VEON Ltd. annual report, Q4 FY2018

Business context and reporting period

VEON Ltd. filed this audited Form 20-F for the fiscal year ended December 31, 2018, with comparative IFRS results for 2017 and 2016, reported in U.S. dollars. This is an annual filing, not a standalone fourth-quarter report; the supplied text does not provide a clear standalone Q4 income statement or cash flow. VEON provides mobile, fixed broadband, data and digital services across 10 countries and reported more than 210 million customers.

Financial and operating performance

FY 2018 revenue fell 4.1% year over year, despite reported organic growth of 3.5%; management attributed the decline principally to $928 million of currency headwinds, partly offset by organic growth and the positive revenue effect of Euroset. Adjusted EBITDA fell 8.8%, reflecting currency headwinds, Euroset integration costs and a prior-year vendor-agreement adjustment. The filing defines Adjusted EBITDA as a non-IFRS measure; it is not a substitute for IFRS results.

Profit for the year included a $979 million result from discontinued operations, including a $1.279 billion gain on the sale of VEON’s 50% stake in Italy’s Wind Tre. Continuing operations remained loss-making. The consolidated income statement reports $858 million of impairment expense; management commentary elsewhere refers to $781 million of accounting impairments. The filing text does not reconcile these figures clearly, so the difference merits verification.

Operating cash flow rose modestly. Cash purchases of property, equipment and intangible assets were $1.948 billion; capital expenditure excluding licenses, a separate measure, was $1.415 billion. Financing activities used $3.916 billion, chiefly reflecting debt repayment. In Q4, VEON used approximately $1.3 billion of Wind Tre proceeds to repurchase or repay debt. External debt principal declined by about $3.8 billion year over year. Cash increased, but the working-capital deficit widened as borrowings approaching maturity were classified as current liabilities.

Material changes versus the prior year

• Wind Tre was sold in September 2018 for approximately $2.83 billion cash; the business is presented as a discontinued operation.
• Debt principal fell from $11.103 billion to $7.298 billion, and management reported eliminating euro-denominated debt while increasing ruble-denominated exposure.
• Impairments rose substantially from $66 million in 2017 to $858 million in 2018 on the consolidated income statement, following revised forecasts for several country operations.
• Performance varied by market: Ukraine revenue and Adjusted EBITDA grew, while Algeria, Bangladesh and Uzbekistan reported lower U.S.-dollar revenue and EBITDA. Currency translation materially affected reported results.
• VEON sold its Laos and Tajikistan operations and completed the Euroset retail joint-venture unwind; integration of Euroset stores into Beeline in Russia weighed on EBITDA.

Outlook, risks and unusual items

Management expected 2019 capital expenditure excluding licenses to remain significant, focused on high-speed data networks and continued 3G/4G deployment. It said cash, operating cash flow and available facilities were expected to meet foreseeable requirements, despite negative working capital. At year-end, $1.790 billion was undrawn under existing credit facilities. Management’s liquidity assessment is subject to refinancing access, currency movements and restrictions on moving cash from operating subsidiaries.

IFRS 16 took effect for VEON on January 1, 2019. The filing estimated approximately $2.0 billion of opening lease liabilities and right-of-use assets; it projected a roughly $450 million increase in 2019 EBITDA, a $100 million decrease in profit before tax, and a $300 million increase in operating cash flow with a corresponding decrease in financing cash flow. These are accounting-presentation effects, not equivalent improvements in underlying economics.

Other notable matters include a proposed 2019 tender offer for additional GTH shares, subject to Egyptian regulatory approval, and a revised Ericsson IT agreement under which VEON expected to receive $350 million in the first half of 2019. The 2018 dividend was $0.29 per share, including a final $0.17 approved after year-end; continuation of a progressive dividend depends on equity free cash flow and currency movements.

Principal risks include foreign-exchange and inflation exposure, substantial debt and refinancing needs, competitive pricing and customer churn, regulatory and spectrum/license requirements, restrictions on subsidiary distributions, and cyber or network disruptions. VEON also disclosed continuing obligations under its DOJ deferred prosecution agreement, SEC judgment and Dutch settlement, including an independent compliance monitor expected to continue into 2019. Material tax and litigation contingencies include Egyptian tax disputes, Bangladesh SIM-tax claims and a Canadian claim; outcomes and potential losses are uncertain.

PwC issued an unqualified audit opinion on the IFRS financial statements and internal control over financial reporting. Management likewise concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2018.

Important facts for investors to verify

• Reconcile the $858 million reported impairment expense with management’s separate $781 million impairment description, and review the affected units’ assumptions and sensitivities.
• Assess continuing-operations losses separately from the one-time Wind Tre disposal gain and discontinued-operation results.
• Review debt maturities, covenant headroom, undrawn facility availability and the effect of currency exposure on debt service and cash repatriation.
• Confirm the expected timing, regulatory approval and funding for the proposed GTH tender offer, and the receipt and use of the Ericsson payment.
• Evaluate 2019 network investment requirements, IFRS 16 presentation effects, dividend sustainability and the status of material legal, tax and compliance matters.