by 3%. And the device revenue more than doubled, as I mentioned before.
The ARPU growth was more than 5% and the churn improvement due to various activities, but mostly because we started to control the sales through our monobrand channel with bigger scrutiny and increased the quality, has decreased by almost 8 percentage points. And a special point of pride is that after several years of decline of our EBITDA, Beeline Russia has produced a return and kicked off.
And finally, we are in the growth mode. The numbers are very small yet, but that's rather a tendency, a trend that is important.
The Beeline is not falling on its EBITDA anymore year-over-year. It started to grow.
And that's actually to mention countered the headwinds. We had monobrand retail and we have absorbed the costs.
We have big network rollout, which was again producing certain costs in CapEx and OpEx, and we have absorbed that. But moreover, the spectrum fees increase last year, we have added more than $1 billion to the costs of the spectrum fees.
And we had the Internet roaming cancellation, which I mentioned before. All of that had been compensated for and we did produce a growth in 2018.
So what it is about Beeline for the next couple of years? As you understand, we will continue the things that helped us that were successful in 2018, but we will produce some of the initiatives for 2019, 2020 and 2021 to boost it.
First of all, as Kjell mentioned before, the growth is the name of our business. We have to grow.
The customer numbers have to grow. The revenue have to grow.
The ARPU has to grow. Everything has to grow.
Otherwise, the business stagnates. We will be growing by customer numbers, but not necessarily the SIM cards customers.
We will be growing on fixed line network in terms of the percentage of the growth faster than on mobile. We will be growing on TV business much faster than on fixed and on SIM cards.
And that is a just a representation of how we want to grow, not necessarily by entering again the bloody battle of the SIM card sales. We will be there.
Our customer base of 55 healthy million customers will stay there, but we want to add on not specifically, not only the SIM cards to that base, but all kinds of the services that we can produce with mobile, fixed, and digital services. The costs, as Trond has given you a presentation about the cost intensity, and our work and our expectation of refining the cost management system.
Beeline is on top of that, representing a half of the VEON's business on EBITDA. We have to be very careful about the costs.
We are producing special tools to control the cost from the beginning to the end. And we will be very dedicated in 2019 and 2020 to make sure that the costs are under very tight control and that we do not spend anything that does not bring us enough of return quickly enough.
And the partnership is the new part of our strategy. The partnership is our openness to the world, is when we want to make sure that anybody that wants and can produce a business can do it with us.
Some carriers, some big businesses are relying on M&As, when they have to make a choice, put the money in and then live with that. We don't think that that's always good in this rapidly changing world.
We think that being open, generating the platforms and APIs and enabling the others to connect and quickly test their tools, their products, their ideas will be beneficial to our business as well much in a better and less risky way than going big time on buying someone. Let me tell you a couple of points about that.
As I said, the growth is the name and is the foundation. And the business has to grow and we have to enable that growth of building the right networks, enabling the tools and the services for our customers and attracting the new customers to our newly built networks.
The core business is driven by fixed and mobile, the FMC. And with the new DBSS project, we hope that, that will be further refined.
But on top of that, comes the media, the fintech and the digital tools that will again be more enabled with the DBSS development that we have just started with Amdocs. The digital part would be split into three distinctive portions.
One of that would be the media. And as we have launched the new television, we now can sell the TV not only to Beeline customers, but basically to anyone in Russia.
A customer of any carrier can consume Beeline television and can have an account with us. And that is enabling us to reach out to those customers that are not yet Beeline SIM card or Beeline fixed network users.
That is a new type of the business that the carrier is conducting in Russia. Usually and historically, carriers would be only selling the television to those customers that they have on network.
We start to sell the television to anyone that will, can and wish to consume our television, because we believe that the television is a stand-alone product. Through that television, we started to actively market and sell not only the streaming channels, which is usual, everybody does so, but the video on demand, the series, the online movies and cinemas that are present in Russia can be sold through our Beeline television.
For example, we don't have Netflix in Russia. But we have ivi, we have Okko, we have MEGOGO.
Those are alike Netflix online cinemas. And those are present in the Beeline television.
You don't have really to have multiple accounts to manage the payments on multiple accounts. Everything is available on Beeline television.
And it's not only the set-top box that you can have. You can have up to five devices.
Your tablets, your phones, your computers connected to any network and use the Beeline television and watch the movies and the series of the third parties on that television having single point of contact, single account, single payments and a bundled proposal from Beeline. The Beeline financial product, Beeline has a number of different financial products including the physical cart, the virtual cart, the application for payments and so on and so forth.
Those were all the tests that we ran. And now, we embark on a full-fledged development in the market when we will be massively proposing those financial services.
Those would not be made in-house only. Those would be partnered with any bank, any financial institution that is ready to partner and to sell it through the Beeline network with the Beeline big data targeting and scoring to our customers.
And the adtech, something very new. Actually, we do service, and that's interesting that even Google buys our ad scoring.
Even those big agencies and big advertisers buy additional services from us to make their targeting better. And it's interesting that we have developed those capabilities, training on ourselves first, and now, being able to sell it to the third parties.
I'm not alluding that this would represent some tremendous money in the nearest future, but we are entering a new business. We are entering the new domain with that.
And we want to become an agency for the agencies and a super targeter for the big advertisers in Russia. And we have some good pilots so far.
We will be turning it into an industry in the very near future. The efficiency in investments is needed to be very well managed and well controlled.
And as you understand, on one hand side, we increased the investment by spending more CapEx. On the other hand side, we have to make sure that it spends very specifically and very targeted.
For example, the base stations, we have used in the past to allocate the base stations on the principle of this is an important region, so we built that first. This is a less important region, we built that later, sometimes never.
Well, we have scrapped that. And now, we build the base stations, and not only base stations, I mean, it's all in the same list, the base stations, the fixed line buildings, the special projects, all in the same list.
So we have specifically removed the geo-position of the base station of the whole list of everything that we want to build. So we built those base stations first that represent better potential.
And the potential is calculated using the big data analytics. So it means that we don't even know where the base station is when we choose to build it first.
Then for sure we know, because we have to build it. But in the beginning, we are making sure that we don't have that skew of mind like this is an important place, let's build it first.
No, we built. We go there where the money is.
So we build those places first that represent better return. In terms of the cost transparency, we use several tools.
And we will launch more tools this year that will allocate the costs down to the products that we sell. Not only to the department like this is the new product department cost, this is the fixed-line department cost, no.
Down to every product, we want to know how much we spend, how much that generates and whether we want to spend more, because the idea, the whole idea is to spend more for more. So we want to prioritize with the areas and products that bring better money, faster money and more money.
And the partnership, which I've mentioned before, the idea is that we can't develop everything by ourselves. There are many developments that are quite risky, but we want to try quite everything.
So now we go on partnering with various startups, with various new digital companies and with old companies. And we want to try to use our existing footprint, our customer base, our knowledge about the base, our retail to try to give more business to our partners and to have more business to ourselves.
Just to give you an example, you've probably been to some of the carrier shops in United Kingdom, but you probably have not seen any Costa Coffees in those. But there are Costa Coffees in our shops in Russia.
Not only Costa Coffees, we have different coffee corners in our shops. And this is one of the attempts to draw more customer traffic and to get more people inside of our shops to interact with them.
There are more places there in Russia, more and more. And there will be some 2,000 places this year, when we will be operating the online store deliveries in those shops.
So we will again have more and more traffic coming to our shops, and we can be working with that. We believe that we have to draw more people to our shops.
And we are ready to present them with very competitive pricing on devices with very well-crafted systems to enable more sales to those people of various products including mobile, fixed, financials and the third parties. All in all, the business is about growth.
The business is about control of the costs and very smart investment. And the business is about enabling the others to make business with us.
Thank you very much. I wish you have a good day.
And now, I would like to invite all my colleagues back on the stage for the Q&A session.
A - Richard James
Yeah, very welcome. We have two microphones over there to be used.
Stella Cridge
Hi, there, Stella Cridge from Barclays Credit Research. And I wanted to ask about, if you don't mind, these press reports on Friday night that VEON had engaged in a discussion last year to sell the Russia business.
I was just wondering if you could confirm if that report is factually correct or not, and the [top-two] [ph] place. And in particular, does it relate just to Russia?
Or does it include the Kazakh and the Uzbek businesses which were in that unit as well? And if this is the case, what would be the motivations for VEON to dispose off this unit?
Ursula Burns
Let me start and then the team can join in. Generally, we don't comment on rumors.
So it's the first. But I will say that we did not engage in a discussion to sell our unit last year.
If we did, across the board we would not actually disclose it until it was at a maturity point that was worth disclosing.
Stella Cridge
And also, you spent quite a large part of the morning, giving us a great update on the outlook for the business and recent developments. Is it of a unit that you consider absolute core to the VEON group?
I mean, obviously, it's a huge part of EBITDA and cash flow. Or is this something you would ever hypothetically consider exiting?
Ursula Burns
Ever and hypothetically, I will not discuss. I mean, ever hypothetically, I probably wouldn't even be here.
It is core to our businesses though. It's well run.
It's large, about half the business. And it has great prospects going forward.
So our goal and intention is to run it well. I think Vasyl did a great job in explaining that we're not just a telco provider anymore, in just about any of our markets.
But we're actually trying to expand the market to engage our customers more across a varying set of revenue generation possibilities. So it's core.
It's key. And we want to make sure that it continues to be fed adequately, so that it can grow.
Kjell Morten Johnsen
I don't think there is much to add.
Ursula Burns
Yeah.
Stella Cridge
If I can sneak in one final one before I pass the microphone? Obviously, you've made the second move to acquire minorities within GTH.
I was just wondering if you could give us an update on your expected timeline in this move. And also, has anything changed in the Egyptian market that you would be hopeful that this would be successful this time in contrast to the previous attempt?
Ursula Burns
Let me take the second part and then, Trond, if you can take the first part. Time helps everything, right?
And visibility to what works in the past or didn't work in the past helps move projects like this along. This involves government, obviously, and working and lots of other partners, minority shareholders, a whole bunch of infrastructure in the government, and just continuing to work to kind of to polish the P, and make it more perfected, makes it more possible to succeed as you go forward.
And that's basically what we're doing. I mean, just literally continuing to engage and expand our communications and our base of believers.
And if we continue to do that, we hope to be able to succeed this time. This is not straightforward and easy.
I mean, this is like, I said, with governments and it's very - and shareholders and it's very challenging but...
Trond Odegard Westlie
No, but I think that's the fundamental development that we have been doing to feel that it's - be better prepared and the recipients or our proposal for the MTO is better prepared. That means the Egyptian stakeholder banks, the Egypt as such and stakeholders there.
So I do think that's the reason for the timing as such. And we feel that, yes, everything is more mature and more prepared now than it was a year ago.
Ursula Burns
And timeline, we'll have to see. We push it every day.
We are working with the associated parties every day and we're pushing it to try to make it as quickly as possible. But who knows, for sure?
Anna Kazaryan
Hello, Anna Kazaryan from VTB Capital. Thank you for this event and the opportunity to ask questions.
Can I ask several questions about Russian market? So can you give your outlook, for example, for competition on the Russian market?
Do you see the opportunity to change tariffs in near term? And what might be the future of tariffs in Russian market?
Can you clarify, do you expect any significant effect from VAT increase? There were several media reports that operators adjusted some [archive for ISIS] [ph] and some corporate tariffs to compensate for VAT increase.
And also, could you clarify your plans about future relationships with multi-brand retail networks, particularly, any plans to prolong your interactions with the Euroset? And the last question is regarding the CapEx in Russian market.
Particularly, what might be the incremental increase of CapEx in Russia, excluding Yarovaya Law expenses? And could you specify what might be the spendings on Yarovaya Law implementation this year?
Thank you.
Ursula Burns
Vasyl, why don't you take that?
Vasyl Latsanych
I would. Well, let's take those one by one.
So the competition, Russian market is very competitive. It's hugely competitive in several regions.
And we do take - participate in that competition. So there's nothing left to live on its own in Russian market.
That is driving the penetration, driving the usage. But yes, that's undermining the potential for the growth.
We hope and we work towards the stability in the markets. And we usually are the latest one, the last one to engage in any competitive battles in Russian markets.
If you take a look and track back those competitive activities, you would see that Beeline would never be the first or the second one to engage. So it's rather a question to our competitors whether they want to tame it down and to finally start a growth mode of the business in several regions.
But all over the place, as you've noticed, we have grown the ARPU by more than 5%. And that's thanks to the various tariff initiatives.
When we see people - well, you look into our megabytes per user numbers of the last year, and you would see that our users have increased their usage by more than 30% that we have managed to reflect adequately in our tariff plans, construction and pricing effectively. And we have managed to overall increase the ARPU, giving people more access to more megabytes, more gigabytes of the traffic, but with an increase of the tariff plans so that, that compensates for the downward trends in some of the competitive regions.
And also, it does allow us to compensate for some headwinds like the internet roaming cancellation. The VAT has been tackled by different measures in the market of different players, where there is no straightforward increase of the tariff plans like they do it in the other industries, where the pricing increase of the VAT - associated to the VAT.
But there is an overall adjustment of the tariff plans that allows to work on the compensation of the VAT increase. So we do not expect the VAT increase to harm us in terms of wipe out our growth.
But we do think that that's - would somehow slow down the potential of the market, which we consider to be better than what it looks like right now. In terms of the retail developments, I think that's - for the moment, we are staying with selling in every channel.
We don't have any restrictions on selling. They are not selling here.
We sell with Svyaznoy. We sell with Euroset.
I have to admit, though, that during the time that have - the Beeline's network, retail network has doubled and developed in a quality term very well, we have seen the deterioration of the quality of the new sales from Svyaznoy and Euroset. And that has to be addressed.
And if that not is going to be addressed adequately, we may be reconsidering the cooperation with Svyaznoy and Euroset. But all in all, we would like to continue working with them.
We just have to fix the quality issue of the sales in those channels. We understand that we have also impacted their quality by increasing the sales and drawing some of the higher-quality customers to our own shops, but we believe that there is a good place for the Svyaznoy and Euroset to continue the sale of the relevant quality SIM card and services to our customers.
Did I miss something?
Anna Kazaryan
What about the CapEx?
Vasyl Latsanych
Yeah, the CapEx. I think we are not in a position to disclose the CapEx number for the next year, but we are continuing the execution of the plan of the network development both in mobile and in the fixed.
And without naming how many base stations, how many houses we will build this year, I should say that it's on a - the client is big. And it's going to be financed adequately by the CapEx and OpEx, but there is a goal to make it very smart and make it very efficient this year, even more efficient than the last year.
Anna Kazaryan
Any specific plans about Yarovaya…?
Vasyl Latsanych
We have initially stated the expected amount for Yarovaya implementation. That calculation has not changed.
It has shifted on in time, meaning that we have spent less in 2018, but we will not spend more in 2019 than we initially planned. It will just have a longer tail into the 2020 and potentially, 2021.
Alastair Jones
Alastair Jones from New Street Research. Just a few questions.
Firstly, coming back to the CapEx in Russia. I mean, the one thing that does stand out is how much you're spending versus what your competitors say they're aiming to spend this year and going forward.
So you're spending quite considerably less, but you obviously portrayed a pretty good picture of how your network is developing. I'm just trying to match those two issues.
Is there a strategic disadvantage by not spending even more? Or do you think there are certain efficiencies that are coming in that are better than the competitors, where you can sort of match their deployment essentially for almost half the price?
That's the first question. And the second question one just on the equity free cash flow guidance, just trying to break it down and if you could help me with my sort of understanding on it.
You said the underlying improvements of around about $280 million, I think. And then there's obviously FX, which knocks off $150 million of that.
So I think my understanding is that it's roughly about $130 million underlying increase. Your corporate costs, you're probably - you're claiming to be able to cut back maybe around about $90 million or so on corporate costs.
So if I understand it correctly, that suggests about a $40 million increase in the underlying operations. So you've obviously been talking a lot about growth and the sort of cost focus and the cost initiatives.
It just seems a relatively small amount. I'm just trying to get an understanding of that, please.
Ursula Burns
Let's start with Vasyl first.
Vasyl Latsanych
Yeah, I'll start with the Russian CapEx. I understand that the question is very specific.
It's difficult to answer that specific question with specific numbers, because the carriers in Russian and I have - as you know, I have quite good knowledge of two of them already, are very different. And you cannot really compare head-to-head the different carriers and their spends specifically on CapEx and say that somebody spends more or somebody spends less on certain items.
I may only say that we have quadrupled the launch of the new buildings of the fixed-line network in 2018. And we have hit the record high construction of the base stations in 2018 on the radio network.
And all of that has cost us less than the ongoing spends of our competitors into their network. And then you draw the conclusions, whether that's efficiency, whether that's a better planning.
Or in general, Beeline is a much leaner and much swifter animal compared to the other carriers. And I could assume that there are more inefficiencies built in those bigger businesses having proliferation of different partnerships, equities that they have around that they have to fund versus Beeline, who is very single - not really single, but very narrowly focused on developing network, fixed-network and digital products.
Others, they may have different games and different toys.
Kjell Morten Johnsen
I think I can add a little bit. I think it's fair to say that when it comes to the CapEx side, we've seen over time that while Beeline is the biggest company in the group, they also do derive advantages within procurement from being part of a group that has operations in multiple countries.
And I think we have a very well-functioning procurement around how we buy network equipment and these kinds of CapEx-related components.
Trond Odegard Westlie
Coming to the equity free cash flow bridge. Of course, if you - what we're trying to do here is to actually simplify the bridge from year-to-year.
And as a result of that, it's a lot of bucketing going on to that level. And as a result of that, what is really driving the element is the CapEx and the sort of the one-off in the severance element.
When it comes to the $280 million and the composition of that, it's much more complex that you're trying to say that it's just a headquarter and then it's the rest. Because like - just give you an example, we expect to pay licenses in Pakistan.
In that license fee arrangement, it's a tax payment in addition. And as a result of that, that tax is not a part of the license payments, but it's going up as a negative effect on that.
So it's just a lot of elements going to this. I think the biggest and the most important element I've got to say to this is really to say that as a result of our businesses is growing, costs will grow.
And that means that the net effect, of course, we'll have a challenge. And as we also say on the slide on that bridge, most on the cost intensity, we see that most of that is coming into the late, because some of these activities that we're running on cost intensity is going to be sort of back flipped and basically going to take is more structural element that's going to take longer-lead items.
So just to say that you take out the corporate costs and then the rest is, it's - yeah, it's a bit skewed, because it's more into that bucketing than that one. So the improvement is actually much better.
But then you have the withholding tax in Pakistan coming on top, because we expect dividend to come in, and then you have the license tax payment on top of that and counter to that, you have the interest. So it's just a - so I'm simplifying it like that.
It wouldn't be this, but the net effect is, of course, the way you put it, is right.
Ursula Burns
Yeah, we'll take a question from the phone or online.
Operator
[Operator Instructions] Our first question comes from the line of Cesar Tiron from Bank of America. Please ask a question.
Cesar Tiron
Yes. Thank you so much for the call and the opportunity to ask for the questions.
I have three questions, please. On the CapEx, I think you said you didn't provide guidance, but was it just for Russia?
I mean, can you provide some ballpark figure at least a percentage of sales for the group? And then second, is your guidance of low- to mid-single-digit EBITDA growth based on 2018 reported numbers?
Or is it based on adjusted numbers that would exclude exceptional items even for 2018? And then finally, on the - can you please give some details on the severance costs and give us some indication if you expect such costs to recur again in 2019 as you probably keep on now reducing the headcount at the H2?
Ursula Burns
Trond, do you want to take them all?
Trond Odegard Westlie
Yeah, I got the first and the second - and no, third. I'm not sure if I caught the second one.
We'll find out. The - on the first one.
On the CapEx, as I said, it's slightly higher. And that means short of a percentage CapEx to sales, I guess.
It's going to be sort of slightly higher than from previous years in dollar terms. And that is really the angle - yes, a percentage - short of a percentage.
On the severance - on the last question, on the severance. What we've done is we have done what we need to do to get to the 2020 rate.
That does not mean, of course, that everything is going to be static going forward. But to achieve the guidance that we've given you on the 2020 rate, we have done what we need to do.
And I didn't catch the second, actually.
Ursula Burns
I neither, so, Cesar...
Trond Odegard Westlie
Was it the - with the growth coming from our revised number or from the original number of the growth this year?
Cesar Tiron
Yeah, this year number. The basis for...
Trond Odegard Westlie
Not revised, reported?
Cesar Tiron
Basically, what I mean on the guidance, a low- to mid-single-digit EBITDA growth, is it based on the reported EBITDA? Or is it based on an EBITDA that would exclude the exceptional items, which have been impacted on 2018?
Vasyl Latsanych
IFRS.
Trond Odegard Westlie
Well, it's - well, it's not IFRS include - IFRS is not included in that growth.
Cesar Tiron
Okay. Got it.
Trond Odegard Westlie
So it's based on the reported number for 2018 and that is what we're guiding on. We're not including IFRS 16 numbers in there.
Cesar Tiron
Okay. Thank you so much.
Very helpful.
Operator
Roman?
Roman Arbuzov
It's Roman Arbuzov. Thank you.
So two questions, please. One is on free cash flow.
So can you just remind us, please? What would you expect for spectrum spend over the medium term just as a rough annual figure?
You used to talk about $200 million, I was wondering if this is still a good estimate? And then secondly, just on the minority leakage, I know you guide without minority leakage on the equity free cash flow.
But is it possible to give us just a rough, a very rough sense of what is a normalized minority leakage if you were able to upstream your cash fully from all of your subsidiaries? And obviously, this will change depending on how the GTH offer goes.
But maybe you can tell us, within the minority leakage, how much would that change if the GTH offer were to go through, just on a rough level. And then I just wanted to double check that the 1 percentage point reduction in the cost intensity that you were talking about that this is on top of the headquarter cost reduction?
And then the second question was just on Bangladesh. I think the way, Kjell, you've explained the CapEx development in 2018, I think it sounded like you basically set a CapEx number for the year, and then kind of the only thing that you have the flexibility to change and play with is kind of the quarterly developments.
Do you front load it? Do you back load it?
But then at the same time, I was just thinking, is this a good approach? And generally, how rigid are you with your CapEx budgets, because Bangladesh has suffered from underinvestment over the years?
So does it actually pay to be so rigid? And would it not be better to overspend massively in one year and maybe double your CapEx in one year, then reap the benefits for many years to come.
Because I think the way you've explained it, it sounded basically quite rigid, I thought. And compared to Vasyl, I think Vasyl sounded like....
Ursula Burns
Can we - let's answer some of the questions because we're not going to get to - we're not going to remember the first one.
Trond Odegard Westlie
No, I didn't speaking right?
Ursula Burns
So why don't we start with Trond and then Kjell, you can do the CapEx question.
Trond Odegard Westlie
On the cost intensity part, the 1% challenge is, of course, to the OpCos. So as we said, it won't be linear, so don't expect that.
Because it is a program started in 2018, we are rolling it forward. Of course, we are going to see effects during the course away, but it's not going to be linear in that sense.
Going to the leakage part, beyond 57% of GTH, of course, there is the most significant leakage element. And as a result of that, I don't have the numbers in my head, clearly.
We do the analysis often, but I don't have that clear in my head. You just have to go through the ownership structure, and we can help you.
Kjell Morten Johnsen
Yeah. On CapEx, we - when we plan for the next years, we set up a yardstick and for - of course, for all the companies.
And we do an earlier release so that people can plan their network rollout. And now since we are in very different geographies, you take Bangladesh and Russia, as examples, there are - there is one very big difference or many differences, but one that is very big.
It is that in Russia, you have a really hard winter. You don't have that in Bangladesh.
And the management team in Bangladesh is often quite keen to rollout a network early in the country - early in the year, because they have a certain amount of money available. We do have a review internally that we do every year in May.
So it's not like we set a number sometime at the end of the year, and then we don't look at it again before we come to the end. So we do make some adjustments here and there as we move along.
Ursula Burns
I want to just emphasize something. You said the word rigid a couple of times.
And it's anything but that. It is literally not rigid.
We operate this business, as I said, actively, including how we spend CapEx. We clearly don't allow changes that are massive month-to-month that those wouldn't make it possible for the operating companies to plan well, but we are not rigid.
Roman Arbuzov
And spectrum spend?
Trond Odegard Westlie
Oh, sorry. The spectrum spend, yes, we have earlier said that $200 million, and I - the way the world is going and lot of the countries that we're in is looking at this as a funding opportunity.
I do think that average is likely to come up. We haven't really made an estimate, the only one coming up this year is Pakistan.
And we don't know the pricing on that. But of course, we are in discussions with the government.
But other than that, that's the only one this year. So yeah - no, but likely higher than the $200 million, we haven't made in U.S.
but...
Roman Arbuzov
Can I squeeze one more and a very quick one? On digital services, [Texa] [ph] has recently announced that they are prepared to wholesale their digital services on a white label basis.
Is this something that is of interest to VEON? Given that you're scaling back somewhat in terms of the dedicated resource, I would say, to digital services, is this a better model, do you think?
Ursula Burns
I think country-by-country, we'll have to determine. And I can't - I would say that we would not eliminate that option on a country-by-country basis.
It depends on how good the services and how open the market is. But we're definitely not opposed to it.
Roman Arbuzov
Okay. Can I just continue on more on the points raised just previously on Bangladesh?
As you were going through all the different countries, I was struck by the significant improvements you made in Russia, Ukraine, Algeria and so forth. Pakistan continues to do very well.
The one that seemed to be - or you seem to do less work is Bangladesh. And that it seems to me it could be a huge opportunity considering that kind of the secular growth in that country you're seeing now, and in my mind at least will continue for some time.
Can you just maybe expand there on what you see is the potential in this country in the competitive landscape? And how you might be able to capture more of that opportunity?
Ursula Burns
Trond?
Trond Odegard Westlie
Yeah. Bangladesh, obviously, as you say, has a population growth, a quite significant population growth.
The dynamics of the market are complicated in the sense that it has in a way a little bit been one player extracting most of the value and two others positioning themselves in that setup. We see Robi spending enormous amount of money on CapEx without really translating that into cash generation and EBITDA.
And that holds - that pulls the market a bit down, the very aggressive approach. Going forward, I think we have some reason to be optimistic in the sense that we have the S&P regulation that will be helpful for us in our efforts to come back to growth.
I think it's a quite strong performance that the management team there has been able to come back to black numbers instead of red. But I don't want to create too high expectations in the short-term.
We don't know exactly how the S&P is going to play out. And I'm not sure if there are going to be delays in the implementation or could there be things that are not really core systems.
So I'm kind of tilting towards a more positive stance on Bangladesh, but I don't want to oversell at this stage.
Ursula Burns
Well said.
Alexander Vassiouk
Alexander Vassiouk from Prosperity. Just on the - on debt, do you plan any further gross debt reduction this year, because you had almost $2 billion of cash balance at the end of 2018?
And also, related to that is how would, technically, the transition to IFRS 16 change your leverage targets, because you would immediately have $2 billion of extra debt by capitalizing your operating lease costs?
Trond Odegard Westlie
Well, when it comes to the cash element, I think that the cash element has come down through the years. So the cash amount that we had out in the businesses last year is actually lower this year than it was the year before.
And we're continuously working on up-streaming those cash elements as we can. And of course, that is helping us to actually do the debt repayment when they come due.
But that's a normal recurring element. So there's no clear ambitions relative to improving it more, but it's a constant element on the improvement going on, on that sense.
Coming to leverage, we do see IFRS 16 as a pure accounting element. So we are going to look at our gearing ratio on 2.0 prior to the adjustments of the IFRS 16, because even though IFRS 16 as an accountant is interesting.
But it doesn't help in understanding the cash flow evolvement and the cash flow circulation because our - most of our payment element in VEON is actually fairly equal to the EBITDA.
Alexander Vassiouk
Okay. Thanks.
And also one follow-up question. You have engaged in some discussions to buy back some of your more expensive debt or bonds.
Can you provide any comment on how that process is going?
Trond Odegard Westlie
Well, we did make an offer before Christmas. That closed before Christmas.
And the offer were made and we repaid $1.3 billion out of the four bonds that we tried to buy back.
Alexander Vassiouk
So that's already in your...
Trond Odegard Westlie
That's already in the numbers as of December 31.
Alexander Vassiouk
Okay. Thanks.
Stella Cridge
Hi, there. And a couple of follow-up questions from me, the first is, I noticed in your presentation in terms of strategic objectives, you highlighted end market consolidation and further simplifying group structure.
I was just wondering what you had in mind when you included those 2 points. I have one other question which I might follow up with that after.
Ursula Burns
So why don't I start quickly, and then Kjell can take over. End market consolidation and this working on the structure, GTH is one of these areas that it's pretty obvious.
We have lots of partnerships, minority shareholders, and partnership opportunities that we will pursue market-by-market. You heard of some of it in Russia, but in Pakistan as well and markets around us to continue to be active and find places for growth.
So, there's nothing really specific that I want to bring out except for that we are actively looking and being very broad.
Kjell Morten Johnsen
Yeah, I think what you should expect going forward is that we may, if we see the right opportunities, do some kind of bolt-on transactions. We do have an ambition with another FMC.
If we see interesting opportunities, we may move on that. They are not mega transactions, but they can be very interesting in order to strengthen our business.
And those opportunities can come in - and actually, in a couple of different countries. Time will show.
Yeah, I think I'll have to leave it at that.
Ursula Burns
Yeah. And it's all we can say.
I mean, we used to be a telco company only. Now, we're a telco company largely and have opened up a significant amount of appetite for other ways to engage the customers that we have and to use the services that we have.
So you'll see kind of swirl around those areas and that's where we want to keep active. Hopefully, by saying it, we'll have people come to us and have propositions.
So that will be good, too.
Stella Cridge
Okay, super.
Kjell Morten Johnsen
But I think you said, you also asked about the structure, I can say a word on that also.
Stella Cridge
Yeah, please.
Kjell Morten Johnsen
What I tried to bring on the table when we talked about digital is that we are now working with a much more decentralized model. We have a strong - we have strong functions centrally within the compliance, controls and the areas where we need to be really strong, we will have a lighter touch in our commercial approach.
So we would be relying more on the ingenuity and the creativity and the efforts of the local OpCos. And I see that that already is creating much more enthusiasm and motivation.
So as I firmly believe that that move is right, so that's part of the structural change we're doing.
Ursula Burns
I think if you pay attention to, which you did, on Vasyl's presentation, it was rooted in this excitement, and this local market understanding and potential for growth. And we're trying to have that happen everywhere.
The approach before was obviously central, central to Amsterdam. And it just didn't yield what we needed it to yield.
Stella Cridge
Okay, super. Thanks.
And…
Ursula Burns
Last question from you.
Stella Cridge
I'm on the debt structure. So looking at the debt maturity profile, we obviously have approximately $1 billion due next couple of years, then a little bit of a peak in 2021.
Do you think that you'll be in the bond markets in 2019 perhaps trying to extend this debt profile?
Kjell Morten Johnsen
There are no plans as of now, so we'll tell the market when we're ready to.
Stella Cridge
Okay. Thanks.
Ursula Burns
Last question, I think, we done? We're done with questions.
So thank you for coming. Okay, I'll let you have one more.
We'll take one more, and then thank you for coming.
Ivan Mazalov
Ivan Mazalov, Prosperity Capital Management. A very quick one, if you look at your equity - or free cash flow to equity, all this projection of $800 million, $1 billion last year, and the level of dividends there, I guess it would be $500 million for the last 12 months from March.
How do you expect this gap to be bridging or is it bridging? And also if you can remind of how your dividend policy connects with this?
Ursula Burns
Well, we'll start with the bridging.
Trond Odegard Westlie
No, I think that as a clear target, I do think that there are two elements going to this. The bridge you see from 2018 to 2019, and you look at the operational improvements relative to the FX effects, it's actually improving more than the FX effects, which has not been the case for quite some time.
And that is really as a result of the initiatives going forward. These are, of course, going to be filled in for 2020, 2021.
And as a result of that, we see that improvements going on. So, of course, the operational improvement is a part of the ambition going forward.
And that is also supporting the dividend policy as such.
Ursula Burns
So basically, we generate revenue, we spend money. We want to generate more money than the ratio that actually improve.
We want to grow faster than we spend. So that's one.
That's this cost intensity. Second, we want to make sure that we can upstream as much as we can in what we hedge ourselves and control the gaps that we have in currency or FX exposure.
And if you look at - and obviously, we want to continue to operate the business well in this really intense way and grow. So if you look at that and you look at the history that we've had over time, what we're looking forward to in 2019, 2020 and 2021, we're pretty confident that we can actually meet the policy that we have on - from a different perspective.
So it's not much more to kind of really think about. We'll manage it every year, every month to make sure that we can generate enough cash to pay the dividend and spend a little less to pay the dividends.
With that, I'd like to thank everyone for coming or calling and for asking questions. And we'll see you hopefully in Investor Day in the summer.
Thank you.
Kjell Morten Johnsen
Thank you.
Trond Odegard Westlie
Thank you.