VEON Ltd. (VimpelCom) 2015 Annual Report Summary
Business Context and Reporting Period
Company: VEON Ltd. (formerly VimpelCom Ltd.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2015
Accounting Standard: International Financial Reporting Standards (IFRS)
Reporting Currency: U.S. Dollars (USD)
VEON is a global telecommunications operator with significant operations in Russia, Ukraine, Kazakhstan, Uzbekistan, Algeria, Pakistan, Bangladesh, and Italy. The 2015 reporting period was heavily impacted by the classification of its Italian operations (WIND Italy) as a discontinued operation pending a joint venture with Hutchison (3 Italia). The company also faced significant macroeconomic headwinds, including the devaluation of the Russian ruble, Ukrainian hryvnia, and other local currencies against the USD.
Key Financial Metrics
| Metric (in millions USD) | 2015 | 2014 | Change |
|---|---|---|---|
| Total Operating Revenue | 9,625 | 13,517 | -29% |
| Operating Profit | 524 | 1,873 | -72% |
| Adjusted EBITDA | 2,875 | 5,560 | -48% |
| Net Loss (Continuing Ops) | (815) | (223) | -265% |
| Net Loss (Total Year) | (553) | (903) | Improvement |
| Cash and Cash Equivalents | 3,614 | 6,342 | -43% |
| Total Debt (External) | ~9.5 billion | N/A | N/A |
| Working Capital | (156) | (938) | Improvement |
Note: Total debt figure excludes US$12.0 billion of indebtedness related to WIND Italy (discontinued operations).
Material Changes vs. Prior Period
- Currency Devaluation: The primary driver for the 29% decline in reported revenue was the significant depreciation of functional currencies (RUB, UAH, KZT, DZD) against the USD. In functional currency terms, revenue declines were significantly smaller (e.g., Russia revenue declined only 1.2% in RUB terms).
- Exceptional Items: The company recorded US$1,051 million in exceptional items in 2015, including a US$900 million provision related to investigations by the SEC, DOJ, and OM regarding its Uzbekistan operations, and US$138 million in transformation costs.
- Impairment Reduction: Impairment losses decreased significantly to US$245 million in 2015 from US$976 million in 2014, primarily due to lower goodwill impairments in Ukraine and Pakistan.
- Discontinued Operations: Results from Italy are now presented as discontinued operations. Italy contributed a profit of US$262 million in 2015, offsetting some of the losses from continuing operations.
- Customer Base: Total mobile customers remained relatively stable at 217.4 million (including Italy), with growth in Bangladesh and Russia offset by declines in Pakistan (due to SIM re-verification) and Ukraine.
Guidance, Outlook, and Risks
Strategic Priorities: Management announced six strategic priorities in August 2015: new revenue streams, digital leadership, performance transformation, portfolio/asset optimization, world-class operations, and structural improvements. The company aims to shift from customer growth to revenue market share growth in mature markets.
Major Transactions:
- Italy Joint Venture: Agreed to form an equal joint venture with Hutchison (3 Italia). Completion is expected in late 2016, subject to regulatory approval. This will remove Italy's debt from VEON's balance sheet.
- Pakistan Merger: Agreed to merge operations with Warid Telecom. Expected to close within six months of signing (subject to approvals).
- Algeria Transaction: Completed the sale of a 51% non-controlling interest in OTA to the Algerian National Investment Fund (FNI) in January 2015, generating proceeds used to pay down debt.
Key Risks and Contingencies:
- Legal Settlements: In February 2016, VEON reached settlements with the DOJ, SEC, and Dutch authorities regarding FCPA violations. The company agreed to pay US$795 million in fines and disgorgement and retain an independent compliance monitor for three years. Future compliance costs are uncertain.
- Geopolitical & Economic: Ongoing sanctions and economic instability in Russia and Ukraine pose significant risks. Low oil prices continue to negatively impact the economies of Russia, Kazakhstan, and Algeria.
- Currency Risk: Significant exposure to foreign exchange fluctuations remains a critical risk, as costs and debt are often USD-denominated while revenues are in local currencies.
- Shareholder Dynamics: Strategic shareholders LetterOne and Telenor East hold ~91% of voting shares. Telenor announced plans to divest its stake, creating uncertainty regarding future ownership structure.
Investor Verification Checklist
- Settlement Costs: Verify the total cash outflow for the US$795 million legal settlement and the estimated ongoing costs of the compliance monitor.
- Italy JV Closing: Monitor the status of EU and Italian regulatory approvals for the Italy Joint Venture, as delays could impact debt reduction plans.
- Currency Hedging: Review the effectiveness of hedging strategies against the continued volatility of the Russian ruble and Ukrainian hryvnia.
- Debt Covenants: Assess the company's ability to meet debt covenants given the high leverage and the exclusion of Italy's debt from the current ratio calculations.
- Functional Currency Performance: Analyze segment performance in local currency terms to distinguish between operational execution issues and translation effects.
- Shareholder Divestiture: Track the progress of Telenor's divestiture plan and its potential impact on the company's capital structure and strategic direction.