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Orange (NYSE:ORAN)

H1 2013 Earnings Call

July 25, 2013 2:30 am ET

Executives

Stephane Richard - Chairman, Chief Executive Officer and Chairman of Strategy Committee

Gervais Gilles Pellissier - Chief Financial Officer, Executive Director of Group Finance & Information Systems, Chairman of Treasury & Financing Committee, Chairman of Risks Committee, Chairman of Tax Committee and Chairman of Investments Committee

Delphine Ernotte Cunci - Deputy Chief Executive Officer

Pierre Louette - General Director and Executive Director

Benoit Scheen - Senior Executive Vice-President of Operations in Europe

Analysts

Nick Delfas - Morgan Stanley, Research Division

Antoine Pradayrol - Exane BNP Paribas, Research Division

Jakob Bluestone - Crédit Suisse AG, Research Division

Nicolas Cote-Colisson - HSBC, Research Division

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Vincent Maulay - Oddo Securities, Research Division

Stephane Richard

Good morning to everybody. Welcome to the presentation of the H1 results of the Orange Group for 2013. And I think we can now call the company by its name. First of all, I would like to emphasize the major point -- the key points for these results, and we'll talk about the performance of the group in the first half of the year.

First of all, commercially speaking, we've had very good interesting figures for the first half of the year, with good performance from the mobile market in France and Poland. We'll come back to that in a few minutes. France, very good results there. Good performance from Spain as well.

And the second major point I'd like to talk about is the speeding up of the results and the efforts which we are making in terms of changing our cost structure in the group. Our aim was to have an annual reduction of EUR 600 million, and we've achieved the 2/3 of this figure already at the end of June. So I think that we will be beyond this figure of EUR 600 million by the end of the year.

If we look at some of the key trends underlying these figures. First of all, let me start with the 2 countries, which for different reasons, in fact, are what everybody else is focusing on.

France, first of all, H1 in a market which is a very dynamic market. In fact, we have demonstrated the fact that we can really play our role to the [indiscernible] on this market, I think 2 outstanding projects, the Open quadruple play, Sosh and the Origami package, which has been redesigned. And we have positive net sales over the first half of the year. And even for the second quarter of 2013, we've got the strongest growth in a quarter for customer base since the arrival of the fourth operator.

And in Q2 2013, we had a 20% market conquest, which is slightly below our medium-term objectives, but nevertheless, it is up compared with Q1, up 4 points. And this is supported by the development of our fiber base and the good figures which are coming in from the Livebox Play.

So all of this has meant that we've been able to preserve our market share. And we're fully in line with what we said in terms ARPU going down. ARPU, which should be down 12% to 13% over the year, a reduction in ARPU therefore, with a reduction nevertheless, in the churn rate.

Let me also point out to you that at the end of 2013, roughly 90% of our major customers will have an offer, which will be launched after the arrival of the fourth entrant on the market there. I think by then -- by the end of this year, the arrival of the new operator on the market will really have been taken into account on the market overall.

So the performance for the cost structure modification overall for France has been very positive. As I said, we've been aiming for a total reduction in direct costs of -- a total reduction of EUR 120 million.

Poland, this is a market which is -- or has been suffering a great deal from repricing. This was a major problem last year. And it led us to undertake pretty energetic plans for last year to overcome this. But we've got encouraging results coming in. The sales are above expectations. And as in France, we have net sales which are particularly on the mobile contracts. So these are above expectations, and these are very encouraging results, indeed, especially compared to -- with the figures for the same time last year, bearing in mind, of course, that there was the positive effect of the Euro 2012 competition last year.

If we look at the rest of Europe, pretty positive results there, with 5 countries out of 8 growing in terms of those figures and extra regulatory affairs, Spain, Romania, Luxembourg, Moldavia, Armenia and the Dominican Republic as well.

We have growth recovering in Spain. I would say outstanding results there for the group in Spain, with sales up 4.5% excluding the regulatory affairs in Q2. And this is a very important figure for us. It's actually a record which we are registering here, plus 50% conquest on broadband. Excellent figures there. I think this result is absolutely outstanding.

In AMEA, we have a 4.4% increase in Q2, slightly above the figure for Q1, which was at 3%. And this is driven by some countries, in particular, Côte d’Ivoire, Senegal, Egypt and Guinea. Egypt, in fact, had very good results in the month of June. There was a 10% increase compared with 2012. So this was for Egypt in June.

Once again, we have great success from the mobile banking service, Orange Money, and the number of customers there has grown by 30%, now standing at 7.4 million.

Just a few points to give you about the U.K., very good results from Everything Everywhere; very strong results in EBITDA, which is up 9%; and at the end of June, roughly 700,000 customers for the 4G service, which are bringing in extra ARPU of roughly 10% compared with the 3G.

If we look at Belgium, where we've had a few more problems. And obviously, the regulatory situation in that country has made things very difficult for us from the beginning of the year.

Mobistar is really between a rock and a hard place, between the FX and mobile operators, I don't want to go into all the details. You may have questions on that later on. But let me just point out that the regulatory problems and weaknesses in this country are really having an impact on the balance of competition. We've seen a very strong decrease in the mobile prices, which are now being used as an attractive price to bring in customers. This is what the fixed players are doing. Whereas the triple-play prices, ADSL and cable, are the highest there of all the surrounding countries. So this is really leading to problems, and we do hope that the situation -- the competition situation will balance out in Belgium in the short-term.

On the enterprise side, the economy in general, particularly in France, of course, is suffering, generally speaking. And therefore, this has had an impact on our sales figures, on our revenue. However, our market share and the revenues from the cloud are continuing to hold steady. For the cloud, the figures have gone up by 26%.

Overall, for H1, and I think this is definitely the good news to give you, the EBITDA margin for the group has gone down very slightly, but it's only gone down by 1%, which is much better than the figure which we had in H2 2012, when the figure went down by 1.6%. So I think that we really are looking forward to our landing -- the landing which we're planning for 2014, with our target of EUR 7 billion operating cash flow for the end of this year. And we're already at EUR 4 billion cash flow, EUR 4 billion for the end of June. So we have achieved over 67% of our target already.

I'll say a few words now about the marketing initiatives, which have reinforced the main markets where we operate. Particularly, in the latest first quarter, I talked about France, Sosh and Open. We have 1.4 million customers for Sosh, 3.8 million for Open. Real successes there, not just in France, but in most European countries as well for the Livebox Play. This is a product which was launched in February, and now we have 500,000 customers using this.

One interesting figure to look at is the 4G figures. It's still early days, of course. But I can tell you that at the end of June, we have 250,000 access customers using 4G on our French network. And these customers have usage of the 4G with 50% above of that other customers and the ARPU is 10% up 2 months after its launch.

Now these are figures which we have to be careful with. Of course, we're going to be using the 4G, putting the 4G on the market for the past few months. But these are very encouraging figures. And we launched a convergent offer based on Sosh with Internet and the TV access. And now the aim is to have 150,000 customers at the end of the year.

And finally, we launched a service which we called guaranteed 24-hours, which really plays on the differentiation between the premium offers with excellent services attached to this offer so that we can stand out from the low-cost operators. And we also launched a new mobile service called joyn in June, which I announced back in November last year in the hello show.

If we look at Spain. We have the convergent Canguro offer, which was launched in April. And we now have more than 220,000 customers on the 4G side. We launched at the beginning of July. We launched the 4G there in Spain with the aim to cover more than 20% of the population at the end of 2013. And we are the operator with most sites there. And we are pretty certain of holding or sticking to our target of 0.5 million customers in 1 year.

In Poland, we have the low-cost Nju brand, which has started off over 80,000 customers there in 3 months. And one interesting point there is that 1/3 of the customers are Nju customers. So this is really a very good way of winning back customers.

For the rest of Europe, the Animals offer, which has been launched in Slovakia, is doing well -- doing very well. The Animals have 11 million customers.

We've got the Go Europe package, which includes substantial reductions in the roaming parcel, which were decided on by the EU last year. And the aim is to sell at least 1 million Go Europe packages this year and to double the traffic on this. And I think that we are even slightly ahead of the target for this product.

And let me point out again that we've launched a new TV, pay-TV service in Romania in June with DailyMotion -- working with DailyMotion. And there, too, the launch has been extremely encouraging.

For Africa, at least, we are continuing to roll out the 3G with a spectacular increase in the number of Orange customers who use the data services. We have an increase of 84% in the number of these customers compared to 2012.

And then I talked about Orange Money. If I could just talk to you about the average monthly transaction volume figures, we've got EUR 160 million there, EUR 160 million. And really countries where the Orange Money services really significantly changed the habits of -- the transactional habits of customers.

If we look now at cost reduction because this is one of the major contributors to the figures of this half year, which really demonstrates that the group is totally committed to mastering its cost structure, both direct and indirect costs. And as I've said, we have a target of EUR 600 million savings for 2013. And you will see on the diagram on Page 6 there that we've already achieved a figure of EUR 203 million, EUR 83 million for indirect costs. The cost savings, in fact, speeded up in the H1 of 2013. As I said, EUR 83 million reduction on indirect costs, with EUR 27 million coming to us in Q1. We've really been very good on tackling the indirect costs and the NCR cuts as well.

The main contributor to these reductions is France through 2 main levers. First of all, reduction in headcount. We have a reduction of 1,800 people in France or full-time equivalents, though we are working hard on this in France. We're working on the part-time people as well, plus the departure programs there for the seniors in the company. And we've also done very well in terms of the Chrysalid plan, the operational efficiency plan.

After which, the reduction in headcount has not been so much a part of our financial project, but there was an operational project working on quality of service. In fact, I can give you one example of this. There's been very significant reductions in the number of calls we receive in the call centers and also roughly 10% reduction in the redirect to all call centers, the people calling up several times -- customers calling several times because they've not been satisfied with the outfit the first time around. So this really reflects the quality improvement. And thanks to this, we've been able to contribute even more to the overall effort in keeping a lid on the cost structure.

If we say a few words about the 4G now. This is one of the major priorities of the group, being -- we want to be one of the leaders in 4G fixed and mobile. So for 4G, this has been launched in 7 countries so far, France, Spain, Luxembourg, Romania, Moldavia, U.K. and the Dominican Republic.

Now I talked about the U.K. just now. And we are the only company offering the 4G in the U.K. So we cover roughly 60% of the population. And we have excellent performances on our 4G network with ultrahigh speed offers, of which are really far better than those of our competitors. We have an extra ARPU of roughly 10%, as I said.

In France, we are far and away leaders in the rollout of the 4G. We have over 100 towns and cities which are covered by the 4G. We have 3x more active sites than our closest competitor. And we have theoretical speeds which are way beyond those which our competitors could even hope to achieve. And this is thanks to the quality of the spectrum which we use. And as you recall, we started for a [indiscernible] 18 months ago.

So for Spain, we launched the 4G in the beginning of July in Madrid and 5 other cities as well.

For fiber now, fiber optics, we have a EUR 2 billion investment for 2015. If we look at where we stand at the moment compared with last year, it was double the number of customers who are connectable. And we've also doubled the numbers -- the number of customers who have been connected. We now have 239,000 customers. When I came into this job in 2010, we had 60,000. Fiber optics really give us an average increase in ARPU of EUR 3, thanks to the content.

As for the 4G, our strategy, which is to be the leader in the rollout of ultrahigh speed in order to provide better services to our customers. This strategy is working. The initial results are extremely encouraging.

For fiber optics there, we have a market share of 55% now. And these figures are very encouraging. They're very, very good. They demonstrate where we stand vis-à-vis our competitors, some of whom are extremely aggressive on prices in order to promote their product. But we have, as I said, a very good market share of 55%. We are a legitimate incumbent operator.

In Spain, let me remind you that we signed an agreement to roll out those fiber optics there with Vodafone, EUR 6 million in total, with an investment of -- through the investment agreement with Vodafone. And we have also an agreement there with Telefonica to have access to the vertical fiber optics. With these agreements, the aim is to be able to connect up to 800,000 households at the end of Q1 2014. We are continuing to work on ADSL, of course.

And then finally in Poland, where the fixed high speed, we have 2.3 million customers who can be connected up. This is through the VDSL, principally. And we have 260,000 customers who have actually been connected up already.

At the beginning of 2013, we also -- we pointed out some operating objectives. I'm not going to give you the details of the table. But I would like to underscore the fact that mid-year 2013, as you can see with the green lights here, we are in line with virtually all of our objectives and quite ahead in certain cases.

If you take the increase in data of revenue, 22% in H1, the annual objective is 10%. The billions [ph] as our mobile market share in France, 36.2%. We're well above the objective, which is 35%. [indiscernible] we mentioned fiber, 4G. We mentioned Orange Money, too.

Regarding something that's a little more complicated, I'd like to say a word about the LiveBox Play. We're somewhat shy of the objective, which is the success of growth sales in broadband using LiveBox Play. We're somewhat shy of that. This essentially ascribed to the fact that we had to cast particular efforts on low-end offers without the LiveBox Play to respond to the aggressiveness of one of our competitors who has put promotion upon promotion and offered great deals. So we could not offer with Livebox, and hence, the effects of the [indiscernible] to date.

Also, we decided not to cut the prices of our premium propositions, in which we -- also the LiveBox plays. So that, of course, preserves the future value of the market. That's how it was -- that's how it's panned out.

Now a word about the 2013 guidance. The quality of these H1 '13 results allows us to clearly confirm our operating cash flow above EUR 7 billion in 2013, that's the first very important item.

As far as balance sheet is concerned, we'd also like to point out that our net debt to EBITDA ratio is -- will be tending towards 2x at the end of 2014 and will be around 2.2x in 2013. You must construe this ratio apart from the impact of a tax dispute that's going to start recurring. And 2 days ago, our appeal was turned down, but of course, we're going to appeal again. So this is a significant tax dispute, significant tax -- a substantial. Gervais Pellissier Will give you the minute details of the tax dispute.

The Montreuil court sentence that we have an appeal for will lead us to cash out EUR 2 billion by the end of July. And of course, it will have an impact on the ratio. But apart from this one-shot impact, which has been on provision for a long time anyway, our financial balance sheet discipline will, of course, play their role.

This balance sheet discipline of ours and the confidence that senior staff has in meeting the effective [indiscernible] EBITDA at the end of December 2014 lead us to fully confirm our dividend payout policy, with dividend at least EUR 0.08 per share with an interim dividend that's EUR 0.03. That will be settled on the 11th of December.

As far as portfolio of businesses is concerned, we have decided to examine our operations in the Dominican Republic, which could lead us to consider potential buyers, which I'll keep you abreast in a potential presentation.

Okay. Before handing it over to Gervais, I would like to close the presentation by stressing the 3 key highlights of H1 '13.

First, sharp acceleration of the efforts cast on our cost structure. The objectives for 2013 will probably be exceeded at the end of the year. And the performance and cost reduction was quite notable in H1. And this means that we are well underway to stabilize EBITDA next year.

Second thing I would like to underscore is the very encouraging startup of 4G in the U.K. and in France. This demonstrates that there's appetite on the customers' side. And we can create a value with this ultrahigh speed proposition and the success and the conquest of share [indiscernible] of high-speed fiber in spite of tough competition and the significant addition in ARPU.

That is what I had to tell you. All this brings me and my staff to be reasonably confident and fully mobilized to meet the [indiscernible] in 2014. It's well within reach. And the demand -- the dynamics we have in H1 '13 regarding cost structure and commercial performance enables us to believe that this 2014 [indiscernible] is indeed quite achievable.

Let me hand it over to Gervais.

Gervais Gilles Pellissier

Thank you, Stephane. I will now comment on the first half financial and operational results. We're on Slide #11. You see here the main aggregates. Regarding our revenue trend, [indiscernible] minus 4.5% in H1 with regulatory impact still weighing in France and in Europe. The good news is that in the [indiscernible] end of the cycle of [indiscernible] cuts, there will be fewer reductions due to regulations moving ahead. In fact, there's still some uncertainty regarding roaming in Europe. And we have already factored all that into our operations. And there's also the macroeconomic impact, whether it be in France or in Spain in particular.

Second thing is that despite this deteriorating revenue trend, there's a decline in H2 that's somewhat greater than in H1. Nevertheless, we are containing margin erosion, that's the margin erosion, and we're even doing a little bit better in Q2 than in Q1.

Against this difficult backdrop, as Stephane said, we maintained investments, a 1% rise in investment in absolute terms, which is far from negligible, whereas there's a lot of pressure there on sales. And in spite of that and with the work done on our cost structure, we can meet our operating cash flow for the full year because we already have EUR 4 billion in H1 of the EUR 7 billion that we've committed to regarding the full year.

Regarding net debt or EBITDA, I'll come back to that later on when I speak about the tax dispute. But the tax dispute itself exerts pressure on the ratio of -- it raised by 0.15%. And that, of course, will be factored into the full year account. Because since the settlement is on the 30th of July, it's not in our books for the 30th of June.

Regarding the details. Here, we are moving on to Slide 12. In France, revenue was down 4.6%, excluding regulatory impact. It still has the impact of the repricing in our mobile customer base, but that is tapering off because 90% of our customers are expected -- the tariff post-Iliad launch.

In Spain, we still have solid growth. But there are 2 of the repricing matters and the ARPU decline is comparable in Spain to France. There are gains in broadband that make it possible to have growing sales, even if you consider regulatory impact. And we're probably the best performer on the Spanish market in that regard.

So in Poland, we also have tariff cuts, reductions and that, of course, has consequences on revenue, mobile revenue. And in other European countries, well Mobistar, I mean, for a specific point, other countries grew slightly past the Middle East, all grew by nearly 5% with very positive growth levels in the countries such as Senegal and Côte d'Ivoire countries, where mobile business has reached maturity.

Regarding Enterprise, as mentioned, well, they affect consumption. Actually, due to the macroeconomic situations [indiscernible], and that explains the pressure exerted on revenue in H1 for enterprise.

Slide 13, EBITDA. As mentioned, EBITDA is contained towards the erosion under 1 point down essentially, on the strength of the efforts made on costs. Direct costs were down 6%, and indirect costs were down by EUR 130 million with significant improvements regarding cost of labor, our network operating content on G&A as well. And here, we need to point out the performance of Orange France, which accounts for virtually all of the groups [indiscernible] others have, indeed, but this is offset by increases in countries where sales have been rising.

Regarding the cost of labor, OpEx for the first time ever, our labor OpEx went down due to the staffing because we have savings greater than the increase -- than the slight increase in payroll expenses in France, oustide France we're at 2.6% in average of payroll expense right. And outside France there can be inflation in some cases, not that we're more or less generous in our pay policy, depending on the countries. It's because inflation varies from 1 country to the next. And in emerging countries, inflation is rather high, and that explains the rise in payroll expenses. So we saved EUR 153 million H1 in labor OpEx ascribed to the effect of the part-time senior -- senior part-time plan versus EUR 79 million last year.

Regarding CapEx, you'll see the geographical breakdown here. As Stephane pointed out, the 2 priorities are 4G and fiber. But if you look at this under the surface, you can see that all the countries have slightly increased their CapEx. There are 2 exceptions. Enterprise, their CapEx has to do with customer contracts. There is less sales with the customers, so there's less CapEx. We spend CapEx on other customers contracts. And the other one is rest of the world. There, major investment programs in submarine cables and 3G deployment were essentially focused on emerging countries last year in the programs, so are less ambitious this year despite slowdown there in 2013.

Moving on to this tax dispute, that Stephane broached upon and there is a specific release by Orange. This has to be put into the accounting and tax context of the France Télécom group, which is now Orange. In 2000 to 2002, our group accounted roughly EUR 20 billion in losses. EUR 20 billion in losses, gave rise to EUR 9 billion in potential tax savings, due to the fact that we could absorb future profit with the losses incurred.

But as most of you know, it is difficult to coordinate the legal and accounting organization of a group with its tax organization. All groups have that problem, and that problem has to do with the French organization only. And the French intermediate holding Cogecom recorded a major portion of these losses. But up until 2005, the tax administration did not recognize the way in which provisions were calculated for asset impairment, whereby we could deduct the losses. The administration has changed its calculation systems since then, so that's the way it was. There is no deductibility, although the provisions accounted for actual losses in the group's business.

There has been a restructuring of France Telecom conducted from 2002 onwards and many things have been done, including the legal streamlining. There were 1,500 legal entities. And in the streamlining effort made, there were companies that were bought all over the world. So all this was streamlined. And the holding Cogecom was dissolved and put into France Telecom SA. From an accounting standpoint, we had to take over the provisions that has been accrued and in order to avoid double taxation. Since the provisions could not be deducted when they were accrued, the group considered that they should not be reintegrated when they were taken over. So they were not to be considered as profit since they cannot be deducted when they had been accrued.

And that is what this tax dispute with the administration is all about, following a tax audit that we were expecting. In fact, they did not recognize the situation. It's peculiar or unfair double taxation situation. I mean, there was no connection between what happened before 2005 and what happened after 2005, considering that there was an after and a before. And there was a comparison between apples and oranges, hence, the dispute since the tax audit in 2010.

Nevertheless, out of caution, the group has been communicating on this. You have the information in our reference documents since the closing of 2010. And we built up provision for the risk, taking into consideration of the quarter tax in advance both in our P&L and in our balance sheet.

So since 2010, the amount that we have paid out temporarily to the administration have been considered as tax spew amounting to EUR 1.7 billion for the main portion and there are -- there's interest of, I think, EUR 400 million. So from a tax standpoint, this has to take place because it's legitimate and the group has the right to have this tax savings.

Also, the question has to do with -- regarding the financial management of the group. Yes, because if we hadn't done the EUR 2 billion, it would have to be cashed out from 2008 to 2010. But actually, this was financed at 4.8%, which is below the average cost of the group's debt.

So of course, it appears as a rather sudden event, this court ruling. But at the same time, in terms of the management of the company, it was a good decision to the extent that we have not lost. The administration has not requested any damage or compensation or penalties. And the administration and the court recognized our good faith. And so we do believe that the Administrative Court of Appeal in Versailles and [indiscernible] will prove us right.

Nevertheless, while we're writing up do tax leads to a mechanical deterioration of our net-net over EBITDA ratio because, of course, the translation of a line in the balance sheet amounted to EUR 2 billion has a 0.15 impact on the ratio. I believe that the market and the analysts has well identified the dispute. The judgment that people had about the success potential may have varied.

But it's also fair to say that this is early days, we're in the infant stages of the procedure. There's 2 more instances of appeal to reach for the end of the story. And the end of the story is by 2017. So EUR 2 billion is an opportunity. Someday, Orange will be given EUR 2 billion, and we must consider that as an option. That's part of the group's value.

Okay. Now moving on to net profit. So net income is not impacted by the tax dispute, by any stretch of the imagination because it has been factored into the results at the closing of 2010, and even in the closing of the books in 2005. So net income is down due to the pressure on EBITDA and due to the fact that we had to write up provisions to the tune of roughly EUR 400 million regarding the value of our shares in Mobistar as the main item. There are pluses and minuses, but that's the bulk of it all. And that explains the price change from last year.

If we take a look at debt as of 30th of June, before the EUR 2 billion, do not forget that the group has continued to alleviate its debt by EUR 1 million in H1, as pointed out in the bar chart on Slide 19 here. And we still pay out the dividend, and we still have the same expenses. And there is a slight increase in WCR in H1 as always. So we have 2.21 at the end of June. And we believe that the ratio will stay like that at the end of the year. And it will increase roughly 0.15, taking into consideration the EUR 2 billion paid to the tax administration on the 30th of July.

Our debt structure remains at the high level of liquidity to face up to events such as what I just described. It would also improve maturity above EUR 4 billion. The next one in 2014, it's already partly pre-financed. As of 2014, there is no amount to be paid above EUR 2.9 billion. Compared with the group's operating cash flow, you see that we are quite cautious indeed. And that probably places us among the best-in-class in the telecoms industry in Europe, which means that we still have our ratings, although it's quite likely that the rating agencies may scratch their heads, following the EUR 2 billion element in the taxes. Which is why we've improved the maturity of our debt, 9 years, 1.5x greater than that of other large groups in the telecom industry in France. And it's 1.2x, 1.3x greater than that of the European group.

Now I'll skip over the country breakdown, and I will say a few words about France and Spain now. In France, as Stephane pointed out, H1 was good in terms of the business. Nevertheless, it does not fully reflect on the top line, because the top line is impacted by the effects of repricing, which carry over from 2012, 2013. There will be less in 2014. The good news is that in spite of the pressure on sales, sales shall remain under control. Because today, we can confirm that the decline in ARPU, in March we've said that it would be anywhere between 12% and 13%. And now we can say that it will be around 12%. So the second quarter did not bring any bad news regarding the decline in ARPU over the full year. But the 12% decline in ARPU, of course, described through the -- what reflects in mobile sales decline.

And also the dynamics are not what we expected regarding broadband orders. Broadband sales are somewhat shy of our expectations. And all this explains the 6.8% decline -- 4.5%, excluding regulation. The good news is with EBITDA. You'll see that EBITDA is down a mere 0.3%, virtually stabilized on the strength of the major efforts cast on Orange France's cost structure. Delphine Ernotte and Claire Roblet are -- sitting by my side here and will be happy to entertain the questions you may have on structure -- on our cost structure. Regarding business proper, well, the mobile market share statement is good, despite increase in the network market share, which has to do with the development of our Iliad partner. But I mean, we can't complain about the fact that our network is being used, we can't complain about that.

And there's the improvement in mobile contacts for private individuals, that is what matters most to us. If you take a look at 4G, which is starting up very handsomely, and we believe that mobile performance will improve in the coming weeks and months.

We have sustained our growth in the top line, 1.6% year-on-year, excluding regulatory impact. This is the one country which is still suffering considerably in economic terms, macroeconomic terms. All of this [indiscernible] if you exclude the regulatory impacts therefore. And in Q2, we're at 2.5% growth, with the total for the H1 of 1.6%.

We're still keeping a good control of costs there and now for the whole of the business EBITDA is 23%. So we're not back to the spectacular results over the long-standing and emerging countries. But nevertheless, the improvement there is significant compared with what we've seen over the past few years. So even when you are right at the bottom of your hole, as the Spanish team has been demonstrating over the past 2 or 3 years, we can still do very well. Very good results in terms of the fixed results of the revenues there have grown by 15.4%, but Stephane has already given you the main figures.

The final table, which I'd like to comment on are the figures for Everything Everywhere, which we commented on yesterday in line with our plan doing very well for 4G. But the rest of the business is doing well too, suffering slightly with prepaid. But nevertheless, excellent performances over 4G is really driving the performance of enterprise and activity as a whole. And we have EBITDA doing well, compared with the time which was presented in 2009 [ph] Deutsche Telekom and [indiscernible]. So we have a lot of synergies working there. It's taking time to implement these synergies. Don't forget that the British market is one which have an extensive or major commercial expenditure. But overall, the performance is satisfactory with 2.6% growth.

Thank you very much indeed. And we are now available to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Nick Delfas, Morgan Stanley.

Nick Delfas - Morgan Stanley, Research Division

Maybe you could talk a little bit more about the French mobile service revenue performance. And I think you mentioned that the ARPU has stabilized Q2 versus Q1, I wonder if you could give us those figures? And speak also a little bit more about how you see the evolution into 2014.

Stephane Richard

Delphine?

Delphine Ernotte Cunci

So on the French mobile revenue, the figures are minus 8% in H1. And what we see is that our proactive action on our base, the fact that we proactively repriced such possible base. That's why, nowadays, end of H1 more than 70% of our contract base is on offers plus for insurance launch, make us more confident on the ARPU evolution next year. So we expect it to be around minus 8%. We'll have the queue of the reprice that we expect more than 90% of our base to be repriced plus free entrance at the end of the year. And along this 80% -- 90%, more than 70% on 2013 offers. So we think that we made a big work on our customer base in order of course to reduce turn but also to stabilize our EBITDA erosion.

Nick Delfas - Morgan Stanley, Research Division

So could you just repeat that? So you think 70% will be repriced on 2013 offers by when?

Delphine Ernotte Cunci

By end of 2013.

Nick Delfas - Morgan Stanley, Research Division

Okay. And ARPU in Q2, you said on the front page of the press release is stable compared to the first quarter.

Delphine Ernotte Cunci

Yes. We have a switch between Q1 and Q2. In Q1, we had the plain effect of the EUR 2, 3 offers and also the EUR 9.9 [indiscernible] offers. And we managed to, by reacting on those open and such offers, to balance this effect. So we had negative net adds in Q1 and positive net adds in Q2 in order to counterbalance the last of the beginning of the year. And I just want to add the fact that the regulation effect will be decreasing in H2 compared to H1 as well. Also, in full year 2014.

Operator

We'll now take our next question from Antoine Pradayrol from Exane BNP Paribas.

Antoine Pradayrol - Exane BNP Paribas, Research Division

Two questions, please. The first one on the fixed line revenue trends. Can you tell us a little bit what you expect for H2 2013 compared to H1 2013 and also for 2014? I mean, do you reiterate your comments on fixed line revenues getting better, even though the broadband side is a little bit weak? And the second one -- that's in France, obviously, and the second one is on Stephane Richard's comment that he was confident that the group can stabilize EBITDA in 2014? I think you said EBITDA and not operating free cash flows, so I wanted to make sure that this is what you said. And also to underpin this target, can you give us an indication of what to expect in terms of cost cutting in 2014. I mean, is it as much as 2013 or a little bit less, a little bit more. Any color on the cost cutting in 2014 will be useful.

Stephane Richard

Okay. On the first part of the question, the fixed line market in France. Delphine?

Delphine Ernotte Cunci

Yes. We expect almost stable revenues full year versus H1 on the fixed revenue.

Antoine Pradayrol - Exane BNP Paribas, Research Division

So what does it mean? What do you mean by that? No decline in H2 2013 versus H2 2012?

Delphine Ernotte Cunci

It's the same trend in H2 versus H1.

Antoine Pradayrol - Exane BNP Paribas, Research Division

Okay. And 2014, do you still say that you expect an almost stabilization of revenues in 2014 and '15?

Delphine Ernotte Cunci

Yes. We're going forward with stabilization. And regarding this target, we have, of course, our ability to be more efficient on ADSL. But also, our increasing fiber penetration, which is going to be -- which is already very helpful in terms of market share, and will grow, in fact, in 2014. And besides, we've just launched a capital play low-cost offer with Sosh. It was launched in June and we expect it to be really, really efficient into 2013, of course, but also 2014. And besides, we are still very tightly controlling the decrease of PSTN and we are consistently in line with what we've -- we were committed 2 years ago in terms of decrease -- PSTN decrease.

Stephane Richard

Antoine, what I would like to emphasize regarding the fixed line market in France is that we have been able to really curve the decreasing trend of PSTN revenues in the last 2 years. We have now the number of lost lines in PSTN is much lower than it used to be 3 years ago. This is the result of a comprehensive set of actions that aims at reducing the speeds of decrease in PSTN market, and it's supposed to be quite efficient. Regarding the EBITDA guidance, I can confirm that I was talking about EBITDA generation, not operating cash flow. Operating cash flow would be treated [ph] in the future. But as you know, we have a very clear in the beginning of this year, in 2013, our really major target and focus of the whole management team is to stabilize the EBITDA next year in 2014. And I was saying a few minutes ago, that this set of results in the H1 2013 and the rest of our action make us reasonably confident in our capacity to reach this target in 2014. Regarding the cost cutting side, we cannot provide today the precise figures regarding 2014. But clearly, we will keep on focusing on cost cutting programs next year. There is something that I can mention, which is the headcount policy in France, where both demographic parameters that pursue the senior part-time plans will keep on producing a big impact on the headcount management. This, combined with the low level of recruitment, but also very reasonable wage policy, will enable us to stay on the same pace of labor cost reduction. So I can probably say that we will at least reach the same level next year than this year. And we will also launch a new set of programs within accessories [ph] in order to secure the EBITDA guidance for next year. Just one additional point, regulations would be also lower. We expect actually to improve by EUR 100 million on EBITDA, in fact, in terms of regulation.

Operator

We'll now take our next question from Jakob Bluestone from Credit Suisse.

Jakob Bluestone - Crédit Suisse AG, Research Division

I've got 2 questions, please. Firstly on the tax case. Could you maybe just talk through how you're thinking on dividends would be impacted, and if you lose your appeal on your tax case? And maybe if you could also just let us know what the time frame for the appeal is? I'm not sure if that was lost in the translation. Secondly, you mentioned EUR 100 million improvement from a regulatory drag in the previous question. Is that assuming that the current proposed EC regulation on roaming does not go through? And maybe if you could just mention what you expect would be the impact from that specific proposal? And then thirdly, given the decline in the share price in Mobistar, could you maybe just give us an update on what your thinking -- your current thinking is regarding increasing or decreasing your ownership in that asset?

Stephane Richard

Okay. Regarding the tax case and the possible impact on dividends, I'll ask Gervais to give you some details. But I want to start with saying that there will be no impact on our dividend policy due to this case.

Gervais Gilles Pellissier

Yes. And the time frame, the scale, we have integrity to our debt situation. As I said, EUR 2 billion. The time frame for our appeal is that we are appealing now. The time frame for decision on the appeal is at least 2 years, which means that it will be another story and another period within 2 years from now, and now as the cash is out, so our dividend would be measured and distributed based on the cash we have as of today. So again, as in this case, which is painful today because of

the cash front from now, becomes an opportunity.

Stephane Richard

Okay. Regarding the regulation issues and our view on next year and the fact that the possible EU new roaming package could impact or not this vision on regulation, I'll ask Pierre Louette to make a point.

Pierre Louette

Yes. Regarding the impact of regulation, we know it's a regulated decreasing impact that we witnessed on our accounts. The EBITDA impact expected through 2013 is EUR 350 million. And actually, we are looking at a situation in which the worst doesn't always happen apparently. In the last meetings we had recently with Mrs. Cruise [ph] in Brussels make us believe that probably the glide path of roaming decrease and the change in the rules of international calls should not probably be implemented -- or will not be implemented as quickly as she was considering it. And so we expect an EBITDA impact of EUR 150 million next year instead of EUR 350 million this year.

Stephane Richard

Okay. And regarding Mobistar, I'll ask maybe Benoit to answer the question if he has understood the question.

Benoit Scheen

Yes. I think that if I got it right, you were asking us about if the current situation in Mobistar is changing potentially our stake within the shareholding structure of the company. It is not the case. We are simply focusing on improving the operational efficiency of the company. You have seen the numbers announced on Monday. The numbers are impacted by several reasons. But what we are currently doing is taking very strict measures to make sure that we can reduce the cost structure and to stabilize EBITDA by 2014. So that's our key action focus for the moment, making sure that we stabilize the activities and that we bounce as of 2014 and by keeping the same position in the market. That's what we're focusing on for the time being.

Stephane Richard

Next question?

Operator

Your next question comes from Nicolas Cote-Colisson, HSBC.

Nicolas Cote-Colisson - HSBC, Research Division

Just a follow-up on your net debt comment you just made. So it looks like you mentioned earlier in the quarter that you could get multiple pressure from rating agencies. What would you do then? Could you tell us some [ph]? Would you play with the 2014 dividend? Or would you be happy to have a net debt-to-EBITDA ratio of 2x to 2.2x by end '14? And I also have a question on Everything Everywhere. Could you give us an indication regarding the dividend policy for the rest of the year?

Gervais Gilles Pellissier

Regarding the net debt, 2 things. The impact of the tax case is 0.15. That's now the total impact. There is no follow-up. I think it's a big difference with some of the issues. That's not like, for instance, the decision of the European Union on the -- European Commission on the pension, which has an impact for the years to come if that's taken. What we -- my comment on the rating agencies, we'd hope to say that we will look at it, and today when we look at our situation, we still have the best rating after Vodafone even if now Vodafone is also under a negative target watch since it is interested to buy Kabel Deutschland. But as we are further searching, we are still ahead of Deutsche Telekom. And if you look at the different agencies, there is one agency with which -- with whom we have remained A3. And [indiscernible] agency that might save the opportunity of the tax case to downgrade us because we have remained A3 with a negative outlook. Whereas now we are, with a stable outlook, BBB+ with the other one. So in my view, this is not a situation where 1 of the 3 agencies could change their rating with this tax case. But I don't expect that we would be out of the scope of the remaining best-rated operators in Europe. But if you compare our ratios to the ratios of our peers, we more or less lead in this institution, for instance, than Deutsche Telekom. Regarding [indiscernible] this has been clearly expressed by Stephane. Here the situation is what he described. And if -- and we count on that. We'll stabilize EBITDA in 2014. Then we will reduce our net debt-to-EBITDA ratio not at 2x but we will be again on the way to growth, to up to 2x. [indiscernible]. And what is important for the rating agency is how we will be in 2014, in the move up or in the move down. And for us, what's important is to be in the move down in terms of improvement of the ratio.

Stephane Richard

Maybe to make an additional comment on that, I would say that in my mind that this payout policy is not linked or uniquely linked to the balance sheet. It's firstly linked to the operational capacity of the company, meaning EBITDA generation and cash flow generation. And this tax case, even though it is actually painful in the short term, maybe an opportunity to midterm, has absolutely no impact on our operational capacity on what we are doing in the market, on what we're doing in the cost cutting program. And so once again, in my view, regarding your shareholders, the decisions regarding the dividend policy and the payout policy should be seen and considered uniquely according to the operational performance and not regarding the balance sheet. I want to once again remind that we have one of the healthiest and most solid sustainable balance sheet of the whole industry. We have one of the best ratings of the whole industry. And so we have perfectly the capacity to deal with this tax case impact in the short term without any operational consequence. So once again, no one should consider this a one-shot event as meaningful regarding the payout policy of the company.

Gervais Gilles Pellissier

Regarding EE, EE we distribute this year about EUR 200 million of dividends to each of our shareholders. This is [indiscernible] what we had last year. Last year there was an exceptional dividend, so EUR 200 million, which means in total EUR 400 million dividend. It's also what we are trying to size in preparation of potential [indiscernible], we are trying also to normalize the dividend policy of EE to better prepare for the future. So there is no exceptional element in this dividend this year.

[Audio Gap]

Unknown Analyst

Okay. My first question was regarding the [indiscernible] the rating agencies. Am I correct to assume that you would prefer a 1 notch downgrade in terms of your credit ratings for the group is BBB+? And keep the dividend stable? And my last question -- my third question is regarding the top line, which is still getting worse. It's not really improving. And you've done a remarkable job on the cost cutting. So that means you're spending less, for instance, on financial cost. Do we expect it to possibly go up in H2 to improve the top line or do you think you will be able to improve the top line through other means?

Gervais Gilles Pellissier

Regarding the rating agencies, just to remind the situation. We have 2 agencies with whom our rating is BBB+ with a stable outlook, and there is one agency where we are still in A3 rating with a negative outlook. What I said is that I expect that this event is the occasion for the agency which has remained -- who has remained with an A3 rating to downgrade us to BBB+. This is what we count. This is our view to date based on our different issues around the tax case of the group.

Stephane Richard

Regarding the top line, I would like first to stress that in H1, the trend in top line is 100% due to the of the trend of market and absolutely not lead to the relative performance of Orange in the market. As a matter fact, we have market share that are stable or even improved in some countries. But clearly, in Europe, where we are doing, as you know, 90% of our operations, we are operating in markets where the ARPU trends are clearly down and down by a very significant proportion. So this is the first time that I would like to really underline which is that we are operating in European markets where the ARPU trends are clearly very significantly down. But within this environment, the global commercial performance of the company is very good, probably one of the best in the industry. I would like also to emphasize that the new offers, both on 4G and on fiber in the fixed market, are quite promising, regarding the ARPU trends and will critically play a role in the next month and quarters. And we'll consolidate us in our capacity to stabilize and then to re-create some growth in the top line. And of course, we are also prepared to spend what will be necessary in the commercial costs probably more in H2 than in H1 in order to preserve our market share and to give the maximum dip [ph] in our top line. But to put it in a nutshell, I would say that our strategy is clearly to protect our customer bases because this is the main asset of the company for the future. We are currently leading within -- and I think we are reaching the end of effective, very huge price cuts nearly everywhere in Europe, and you know the reason for that situation. I think that we have been quite successful in protecting our customer bases and our market share. And that's in the next month. Because of this commercial performance, because also of the regulatory cycle that has been mentioned before and because of the new technology, 4G, fiber especially. And the fact that we will be as aggressive as necessary in the sales cost side, we are reasonably also confident in our capacity to manage the top line.

Operator

Your next question is from Frederic Boulan with Nomura.

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Firstly, if I could come back on your EBITDA target for next year. Do we think some growth [indiscernible] accelerated in terms of how [indiscernible] And I think if we go back to the total guidance [indiscernible] 2014 [indiscernible] considering [indiscernible] more pressure [indiscernible]. And the second question is on the more compression on your asset portfolio. [indiscernible].

Stephane Richard

Okay, all right. Maybe regarding the way we are going to secure they EBITDA stabilization in 2014 in the complex environment where there is some pressure, I don't know if it's a growing pressure but I wouldn't say so. But there is some pressure on the top line and not only in France. You're right. Even though I want here to remind that in 5 European countries, we have top line growth excluding regulatory impact. So maybe we should be careful about -- I mean those global statements that maybe do not correspond exactly to the reality. Gervais, do you want to add something regarding the profit impact of cost cutting?

Gervais Gilles Pellissier

I think on the cost cutting, and we will comment that for -- in the course of the year. But first, we have the Chrysalid program, which has different steps and which is improving our operations year after year. It's beginning. It has been said earlier by Stephane in answering another question. The labor cut decrease will continue because we are just in 2013 at the first step of labor cuts and number decrease in France, and this will go on probably next year. Regarding EBITDA within France and outside France, you're right. But this is also portfolio management. We are securing this year not exactly with the figures in terms of EBITDA position we could have had in mind last year at the same period. So that's part of portfolio management also -- operational portfolio management through we'll be able to offset and compensate some accident somewhere, some better performance. If we take Spain, for instance, we have better performance than expected, that is true. And even Poland is doing better than what we had initially in mind in our plan, whereas it is true that Belgium has an accident. But this is compensating, I would say, though differently.

Stephane Richard

Frederic, maybe I could suggest Pierre to make a point on the Chrysalid program because I think it will answer both of your questions regarding the trend in cost cutting program. And then I will take the floor to speak a little bit about M&A and consolidation.

Pierre Louette

Yes. If you remember the way we designed the Chrysalid program more than 2 years ago, it's really rather a transformation for them than just the direct cost saving program. The costs decreased by controlling the way we operate. It's a program that aims at adapting the functioning of the company to the new realities of this -- especially mobile telephone industry. So the initial ambition was EUR 2.5 billion when we launched the program. It was brought to EUR 3 billion at the end of last year. And I can tell you that as of today we have covered with our proven initiatives, 95%, 96% of the global EUR 3 billion program until 2016. So it's a well-documented transformation program. We know exactly where we're going. We have a lot of initiatives which are undergoing. And so with this, we will transform the way we operate. It's based technically on many process descriptions and process optimization, optimization also of the network deployment and fertilization and profitization of initiatives brought from one side of the company to the other. So overall, this is going the right direction. We are going to be massively helped on the indirect cost structure by that the demographics of the company. As you know, around 10,000 people will leave the company in the next few years, and they will not be replaced entirely. So this is something also which is in a way linked, and it's parallel to the Chrysalid program. We are looking at a way in which we're going to function in the coming years with less people. So this is underway. It's documented, and it's well programmed.

Stephane Richard

Regarding the situation in Europe, I would say that first, what we have done is interesting evolution of the situation in Europe, where in some big countries like Germany today, maybe Italy tomorrow, we see some attempts to consolidate the market. I think we should still remain cautious about the output of those operations because I think that there are still a lot of hurdles to overcome. What's so scary is that the current situation of the industry in Europe is, in my view, not sustainable. As you know, I am clearly an advocate of the consolidation of the industry in Europe. But in the same time, I think we still have to be realistic about the political and regulatory up cycles that are in the way of consolidation. But I think that there's clearly some need for consolidation. As far as we are concerned, we will, of course, look very seriously to any kind of opportunity in the main markets where we operate. I could mention Spain, where as you know, we were a candidate to buy Yoigo. Maybe this case will reappear in the future. I could mention Poland also. I don't expect in the short term any major consolidation project in countries like France. I would like also to say that there could be some forms of consolidation, some organic [ph] forms of consolidations like RAN sharing. Look at what's going on in France. And as you know we have a lot of projects, RAN sharing all over Europe. I could also mention fixed to mobile consolidation or convergence. I think that it could make sense in some countries, maybe like Spain, once again, or Romania or other ones. And to that extent, I think also that the German situation is quite interesting. So to summarize, I would say that there is obviously some need for moves and consolidations in Europe. I think we are in the beginning of this process of this cycle. And as far as Orange is concerned, we are prepared to play the maximum role in this consolidation move if it really happens. And then, regarding the M&A policy as a whole, I think that we have always been very serious in the way we are working on M&A opportunities for the last 3 or 4 years. And of course, the discipline that we have to respect in our balance sheet will, of course, clearly, strictly serious in our M&A approach, meaning that we don't have any significant projects in the short term regarding M&A.

Operator

Your next question comes from Vincent Maulay of Oddo Securities.

Vincent Maulay - Oddo Securities, Research Division

Two quick follow-ups on [indiscernible]

Stephane Richard

Okay. First, OpEx savings in H2, Gervais?

Gervais Gilles Pellissier

We had an objective for the year of OpEx savings. EUR 600 million is what we said in February. We will be above that. I think already EUR 414 million has been achieved in H1. So it should be above that. I will not confirm any figure today. I can just say what also Stephane had said before. It's that there is room for maneuver to increase the financial expense and especially the need for [indiscernible] in the second half compared to the first half. I would say [indiscernible] 10% increase -- between 5% and 10% increase between first half and second half for our financial expense. But we will be above the initial objective. This is also because the revenue is lower than what we had initially planned, and we had not seen [indiscernible], but maybe not exactly either [ph] 2x, but we didn't [indiscernible].

Stephane Richard

Regarding the French market, the Free subsidiaries, [indiscernible], Delphine.

Delphine Ernotte Cunci

On the subsidiaries, so it was [indiscernible] for Free. We don't have the results, of course, but we didn't see any impact on our base. So we are going to see what we are going to do. Anyway, as we always do, we anticipate and, of course, get prepared to any new or personal competitors in general. On 4G, as Stephane Richard has mentioned previously, we are very far ahead of our main competitors. Of course, [indiscernible] is going to have the opportunity with its frequency to serve, quite good coverage, but we've seen us are very far from all the competitors. So I don't see how [ph] our competitors, although we are going to be as efficient as we are on coverage, which is key, of course, in terms of new network.

Stephane Richard

Regarding the roaming agreement and the RAN sharing prospects with Free, I'll ask Pierre to give you some answers.

Pierre Louette

So as you know, the roaming agreement to be considered as the first form of mutualization to some extent, it's been commented upon, and it's more or less described by the competition authority in France in March this year. And what is maybe happening today between SFR and Bouygues is also very much looked upon by the competition authority. So we are in France, with a difference to Spain and Romania, for instance, and many African countries, we're a bit late in the mutualization processes. It's very well described and then defined by the law. Regarding our talks and the progression of things with Free, it is obvious that the agreement, Memorandum of Understanding signed between our 2 competitors, is also a sign of the direction in which we like to in the future.

Gervais Gilles Pellissier

Regarding Dominican Republic. So as I said, we are regarding our [indiscernible] potential there. So we have launched a process. We decided that this affected the situation process [ph]. We see that such a process could take a few months, if it goes through. It's not 2, 3, 4, 5-year process unless the potential acquirer would be a competitor within Dominican Republic. But I think there are many other options. Regarding EE, I think we've said it already. On EE, I think our 2 partners are still contemplating, and we'll contemplate a potential IPO. And now is the timeframe is probably to show to the market that they're a good 1st tier of 4G performance and a testament [ph], which means the timeframe, which is 2014.

Stephane Richard

Regarding more globally the M&A policy, I would like to really make it clear that the management team and myself are today focused on short-term operational management on cost cutting, on commercial initiatives and clearly not on M&A. It being said, we are focusing on organic development in our footprint. We do not exclude from time to time to participate in some processes or options in order to buy a license if the country or the market is interesting. It was the case, as you know, recently in Myanmar. Unfortunately, we did not succeed. But maybe this opportunity is not totally lost, so we will see. But organic development in our footprint is the main priority. And I want also to remind that we still have some opportunities in consolidating some of our African and Middle East operations, where we are still the minority shareholder. And I could mention especially Morocco, where certainly in the Northeast, we are not a candidate to buy Maroc Telecom, but we are still a candidate to becoming a majority shareholder of Meditel, which is our Moroccan operation. I could also mention Tunisia.

Maybe I want to thank all of you and to wish you a very, very good holiday, and to thank you also for your attention in this meeting and, more globally, towards Orange. Thank you.

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