Good day, welcome to VEON Q1 2019 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Maximiliano Cominelli, Director of Investor Relations. Please go ahead, sir.
Good morning, ladies and gentlemen, welcome to VEON's Q1 2019 results presentation. I'm Max Cominelli, Director of Investor Relations at VEON, today I'm pleased to be joined on the line by Trond Westlie, VEON's Chief Financial Officer, and Kjell Johnsen, VEON's Chief Operating Officer. The presentation will start with a financial overview of the quarter from Trond, followed by an individual country review by Kjell. We'll hand the floor back to Trond to conclude with some general observations on our financial progress as well as our outlook for 2019. As ever, we will ensure that there is ample time for your questions at the end of the presentation when we hand the call back to the operator. 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 part to the company's anticipated performance and guidance for 2019, future market developments and trends, operational and network development and network investments, and the company's ability to realize its targets and strategic initiatives, including current and future transactions. Certain factors may cause actual results to differ materially from those in the forward-looking statements, including the risks detailed in the company's annual report on Form 20-F and other recent public filings made by the company with the SEC. The earnings release and the earnings presentation, each of which includes reconciliations on non-IFRS financial measures presented today, can be downloaded from our website. I will now hand over to Trond to review the key developments of the first quarter. Trond?
Well, good morning from me as well, ladies and gentlemen. Going to the page three on the presentation. You see an overview of our key developments in the quarter, our view is that we have a clear, solid quarter and a good performance. Looking on the country perspective, we see a very strong performance in Pakistan and Ukraine, well followed up by Russia. We also see a good turnaround being in effect in Bangladesh. An overall element, I think we are well on our way in 2019. If we look at the numbers, we see a good organic development. Revenue slightly more than 7% up, EBITDA slightly more than 10% up. That is due to, of course, the cost development in the group.
We see corporate cost trending the way we should, also cost intensity overall, as we mentioned in the presentation in February. Cost intensity is decreasing with 1.9 percentage points. Overall, a good start of the year. The numbers are, of course, affected also by the Ericsson settlement, as we did in our focus on enhancing our core. We have been revising our terms of our relationship with Ericsson, redirecting them to help us delivering market-leading DSS architecture across many of our markets the next few years. As a result of that, we have a $350 million settlement that comes into the P&L in the first quarter. On simplifying our structure, we see that we have a continuous and constructive dialogue with the stakeholders in Egypt.
Even though we see that this takes more time than one can be used to in a more Western market, how to organize things, we feel that we're moving along and we are more optimistic this time than before, even though it's difficult to give a timeline on the development. The last part that happened in our just around the first quarter, it was the sell-down of Telenor's stake with approximately 5 percentage points of the outstanding shares. That leaves the free float to around 35% of the total outstanding shares. If we go to page four and look at the operational performance in the first quarter, I'm going to spend a bit more time on this page due to the fact that IFRS 16 is introduced and the way we'd like you to look at the numbers to see apples to apples.
Total revenue, good, $2.1 billion. As I said, 7.4% organic growth with 5.6% declining reported year-over-year, since we have a currency effect of just short of $300 million. If you look at the EBITDA number in the top middle, $823 million comparable to the $854 million last year. With a currency impact of approximately $120 million. Our reported number is $1,298 million. The difference between the $1,298 million and the $823 million is one, the IFRS 16 of $126 million, and the Ericsson settlement of $350 million. That's the two elements that goes into that difference. Going to the equity free cash flow, we're showing $205 million compared to the $334 million last year. The difference between the $205 million and the reported $457 million is two elements there as well.
The IFRS effects is $77 million, the second effect is that we have only get paid half of the Ericsson settlement, so that affects the reported equity free cash flow with $175 million. That is the difference between the $457 million and the $205 million. We also see a good development in mobile data revenue, I'll come back to that, with an organic growth of more than 26%. A leverage ratio, it's still 1.7x, I will come back to that on the calculation a bit later. The corporate costs is $54 million in the quarter, trending exactly as we expecting to come out of 2019, according to what we have guided you on. If we go to page five on the revenue and EBITDA development by country, you see the bridge that I talked about on the EBITDA level to the right of this chart.
If you look at the top chart on the revenue development, Russia is moving ahead very well, driven by equipment accessories and mobile services. Pakistan increase of 87% is driven by a top line growth, and a big part of that is the suo motu, and Kjell Johnsen will come back to that in his run through of the countries. Ukraine has been very successful in their marketing activities throughout first quarter. Those three countries are really driving the top line growth. As you see, towards the $2.4 billion of organic development, then the ForEx element $291 coming down to the $2.1 billion of reported. On the EBITDA same trend line, Russia slightly lower on the EBITDA development due to the fact that equipment accessories is driving the top line. Pakistan and Ukraine is developing well. Pakistan EBITDA development year-over-year with more than 22%, and Ukraine with 27%.
All in all, a very good progress. Going then on page six, we see that data revenue is growing very well, more than 26%, as I mentioned, and you see this in $156 million in the top chart. Ukraine is actually increasing with 83% year-over-year, Pakistan with 94% year-over-year, and Bangladesh with 36% year-over-year. That is really showing that our investment is starting to work. Going then to the EBITDA development, you see that the effect of service revenue coming up and total cost is not going up as much. There you find the effects of the cost intensity ratio improvements, and that leaves us with an organic EBITDA for a score of $942. Then you see the bridge to the reported EBITDA of almost $1.3 billion. With that, I leave the country reviews to Kjell.
Thank you, Trond, and good morning, everyone. I'll take you through some of our key markets, and I'm happy to say that the overall message is that we see continued good performance in actually all our major markets. Let me start with Russia, where we are now quite far into the cycle after the integration of Euroset, which was in place by beginning of August last year. We do see the effects that we wanted to see. We see a focus on value that has continued to drive an increase in the ARPU. We see a shift or rotation out of the washing machine of the multi-brand stores that we were a part of before, towards a much higher proportion to our mono-brand stores, which is helping us to underpin the ARPU and the affinity towards Beeline from the customer perspective.
In terms of our numbers, the ARPU development is going well, despite the fact that there are strong competitive pressures from the regional campaigning that is happening around us. Going into the second half of the year, we also want to stabilize and strengthen the customer base. One part of the rotation out of the gray channels and the washing machine has been to get people's buying patterns to move into the mono brands, and we are well underway to that. Now we need to stabilize the customer base in order to underpin our growth. You see the numbers. We're growing on top line, we are growing in service revenues, and we're also growing in EBITDA. The overall question for the Russian market is how long will those campaigns go on out there? Predominantly two players playing that game against each other.
When it comes to Pakistan, we see phenomenal growth, both including the suo motu, which takes us to 23%+, but also in the underlying growth, which is above 10%, which is an improvement even over the trends of the last quarters. As Trond mentioned, the suo motu will go away. The details are not 100% clear, but we should expect that is as of end of April, approximately. We'll be back to our underlying growth. We are succeeding with our network rollout. I think we are perfectly on cue with the timing of the rollout of the 4G network. We see that the network comes out with very good numbers in independent tests, and we are also quite on track with the upgrades of the existing base stations. We see a growth in the customer base.
To remind you, Pakistan is also, of course, a country with secular population growth of two, three million per year. There is still room for growth there. When it comes to the EBITDA, we're growing well. There is a tax adjustment that means that the margin gets a 1.8 percentage point impact, but the underlying EBITDA is growing quite well. We are going to renew our license in the second quarter of this year. We are in an active dialogue with the government around that. We have brought up a few issues in that respect, and it's important that this process moves on in a most streamlined way. Algeria, on the face of it, a complicated situation with all the political changes.
Inside the company, we are well underway on delivering on the plans that actually have been in place for the last 18 months, which was to upgrade the networks, go more active into Algiers, and to take back the momentum by being a bit more pushy into the markets. We see that the performance is flattening out, but we also see that relative to competition, we are doing quite well. We're doing really well. I would say that in a difficult environment, the organization and the management of Algeria on Djezzy have been able to keep the company well on track and to build more strength in the local markets. We also see that some of the challenges that we've had in terms of rollout of fiber optics and other things are starting to improve. Hopefully that will contribute to the growth going forward.
Likewise, in Bangladesh, Eric and the team have executed on the turnaround. To refresh your memory, we bought Spectrum in Bangladesh some time ago and have upgraded networks afterwards. We have an interesting and good value proposition in the local market. Customers are moving to Banglalink and returning us actually to growth. We are now seeing several months of growth, and service revenues of around 5% is a result that is a significant improvement of where we were 18 months ago. This also filters through to EBITDA. We can clearly say that from where we are now, Bangladesh has executed on turnaround and is becoming a growth company again. Will never be a straight line. There will always be work to be done.
We also see the SMP regulation coming in, and we will actively engage with the government and with the regulatory bodies in how to implement that in Bangladesh. Ukraine, excellent growth, excellent performance. The market has seen a lot of activity from our side. We are a market leader, and we have led on to that. Of course, seeing growth rates of 20% plus mobile service revenues is a phenomenal result. Going forward, we expect solid double-digit revenue growth, but it may not be in the 20s for a very long time. That is an exceptional growth level. Again, we are very positive to the Ukrainian market and expect solid double-digit growth both in revenues and EBITDA. We are also very well on the way with the performance of the 4G network in Ukraine.
Uzbekistan, on the face of it, looks a bit more complicated due to a number of tax changes. If we take away all of the changes, IFRS, MTR, new taxes in the country, we see still an underlying revenue growth of 7.7%, which is a good result. The impact of going out of the SIM-based tax towards an excise tax plus the MTR, that means that we get an impact on our headline numbers, especially on the revenue, but also at EBITDA. In cash terms, we're doing well in Uzbekistan. In a way, these disturbances that you have on the surface, they disappear when you go down throughout the P&L and towards cash. We are quite happy with the development we see in Uzbekistan, and are, I guess, also there very well on the way with the network upgrades and rollouts.
I think that will be the key messages on the countries, and I hand it back to Trond.
Thank you, Kjell. We're going to page 13 of the presentation and the income statement for first quarter. I'm not going to spend more time on above the EBITDA line, but I'm going to just spend some time on the columns as a result of the IFRS 16. The first column is the reported number of the first quarter. The second column is the pre-IFRS 16 number, and the third column is the reported first quarter 2018 numbers. The comparable figures is the first quarter pre-IFRS and the first quarter 2018. Here you can see all the numbers. Looking at the EBITDA, you see that we're reporting $1 billion 298, pre-IFRS, $1 billion 172, and just to be precise, that includes the $360 million of the settlement.
Depreciation coming down mostly as a result of currency effects over the year, and then adjusted a bit the other way on the IFRS 16 effect. That's where we are. Operating profit reported on short of $800 million, $772 million compared to the $354 million, including the $350 million. Net finance coming down. If I compare $151 million with $198 million, with $47 million, really is a part of reducing the debt structure. We settle a lot of our debt in the fourth quarter of 2018, and we see the effects coming in the first quarter of 2019. Profit before tax $609 million reported, $638 million pre-IFRS. All in all, good numbers. Also excluding the $350 million of Ericsson, we still see a good progress coming up. Taxes coming down. Most of that is one-off corrections.
That is periodization between quarters, and that's the reason why you see that we're coming down from $117 million to $75 million. That leaves us with the bottom line number of net profit to be on shareholders of around $495 million reported and pre-IFRS of $524 million. First quarter 2018, we're still affected by our Italian joint venture, and therefore you also see a negative number in 2018. Going to page 14, the continued cash flow generation. I'm just going to say that we see positive cash flow contribution for all of our countries, and you see a big other in there, and that is due to the $350 million from Ericsson leaving operating cash flow of $854 million. The adjustment of working capital and provision is driven by that half of the Ericsson settlement is not paid in the first quarter, and therefore it's in the balance sheet gap. The $175 million is there.
You're coming down to the equity-free cash flow, excluding licenses and pre-IFRS of the $380 million. Going to page 15. Same element there. Net debt development both starting with $5.5 billion at year end. The pre-IFRS EBITDA number of $1,172 million, as you saw in the column of the P&L. That includes the $350 million from Ericsson. Change in working capital is therefore high, also including half of it, $175 million. Here I would like to focus your attention to the MTO cash collateral that is taking out, because as a result of applying for the MTO in Egypt, we had to put a cash collateral for the overall bid, and as a result, we have put down $645 million. That means that after paying dividend in the first quarter as well, we're coming up to $6.2 billion of net debt pre-IFRS.
As you can see on our EBITDA numbers, that leads to a 1.7x. That 1.7x is including the $350 million with Ericsson. If I exclude the $350 million from Ericsson, the gearing ratio would be 1.9x. As we have previously told you, a bid on MTO with 100% pickup will increase our leverage ratio with 0.2%. With the IFRS impact of a bit more than $2 billion, our net debt reported is $8.265 billion. That is a 2.2x gearing ratio, that is also a bit distorted by not IFRS effects for three quarters and one IFRS effect of one quarter, including the $350 million with Ericsson. That will, of course, adjust itself a bit over time. Going to our targets for 2019. First quarter was a good solid quarter with a good organic growth of more than 7% in revenue and more than 10% of EBITDA.
Equity free cash flow of pre-IFRS, as we have guided on $380. If we take out $175 from Ericsson, that takes us down to $205. All of them showing that we are well on our way on delivering on the targets. All in all, good start of the year. Well progressed to deliver on our targets for 2019. With that, I will open up for questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. If you are using a speakerphone, please make sure your mute function is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star and one to ask a question. We will pause for just a moment to allow everyone to signal. Thank you. We will now take our first question. The first question comes from the line of Hervé Drouet of HSBC. Please go ahead.
Yes. Good morning. Thank you very much for the presentations. A couple of questions. Firstly, for Russia. I was wondering, can you tell us if you've seen any change in behavior on what you booked in term of revenue following the VAT hike that happened in January, in Russia? Obviously, you have, I think mobile service revenue is growing at 1.1%. Do you expect there could be a lag of this VAT hike in coming quarters, looking forwards? Second question is again on Russia and about your network in place and how do you believe that with those unlimited data package, how much your network can hold the increase of traffic. I was wondering if you can give us maybe some data traffic increase in Russia you may see.
It looks like there has been as well some discussion from some people at VEON about asking for frequency to be released in Russia. I was wondering when we may expect that to happen, and how that can impact your CapEx, or how you will set the tariff and tariff structure looking forward in Russia. Just finally on Algeria, just if you can give also your numbers shows compared with your main competitors, an improving trend. It's still a very challenging time in Algeria. I just wanted to get your view on when do you believe you can turn around back to positive growth in Algeria? Do you think that could happen this year, or we should be more patient? Thank you.
Let me try to take this one by one here. First of all, we are not directly adjusting for VAT in the Russian market. I think that's an important message. Thus, obviously setting the prices based on the inputs that we see around us. It has been a very important point from the Russian authorities that they would look very unkindly to people adjusting directly for the VAT increase. Having said that, I think the market has been better over the last few years at driving a value agenda and improving the ARPUs. We've seen some reverting to old sins in terms of having aggressive campaigning in quite a few regions of Russia, where we saw prices being dropped by up to 50%. I do believe that that should be coming to an end, although that's an external factor that we don't control.
Within our company, we've been pretty good at driving the big data-based analysis on our customer base. We've seen a continuation of our ARPU growth, also in the first quarter of this year. We are, of course, relying on the behavior of other players in the market to continue those trends. In terms of the focus areas for us is to stabilize now the customer base. Then, of course, we will be very actively monitoring how the rest of the market goes in terms of driving further ARPU-generating activities. When it comes to the network, we have made significant improvements
Last year, the Rostelecom published the data for the network rollout, and we came out as number one on that statistic. We are clearly increasing speed. We have fast-forwarded the swap that is ongoing in Moscow and also expanded the scope for this one so that we build more capacity. Your question to spectrum is a very good one. It's not only a question of having the spectrum or releasing more spectrum, it's a question of being able to fully utilize the spectrum. Some parts of our spectrum still have interference from primarily military use, which sets limitations on how we can utilize the spectrum. That can be different a bit from city to city. We have had situations in Moscow where we actually have the spectrum, and we have physical infrastructure in place, but we have had to run it at relatively low power.
I'm getting a bit technical here, but these are the granular detail that we operate under. In short, we would always like to have more spectrum. We have built a lot of infrastructure, and we have expanded the scope in Moscow to cater for the growth in data usage. We have also executed on a significant improvement, especially in the south, where the network quality has improved quite a lot. I think we're well on the way to cater for the data growth now in the short and medium term. Then, of course, the next big discussion is, of course, how this plays out around the 5G, but that's a little bit down the road, so it's not an immediate issue. If I then can move to Algeria, like I said, on a relative basis, we're performing very well.
We have a good network performance. We have also been quite a bit more aggressive, especially in Algiers over the last year. It's giving good results. I'm confident that we are increasing our market share in the Algerian markets. As you, I'm sure, observe over TV and newspapers, the situation is a bit unpredictable. Of course, all the media will be full of stories about the political situation rather than being a market where you can easily push an advertising campaign. People's minds are a bit distracted by that. Having said that, we are on course for stabilization. I can't give you a specific time for when that may translate into revenue growth, but all other things equal, we should be getting closer to that point during this year.
All right. Thank you. Thank you very much.
Thank you. Just as a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Your next question comes from the line of Onajie Kabajisk of UBS. Please go ahead.
Hi. Good morning. Thanks for taking my questions. I have two, please. First one is quite simple. If you could please update us on the potential non-extension of the Svyaznoy contract or how that's evolving. The second one regards B2B. If you could please comment on the dynamics that you've seen over the past, say, two, three quarters in the B2B market, in Russia, that is, whether they've changed significantly following some changes in shareholder structures and then planned changes in shareholder structures of your competitors, especially. Thank you.
I'm afraid, I think we have to ask you to repeat the first question because we didn't catch it.
Sorry. The first question was regarding, you were saying in the past couple of quarters that you will be looking at potentially not extending your Svyaznoy contract in mid-2019, whether we're closer to any decision on that front.
Yeah. Okay. When it comes to our long-term ambition is to move more towards monobrand and also an online interface through our B2C ecosystems in our interaction with clients in Russia, and for that matter, elsewhere in the group. We are very pragmatic in terms of how we approach retail. We have definitely gone out of the gray markets. We are not a part of these metro station distributions points like before, but we are absolutely pragmatic at working with Svyaznoy. We will, of course, in that respect, also align our contract and our expectations with Svyaznoy towards the objective that we are pursuing, which is to get the churn down, to focus more on value, and getting completely out of the washing machine we had before. I am quite positive that that is possible to do also in a dialogue and in a relationship with Svyaznoy.
Those are the parameters that we give to the Russian management in that respect. The B2B market has generally performed well. Over the last years, we've seen improvements, and we see a team that is actively pursuing both the big contracts like the Yamal contract, but also coming up with new approaches to the market in the SMB and smaller segments, where I think we have a quite strong position. We have seen more and more usage of our platform for the interaction of banks with their customer base, and we are benefiting from that. I'd say the general trends in B2B have been improving in a quite linear way over the last couple of years.
Thank you. If I can just follow up on the B2B, please. Sounds like you're happy with your growth, and the developments surrounding beyond, but would you say in a growing market, is your market share stable? Is it declining? Is it growing? Then the second follow-up question on this, if we look at your fixed revenues and service revenues in Russia, those seem to have improved quite significantly on a sequential basis.
Yeah.
Clearly you've invested money into the fixed asset. Is this perhaps again, driven by B2B, or is this now both B2B, B2C?
It's a combination. On fixed, we actually made those decisions in August 2017, lead times are quite long in this business sometimes. It was about upgrading city rings. It was about upgrading our connections to business centers, where we, through the old Golden Telecom business, had a strong position. We have now revamped that approach, that is leading to positive dynamics. We're renewing contracts, winning some new customers. That has been helpful to drive both our B2B ambition. Of course, when you upgrade these networks and city rings, that is also helpful to driving the core mobile business. In all, I'd say we have strength in our position in B2B. We're doing pretty well through competition. The thing that will be a challenge, of course, in the medium term to longer term is the political approach to the biggest companies.
The biggest companies that are owned by the government are under some pressure to sign up with Rostelecom, that is a fact of life. The good news for us is that we are stronger in some of the other segments, we don't have that much to lose in that top segment of the state-owned companies. Some of them still continue using our services because they have a preference for Beeline over other suppliers.
All right then. One final question, please. The improving trends that we're seeing in the fixed, do you foresee a return back to growth at some stage, or would you see a flattish trend you've reached towards the end of this year as a good level to be?
Our ambition in fixed is to connect more households, not only to drive a fixed strategy. I think as we move along, some of the distinctions we have had been used to in this industry kind of lose their value. Yes, we would like to return fixed to some growth, but that's also as a part of our FMC strategy. We are not building fixed for fixed sake in consumer. We are building it to drive a longer-term FMC position also with other product offerings on top of the connectivity business.
All right. Thank you very much.
Thank you. Your next question comes from the line of Stella Cridge of Barclays. Please go ahead.
Hi there. Good morning. Many thanks for the call. Couple of questions, please. I wonder if you can just update us on the CapEx guidance for the year, and potentially if you've got any sense of what it might cost to do the license renewal in Pakistan, that would be great. The second question would be, I had seen some local press reports in Bangladesh about a potential sale of Banglalink to another telecoms company. I was just wondering, can you let us know if there's any truth in that report? Is that something that you are considering or would consider? That would be great. Thanks.
When it comes to our overall guidance, we haven't given you any targets of guidance on CapEx as such. What we have said is that as a result of slightly more needs as we see in Russia and some in Pakistan, on a like-to-like basis, except for the year-over-year, we do see a slight increase compared year-over-year percentage-wise. Slightly higher CapEx revenue this year than last year, but it's still within our careful guidance, because that's the guidance we're giving. On the Bangladesh rumors, yes, we are aware of the rumors. As usual, we don't comment on those rumors. We will address the market if there is anything to address the market on, no comment on those speculations on our part.
Okay. If you could perhaps add any expectations on the cost of license renewal, are you including that in your overall CapEx guidance? I guess just maybe to ask again on Bangladesh. Obviously, it has been challenging quite a few quarters there, but obviously you made the investment there and you commented yourself today that you see this as a rebound. Obviously, just the question from me would be, do you see that business, do you see it now as having more potential, sufficient potential to really make returns on those investments, just within the context of whether you see it as a core part of the VEON group as well?
Just before Kjell gets into the answer to the questions. On the guidance, just to be very clear, we are guiding before license. Over to you, Kjell.
Yeah. Let me start with Bangladesh. We have, I think you've heard over the calls the last few quarters, been a little cautious on the expectations of Bangladesh, and I'm happy to see that we have been able to return to growth. I think fundamentally in a country with secular population growth, that there are some parameters in place also for longer term growth. When we are a little cautious, it is because of the position in the markets, and there is a bit of uncertainty on how this will play out in the longer run. I don't see any reason in the short term why we should not continue to have a decent growth throughout this year. I just don't want to raise expectations too high in the longer term on the Bangladesh markets. Again, we work with the government on the SMP.
There are some positive things happening around our business. We are definitely more optimistic about Bangladesh now than we would be 12 to 18 months ago, for sure. When it comes to Pakistan, our position is relatively straightforward. We think the license should be renewed at the last renewal price, which was $291 million. That already represents a significant increase from the last renewal, given that we are actually operating in rupee terms in Pakistan, and the rupee has depreciated quite significantly since the last renewal. We think we have a strong position for asking for the renewal to take place at $291 million, but we have not received the information memorandum at this stage. We are carefully monitoring the situation in Pakistan.
Okay, thanks. Extra color appreciated.
Thank you. Your next question comes from the line of Alistair Jones of New Street Research. Please go ahead.
Hi. Just following up on Russia, just a bit of, I guess, the sort of big disappointment from my perspective was that your data revenue slipped into negative territory, data revenue growth. It looks like traffic increased, but it was sort of pricing that obviously came down. I know you've mentioned fairly irrational movements from your competitors. Is there a sense that you sort of believe that growth can sort of accelerate from here and actually data revenue growth was maybe hit more on a one-off basis and there could be some recovery in future quarters? If you can get some clarity on that would be great. Secondly, just unfortunately a bit of a dry topic, but just on the cash flow that you've described in the release. One thing I'm sort of confused by is the IFRS 16 impact.
I would have thought that's merely an accounting issue, no cash impact as a result of IFRS 16. If you can clarify that. Just finally, I know you got about $270 million of negative working capital, and most of that is related to the Ericsson issue. The balance, which is about $100 million negative, is quite a big swing from sort of $100 million positive in the first quarter of last year. I was just trying to get a clarity as to whether that is going to turn around in the next couple of quarters or any specific items around that. Thank you.
Let me start with Russia, and I am sure we'll handle Trond Westlie afterwards. We have been quite successful in upselling on our base and driving that kind of performance through to the ARPU over some time now in Russia. The Russian market seems to go a little bit in waves. If you remember a couple of years ago, three years ago, there was almost this full speed on the unlimited, and then the market kind of stabilized and started operating a bit more rational. We've had now a round with quite active campaigns in multiple regions of Russia, which has dampened the ability to drive the ARPU growth in the markets. What do I foresee? I think logically you would come out of that cycle. Exact timing of that is, of course, not for me to guess.
I think logic would dictate that we would get to that point, and hopefully sometime during this year. That is just a kind of feeling from me from having been exposed to that market for many, many years. I think it's going to be painful for the red player to do this for a significant amount of time going forward.
Going to the cash flow. Just to comment on your latter question first on working capital. Yes, I agree. It is the reverse change from last year on the working capital. Excluding the $175 from Ericsson. That is more sort of the floating nature of operation and when you pay and how you pay. It does not affect our guidance for the year as such. Of course, some quarters you will find payments before or after the quarter end, and as a result of that, you will see a certain amount of swings. When it comes to the IFRS 16, you have my 100% wholehearted support that I agree that when it comes to the balance sheet, the P&L, that should be affected, but not the cash flow.
They have made changes to the definition in the cash flow statements as well, and that means that it has a positive effect in the operational cash flow, and then it's a reversal in the financial part. It affects the operational cash flow and our equity free cash flow definition positively, but it reverses under the funding or the financial part of the cash flow. Net effect coming out is zero, but it is affecting the specifications of numbers in the cash flow statement.
Okay, thank you. It's right to say, just to clarify, the equity free cash flow target of $1 billion, the comparative amount is $380 million.
No.
Not the $457 million.
It's the 205. Sorry. That's correct. It's the 205 plus the 175 from Ericsson-
Yeah
that relates to the $1 billion.
Okay, perfect. Thank you.
Thank you. Our final question comes from the line of Rahul Bhatt of JPMorgan. Please go ahead.
Hi. Thank you for the call. I just had two short questions. Firstly, if you could just provide any color on the GTH MTO process. What exactly are the approvals that you're waiting for, and what makes you more confident this time around? Secondly, on your debt profile, in terms of the currency mix, I just wanted to check on the FX derivatives. You've got $1.2 billion of dollar debt that you swapped into rubles. Is that plain vanilla swaps or there's put call options that have a ceiling above which you are basically unhedged on the rubles above which you're unhedged? Thank you.
Okay. When it comes to the GTH, as I said in the beginning, we have submitted our request for an MTO. That is with the Egyptian FRA, they are in the process of evaluating that. We haven't, as I said, heard the final decision on that yet. As a result of different Egyptian stakeholders having a look at this, as it was last time or our last attempt on the MTO, we are having continuous and constructive dialogue. I will not go more into details of that, but it is really our interpretation of the content of that constructive and continuous dialogue that leads us to be more positively, or have a more positive view than last time. As I said, as a result of being in this dialogue, it's difficult to give you a timeline.
Going into the debt profile, when it comes to the currency swaps, I will not go into the details of the structure of the swap, but they are fairly plain vanilla. We are not doing any exotic elements on our structuring. As we said, both in our third quarter reporting announcement, the fourth-quarter announcement, we said that we were increasing our ruble exposure overall, and that has been done very much by derivative structures.
Understood. Can I just, on the GTH MTO enhance, is one of the things that are part of your negotiation also the litigation on taxes? Is that part of the discussion, or is that something separate and that can happen even after you take GTH private?
The significant question last time, a year ago, was part of the Egyptian Tax Authority raising or sending some letters regarding the taxes. Yes, part of the element is, of course, clarification of GTH legal situation as such, and that discussion is run by GTH management. Of course, we are informed about the involvement as well as participating in regards to also have an effect of the MTO.
Understood. Perfect. That is very helpful. Thank you.
Thank you. I'd now like to hand the conference back over to Maximiliano to close.
Thank you very much. There are no more questions, hence we can conclude today's conference call. Thank you everyone for attending, and please contact the IR department for any follow-up question you might have. Goodbye.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.