VEON Ltd.
Q3 2023 Earnings Call Transcript

Published: 20 Nov 2023

[Faisal Ghori:]

Hi, good morning, and afternoon, and thank you for everyone joining us today for VEON’s Third Quarter Presentation for the Period Ending September 30, 2023. I'm Faisal Ghori, Head of Investor Relations. I'm pleased to be joined in the room today by Kaan Terzioğlu, our CEO; along with Joop Brakenhoff, our CFO. Today's presentation will begin with the key highlights and business updates from Kaan, following discussion of detailed financial results by Joop. We'll then hand it back to Kaan to discuss our outlook and priorities for 2023. We'll then open up the line for Q&A. Before getting started, I would like to remind you that we may make forward-looking statements during today's presentation, which involve certain risks and uncertainties. These statements relate in partly to the company's anticipated performance and guidance for 2023, future market developments and trends, operational and network development and network investments and the company's ability to realize its targets and commercial 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 with the SEC. The earnings release and the earnings presentation, each of which include reconciliation of non-IFRS measures presented today can be downloaded from our website. With that, let me hand it over to Kaan.

[Kaan Terzioğlu:]

Faisal, thank you very much. Good morning and good afternoon to everyone. Thank you very much for joining us for our presentation of VEON's third quarter results for 2023. Before we jump into it, please allow me to take a few minutes and zoom out and talk a little bit about where we are today, and how we got there. I have been in the industry for nearly 30 years. And in that time period, as you may imagine, I have seen quite a bit. VEON is beyond all these and it has a very special place in my heart. VEON is resilient. VEON is strong, VEON is tough. And let me say it again, resilient, strong and tough. Nearly two years ago, we were thrown into an unprecedented situation. Two of our largest markets, 70% of business went to war with each other. The company was thrown its largest set of challenges ever. Not only did we have to deal with the day-to-day challenges to continue providing essential vital services to our customers, we had extraordinary challenges dealing with regulators, governments, sanctions, and financial market actors. I want to thank all of our employees, our partners, and our shareholders for supporting us under very trying circumstances. We could not have done it without you. I also want to talk a bit about culture. I'm a believer in the adage, culture eats strategy for breakfast. We had a good culture at VEON prior to the challenges we have faced, but now having been thrown into the fire, we have emerged tested by war, battle ready, excited and optimistic about our future, about what we can do for our customers, our partners, and our shareholders. We now have an exceptional culture at VEON, which is reflected across all of our portfolio. Let me give you a few examples. In markets like Pakistan and Bangladesh, our companies are the highest ranked national employers. Employees that had previously departed our companies are rejoining our groups, helping us to deal with the challenges and showing their loyalties. Why I am confident that we can continue delivering growth? Because we have exceptional people and the performance-driven culture. During the last 24 months, we have not only survived, but we have tried. We have continued to deliver services to our customers and delighted them. We will continue to generate significant shareholder value. We are working tirelessly to deliver profitable, sustainable growth. And imagine a second, if our team can deliver results as strong as these under most difficult circumstances, what we can do in more normal environment in the quarters to come. Let me spell it out for you. VEON will keep moving faster, stronger, and harder. This is VEON 2.0. I am deeply proud of all our employees across all of our operating companies for their exceptional hard work and commitment to VEON and our shared future. With that said, let's talk about Russia. The business, this business was originally founded in Russia and exiting was neither easy nor simple. Yet, day one, we made a choice and we chose Ukraine, and our team worked tirelessly in an extremely challenging environment to exit smoothly a very large country. I wanted to thank everyone who helped VEON successfully complete the sale of our Russian business. I'm pleased to note the positive impact that this has already had on our cooperation with banks and brokers with trading volumes of our stock rising and sell side coverage from Barclays, New Street Research and I&M now available. With the sale of our Russian business complete, VEON has significantly deleveraged its balance sheet and we are delivering much faster growth. Moving on, our operating companies in their markets are all delivering double digit local currency revenue growth. I will present the highlights of the third quarter of 2023 on next slides, and then move to a country by country overview of our operating companies and their continued execution of VEON’s digital operator strategy. This time, as you have demanded, I will give you more detailed update on our digital services and some more KPIs around those. What is VEON 2.0? The material on this slide should be familiar to you from my introduction. In short, the new VEON is focused on five pillars

[Joop Brakenhoff:]

Thanks, Kaan. I'll outline some of our revenue highlights for the third quarter. We have delivered another quarter of double digit year-on-year local currency revenue growth across all of our six markets with group service revenue rising 19.8% year-on-year and total revenue up 19.3% year on year to reach $945 million. While our reported revenue also demonstrated growth, up 6.1% year-on-year. This was impacted by significant local currency depreciation across our markets, particularly in Pakistan, Bangladesh, Uzbekistan and Ukraine. Revenue growth was driven by market share gains and the expansion of our digital platforms across all our operations, as well as the effect of disciplined inflationary pricing. Let's now take a closer look at our EBITDA and EBITDA margin. VEON’s local currency EBITDA rose 30.6% year-on-year in the third quarter, while our EBITDA margin increased 4.4 percent points to 47%. It is important to note that EBITDA growth was impacted by extraordinary one-offs in Kazakhstan, Ukraine, and Uzbekistan in both the second and third quarter. Adjusting for these one-offs, normalized group EBITDA increased by 27% year-on-year in local currency terms. On Slide 32, we can direct our attention towards our CapEx and CapEx intensity. In line with our asset-light strategy and focus on maintaining strict financial discipline, CapEx and CapEx intensity have decreased year-on-year and fall within our full year 2023 guidance. CapEx in the third quarter stands at $131.1 million, the CapEx intensity of 17.8% helping drive our 4G network expansion and deliver on our 4G for all strategy. Given the challenges of Pakistan and Ukraine, our CapEx spend was less than anticipated at the beginning of the year. We remain disciplined and flexible with respect to where, when, and how we will spend CapEx to ensure our customers have the best service possible across our platforms. Moving now to some important balance sheet metrics. Let me outline our debt and liquidity positions. At the end of the third quarter, the group's liquidity position remains strong, with a total cash position of $2.2 billion, excluding banking operations in Pakistan, with $1.8 billion of this cash held at HQ. At a local company level VEON’s operations continue to be self-sufficient from a funding perspective. In September, VEON initiated a full and early redemption of notes due mature in December '23 and June 2024, which led to a meaningful reduction in reported gross debt levels. Outside of the Q3 2023 reporting period, October 2023 contained numerous transactions that have had a material impact on the group's financial position, specifically, the sale of our Russian assets and the repayment of VEON Holding of 5.95% notes maturing in October 2023. Adjusting for both events on a pro forma basis, VEON net debt, including leases, stands at $2.7 billion, representing a significant reduction from $8.2 billion of net debt 12 months ago. We note $1.6 billion of net debt is at HQ level. Our cash balance stands at $1.7 billion. Of it, $1.3 billion is at HQ. Moving on to the highlights for the nine months of 2023. VEON once again reported -- recorded double digit local currency revenue and EBITDA growth with revenue rising 18.2% year-on-year and EBITDA up 18.1% year-on-year. These figures demonstrate the continued impact of our digital operating strategy across our markets. While inflationary pricing continues to play a role in increasing revenues, revenue growth for Q3 is aligned with our full year guidance, which we revised outlook at the end of the second quarter. We have repeatedly said that we're embarking on a new era as a leaner, well-capitalized VEON, and this vision is reflected in our continued focus on cost controls. CapEx declined by 31% year-on-year with CapEx intensity turning lower to 14.3%, while our EBITDA margin stands at 45.4%. The process of selling of our Russian assets marked a milestone moment in our transition to a new VEON and has led to substantial degrees of debt levels with gross debt reducing from $11.4 billion to $4.3 billion year-on-year, a decrease of 62% and net debt reducing from $8.2 billion to $2.1 billion year-on-year, a decrease of 74%. Following our exit of Russia, our capital structure continuous to be progressively optimized. Our case liquidity position remains strong with leverage metrics at 1.2x net debt to EBITDA due to large declines in gross debt balances over the past 12 months. In addition to this, there's a 1.5 billion -- sorry, $1.05 billion outstanding under the RCF, which can be rolled over until final maturities in 2024 and 2025. We've also maintained a robust cash position as outlined earlier in this presentation with $1.7 billion cash equivalents. Of it, $1.3 billion is held at HQ. Where does debt profile stand now? We have made significant progress in establishing a more favorable debt maturity schedule, shifting all significant debt maturities to 2025. As of the end of the third quarter, VEON has $124 million of debt maturing in the next 12 months. As October 2023, VEON debt maturing in 2025 is $1.5 billion. We know the additional debt redemption will not only reduce effective gross debt levels and maturities at VEON, but also reduce absolute debt servicing cost at VEON. In addition to this, there's $1.05 billion outstanding under the RCF, which can be rolled over until final maturities in 2024 and 2025. Let me outline some of the changes to our cost of debt and average debt maturity. The cost of borrowing from the second quarter of 2023 has been impacted by three key factors

[Kaan Terzioğlu:]

Joop, thank you very much. And before I share with you our revised upgraded guidance, I want to highlight two important things. I am realizing that there are less analysts following our company's details, I think these two information will be useful in visualizing our run rate figures. Let me zoom out for two important factors. One, last year in October 2022, due to us winning a court case in Pakistan, we had extraordinary recognized revenues which were not recognized previously properly because of this tax case. And it had an impact of 30 million in revenues and 91 million in EBITDA. I think it is important to note that to compare our 2022 and '23 results. It's also important to note that almost $43 million of extraordinary costs year-to-date is associated with exit from Russia and restructuring of our headquarters operation in 2023. Naturally, these costs will also not be recurring. Excluding the above mentioned one-offs, the two cases, October 2023 year-to-date EBITDA growth is trending at 20.3% year-on-year. And this level of growth accurately reflects the current normalized EBITDA growth trends for VEON’s underlying operations. Going forward, we will now provide the market guidance for EBITDA on a normalized basis, excluding these two one-offs. Let me share with you our full year guidance for 2023. Although, we have revised the guidance upwards last quarter, we are now revising our guidance upward again for the second time this year. We expect our full year top line growth to be in the range of 18% to 20%, up from previously declared 16% to 19%. And we also expect normalized EBITDA growth of 18% to 20%, up from 10% to 14% as expressed before. Our CapEx intensity will now be in the range of 16% to 18% versus 18% to 20% as we have expressed before. Where are we going with this illustration? Let me try to summarize. We are effectively progressing and executing on all our goals, despite certain new challenges, we are optimistic and excited about our future. We have exited Russia. In Ukraine, we will now focus on ensuring VEON's ownership and shareholder value protection. Looking ahead, our markets remain nascent with most of the population still using feature phones. We will continue delighting them with great service and digital products that matter to them and make their lives better, whether that is through healthcare, education, financial services, watching cricket or entertainment. We are increasingly becoming asset-light. As some of you may be aware, we recently announced the sale of our towers in Bangladesh, to be precise one-third of our portfolio. Expect more news along these lines in the future. We will continue to optimize our balance sheet to better reflect our digital operator strategy. At the end of the day, we are here to create value for our customers, our partners and shareholders, becoming a leaner, faster, a stronger organization that will deliver greater value to all. Thank you very much for listening us today. And Faisal, let's move to the questions.

[Faisal Ghori:]

Thank you, Kaan. We can open the line for questions.

[Operator:]

[Operator Instructions]

[Faisal Ghori:]

I think we have some questions in the Q&A, so let me start from there then. Our first question comes from [Sean Cook]. With the Russia sale complete, are you now able to pursue a credit rating from a reputable firm? Joop?

[Joop Brakenhoff:]

Thanks, Faisal. Yes, indeed with the Russia operations being sold, we really want to go back to normal and we start the process to pursue a credit rating with one or more of the credit agencies. Yes.

[Faisal Ghori:]

Thank you. Our next question is from [Anjali Doshi]. Can you comment on the following, what is your comfort level of net debt to EBITDA range, excluding inclusive and excluding leases going forward?

[Joop Brakenhoff:]

Yes, I think we've given a lot of information in this update. Going forward probably we talk around 1.5x post IFRS, including leases, for us in an acceptable level. And as you know, we are optimizing our capital structure and also increasing our debt maturity. So we think about 1.5x.

[Faisal Ghori:]

The second part of the question. Can you discuss the opportunities to repatriate cash from each of your markets to HQ?

[Joop Brakenhoff:]

Yes, Faisal, thanks. And these are relevant questions of course. We have no formal limitations to repatriate cash to the center except for operations in Ukraine, of course due to the martial law. But for the other operating companies, there are no formal limitations to upstream cash.

[Faisal Ghori:]

The next question is from [Roman Ivanov]. Can you please clarify your plans with respect to the RCF? Do you plan to repay the facility or at least partially extend it?

[Joop Brakenhoff:]

Yes, as mentioned, we are optimizing our capital structure with a smaller organization. Of course, we are also reviewing our RCF. At this moment, we're in discussion with our RCF holders to look for possibilities to reduce and extend the current RCF. As mentioned, we also want to increase our debt maturity. That's a good combination of this discussion.

[Faisal Ghori:]

Our next question is from Stella Cridge from Barclays. Can you explain the move in net debt quarter-over-quarter in between September and October? What other steps need to be taken before VEON can return to debt markets?

[Joop Brakenhoff:]

Yes, these are two questions. The first one, as presented, you've seen the numbers of September 2023. These are the numbers where the Russian operations were still part of VEON Group. We've also explained, showed you the current cash gross debt and net debt level as per October 2023. And these are, of course, the numbers without Russia. So there you see changes which mainly have to do with the redemption of intercompany balances with Russia.

[Faisal Ghori:]

Our next question is from [Daria Naumenko], could you please provide more updates on asset monetization, and on the recent tower deal, are you planning to upstream proceeds to the HoldCo level?

[Kaan Terzioğlu:]

Sure, Dario. First of all, you would remember that back in two years ago, even actually in 2021, when we set our strategic plans, we said we are going to be an asset-light company. And we believe that there are better specialized, dedicated, independent tower companies to manage the towers rather than keeping them buried in our balance sheets. Since then, we have done actually quite a lot of heavy lifting. We have, as of now, ring fenced and spin out all our towers into separate companies in all the operations that we are currently operating in. Regulatory wise, Bangladesh was an exception because we cannot own a tower company in Bangladesh. It's a licensed operation. But apart from that, all our other operations already have tower companies, and we are working with and talking to different independent tower companies in terms of how to engage them, managing our towers in a better way and allowing us to crystallize the value. Since the beginning, we have sold before the war our towers in Russia. Later on, we have now sold one-third of our portfolio in Bangladesh, and we still have close to 30,000 towers in various different operations, which we will be working on.

[Faisal Ghori:]

Thank you, Kaan. Our next question is from Chris Hoare of New Street. Regarding CapEx guidance, do you expect 16% to 18% of sales going forward, or can you reduce it further?

[Kaan Terzioğlu:]

Maybe let me take this question, because if you remember, we said that we are targeting for 70% 4G penetration and we will continue to be elevated at the levels of CapEx. There are two important things happening. First of all, we are growing faster, and we are happy with that naturally, and that is of course releasing the CapEx to revenue sales ratio in favorable way. Secondly, if you, for example, take a country like Pakistan, today 15% of our revenues in Pakistan is actually from mobile financial services and entertainment platforms, which are totally different business models and does not require same level of CapEx. So if you put all these things together, and if you add the fact that we are now getting very close to 70% and actually already exceeded 70% in Kazakhstan and Uzbekistan, you would naturally see a reduction on the CapEx to revenue ratio. That's why you see 16% to 18%. And I would expect this figure to go below 16% over the next three to five years as we further generate more revenues from non-telecom businesses, as well as reach the penetration levels that we desire.

[Faisal Ghori:]

Our next question is from [Roman Ivanov]. What actions would you take to crystallize value of digital assets?

[Kaan Terzioğlu:]

We are unique in the sense that the population in the markets that we operate in is more than 510 million. What we observe is the consumer business, consumers in these markets are significantly underserved. There is an unmet demand, especially when it comes to entertainment, financial services, education and healthcare. Therefore, every single investment we do in this area, and as you can imagine, investment in digital services, considering the power of distribution we have through the, thanks to telecom is much smaller in size, it gives us to create the largest player in a vertical over 12 to 18 months. This is what happened with Tamasha. This is what happened with Toffee. What happened with JezzCash, Simply, IZI, and Helsi. So, what we would like to do is to make sure that to further accelerate the growth of these digital services, we will be seeking out strategic partners who can enhance our offers and create differentiation. And you will see us moving in that direction when it comes to looking for partners that will also, of course, crystallize the value of these assets as well.

[Faisal Ghori:]

Our next question is again from Chris Hoare of New Street Research. He's asking about the EBITDA margins, specifically regarding our currencies. Normally, when currencies are under pressure, you would normally expect margins to fall. Why aren't you seeing that? And then secondly, does that imply OpCo margins can rise next year if we have stability in the currencies?

[Kaan Terzioğlu:]

Yes, I will also -- Joop, you can add to what I will say. But clearly, we see our revenues growing actually much faster than our cost structure is growing. This is thanks to two things. One, of course, us having more wallet share from the adjacent markets and ability to increase our prices, while keeping the customers, which is very important. It's not only about inflationary price increases. It's actually increasing the value that we offer to the customers and them embracing this in a positive way. And of course, the second important thing, especially this year, while we have gone through our restructuring, we have lowered our headquarters cost by 55%. And this is basically a sign that as a company we are agile, we can adapt to new conditions. As we exited from Russia, we reflected this also in our HQ run rate cost. And that of course will -- has its impact for next year. I'm very happy currently with the margin expansion that we have demonstrated in Q3 with -- or more than 4 percentage points. And I think, given our structure with higher growth expectations, I think, this trend will continue at least one or two more years. Joop, anything you would like to add?

[Joop Brakenhoff:]

Yes, Kaan, I think it's good to mention that, of course, in our challenging markets, Bangladesh and Kyrgyzstan, where we're not the number one, our margins are a little bit lower. And also more difficult to increase compared to the markets where we are number one, like in Pakistan. So that also has an impact, of course, on how we can manage EBITDA.

[Faisal Ghori:]

Our last question comes from [Anjali Doshi]. How do you view the optimal mix between HoldCo and OpCo debt in local currency. On a normalized basis, what is the cash level you'd like to keep at HoldCo?

[Joop Brakenhoff:]

Yes, we -- it's very clear that we want to de-leverage the group as a total, whereby we also want to leverage operating companies in local currency to a normalized level. That means that we will have going forward more local currency debt than dollar debt at the center, right? That balance will shift. And what we also think about is that probably we need a cash level of several hundred, $300 million, $400 million at HQ.

[Faisal Ghori:]

Thank you everybody for joining our call.

[Kaan Terzioğlu:]

So maybe if I may add something. You know, naturally over the last two years, we -- I named it as the fortress of balance sheet. We needed it, we did it well. But of course moving onwards, you should expect us reaching out effective use of cash balances. And we realized that over the last two years it was difficult to spot this. We had always ample liquidity and we needed it. I think that was the right thing to do. But moving onwards, you will see us much more lean when it comes to cash management. Thank you.

[Faisal Ghori:]

Thank you everybody for joining our call. And with that, we'll close.