Executives: Bart Morselt – Head of Investor Relations Andrew Davies – Chief Financial Officer Jean-Yves Charlier – Chief Executive

Officer
Analysts: Emmanuel Carlier – ING Ivan Kim – VTB Capital Karim Sawabini – Moon Capital Alexander Vengranovich – Otkritie Capital Igor Goncharov – BCS Madhi Singh – Morgan Stanley Olga Bystrova – Credit Suisse Alastair Jones – New Street

Research
Operator: Good day, and welcome to the VEON Second Quarter 2017 Investor and Analyst Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bart Morselt, Head of Investor Relations. Please go ahead, sir.

Bart Morselt: Good afternoon, ladies and gentlemen.

Welcome to VEON's Second Quarter 2017 Results Conference Call. Today, I'm pleased to be joined on this call by Jean-Yves Charlier, VEON's Chief Executive Officer, and Andrew Davies, VEON's Chief Financial Officer. The structure of the presentation mirrors the previous quarterly results, with Jean-Yves starting with the key financials of the group and the business update, followed by Andrew running us through the capital structure improvements, operational results review for both the group and the key countries, ending with comments on the full year 2017 guidance. At the end of Andrew's discussion, we will open the line for the Q&A session. Before getting started, I would like to draw your attention to the disclaimer.

Forward-looking statements made during today's presentations involve certain risks and uncertainties. These statements relate in part to the company's anticipated performance and guidance for 2017, including its ability to generate sufficient cash flow, future market developments and trends, expected synergies of the Italy joint venture and the Warid transaction, operational and network development and network investment, the effect of the acquisition of additional spectrum on customer experience, and the company's ability to realize its targets and strategic initiatives. Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risk detailed in the company's annual report on Form 20-F and other recent public filings made by the company with the SEC. The earnings release and the earnings presentation, each of which includes reconciliations of non-IFRS financial measures presented today can be downloaded from our website. I would like now to hand over to Jean-Yves, who, as you can see from the agenda on Page 3, will start talking about the second quarter results before presenting to you the business update on recent strategic achievements.

Jean-Yves?
Jean-

Yves Charlier: Thank you, Bart, and good afternoon, ladies and gentlemen. VEON delivered a strong set of financial results in the second quarter, with both revenues and EBITDA growing at double-digit rates. We are pleased with the rate of progress we are making as a company both strategically and operationally. We relaunched the company as VEON on the 27th of February, and announced our strategy to be first, a best-in-class provider of connectivity in the frontier markets where we operate; and second, to revolutionize the personal internet experience for customers with the creation of the VEON platform. Since then, we have made further headway with the business turnaround, with solid progress in transforming how we operate and how we serve our customers.

Furthermore, we launched the VEON Engagement Platform in 5 key markets, a major milestone on our digital agenda. In terms of financial results, I'm pleased that we have seen a continuation of the positive first quarter trend during Q2. And not just that, but we have also posted solid organic growth on a number of metrics. Total revenues grew by 12.3% to $2.4 billion and by 3.7% on an organic basis. The key driver for revenue growth continues to be data usage, posting 30% organic growth year-on-year.

EBITDA improved by 17.1% to reach $931 million for Q2, and benefited from the organic revenue growth as well as from the Warid transaction in Pakistan and positive foreign exchange dynamics in our footprint. Although CapEx increased by 17% year-on-year, this is partially driven by the Warid consolidation process, but also we believe because CapEx in 2017 will be more evenly spread over the 4 quarters than it was in 2016. Underlining equity free cash flow, excluding licenses and spectrum, growth was especially strong during the first quarter of this year, totally $491 million – excuse me – not the first quarter – first half of this year, totaling $941 million, of which $293 million was generated in the second quarter. Finally, we can confirm that VEON is on track with the full year guidance for 2017 that we issued in February. On the back of these strong results, the Supervisory Board has approved an interim dividend of $0.11 per share for the 2017 results, with a final dividend, which we can expect after our full year announcements early 2018.

The record date for the interim dividend has been set for the 14th of August of this year, and the expected payment is on the 6th of September. For shareholders owning euro-denominated securities on Euronext Amsterdam, we will be paying the dividend in a euro equivalent. On the back of the new dividend policy announced earlier in the year, we are pleased that VEON has returned to being a sustainable and progressive dividend paying company. Let me now move on to present an update on important business events of the quarter. I want to particularly highlight three key developments before handing over to our CFO, Andrew Davies, who will provide an overview on the capital structure initiatives and review the financial performance of the quarter in more detail.

I will present our progress on the launch of our VEON platform, the implications of expanding our monobrand footprint in Russia and important changes to strengthen our corporate governance. Back in February, we presented VEON, our Personal Internet Platform, to you as our core initiative aimed at engaging with our customers in a new way. Half a year on, we're excited about the recent launch in 5 of our key markets. At the heart of the platform is a fresh stake on three key elements of today's internet experience. First, an innovative take on communication and messaging, customer care and customized content and offers.

VEON gives customers access not only to chat, calls and a totally new account management platform, but also the best features on the mobile internet, all in the palm of their hand. Secondly, our integration of powerful data analytics enables users to discover new content daily. Personalized top stories, music and video are all accessible through a world-class interface. And finally, VEON network customers can access the platform and its core functions completely free of charge without having to worry that they will run out of data before topping up. The new features presented to our customers are the foundations for a new customer engagement strategy, which we will focus on for the next 18 months.

While the VEON platform will also serve as a tool for improving efficiency in our core business, for instance, by reducing churn and customer acquisition cost, increasing digital gross adds or reducing calls to customer care. In the medium and long term, VEON is intended to be a platform to open up new revenue streams and better monetize customer engagement. We are working on a unique model to use advanced analytics to provide contextual internet services to consumers when and where they need them. As we are working with global and local third parties, the business model will turn on revenue and value sharing with those partners, opening up whole new ways of using the internet far beyond today's app economy. The July 19 launch covered Russia, Ukraine, Georgia, Pakistan, as well as with upgraded functionality in Italy.

In all of these countries, we have integrated VEON fully with the core telecom systems for self care, text messaging and voice telephony. VEON is also available globally in the Google Play store and iOS app store for more than 10 countries, and growing, including the Netherlands, the UK and United States. This means the platform is available to 134 million of our own subscribers. Back in February, we presented our initial global partners to you, including MasterCard, Vivendi and Deezer. Today I'm delighted that in the meantime we have made great progress, adding nearly 100 partners to the VEON platform either globally or locally in our markets.

These partnerships center on content, personalized offers to our VEON users and enabling payments. We will start substantial marketing campaigns in the back-to-school window in September to generate customer engagement. We aim to launch the VEON platform in the remainder of our footprint by year end. Let us now move to the next slide to discuss our plans to reshape distribution in Russia. Euroset in Russia was a joint venture with MegaFon for quite a number of years.

We believe it's now time to move towards fewer independent chains and more monobrand exposure, given the dynamics of the Russian telecom marketplace. In practical terms, this means three things for us. First, we agreed that MegaFon will own 100% of Euroset going forward, with VEON giving up its 50% equity stake while acquiring the rights to half of the shops for consideration of some $20 million. We have no obligations towards the remaining debt which stays within Euroset. Second, we will start integrating and rebranding these stores in our own Beeline footprint.

We expect this process to be completed by the middle of next year. Third, our overall monobrand footprint will benefit significantly from the integration of 2,000 Euroset stores, not just in terms of the actual number of stores which increases to approximately 5,500 stores over the next few years, but also in terms of lower churn, more upsell opportunities, higher ARPU and greater customer satisfaction. All-in-all, this is another step in addressing some of the structural challenges of the past. Finally, let me provide an update on corporate governance. We recently announced a set of appointments to our Supervisory Board to strengthen the corporate governance of VEON.

We increased the number of Supervisory Board members from 9 to 11, with the election of Ursula Burns and Guy Laurence during the July AGM. As a result, the majority of the board is now unaffiliated with major shareholders. Ursula Burns was also appointed new Chairman of the Board in July. Ursula not only brings significant expertise in business transformation, but also extensive board experience. I would now like to hand over to Andrew Davies, our Chief Financial Officer, who will take you through the financial performance of the business in the second quarter.

Andrew?

Andrew Davies: Thank you, Jean-Yves. And good afternoon from me as well. The first half of 2017, we made significant steps in achieving the strategic priorities for our debt structure through the series of transactions that we articulate on this slide. Let me explain broadly what we've achieved. We've transitioned from largely subsidiary to a group financing model, reducing the structural subordination of debt.

We've created consistent modernized and extremely favorable bond, bank and other debt documentation across the group. We reduced the legacy capital structure complexity, increasing transparency and diversification. We've shifted the debt currency mix to better match it with cash flows and assets and we've reduced the net cost of the debt as you will see from the next slide. The steps we have taken have allowed us to issue unguaranteed bonds with the same rating as the bonds previously guaranteed or issued by PJSC VimpelCom. The next slide brings together all of the key improvements to our capital structure.

By executing these transactions, we have significantly reduced our priority debt and have terminated the guarantees on $1.8 billion of VimpelCom Holdings bonds, which has led to a largely unguaranteed debt structure. The currency mix has then been improved by refinancing maturing US dollar denominated revolving credit facility via a multi-currency term loan, an RCF, and then drawing that term loan in euros. We paid the maturing US dollar debt facilities and we swapped the 4-year tranche of the new U.S. dollar bonds issued in June into euros, which will effectively act as a net hedge against our investment in the Wind Tre joint venture. And we've increased the size of the superior bank loan.

Future improvements in the currency mix will continue to be a focus area for us as we further optimize the capital structure. In addition, we took advantage of current market conditions, pushed out maturities and refinanced debt at lower rates. All of this has culminated in an annualized $100 million savings of interest costs. I'll now move on to the second quarter results review starting, as usual, from the macro trend on currencies. One of the key drivers for the double-digit top line growth that Jean-Yves discussed earlier was the currency appreciation against the US dollar.

The VEON coin as shown in inflection from Q1 2016 onwards, with a further positive year-on-year trend during the second quarter of 2017, thanks mainly to the appreciation of the ruble. The result on currency tailwinds explain the majority of the year-on-year revenue and EBITDA growth for this quarter, which leads us nicely into the next couple of slides. In the waterfall charts on Slide 15, we show the evolution of our revenue both in reported and organic terms. On a reported basis, our Q2 2017 revenue grew by over 12% year-on-year, boosted by organic growth, the FOREX effect as I've already noted, and the Warid acquisition. Excluding Warid, the year-on-year growth would still have been robust at 8.5% year-on-year.

If you look at the composition in the upper chart, we see a continuation of the trend from previous quarters, with strong growth in data and MFS revenues, partially offset by a decrease in voice revenue; this latter phenomenon being a secular trend across the industry. Mobile data revenue showed strong growth of over 30% year-on-year on an organic basis, driven by the continued monetization of our high-speed data networks through smartphone penetration and the adoption of integrated bundles. In the lower chart, you can see that on an organic like-for-like basis, revenue increased by almost 4% year-on-year. And in this like-for-like calculation, we've included Warid's revenue for all of 2016. The positive year-on-year trend is attributable to Russia, Uzbekistan and Ukraine, while the emerging market region with a mixed performance was neutral to the year-on-year trend overall, with the strength in Pakistan being offset by weakness in Algeria and Bangladesh.

Let's now move to the next slide, 16, on EBITDA. On a reported basis, EBITDA improved 17% year-on-year. The drivers here are the same as for revenue, being organic growth, FOREX and the Warid acquisition. Excluding exceptional item mainly related to performance transformation costs of $118 million in Q2 last year and $46 million in Q2 this year and also including Warid in the 2016 baseline, the year-on-year like-for-like growth of underlying EBITDA was 5.3%. As you can see from the upper chart, on a year-on-year basis, the performance transformation program has contributed approximately $84 million in Q2 2017 to the underlying EBITDA improvement.

But this is more than offset in this quarter by short-term reinvestments and other value accretive initiatives such as monobrand stores, network development and devices all aimed at driving future growth, which in Q2 aggregated to just over $140 million. Looking at the lower chart, we can see that on an organic underlying basis, EBITDA also shows positive momentum, growing by 1.5%, excluding both the positive currency impact and the exceptional items that I noted earlier. Looking at the geographies in the lower chart, the positive trends in Pakistan and Ukraine and Uzbekistan, more than offset weakness in other countries. I'll now move on to the country review, starting, as usual, with Russia where results improved during the second quarter, although the conditions on competition in the market remain challenging at the same time. Total revenue increased year-on-year by 3% due to a 4% year-on-year growth in mobile service revenue, driven by growth in mobile data, value-added services and mobile financial services revenue, partially offset by a decrease in voice revenue.

Mobile data revenue continued its strong growth, increasing 18% year-on-year, resulting from increased penetration of integrated bundles and smartphones, together with data traffic growth. Mobile ARPU grew 4% year-on-year, driven by the continued efforts to simplify tariff plans, while also being supported by the increased penetration of bundle propositions in the customer base. Fixed-line service revenue decreased by 9% year-on-year, due to the negative effect of the strengthening ruble on foreign currency contracts and the growing penetration of FMC in the customer base. However, the take-up for FMC proposition remain strong, with a total customer base of more than 730,000 customers at the end of the second quarter. Underlying EBITDA adjusted for transformation costs decreased 1% year-on-year, with an underlying EBITDA margin of 39.4%, representing a sequential quarter-on-quarter improvement of 1.8 percentage points.

I'm now going to move on to emerging markets, starting with Pakistan which continues to show strong momentum in Q2, and the Warid merger integration process is now almost complete. The annual run rate of net synergies in Q2 is above the $115 million target we announced at the time of the transaction, a clear demonstration that we achieved that target well ahead of schedule, although some activities related to network integration are still in progress. Please note also that the pro forma comparative numbers are a non-GAAP measure and do not include any purchase price allocation adjustments. If we look at the key financials, revenue increased by almost 7% year-on-year, boosted primarily by data revenues, which accelerated to a 46% year-on-year growth rate. The customer base increased by more than 6% year-on-year, driven by continued customer satisfaction through a focus on price simplicity and more efficient distribution channel management.

Underlying EBITDA margin, excluding PKR 600 million restructuring costs related to both performance transformation and the Warid integration, was 44.7% in Q2, improving by 4.6 percentage points year-on-year and 1.5 percentage points quarter-on-quarter. CapEx increased year-on-year in Q2, with the last 12-month CapEx to revenue ratio of 18%. And in Q2, Jazz won the auction for 10 Mhz of spectrum in the 1800 Mhz band, and the payment of $295 million together with the 10% withholding tax was made at the end of June. Finally, from the end of June, we have reclassified our tower business in the indirect subsidiary Deodar, as an asset held for sale. We are in advanced discussions for the sale of Deodar, which holds a portfolio of approximately 13,000 towers and provides network tower services in Pakistan.

However, there can be no assurance that the definitive agreement will be reached. Following this classification as held for sale, the company will no longer account for depreciation and amortization expenses of Deodar's assets. Moving on to Algeria, where signs of a turnaround are finally evident, with a gradually improving revenue trend where we showed 8% dilution year-on-year in Q2, compared with a 15% dilution in Q1. In particular during the second quarter, data revenue accelerated, with 89% year-on-year growth as a result of the strong focus on customer-based retention through the launch of a new tariff portfolio. We also continue to have strong leadership in 4G/LTE population coverage, which is clearly an important differentiator and an important element of our overall competitive positioning.

However, Algeria remains challenging both on the macro and competitive fronts. Inflation continues to be high. And as we've already noted, the new finance law increased both VAT and tax on recharges with effect from January of this year. These higher indirect taxes directly influenced performance of the company as they could not be passed on to customers. In addition, competition is still intense and primarily focused on data pricing.

Underlying EBITDA margin was just over 45% in Q2. While excluding the impact of the indirect taxation increases caused by the finance law that I noted earlier, the underlying EBITDA margin would have been just above 48%. The new leadership team is focused on improving performance and stabilizing the customer base through distribution transformation and monobrand rollout, acceleration of 4G/LTE network deployment, promotion of micro campaigns with tailored services to increase satisfaction and data monetization activities, coupled with bundled offers. And as you can see, these are finally showing the first signs of progress. Last, but not least, the board of Djezzy approved gross dividends of approximately $150 million, or the equivalent of 60% of 2016's net income, which will be distributed in the third quarter of 2017.

In Bangladesh, the operational focus during Q2 continued to be on improving network coverage, which drove the data growth of 32%, resulting from data usage growth of 117% along with a 9% growth in active data users. Service revenue, however, decreased by 2.5%, and this is mostly attributable to the historical gap in 3G network coverage versus the market leader. In addition, the market is still characterized by intense price competition, which accelerated following the completion of the SIM reverification process. Underlying EBITDA decreased by 16% year-on-year as a result of the revenue trend and higher costs incurred in acquiring new customers, while the underlying EBITDA margin remained above 40%. At the end of the second quarter, 3G population coverage reached 68%, representing a gradual closing of the gap with the competition.

Finally, we are focusing heavily on the regulatory agenda, specifically on the topics of technology neutrality, addressing our spectrum deficiency and tower regulations. And on the first two of these topics, the government has recently published draft guidelines. Now move on to Ukraine on Slide 21, where Kyivstar continued to deliver strong results during this quarter and remains the clear leader in both market share and Net Promoter Score. Total revenue grew 10% and mobile service revenue increased 11% year-on-year, driven by the continued strong growth of mobile data revenue, which grew in excess of 70% as a result of growing data customers, successful marketing activity stimulated by the continued 3G network rollout and data-centric tariffs. As a result, data consumption per user more than doubled in Q2 2017, compared to the same quarter in the previous year.

The customer base grew 3% year-on-year as a result of improvements in churn and increased gross additions driven by promotional activities mainly for B2C customers. Underlying EBITDA adjusted for performance transformation costs grew 15% year-on-year, driven by higher revenue and lower interconnect costs, resulting in an increase of underlying EBITDA margin by 2.5 percentage points to a strong 57.5%. Kyivstar continued to roll out its 3G network Q2, reaching a population coverage of 69% compared with 48% in the same quarter last year. In Uzbekistan, we reported strong revenue performance, and total revenue grew 20% year-on-year, driven primarily as a result of the impact of Beeline's price plans being linked to the US dollar, together with successful marketing activities and increased revenues from interconnect services, value-added services and mobile data, which grew 28% year-on-year, driven by the continued high-speed data network rollout, increased smartphone penetration and the launch of new bundled offerings. The customer base increased 3% year-on-year, the second consecutive quarter of year-on-year growth, driven by strong gross additions.

Underlying EBITDA increased 14% driven by the revenue growth, partially offset by higher interconnect costs as a result of both higher off-net usage and a negative currency effect, together with increases in content costs, customer acquisition costs and a structural OpEx, while the underlying EBITDA margin remains robust at in excess of 54%. The last 12 month CapEx to revenue ratio increased to 25%, mainly due to prepayments of equipment in Q4 of 2016 for deployment in 2017. Finally, the decision by the Republican Radiofrequencies Council in Uzbekistan may, if it comes into force as planned in September 2017, result in a partial reallocation of Beeline's spectrum to other cellular communication providers in the market. I'll now move on to Italy on Slide 23, where the competitive environment has become tougher ahead of Iliad's market entry. Revenue for Q2 decreased by 1.7%, driven by a 2.2% decline in mobile service revenue as a result of the increased competition impacting customer growth and also as a consequence of lower sales of mobile devices, while mobile ARPU for Q2 remained stable year-on-year at just over EUR 11.

The mobile service revenue decline was partially offset by growth of 0.5% in fixed-line service revenue, being driven by increased broadband customers coupled with broadband ARPU growth of 4% year-on-year. Underlying EBITDA, excluding nonrecurring items, grew strongly by 6%, with margin expansion of 2.5 percentage points year-on-year to 34%, mainly driven by the benefits of post-merger synergies and increases in other revenues. CapEx for the quarter totaled EUR 266 million and was primarily focused on expanding capacity and coverage of the 4G/LTE network as well as modernizing and merging the former Wind and Tre networks. The net leverage ratio continued to improve to 4.1x at the end of the second quarter, and we continued to see a clear deleveraging path for the business. The JV contributed a loss of $85 million to VEON's income statement for the quarter, primarily driven by integration costs and accelerated depreciation and amortization.

Finally, in July, Jeffrey Hedberg was appointed as the new CEO of the Wind Tre joint venture. We now look at the second quarter income statement, and, as normal, I'll now focus my attention mainly below EBITDA. Depreciation and amortization increased year-on-year as a result of higher amortization related to the revision of the useful lives of the Mobilink and Warid brands following the introduction of Jazz as the new brand in Pakistan earlier this year. FOREX and other costs was a negative $169 million for the quarter and was primarily driven by a net $124 million cost associated with our bond refinancing exercise. Also in Q2, we have quite a visible impact in the line capturing the share of results from JVs and associates.

And here the significant decrease year-on-year was primarily driven by the $85 million share of the loss from the Wind Tre joint venture as I previously noted. In addition, we also had $110 million impairment in the quarter of the Euroset asset in Russia. Last, but not least, on taxes, in the second quarter, the year-on-year trend was positive, as higher taxes resulting from higher profits in Pakistan and Ukraine were more than offset by lower taxes in Russia, resulting mainly from the deductibility of the bond tender fees. Now move on to the net debt analysis. We closed the second quarter with $8.4 billion of net debt and leverage ratio of 2.2x, slightly higher than the 2.1x ratio at the end of Q1.

The primary reasons for the slight increase in leverage was a payment of the final 2016 dividend of just under $350 million, coupled with $325 million investment in spectrum in Pakistan. On the next slide, 26, we provide an update on the underlying equity free cash flow. As already presented by Jean-Yves, the cash flow generation in the second quarter was very healthy and in line with our expectations. If we look at the year-to-date results, in the first 6 months of 2017, we delivered $491 million of underlying equity free cash flow, excluding licenses, a robust growth compared to the same period last year, with a significant increase in net cash generated from operating activities of approximately $336 million, more than offsetting the increase in cash used for investing activities, resulting in underlying equity free cash flow of close to $0.5 billion. Let's move now onto the final slide on full year 2017 guidance.

The first half year results demonstrate that we remain on track to deliver the full year guidance. From a revenue perspective, results were fully in line with the guidance of low single-digit growth, showing 1.5% year-on-year growth as previously discussed. Underlying EBITDA margin was slightly down in the first half by 20 basis points organically. However, we are confident this trend will be more than compensated for in the second half of 2017; and, hence, we are confident about the full year guidance. Finally, and as noted in the previous slide, we've generated $491 million in underlying equity free cash flow before investments and licenses, which leaves us confident on the full year target of between $900 million and $1 billion.

As we previously communicated at our Q1 results announcement, we had included $200 million, per our numbers, the estimate for the average annual spend on licenses for spectrum. However, this number can vary greatly and is not under our control, which is why we now guide on the basis of underlying equity free cash flow, excluding licenses, while we also believe that the $200 million as an average annual spend on licenses over the long term is still valid. And with that, we can now start the Q&A session. Operator? Hello operator?

Operator: Thank you. [Operator Instructions] We'll now take our first question from Emmanuel Carlier from ING.

Please go ahead.

Emmanuel Carlier: Yes, hi, good afternoon. Three questions, first, on Italy, why did you not yet refinance the debt there? Because I think there was a pretty big opportunity to save a lot of interest costs. Secondly, on Pakistan, so you announced that it's likely to sell 13k towers. Could you maybe provide an update on the amounts you expect to receive from that? And especially what you would do with these proceeds.

Would you prefer to do share buyback at GTH or refinance debt at GTH? Or just use it to pay dividends at the fee-on level. And then finally, on the EBITDA margin, so it was down in the first half of year despite this, I would say strong service revenue growth. So that was due to reinvestments. But could you just give a little bit more color why you believe it will be up in the second half of year? Is that because you will do less reinvestments, and, as a result service revenue growth might also be a bit lower? Or is there anything else? Thank you. Jean-

Yves Charlier: Emmanuel, thanks for all three questions.

They're rather technical. Andrew, you want to take a shot at them?

Andrew Davies: Yes, sure. I'll take them in the order that they were asked, actually. So on Italy, first of all, I wish we had the level of control that you implied, but we don't. So this is a decision for the Joint Venture Board, clearly, and not just for VEON in isolation.

That's the first important point to note. Secondly, addressing the substance of the question, clearly, there is an opportunity there. And I think as the JV team articulated on their analyst call the other day, they are now starting to actually look at that. So I won't say any more on that topic right now. On Pakistan, it's too premature for us to be speculating about transaction amounts, et cetera, et cetera.

I mean, clearly what I would say is that 13,000 towers means that it will be a relatively significant amount of proceeds and it will be value accretive. We've always stressed that we're only going to do genuinely NPV-accretive towers transactions and we're not going to do towers transactions that are essentially just an expensive form of financing. Now, in terms of what we might do with the proceeds, a couple of things to note. So first of all, as I mentioned in the slides, Pakistan has just spent $300 million on spectrum. So the spectrum needs to be funded.

Secondly, there's a fairly sizeable amount of debt in Pakistan which has claim on most of the tangible assets in that business. So part of the proceeds will, in the first instance, go towards paying down some of the debt that we have locally within Pakistan. And then, Pakistan can consider paying a dividend to GTH. I would remind you that GTH has got itself the bridge facility that was put in place for it to do its share buyback program to repay, and it's also got interest to service on the $1.2 billion bond that was issued last year. And then finally, but by no means the least, there is a revolving credit facility in place between VEON and GTH which also needs to be repaid before GTH considers doing anything with regard to its own shareholders.

On EBITDA margin, I think what we will see in the second half of the year is not so much a deceleration of reinvestment-type activities, but more, as the program matures, you're actually going to see a larger amount of gross savings generated by the performance transformation program. So that's the main reason why we are confident about second half and, therefore, full year EBITDA margins.

Emmanuel Carlier: Okay. Thank you. Jean-

Yves Charlier: Thank you.

Operator: We'll now take the next question from Ivan Kim from VTB Capital.

Ivan Kim: Good afternoon, two questions for you, both on Russia. So in Russia your mobile service revenue has accelerated in the second quarter. So I was just wondering how do you view the competitive environment right now? Has it improved a lot? We saw increases of on-the-shelf bundle prices in the first half. And so shall we expect even a better second half 2017, which, among other things is also informed by their revisions that you started recently? And the second question on the retail and Euroset.

So you say that the medium-term plan is to have 5,500 stores following the Euroset transaction, which doesn't really imply much of the reduction of your network from what I see in the numbers. Do we think is there room to optimize the distribution in Russia? And do you importantly also plan to continue to sell through multibrand stores? Thank you. Jean-

Yves Charlier: Okay. Maybe I can start and then let Andrew add to what I'm going to say. I think the competitive environment remains, I think competitive, if I can use that term in Russia right now.

I think what we've seen in the second quarter is that our strategy to move to more data pricing and bundles has been generating good results. And whilst I think it's too early to say that this is going to be an absolutely continuing trend, I think we're relatively confident about the outlook right now in the Russian marketplace. I think in terms of distribution, we'll look at optimizing our monobrand footprint once it's absolutely fully in place. Right now we've got a medium-term objective of about 5,500 stores. I think that longer term, we could operate with a smaller footprint, particularly depending on what happens with multibrand distribution in Russia, and particularly the take-up of our own VEON platform and how ultimately consumers top-up and engage with us.

So I think whilst we have a clear vision about 5,500 stores for the medium term, I think depending on what happens in the market place and our own internet strategy, we could very well further optimize that. I think in the short to medium term, we will continue to look at opportunities to sell through multibrand. But clearly, our medium- to long-term plan is predominantly to expand our monobrand presence and certainly focus on digital dimension. Andrew, anything to add on that?

Andrew Davies: I don't think so, no. You covered it all.

Jean-

Yves Charlier: Okay.

Ivan Kim: Thank you.

Operator: We'll now take the next question from Karim Sawabini from Moon Capital. Please go ahead.

Karim Sawabini: Hi, congratulations, guys, on the quarter, just a quick follow-up on the Pakistani question regarding tower sales.

As you sort of look to create further value at VEON, how do you guys think about GTHE in terms of buying out or consolidating more of the business? Thanks. Jean-

Yves Charlier: I think I'll start, and Andrew can add. I think the way that we look at it is that we will always look at opportunities of streamlining the structure of VEON, and that includes GTH. Obviously, valuation is absolutely critical in any of our thinking around that. So I think that's the framework that we've set for ourselves.

We've addressed, as you know, the balance sheet challenges. Obviously, if these tower transactions and particularly the Pakistan one comes through, it gives us, as management and the board, more optionality to streamline the structure wherever it may be, including GTH.

Andrew Davies: Yes, I would echo that.

Karim Sawabini: And if I can just do a quick follow-up. I mean, on Pakistan, I know you've been trying for some time to execute that transaction.

What's your best sense on timing now, given the move to deconsolidate at the GTH level?

Andrew Davies: Sure. So let me take that one, Karim. So, look, we've classified it as an asset held for sale. And as I noted in what I said earlier, we are in advanced discussions for the sale of that business. Now, we can't give any assurance that we will reach a sale.

But clearly the fact that we have it as an asset held for sale does mean that we feel that a transaction is highly probable in the relatively near- to medium-term future. So I think that's as much as I would say right now.

Karim Sawabini: Great. Thank you.

Operator: [Operator Instructions] We'll now take our next question from Alexander Vengranovich from Otkritie Capital.

Please go ahead.

Alexander Vengranovich: Yes, hi, so first two follow-ups on Russia. First one on the reason for strong growth in mobile service revenue second quarter. So I've noted that you had some significant churn decrease in the second quarter, form 16% to 15.3%. Do you think that's the major reason for the improvement of the subscriber base? And do we think such low churn is sustainable for the second half of '17? And the second question also on Euroset.

When do you expect to convert all the Euroset stores into your monobrand retail stores? And once the stores are converted, do you think you may make some push on the subscriber acquisitions using the stronger monobrand network you have? And the third quick question, on Uzbekistan. Can you please provide us the update on your position regarding the distribution of the licenses in the country? Do you plan to deal within the court? Or what sort of an impact do you foresee if that decision of the regulator comes into force in September '17? Thank you. Jean-

Yves Charlier: Andrew, you want to take the first part?

Andrew Davies: I'll take the first two, and you take Uzbekistan. Jean-

Yves Charlier: Yes.

Andrew Davies: Yes.

So first of all, thanks for the questions, Alexander. On the mobile revenue growth, clearly, the improvement in churn for the quarter was an important facet driving that, that growth. As we mentioned earlier, I think the slight lessening of pricing pressure as well played a part in that. In terms of second half of the year, I think we would be broadly confident about being able to maintain roughly the same kind of churn levels. The only caveat I would put around that is, as I think you know and we discussed in the past, churn in Russia tends to be a little on the cyclical side, mainly related to in- and outflows within the migrant segments, right.

So end of Q4, Q1, we tend to see a bit of a surge in churn, which then dissipates in Q2 and Q3. But we actually – back to the substance of your question, we do think that we are on an underlying improved trend when it comes to churn. With regard to Euroset, first of all, we anticipate and intend that the store integration will be complete by basically this time next year, right; so by the end of Q2 2018, or thereabouts. I don't think you see us pushing be more aggressive on gross adds, per se. I mean, part of the Russian now for moving towards a more kind of a monobrand store footprint and taking more direct control over distribution is to reduce what people would describe as the washing machine effect in the marketplace, and further reduce churn and also then improve service levels and, therefore, catch of a lifetime and also ARPU improvement through upselling.

So I think those are the main reasons why we are taking control of monobrand as opposed to wanting to be more aggressive on the gross additions front.

Operator: We now take the next question from Igor Goncharov from BCS. Please go ahead.

Igor Goncharov: Yes, thank you very much, couple of questions. First on the guidance, the equity free cash flow guidance.

You clearly provided the guidance for 2017. But in your previous presentation, you also guided for 2018, which was I think $1 billion after license fees, not excluding those. Can you maybe update that guidance, if this is possible? What do you see in terms of free cash flow in 2018? That's number one. And number two, in relation to in Euroset stores acquisitions, is this quite easy to imagine that some of the stores that you acquire from Euroset have suboptimal location by themselves, some might interrupt with existing stores of Beeline. In this relation, what's your view on potential closure of some of the stores that you acquire from Euroset or you already own as Beeline? Thank you.

Jean-

Yves Charlier: Okay. I don't know where we dropped off. We're in the London offices, so you'd expect that the lines would be all good. But there was a technical problem. So I was just explaining Uzbekistan, just saying that it's not a redistribution of license, but spectrum, that ultimately we're working with the regulator and the government on these matters on timing of a potential decision and obviously how spectrum would be redistributed if the regulator went ahead with this.

And obviously, we're evaluating at the same time the CapEx impact, because with a smaller spectrum portfolio, we'd have to expand our network and the number of base stations and towers to ensure that we continue with the same quality of service in Uzbekistan. I think there's not much more to say on that front for the time-being.

Bart Morselt: All right. Apologies. I suggest that we move on to the next question, please.

Operator: Thank you. We'll now take the next question from Madhi Singh from Morgan Stanley.

Madhi Singh: Yes, hi, thanks for the call. Just to follow-up on the performance in Bangladesh and I will give you – continue to remain quite weak and volatile. Can you just give some idea about how long it will take before things improve in Bangladesh, especially – and Algeria as well? Thank you.

Jean-

Yves Charlier: On Algeria, we've always said that this was a medium-term turnaround. What we've seen I think in Q2 is an improvement in the underlying performance of Algeria, particularly if you strip out the Ramadan effect which was earlier this year. So if we strip all that out, quarter-on-quarter we're seeing an improvement in underlying business trends. We believe that that will continue going forward. And we, I think, see potential improvement in that business in the short to medium term.

So I think we are starting to see light at the end of the tunnel in terms of the Algerian operations. Bangladesh is more linked, as Andrew outlined, to the regulatory environment and our spectrum portfolio. We are working with the government on these dimensions. And it seems that the government will hold a series of spectrum options in the next 6 to 9 months. And hopefully that will provide us with a spectrum portfolio to be much more competitive in that marketplace.

Andrew, anything else to add on those two points?

Andrew Davies: I don't think so.

Madhi Singh: I do want to just follow up on the margins in Algeria. There seems to be some further, I would say dilution of the margins in second quarter. So is the second quarter margin the right place to go forward in Algeria?

Andrew Davies: No, not really. I think two things driving the margins in Algeria in the second quarter, as well as I noted there has been an impact on margins from the impact of the finance loan, the increased indirect taxes which we're not able to pass on to customers.

And I guess you'd argue that is probably now a sustaining pressure on the margins. However, as Jean-Yves mentioned as well, in Q2, we did see the impact from Ramadan. And Algeria, amongst our markets, sees a much, much bigger and more pronounced impact from Ramadan than any other in terms of the almost immediate downturn in all forms of traffic volumes, which obviously translates into ARPU and revenue. So, but our cost base, obviously, there's not, except for a beneficial impact in Ramadan. So the Ramadan impact on margins for the quarter, probably a couple of percentage points.

So we would expect margins for the rest of this year to be closer to the 50% mark, yes, going forward 2018 onwards as well.

Madhi Singh: Just very quickly on Bangladesh as well. The margins there also seem to be quite weak.

Andrew Davies: Yes. As I noted, margins are weak there, two reasons.

We are, first of all, in a very competitive environment for gross additions. So the customer acquisition costs were higher in Q2 than they normally are. And then also we are, as I noted, trying to rapidly increase our 3G network coverage. And obviously, that doesn't come for free. You have to deploy CapEx.

But then there's also the operational and maintenance costs associated with having a larger network footprint as well. That acts as a bit of a drag on margins until you start to successfully recover the customer and the revenue market shares that you would hope would lead from the increased network coverage.

Madhi Singh: That is very helpful. Thank you.

Andrew Davies: Thanks.

Operator?

Operator: We now take the next question from Igor Goncharov from BCS. Please go ahead.

Igor Goncharov: Yes. Thank you very much. I was trying to ask a question before the interruption.

So maybe excuse me if I'm just repeating myself. But I had two questions. Jean-

Yves Charlier: Well, we didn't hear it, so it's a good thing.

Igor Goncharov: Yes. So I had the questions.

One was on guidance. You provided guidance on the free cash flow to equity before licenses payments for the year '17. But previously, your previous presentation, you also guided for the free cash flow, although after licenses for the year '18, which was more than $1 billion. Is it possible to update this guidance? And can you provide indications of what will you expect for the year '18 in terms of free cash flow? And second question on Euroset. Just was wondering what's your plans in terms of closing some of the outlets that you acquire or that you own already? Because it's easy to imagine that some of the outlets now have suboptimal locations by either interrupting with existing ones or maybe just because they have been located poorly initially.

Do you plan to close some of the existing ones or some of the Euroset, some of those that you have acquired from Euroset? Thank you. Jean-

Yves Charlier: Andrew, you want to take…

Andrew Davies: Yes, I'll take both of them. So first of all on guidance, so, yes, you're right, Igor. So we guided previously for this year on equity free cash flow after license costs, and that was $700 million to $800 million, but obviously $200 million of annualized investment in spectrum. And we now guide on basis of excluding spectrum license costs, and that range is now $900 million to $1 billion.

Similarly, when we guided towards $1 billion for 2018, that was after licenses and also included the same assumption around an annualized average of $200 million for license cost. So we broadly still think that that's a good number and we're confident about achieving that. Now, if you wanted to kind of wanted me to reframe it in the way that we have done for this year's guidance, I guess what we'd say is that excluding the investment in spectrum, that we now expect equity free cash flow to be at least $1.2 billion for next year. But it's the equivalent number. And on Euroset, I think it's a bit too early to speculate in detail.

But clearly, there is an overlap in a bit of the footprint. You've got some stores that are too close proximity to each other. So there will over time undoubtedly be an element of store rationalization. But it is still too early to speculate as to both the quantum and the geography of that rationalization.

Igor Goncharov: Excellent.

It’s very helpful.

Operator: We'll now take the next question from Olga Bystrova from Credit Suisse.

Olga Bystrova: Good afternoon. I want to ask a question about the dividends. So obviously your underlying equity free cash flow was pretty strong.

When you look at sort of your ability, willingness to pay dividends, do you focus only on this metric, so you actually somehow look at actual figures for which was affected by also maybe recurring – on nonrecurring items? And also, can you tell us when you look in the second half how sensitive you will be to your previously announced leverage targets of 2 times net EBITDA? The second question is on your VEON platform that you launched in, let's say Russia, for example, do you have any sort of data that you can share with us in terms of people who have signed up for it? Any sort of signs of such as feedback from customers or indications of usage? And finally, a follow-up on Euroset. When you talk about 5,500 stores as a target, what kind of stores are you taking into account? Are you taking your previously announced X-5 franchise stores as well? And can you remind us – and forgive me if I misheard that – what is where you stand currently with the Euroset decision where you stand in terms of the number of stores? Thank you.

Andrew Davies: Yes. So thanks for the questions, Olga. So, yes, when we look at dividends, we take account of a number of things.

So clearly, the equity free cash flow that we've generated already in the year and expect to generate going forward is an important and probably the single-most important thing that we look at. But we also look at potential uses of funds going back potentially to some of the questions that were asked earlier on today. And also, we look at what do we think is coming up in the way of other major transactions such as a tower disposal. And in doing so as well, we look at what the leverage ratio is, where do we think it's going, do we have any sensitivities to currency, et cetera, et cetera. So it's not just a simple binary decision saying, oh, we've got x-hundred million dollars of equity free cash flow, and, therefore, let's distribute y percentage of that in the form of dividend.

It's more complicated. On the question of leverage, I think we've said that being round about 2x over the medium term is where we'd like to be. We remain very comfortable at the leverage ratio of 2.2x, particularly given the success of the refinancing activities that we've completed earlier this year where we've refinanced or restructured 60% of the debt and it made it much more flexible and much, much more affordable, but we also derisked it somewhat in terms of currency. So, yes, 2.2x we're comfortable. And I'm in no particular rush to immediately deleverage slightly down towards the 2x ratio.

Jean-Yves?
Jean-

Yves Charlier: Look, on the VEON platform, what we've done in the last few weeks is really a soft launch of the platform in 5 of these major markets. We are really focused on the back-to-school campaigns when people come back from holiday. The soft launch obviously enables us to focus on making slight improvements to the platform, addressing potentially certain bugs that would not have been identified during the development phase. So the large scale really rollout comes from September onwards with significant advertising programs, upgrades to the VEON platform from the various apps that are OpCos might be operating in the marketplace. I think once that is completed, that's the point in time when we'll come back to you with more meaningful data at that point in time.

So I think that's where we are on the VEON platform at this stage. I think coming back to Euroset, the 5,500 monobrand stores includes both stores owned by ourselves and stores that we will have franchised under the Beeline brand in Russia. And as I said, whilst that is a medium-term target that we've given ourselves, we will look at that going forward, whether there's a requirement to specifically either add on or reduce the footprint and particular how our VEON internet platform is going to perform in the marketplace. So I think if you look at the breakdown to get to the 5,500, we roughly have today about 1,500 own monobrand stores, about 2,200 Beeline franchises. You add on to that the 2,000-or-so stores that we are migrating as part of the Euroset transaction, the rationalization of optimization of about 200 stores, that gives you the breakdown of 5,500.

Bart Morselt: Operator, in the interest of time, I suggest we take one final question and then wrap up. Thank you.

Operator: Thank you. We now take our final question from Alastair Jones from New Street Research.

Alastair Jones: Yes.

I was wondering if I could come back to on the EBITDA side of things, particularly in Russia, the performance there. Obviously, the revenue trends were encouraging. If you look at the OpEx in the last couple of quarters, the OpEx had been declining by around about 3% to 4%, which makes sense given your sort of performance transformation. But then in Q2, the OpEx seem to increase by 6% year-over-year. So there definitely seems to be a bump up.

And I was just trying to understand if there was anything one-off related to that, one-off related in those numbers, either in this quarter or in year ago. And to what extent, I mean, given we obviously want to push the VEON platform in September time. I mean, to what extent can you start to see maybe EBITDA starting to grow in the second half of the year? And then just the second question on Pakistan repatriation of cash. If there is a transaction that's successfully completed, how does work in terms of repatriating the cash out of Pakistan in terms of timing challenges and sort of approvals, how long is that supposed to take? That would be great. Thanks.

Andrew Davies: I think I'll take both those questions. Thank you, Alastair. I think on Russian margins, I think your hypothesis is largely correct, right. So in Q2 of last year, there was a series of what were, in isolation, relatively small accrual cleanups or provisioning cleanups which aggregated up to just in excess of about RUB 1 billion that benefited both the OpEx as reported and the margin last year. And I need to argue that in this year we had a little bit, but only a little bit of the opposite where we needed to true-up some accruals particularly related to compensation schemes from Q1 into Q2.

So as I look at it in detail, once I isolate out both of those effects and I look at the true underlying kind of operational performance of that Russian cost base, we continue to see good year-on-year declines, and, therefore, real kind of what I would describe as operational margin improvement. On Pakistan on dividends, it does take awhile to get dividend flows out of the country. I mean, clearly, we need to go through an approval process with the state bank basically to convert the rupees into dollars. We kind of know how that path works now because we've got decent experience over the last 6 months or so, having declared a dividend for the first time in about 11 years towards the end of last year, and then we distributed all of that declared dividend within the first half of this year. So to the extent that we have a dividend declaration from Pakistan, I would not imagine that we would be able to flow all of that money up to GTH in one quarter.

I think it'll take a couple quarters to do so. But we remain confident about our ability to do so and to manage the approval process.

Bart Morselt: That answer your question, Alastair?

Alastair Jones: Yes, that's great.

Bart Morselt: Very good. In that case, Jean-Yves, thank you.

Andrew, thank you. But especially thank you to all who have listened in, dialed in or on the webcast. Thank you for your interest. If you have any further questions, feel free to contact us, Investor Relations at VEON. And otherwise, for now, I wish you a very nice day.

Thank you, and good-bye.

Andrew Davies: Thanks, everybody.

Operator: Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.

You may now disconnect