Orange Management Discusses Q3 2013 Results - Earnings Call Transcript

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Orange (NYSE:ORAN)

Q3 2013 Earnings Call

October 23, 2013 2:30 am ET

Executives

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

Jean-Marc Vignolles - Former Chief Executive Officer of PTK Centertel

Pierre Louette - General Director and Executive Director

Thierry Bonhomme - Senior Executive Vice-President of Orange Business Services

Analysts

Jeremy A. Dellis - Jefferies LLC, Research Division

Stephane Beyazian - Raymond James Euro Equities

Andrew Lee - Goldman Sachs Group Inc., Research Division

Nicolas Cote-Colisson - HSBC, Research Division

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

Stéphane Schlatter - Societe Generale Cross Asset Research

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

Will Milner - Arete Research Services LLP

Giovanni Montalti - UBS Investment Bank, Research Division

Jonathan Dann - Barclays Capital, Research Division

Antoine Pradayrol - Exane BNP Paribas, Research Division

Gervais Gilles Pellissier

So good morning, everybody. Thank you very much to -- for joining us this morning for our Q3 results release. I'll start with a short presentation. We have tried to shorten the presentation, at least, from -- for the speaker and to leave more time for your questions and remarks.

I am with my colleagues from the executive committee, especially Delphine Ernotte Cunci, in charge of France; Pierre Louette, in charge of -- General Secretary; Benoit Scheen, in charge of Europe; Marc Rennard, in charge of AMEA; Thierry Bonhomme, in charge of Enterprise, as well as in the room, Jean-Marc Vignolles, in charge of Spain; and Béatrice Mandine, in charge of Press and Communication.

The performance of Q3, I think, I hope is not a surprise for you, at least, not a bad surprise. I hope, for some of you, it's a good surprise, at least, for those who are not -- who are sometimes desperate about us. So I hope it's, at least, a good surprise for you.

If you look at the revenue line and maybe to start with, I would say, the worst on the page, I'm clear, the revenue line remains a question mark for us and will remain a question mark for a while because we still see a strong reprice pressure in the major geographies. So revenue line is minus 4.3% for the first 9 months of the year, with a slightly lower decrease in Q3, but I don't think we should consider this lower decrease is a permanent. We see that the figure of the whole year is more or less in line with the first 9 months. We'll come back on that. There is less regulation impact in the third quarter. And if we take out the regulation effect, the trend in Q3 is more or less the same than what we had in the full year because it's minus 2.3% for the first 9 months and minus 2.4% for Q3.

If you look into a little more detail, we'll come back to that later, regulation is still half of the revenue decline. Year-to-date, that impact is lower in Q3, especially in France. Spain and Poland improvement in Q3 compensate the deterioration we have observed in Enterprise and other European countries. In France, the decrease is similar to the decrease we had in Q2, while AMEA, in spite of a slight decline in Egypt, is still posting a reasonable growth.

In this difficult context, one point which is, however, very positive for us is that our commercial results are clearly improving, especially in the 3 major countries of the group, acceleration of mobile customer base growth in Poland, France and Spain, plus 515,000 net adds in Q3 for those 3 countries.

Despite the pressure on revenue, EBITDA margin erosion has been limited to 1 point of revenue, mainly thanks to the effort, which have been made everywhere in the group, but especially in France on the cost structure.

Just to remind you that in the same period last year, our revenue erosion -- our EBITDA erosion was minus 1.6 point of revenue. Group EBITDA reached EUR 9.8 billion, a decrease of 7.4% year-over-year. The regulation impact is slightly lower than what it was in H1, I'll come back on that. And the cost base has been decreased by EUR 617 million over the first 9 months of the year, already exceeding the objective we had given at the beginning of the year of EUR 600 million cost decrease. And almost 1/3 of the reduction came from indirect cost decrease, which means that we are working on the structure of the company, including the labor cost.

We have maintained the investments required to preserve our network EDGE in most of the countries. CapEx, we're at 2.6% year-over-year, with a sharp increase in very high broadband investment in France and Europe, more or less 2x more than what we did last year, nearly EUR 400 million investment in 4G and fiber compared to EUR 200 million investment done last year in the first 9 months of the year. Other investments have been decreased by EUR 110 million.

With EUR 6 billion of operating cash flow generated in the first 9 months of the year, we are fully in line with the year-end objective of EUR 7 billion, reaching 86% of the objective so far.

Let's look now at the commercial performance of this quarter. The third quarter has confirmed a strong commercial performance, especially in the mobile market, with an acceleration of mobile contract net adds growth in our main geographies. And for the main geographies, we are back to the situation and to the volumes we had before the strong price decrease of the turmoil in the sector we have been facing since 2011.

This confirms the success of our convergent offers, especially in France, Poland and Spain, but mainly France, Spain and then Poland, as well as the efficiency of our commercial segmentation between SIM-only and subsidized offer between high-value, lower-value customers. And one point also, very important, is that subsidized offer under the French market has shown an increase of subsidized net adds in this third quarter. Delphine can comment on that later on.

Overall, the contract mobile customer base, excluding machine-to-machine, has grown by 7% year-over-year, driven by top European countries but also emerging markets. In France, excluding machine-to-machine, we have increased our contract customer base by 300,000 new clients, posting the best quarter of the last 3 years, so even before the VAT rate change we had early 2011, and sustained by substantial progress in retention as the level of contractual rates went down back to the lowest level since 2010.

As in France, Spain and Poland recorded the best quarter since quarter 4 2010 in terms of contract net adds, driven by new portfolio, including conversions, that contribute to both fixed and mobile KPIs. The number of broadband conversion customers has grown by more than 70% year-on-year in France, Spain and Poland, plus 52% in France, plus 127% in Spain and multiplied by 30 in Poland.

We saw an increase in demand for very high-speed both in mobile and fixed markets. In France, the pick-up of fiber is confirmed with 273,000 FTTH customers at the end of September. This is materialized by now a base of 6,000 connections per week in September, and we expect to reach nearly 8,000 connections per week at yearend, being probably on the top list amongst European operators the numbers of new connections per week. Orange affected almost 2/3 of the new French FTTH customers in Q3 2013.

While in the U.K., our EE brand continues to post strong performance on mobile broadband, with around 500,000 new customers, leading to around 1.2 million 4G customers in the U.K. at the end of September. I'll just remind you that the progression EE has been doing in the U.K. is slightly quicker than Verizon in the U.S. in terms of 4G launch.

If you come back to the revenues, on the next page, at the top of the graphic, you can see on Page 5, you see that growth is coming from Spain and emerging markets, in Africa and Middle East. In Spain, the strong commercial performance is matched by underlying third quarter revenue, growth of almost 7% before regulation. Including a regulatory impact, growth is at 1.2%, with a drop in mobile sales revenues, which is more than offset by mobile equipment sale. So mobile equipment sale has been multiplied by 3 in Spain. This is mainly due to the shift of subsidized business model, much bigger parts of SIM-only market in Spain, whereas SIM handsets are now sold in installment sales.

We have also been posting a double-digit growth in fixed services in Spain, driven by broadband. In our emerging markets, the driver for revenue growth remains increased in our customer base, which is up by more than EUR 3 million year-on-year. In this region, revenue growth is coming from a wide range of countries with strong performance as, for example, the Ivory Coast and certain selected group countries. There is also a positive impact coming from incoming and outgoing international carrier traffic, which is growing [ph] on an underlying basis and experience the next high boost in the quarter related to Ramadan.

Moving down the graphic, pricing pressure, very often subsequent to regulatory decisions, is prevalent across many of our more major European operations. However, in both France and Poland, the quarterly revenue trend has improved compared to the first half of the year. In both cases, this is underpinned by an improvement in fixed services, where PSTN revenues have proven more resistant, especially in France. We have increased the excess fee, if you remember, by less than EUR 1, by EUR 0.90, in June 2013, with quasi no impact on the churn of PSTN accesses.

In France also, 12 months mobile ARPU is down by 12%, in line with the forecast we have been giving in March, and of which, 1/3 is due to the regulatory effects. The same regulatory effects are also impacting our European country operations, representing more than half of the revenue drop in third quarter. However, we are also facing significant competitive and repricing pressure in Slovakia and, to an even larger extent, in Belgium, as you may have seen with the results published by Mobistar last week.

In the Enterprise segment, an unanticipated recovery of activity in the second half of the year has not materialized. This is mainly due to the permanent macroeconomic difficulties of European copyright, especially in France. Third quarter revenues were, therefore, fully impacted by ongoing pricing pressure as contracts are negotiated or extended, and revenues were also impacted by a lower level of equipment sale and -- which has impacted our revenue by about 100 basis points in this quarter but is close to neutral in terms of EBITDA.

If you come now to the cost line on Page 6, the strict cost control, I will say even more, all the actions, which have been taken within the Chrysalid program to reduce our cost base, have contributed to almost 40% of the decrease compared to 30% in H1. Now, the indirect costs rate 40% of the cost decrease. Our cost base was further reduced by EUR 176 million in Q3, enabling total savings of EUR 617 million after 9 months, overtaking our full year target of EUR 600 million.

For the 9 months, direct costs, which include termination rates, wholesale costs, plus commercial costs and marketing, have been decreased by 5.3%, mainly thanks to a regulatory impact on interconnected cost, without distributing all the benefit of termination rates to our customers. This is also because we had already expanded most of our -- in most of our subscription, unlimited SMS, for instance, in France. Commercial costs are accounted for 15% of the direct cost decrease, with a significant contribution from France and a lower contribution from Spain.

As an illustration, 3 lines of costs have particularly contributed to the decrease of indirect costs of EUR 68 million in Q3 and EUR 197 million over 9 months. Labor costs, which represent nearly 50% of our indirect costs, were reduced by EUR 76 million, thanks to the headcount decrease but also to the crédit d'impôt pour la compétitivité et l'emploi, which is a French tax relief created last year to help companies with strong labor charges and to reduce the cost of labor in France.

General expense, 8% of our indirect cost, has been decreased by nearly 5% and nearly -- 10% in Q3. Advertising and commercial, which was 5% of our indirect cost, has been decreased by 10% in Q3, mainly in France, Poland and Spain. It is also worth mentioning the credit stabilization of IT and network costs, 16% of our indirect expense, with contract renegotiation and improved productivity compensating for energy pricing fees, mainly in AMEA, but also compensating for the need to cover the need we have to change our processes and to improve our IT in most of our geographies.

With a short look on the headcount evolution on Page 7, just to give you the figures, the decrease has reached 4,700 people since the beginning of 2012, out of which, 2,700 in France, which is linked with the natural attrition but also the success of our senior part-time plan, which is accelerating the natural attrition of the company. In Poland, the decrease of 1,800 people is in line with the voluntary redundancy plan signed at the end of 2012, in which 1,300 employees have already signed out of yearly target of 1,700. Only Spain and emerging markets have seen their headcount improve, Spain with 108 new jobs, following the internalization of call center activities in emerging countries to support the business development and, at a slower pace, some revenue growth, plus 1.8% job increase of manpower, whereas revenues are increased by 3.4% year-to-date. All in all, this decrease enabled us to already reduce labor costs while we initially only expected to stabilize them in 2013 and to decrease in 2014.

As we got the EBITDA approved on Page 8, the good performance on costs has helped to limit the ordinary EBITDA to 7% year-on-year, and this decline has mainly come from the pressure on revenue, partly offset by the decrease on costs. Indeed, lower revenues play a very strong role, especially the regulatory part. But the cost line is really improving. Direct costs went down 4% year-on-year. Interconnection, as I mentioned, interconnection costs have continued to decrease. In France, impact of termination rates reduction was limited, as we sharply decreased rates in July 2012. And we should have -- since the last decrease was July this year. We still have, however, termination rate cuts in Spain, Poland and other Eastern Europe countries that will continue also in 2014 rate. We're having at the end of probably 2015 within the European Union more or less the same level of termination rates, which is between EUR 0.5 and EUR 0.8 terminate.

We have observed the slowdown in commercial and content cost decrease everywhere, especially in the major countries. And as I already mentioned, indirect costs have continued to decrease.

At the end, maybe just a few words on CapEx over -- on Page 9. Over the last 9 months, group has spent EUR 3.75 billion in CapEx, which represents an increase of nearly 3% year-over-year, plus 5% in France. As in previous quarters, we have considered as a priority to keep a sustained level of investment in very high broadband to preserve our network differentiation. Consequently, CapEx for 4G and FTTH, VDSL have amounted to EUR 400 million over the first 9 months of 2013, which is 2x what we spent a year ago. Also, I would like to point out that compared with previous year's seasonality, CapEx this year will be more front-end-loaded as several programs are over or in the process of being completed. For example, the investments that were part of the MoU with a Polish regulator in Poland have now been completed.

In France, we have accelerated the 4G rollout compared to the initial plans, with 500 cities covered at the end of September or 32% of the French population. I'll just also remind you that we also want this coverage of 32% to be on big areas and not like a little part scheme [ph] , which is also that we are not just targeting the population coverage as an objective, but we are targeting, this is the quality of experience for our customers rather than just the statistical number in terms of population coverage. And we intend to cover more than 40% of the population by yearend. In Spain, we are leading 4G rollouts and should cover 24% of the population by yearend. In AMEA region, 4G is already launched in 2 countries, and Senegal and Botswana should follow soon. As regards FTTH, we now have more than 273,000 customers in France, and we are aiming for more than 350,000 customers by yearend. We still have -- as I mentioned, we are far above 50% share of conquest in fiber. In Spain, as agreed with Vodafone, we should reach 800,000 homes connectable by the end of Q1 2014.

In conclusion, I would just repeat what we said at the end of Q2 by confirming our 2013 guidance. In terms of operating cash flow, I mentioned that we already reached 86% of the objective at the end September and this, without sacrificing investment, investment we'll continue to grow, to reach nearly 14% of revenues at yearend. And excluding tax litigation, we have kept our guidance in terms of net debt-to-EBITDA to be around 2.2 at the end of 2013, which means including the EUR 2 billion of tax payment at 2.4 at the end of 2013. And we also intend to be closer again to 2 by the end of 2014.

We have already announced the dividend for 2013. This was a decision of the board of July 2013, with an interim payment planned of 30%, planned on December 11. And as regards our portfolio, you know that we continue to focus on the existing footprint. We have already announced that we are within the process to dispose our assets in Dominican Republic. There are no other news on the M&A front as of today.

Thank you for your attention. Now with my colleagues, we are ready to answer your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Jerry Dellis from Jefferies.

Jeremy A. Dellis - Jefferies LLC, Research Division

Two questions, please. Firstly, what percentage of your Origami base is now on the new plans that you launched last April? And then my second question is that your outlook is clearly for 2.2x leverage by the end of this year, excluding the tax dispute, and to be closer to 2x by the end of 2014. Are you able to tell us what sort of dividend, whether that -- sorry, whether the 2x is consistent with paying a stable dividend in the 2014 year?

Gervais Gilles Pellissier

Maybe Delphine on the Origami base?

Delphine Ernotte Cunci

Yes. On our mobile base, at the end of September, 80% of the base is on -- offers post-free launch, first figure. And second figure, we estimate that by the end of this year, 70% of our base will be on 2013 tariff plan.

Gervais Gilles Pellissier

Regarding the net debt-to-EBITDA ratio, first, I confirm the dividend. Today, we have -- I think there is not only [indiscernible] , but there is no change in the dividend policy. Our dividend policy, that was changed last year, is valid for several years. I've been discussing that with some of you in one-on-ones, but clearly, the -- when we choose to go down to EUR 0.80 to keep a stable dividend for at least a couple of years. Regarding the leverage, so we will be at 2.4, including the tax payment at the end of 2013. The guidance remains the same, including this impact, which means that for us, the guidance to be -- to come back nearer from 2 at the end of 2014 is now to come back nearer from 2 -- from 2.2. We increased, more or less, the guided figure by 0.2. This is the way you should understand what we are saying today. We decided not to change the guidance formally this year. We'll probably adjust this guidance whilst publishing the full year results and announcing the 2014 guidance next March. Is that an answer to your question?

Jeremy A. Dellis - Jefferies LLC, Research Division

That's clear.

Operator

We'll now take our next question from Stephane Beyazian from Raymond James.

Stephane Beyazian - Raymond James Euro Equities

Two questions, if I may, regarding France -- one on France and one on Spain. Regarding France, we're seeing some acceleration in fiber, but penetration might still be a little low penetration of fiber versus some of your peer groups. So what is your sort of penetration you've reached in the oldest building now and that could be used for you as a target eventually in term of building penetration for fiber? And we've seen some decision by some of your competitor, for instance, KPN, to accept -- to slow down fiber and accelerate vectoring or pair bonding technologies. Is there any room in your plan for such a strategy? My second question is regarding Spain. Can you elaborate a little more on how many customers have picked up, I think that's the Canguro plan, which has the quadruple-play plan?

Gervais Gilles Pellissier

So Delphine on France and maybe Jean-Marc on Spain.

Delphine Ernotte Cunci

So it's true to say that the penetration in fiber, the number of customer compared to the number of lines built is not high enough, it's 10% in average. Of course, in older buildings, it's rather 15% or 20%. But still, we believe and we can do much better. For instance, we have a trial in one specific city in France, which is called Palaiseau, and we can really observe that if we can speed up on both building fiber in the building and in the street, we can improve, very much, our penetration -- our building penetration. So we think we need to go further and to speed up fiber to be more efficient. And I just want to point out that for fiber, we have 6,000 activations per week, and it's better than Telefónica in Spain, which does 4,000 kind of activation per week. So we are not so slow.

Jean-Marc Vignolles

Regarding Canguro, so I can confirm that the uptake has been very good and even better than we expected. Around the data that can be communicated, that Canguro accounts for 75% of our ADSL sales and clearly has been a booster of our ADSL sales growth. And in terms of mobile, 1/3 of our mobile and gross adds come through Canguro.

Stephane Beyazian - Raymond James Euro Equities

Delphine, any comments on vectoring and pair bonding?

Delphine Ernotte Cunci

We are launching in October a VDSL offer, but still, we think that fiber is really, definitely the right thing to do because it's a bandwidth which is guaranteed compared to VDSL or ADSL. And we also expect fiber to be much cheaper in terms of network maintenance. So we have a VDSL offer. We'll, of course, see any new proposition on copper, but we definitely think fiber will replace copper. And, of course, in France, you know that we cannot experiment what everyone wants. For VDSL, we had to ask our regulator to do an experiment with all the operators, and it's the same, of course, for vectoring.

Operator

We'll now take our next question from Andrew Lee from Goldman Sachs.

Andrew Lee - Goldman Sachs Group Inc., Research Division

Just a question on the indirect cost cutting that you've delivered. It's very strong. And I was just going to ask over and above the accelerated levers. Can you give a bit more color on where else these efficiencies are coming from? And is indirect cost cutting opportunity for 2014 mainly based on reduced labor costs or do you still see having the same kind of proportion of indirect cost reduction as you're seeing in 2013? And then secondly, I just wondered on your view on the sustainability of the lower declines in the French fixed business seen this quarter, given the improvement was driven by PSTN price rises. Are you seeing an increase in competitive intensity there?

Gervais Gilles Pellissier

Delphine will answer maybe on the question on PSTN, and Pierre will answer on the question on costs.

Pierre Louette

So regarding indirect costs, as you now, we have split them in several natures of labor costs, general expenses, advertising promotion. But I just really wanted to insist on the future sources, I would say, of the cost cutting possibilities, which are linked to network costs, IT costs. Network costs are really decreasing now. They're providing us a large proportion of the future indirect cost cuts that we can hopefully witness in the coming years. Also, we're going to be working very hard on real estate and energy costs, which are other areas in which we can still improve. So I think we are facing with a relative level of trust the coming years. As you've seen, we've already gone above this year the original targets, which, I think, speaks in favor of our credibility in cost cutting now.

Gervais Gilles Pellissier

Just regarding the labor part within the cost, just to say, this year, as I said, we were not counting on the real impact of labor within the indirect cost decrease. When we did our plans at the beginning of the year, we considered that the decrease of manpower would be more or less offset by inflation, offset our increase in the different geographies. We have a slight surplus this year, which will be possible while that's probably around EUR 20 million for the full year. So EUR 20 million is, I would say, not completely meaningful today. We expect, however, that labor costs should have a bigger impact in cost decrease next year, probably maybe between 20%, 30% of the total indirect cost decrease. And the total workforce has been decreasing this year by, as I said, until end of September, 4,700 people. And why do we have a better figure than what we initially planned? This is because the senior part-time plan has had a more immediate impact than one had initially thought. So we count on, I would say, an amplification of this move next year.

Delphine Ernotte Cunci

On PSTN, we don't see any big competition on PSTN, and we are completely on track on our objective on PSTN, slowing down the line losses by 12% compared to 2012. And we can see also the revenues decrease, slowing down on PSTN. But since the fight -- the real fight is on ADSL, we continue to monitor the switch from PSTN to ADSL for our own PSTN customers, of course.

Andrew Lee - Goldman Sachs Group Inc., Research Division

Can I just follow up on Gervais' comments? Would you expect your indirect cost reductions to accelerate in 2014, given the labor cuts that are likely to accelerate?

Gervais Gilles Pellissier

A little premature to fully answer the question. We are not yet there to give all the details. We are currently working on that. What I can say is that, what we expect is that in terms of cost move, we expect, at least, the same type of cost decrease next year than what we had been having this year. This is what we expect in terms of direct cost move. Now the way it will be compounded for between external costs, subcontracting labor, this is still -- that's still something under discussion. The 2 lines on which we still have some uncertainty, this is the way interconnected will behave but also the way commercial costs will behave. We are still working with the different countries. And by the way, Delphine and Jean-Marc or Benoit for other European countries can comment, the split between SIM-only subsidized is still something we are working on for next year. We see, as Delphine and myself mentioned, some, let's say, rebound of subsidized offer in the third quarter, so -- which means that we are spending maybe slightly more commercial costs. We are also revisiting the subsidized offer between, I would say, installments and fully subsidized offers. So all this is really the evolution of our business model in the 3 major geographies, which is under scrutiny today and why it's a little difficult to give you a forecast so quickly. This is why we prefer to comment the indirect cost line and on the indirect cost, I'd say it should be the same order of magnitude than this year, with probably a different composition, probably a little more labor and maybe less external costs. Is that clear?

Operator

We'll now take our next question from Nicolas Cote-Colisson from HSBC.

Nicolas Cote-Colisson - HSBC, Research Division

I was wondering what was the percentage of broadband net adds with the Livebox Play and also if you had any indication on what could be the market share of net adds in broadband that you intend to achieve in Q4. And I've got a follow-up question on your earlier comment, I mean, from July when you said that you are concentrating on possible consolidation and disposals. So just, can I have an update on that? And also, if I may, if you could share your views on the upcoming new legislative package put forward by the European Commission that will be discussed at the European Council this week.

Gervais Gilles Pellissier

Delphine, on the broadband?

Delphine Ernotte Cunci

So on broadband, the mix between premium offers with the Livebox Play and all the offer in our target in December is 40%. And I can say that by the end of September, we are on track at 42%, exactly, so, and we expect the last quarter to be around 30% in net adds market share.

Gervais Gilles Pellissier

On the consolidation and disposals, I've just -- I've said Dominican Republic is on the list. We have no new, I would say, big objects in terms of size on the list today. As regards to consolidation, there is a new move undertaken today that we are really observing the market, and think we have been commenting several times that the EU decision on the O2/E-plus in Germany will be a structuring decision for further consolidations elsewhere and I think we have been commenting that there are 2 countries where consolidation could be of some interest for us. And especially Spain in which we had, and I think it's public knowledge, we had been a candidate to buy Yoigo last year. Yoigo had then finally sold. And Poland where probably later on, we think probably more in the second half of 2014, there could be some consolidation moves. So these are the 2 countries in which we might look at in market consolidations, if they are affordable to us. Regarding the EU package, Thier?

Thierry Bonhomme

So you know that there is a European Council today which intend -- tomorrow actually, which aims at examining the European Commission proposal or package to create unique telecom markets in Europe. Of course, we totally share this general target. We've been describing a situation of fragmentation -- excessive fragmentation for years. As you know, above 120 operators are active in Europe with a population, which is lower. The United States have only 4 and not speaking of China. So as everybody knows, this fragmentation puts a heavy weight on our revenues and margins. And also on our level of investments, we've been able to grow our level of investment because we really insist on building our future, but it is still lower than what it is in the United States today. So we agree on the general target, but we do disagree on the method that the commission has chosen. First of all, because of the tax proposed by the Commissioner, Neelie Kroes, has, I think, a wrong way of addressing the priorities. The tax starts by attacking the revenues coming from roaming and international calls. Actual, roaming is a consequence of the fragmentation, not a cause of fragmentation. So I think it's a wrong way to address this issue. And also, it will put more pressure on our situation, which is not -- actually, that is not aim and purpose of the package. Also the package doesn't really address the main -- the most, I would say, crucial stakes today. Most or a lot of the value created by digital is taken by the over-the-top players and those players do have a different perspective on taxation and regulation because they're not really regulated, actually, and not so heavily taxed in Europe. So they're not the ones deploying in the networks today. They're the ones using the networks. So the commission, instead of really giving help to the European players, actually would add a new regulation layer on this and also is giving a lot of the credit to those over-the-top players instead of helping us. So as you understand, overall, we feel this is not exactly going the right direction. Some of the more favorable items we fear will not be retained at the Parliament level. The unification and spectrum allocation will not probably be pushed by the government. So I think I don't know what's going to be left of that package. But we fear it would be not so good.

Operator

We'll now take our next question from Frederic Boulan from Nomura.

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

A couple of follow-ups. Firstly, if we look at the French business next year, so Q3, you just posted about EUR 300 million year-on-year decline in revenues. The idea, I think, last year was to stabilize Fixed Line further around 2014. While in mobile, again, we should have a -- hopefully, a slightly more stable outlook. So what's your overall expectation? Do you think it's possible to stabilize revenue somewhere between EUR 500 million to EUR 1 billion decline? And secondly, just want to understand the cost implication a bit further. You're saying, I think, if I understand well, that indirect costs will continue to go down at the same pace. Q3, at the group level, indirect cost were down EUR 68 million. So less than EUR 300 million at the group level. Next year we'll have much less interconnection decline in France. So what do you have in mind in terms of incremental elements to offset that? And third question on the leverage, I was just running through your revised 2.2 level for 2014. I mean even if I'm assuming a stable EBITDA for the group next year, lowering the debt by 0.2 notch implies about EUR 2.5 billion lower debt, which appears quite optimistic, organically, after dividend payments. So can you share with us what kind of assumptions you have around M&A and that inorganic move in that target?

Gervais Gilles Pellissier

Regarding the revenue and the revenue for France in 2013, I don't think that I've been speaking on the revenue stabilization as a whole. We said that within -- especially on the -- during the roadshows, we said to see it's one [ph] that we would still face a strong revenue, a relatively strong revenue pressure on mobile with ARPU pressure, this was said. Now, how big the ARPU pressure, probably lower than this year. This we are sure, because I think we'll have, at the end of the year, I think, 2/3 of the base, which will be with the 2013 prices, so which means that the reprice to be expected is less. There is a second area of uncertainty, but which for me is a positive uncertainty. This is what we see as the impact -- positive impact of 4G in the ARPU uplift. We are still working on that. We have been waiting and we are still waiting on the price launch by our competitors. That's part of the question mark on how far can we go and how much can we expect in terms of ARPU uplift with 4G. And -- but for me, it's more a positive uncertainty versus what we have in hand today that could help. But we don't expect any stabilization of the mobile revenue next year, especially because of further roaming agreement with Iliad, we'll not produce more revenues next year, okay? Regarding Fixed, this is true that we said that we would expect the stabilization in the course of 2014. Now, when that will be, that's still difficult. To be honest with you, we have been slightly disappointed by the level of the market for broadband in France. The level of the market, we have better figures in terms of share of conquest but we have better figures, not because we are better, but because the market is lower. We are not better than what we expected, but we are -- the market is lower-than-expected. So growth of broadband in France is probably around 2.5% or something like that, which is probably 1 point below our expectations. And that this might, I would say, delay the capacity to stabilize the broadband revenue. However, to offset that, that's part of the debate we have been having before. We are trying to accelerate fiber deployment, because one of the ways to recover and to increase on Fixed is to accelerate fiber deployment with -- if we reach 8,000 connections a week, we'll be amongst the quickest in Europe for fiber-to-the-home. Again, I'll just remind you that this is 100% fiber-to-the-home. There is no VDSL vectoring in those 8,000 connections a week. So new stabilization of the revenues in total because of mobile. ARPU decline, which would be lower than the ARPU decline in 2013. And probably, within the course of the year, we will be approximating a revenue stabilization for Fixed. Regarding the indirect expense. The indirect expense, I have been commenting them, should be at the same pace. Regarding the direct expense, and I guess your question is more on the direct expense, I have said that it would depend on the business model. And by the way, the revenue level and the ARPU level is also linked with that more subsidized, more ARPU; less subsidized, less ARPU and less direct cost. But at the end, what is the real impact on EBITDA, this is what we are calculating. We think that for the low end part of the subsidized bundles, there is very little impact on EBITDA if you move from subsidized subscription to a SIM-only plus installment space. We think that the space within subsidy is more for the high-end subscription, where there is, of course, much more EBITDA if you're able to sell a bundle with the handset, with value-added services. So this is what we are working on today. So this is why it's a little difficult today to tell you what is the volume of direct cost decrease expected next year. Regarding your last question on debt, you have answered by yourself by making your calculation. There is no room for M&A within the margin of maneuver if you want to decrease the debt and to resistive. Even if you reach a stable EBITDA, you need to slightly reduce the debt, which means that there is no room for M&A. The only room for M&A is a reshuffle of the portfolio by reusing some of the cash we might get by selling some assets, unused, as there is. In terms of sales, Dominican Republic on the table and there might be the IPO of EE next year that could be another source of cash.

Operator

We'll now take our next question from Stéphane Schlatter from Societe Generale.

Stéphane Schlatter - Societe Generale Cross Asset Research

Could you please give us the expected impact of the 5% tax rate increase to 10.7% in full year 2014, please. And will this increase be offset by the consideration of the [indiscernible] and the 3S, please. Question number two, and this is about Spain, could you please update us about talks between Orange Spain and Telefonica about the access to fiber infrastructures, especially on wholesale prices. And finally a question on France, B&YOU cut its basic prices -- I'm sorry, B&YOU cuts its basic price to EUR 2.99, so do you intend to cut the basic price of Sosh which amounts today to EUR 9.4 -- sorry, EUR 4.9, please?

Gervais Gilles Pellissier

Regarding the increase of income tax, I think it's EUR 28 million, which is, I would say, not a good news, but much better than the initial projects of the government, where with the tax on EBITDA, we would have paid more than what we get in terms of crédit d'impôt pour la compétitivité et l'emploi, So this would have completely offset the positive effect of the tax relief on employment. Regarding Spain, Jean-Marc?

Jean-Marc Vignolles

Regarding Spain, as you know, we signed, in early July, an agreement with Telefonica regarding access to verticals, which has sold all existing issues regarding processes and the operational activities. And which has enabled to launch the massive rollout, jointly, with Vodafone which Gervais commented. So the main remaining issue is price. As you know, CMT decided on a temporary, cautionary way on a level of price -- wholesale price for this vertical access, which we still consider as discriminatory since, for us, it's 15% higher than the one agreed between Telefonica and Jazztel. And then twice the cost we experienced in our own rollout. So here we are expecting the final decision by CMT, now the CMNC, regarding those prices. And last but not least, of course, there is a process ongoing, following market analysis, to determine the price for bitstream access, which we know, so far, is limited to 30 Mbps, but which following the agreement between Telefonica and Yoigo, enabling Yoigo to access or resell the existing FTTH offer by Telefonica at 100 Mbps, we can see this should be revised shortly.

Delphine Ernotte Cunci

In France, we are very happy with our mobile net adds in Q3 and seen in October. And many thanks to our very good performance in premium offers. Origami and Open, which represents more than 60% of our consumer gross adds in Q3. So there's no need for us to cut prices today. And besides, B&YOU cut their prices only a few days ago, so it's too soon to see any impact on our Sosh space. So no intention to cut Sosh prices.

Operator

We'll now take our next question from Dimitri Kallianiotis from Citi.

Dimitri Y. Kallianiotis - Citigroup Inc, Research Division

My first question is regarding CapEx. I mean, some of your peers, like Vodafone, has been talking about significant increase in CapEx to really differentiate on sort of network quality and others, like KPN, actually talking down a bit CapEx, saying that there's no needed to push, too hard, fiber. So I just wanted to -- if you could share a bit your view on CapEx going forward? I mean, not especially for next year but for the coming years. If you feel now is a good time to increase CapEx, especially in France where Bouygues has, I believe, for the time being, on 4G and cable may get a bit more financial flexibility? Now regarding next year, your guidance is still to stabilize or grow your operating free cash flow. I just want to come back a bit to your comments on the -- that you've mentioned regarding the question mark on revenues, and just to see what would make you confident that you can achieve that guidance if it's driven by most your revenues stabilizing or declining a lot less or if you think you can really reaccelerate significantly the cost cutting or I guess a combination of both?

Gervais Gilles Pellissier

Regarding the CapEx, I would differentiate France from other countries because even if we, as I mentioned, we have made -- we have not seen a stronger figure of CapEx of our competitors, especially on the Fixed network including cable, by the way. And I'm not sure that this is just because the IPO -- the world -- this would mean that individual investors are stupid compared to private equity. It's just the fact to go to an IPO increase the CapEx. I'm sorry to say that guys, but I'm not sure this is exactly what will happen. What we see is that in terms of fiber, we are doing the maximum we can do today without -- before reaching a kind of non-written rule in terms of market share. I just mentioned that we are at 68% of net share of conquest on fiber, which is probably -- probably limit we can have, without creating regulatory questions, additional regulatory concerns. And coming at the base of installation of 8,000 connections if we are able to do that, which we hope at the end of the year, this is really, again, one of the quickest deployment for FTTH. I don't say for VDSL or vectoring, but for FTTH, within European countries, for big European countries. So that's one point. Regarding 4G, we don't communicate our plans and I'll not communicate them today. What I can tell you is that we will do all what we can to be at par and even before Bouygues as quickly as possible, okay? But it will not tell you when and what are our plans, okay? The second point on the 4G and, by the way, this is really a transition to what Vodafone had said, we think that some of our mobile-only competitors have strong weaknesses in their backhaul, in their distribute -- in their collect network and this is what they will have to invest in. If you look at the -- what Vodafone has been doing for the last 12 months, the purchase of cable and wireless, very dedicated to that, even if, at the same time, they get some customer franchise in B2B. This was not the main asset they were buying. If you look also at what some of you analysts are reporting on the synergies on Kabel Deutschland, this is also a huge part of the expected movement for Vodafone. This is the backbone of Kabel Deutschland and not just the business, the B2C business, coming from cable customers. So I think probably Vodafone has to do something. And my last point on the figure given by Vodafone, I think by saying I need to 20% CapEx is a way to keep cash and not to -- and to try to reduce the pressure of shareholders for more share buyback and I would probably do the same if I got, as a strong check, they got from Verizon. So that doesn't mean that we are not working on, maybe, increasing our CapEx this year. We might increase our CapEx next year, we have been increasing them slightly this year. We'll continue to that. But it is a country-by-country decision. It is not an overall strategy, because the competitive landscape is very different from one country to the other. Regarding the stabilization of our EBITDA. This is clearly the task on which the executive committee is spending time for the 2014 budget preparation. We know we still have pressure on revenues. And even if we expect some potential good news on revenues with 4G, we know that 2014 will still be a year of transition. We see the reprice coming from the price pressure of the past to move to SIM-only but at the same time, some revenues. This is why we will accelerate cost cutting. Now to which extent are we able to do that, that is still a question mark. Clearly, we have the ambition to stabilize EBITDA in the course of 2014. Now, how will that be done, I cannot tell you yet and we will comment that in March.

Operator

We'll now take our next question from Will Milner from Arete Research.

Will Milner - Arete Research Services LLP

I just want to actually build my last question a little bit more. I think talking about 4G deployment in France, I think Vodafone's accelerated investment is very much focused on the 800 megahertz band and it certainly seems that, certainly, to date, Bouygues has been focused more on the 2.6 and that sort of feels as though that's why you've been trying to match Bouygues. I just wonder if you can talk to the merits you see in accelerating deployments of LTE in the 800 band and, particularly, using this is a competitive lever against Iliad, who doesn't obviously have this capability. So I'd like to get your thoughts on that. And the second question really is just, I mean it seems that obviously a large part of free cash flow now is coming from the Iliad wholesale agreement, maybe EUR 500 million, EUR 600 million of free cash flow annually. I just want to get your thoughts on how you plan to replace that over time, over the next couple -- 2 or 3 years or certainly by 2018? And also, just focus on when you expect the greater savings from headcount reduction to come as I believe there's a faster pace of headcount reduction in the second half of the decade?

Delphine Ernotte Cunci

So on the 4G deployments, in fact, the combination of the 2 bands, 2.6 and 800 is the best combination in terms of bandwidth compared to the 1.8 of Bouygues. So we are deploying both frequencies in the core cities. And of course, outside in the suburban areas. So we began with the 2.6 for the best bandwidth. But nowadays, we are accelerating on the second band, the 800, in order to increase indoor penetration and to complete the cities' penetration. So we are very confident in the fact that we have the best frequencies to have the best customer experience in 4G.

Gervais Gilles Pellissier

Regarding the evolution of our revenues. I have said already in the past that regarding the roaming agreement. The roaming agreement, first, is valid and will bring revenues, at least, until 2016, okay, and probably some part of 2017 because it was in the news that Iliad has no 2G. We never have 2G and there will still be, whatever happens on 3G, some revenues with that. What we have said in the past is that we'll probably move, and by the way, our 2 competitors, Bouygues and SFR have done that, to, in France, probably, to a structure with network sharing as it is in other -- developing is other European country. Will that be with Iliad, will that be a group of 3 operators, will that be the 4 operators, are still huge debates on that. That's probably, for the year 2014, will be full of news and events on that and maybe Pierre will comment on the state of the art and what we think on the Bouygues-SFR agreement as of today and that will probably replace in the EBITDA and in the CapEx, the cash -- or part of the cash coming from roaming and this is the way we see the evolution of the situation. The second part is that we expect, clearly, from 2015 and after, that revenues from the retail business will grow again, that's part of our expectations. Pierre, maybe on the network sharing, where it is today with what do you -- what we think on the SFR-Bouygues agreement?

Pierre Louette

Well, hate to say, that we have limited knowledge of the, actually, apparently very short agreement that's signed. It's a memorandum of my understanding, which is, I think, a 1-pager, we don't know it. I haven't read it personally. So it's being elaborated upon now. This is really under the scrutiny of the asset and even more it's really heavily scrutinized by the Competition Authority here. So they are not there yet. This is what we can say. Is this going to be a mutualization? I think above 50% like they wanted, above 63% like the ARCEP and the ELC [ph] have said. This is really unclear now. Regarding the other players, One clear thing is that free Iliad and -- still has a relatively underdeveloped network as of today and a limited access to 4G as Gervais said. This is very clear for them, clear for us too. And if we come to a mutualization at one point or another, it will be more a co-funding of our network than mutualization with a non-developed network. So these are the premises of anything in the future but the future is not clear with that regard.

Gervais Gilles Pellissier

Regarding the account reduction until the end of the decade, the natural move was that we would have 10,000 departures between now and 2015, about 20,000 departures between 2017 and 2020. With the senior part-time plan, we will equalize the first part of this period, with the second part, more or less 15,000 departures until 2016, about 15,000 departures until 2020.

Operator

We'll now take our next question from Giovanni Montalti from UBS.

Giovanni Montalti - UBS Investment Bank, Research Division

You were saying before that the decision of the European Commission about the deal in Germany may provide ground for furthering market consolidation. Do you think this may be relevant also for the French market? Or the opposition of the French authority may not help?

Gervais Gilles Pellissier

I think Pierre will comment on that. We don't think this will change the opinion of the French regulators so far. But coming to the previous question on what will happen after the roaming agreement, that's also a big interesting question. What will be the consideration of the French market beyond 2016? Will we still have 3 operators on the market or not? If we ask the authorities today, they will say yes. But if you ask the question in 1 year, 2 years, 3 years from now, maybe the answer will be different. Pierre, [indiscernible] ?

Pierre Louette

Quite simply, things are moving now in Europe, everybody is looking at consolidation plays, intramarket or cross market. And everybody's going to be expecting the [indiscernible] , I would say, stance and decision on Germany. This will be sort of an orientation to the other regulators, even though it wouldn't be a clear directive or something that would need to be necessarily followed in every domestic market. So this will be first step. And then if you look at consolidation plays in France, I think we're not the weakest player and everybody knows who the weakest is. So this is all we can say today.

Operator

We'll now take our next question from Jonathan Dann from Barclays.

Jonathan Dann - Barclays Capital, Research Division

I had 2 questions. The first question was, could you just explain, one, the underlying x regulatory French mobile revenues are down 8%. It appears to have worsened. Could you comment on what's happening if you exclude the impact of Iliad? And then separately, you mentioned regulating OTT. I mean, generally speaking, what do you want the European regulators to actually do to them?

Pierre Louette

Okay. Yes, and so I'll take the second question first, the one regarding the OTT regulation. I think to make myself clear, the first thing we want is a world in which there are not 2 kinds of players, the ones who are regulated -- the ones who are heavily regulated like we are, and the ones who or not, competing for the same consumers or competing in exactly the same area. So we want this asymmetry to be ended. It can be ended because you will regulate the OTTs or it can be ended because you would un-regulate the traditional players we are. So this is the direction we are trying to push the commissioner into. Also there is another asymmetry that we are insisting very heavily upon, it's the fiscal taxation asymmetry. You're looking at a world in which you have, on the one hand, people who are very engraved within their domestic qualities and they have networks, people underground; and on the other hand, we have companies which are not completely inscripted within the terrestrial, I would say, reality and not paying taxes for most of them, in regard -- in proportion to the benefits they reap from the European markets. This is something I've seen, I think we've seen some of progress made on the -- clearer conscience is now established that this situation cannot go on and for instance, so just to conclude, a very recent evolution in Ireland was, I think, interesting for us. Ireland had decided apparently to end a bit of the fiscal haven given to Apple and this is something, I think, which is a sign that Europe is finally moving to that direction. So that's for the OTT telcos difference -- differentiation end.

Gervais Gilles Pellissier

And regarding the French revenues?

Delphine Ernotte Cunci

Yes. On the sluggish revenue drop is slightly better than the ARPU drop because of 2 things: incoming revenues and, of course, growth of the base.

Operator

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

Antoine Pradayrol - Exane BNP Paribas, Research Division

Most of my questions have been answered but I still have 2 small questions on -- first, on Spain, I think you said that handset sales were tripled year-on-year. Can you -- so that's something like EUR 120 million incremental revenues in Q3 compared to Q3 last year. Should we expect this kind of trend, I mean, this incremental EUR 120 million to continue for the next 3 quarters? Or is this going to fade away progressively and how should we model that? Then the second one is on Enterprise, which was certainly worse than expected in the quarter. Should we expect Enterprise revenues to continue dropping in Q4 and what do you expect for 2014 as well?

Gervais Gilles Pellissier

Jean-Marc on Spain?

Jean-Marc Vignolles

So regarding the Spanish market and on the reality that, obviously, we have moved rather dramatically from a subsidized model to a senior model where you have separate sales of the tariff on the one hand and the handsets on the other, which obviously explains the increase of the handset revenues you commented. As obviously, in the quarter figures, we recognize the total amount to be paid for the handset upfront plus financing on by the customer. So this obviously accounts for the increase of the handset sales and it should definitely go on in the next 3 quarters.

Antoine Pradayrol - Exane BNP Paribas, Research Division

On Enterprise?

Thierry Bonhomme

On Enterprise, I confirm what was said by Gervais, we have been facing, mainly in France and Europe, some kind of increase of the legacy decrease of our revenues during Q1, Q2 and Q3. And at the same time, less investment within our customers into their digital transformation. As a result of that, we have seen a slight decrease of global revenues. And we expect the year-on-year to be stabilized on Q4 around the 6%, 7%, which were mentioned by Gervais during the presentation. By the way, we had recorded very good results in terms of new acquisition in Asia-Pacific which is a growing area. Good result as well in Africa and Middle East. And very good renewals, even if they are with the rebates in France, both in the government and institution domain and within the industry.

Gervais Gilles Pellissier

This is a Thierry Bonhomme, he did not introduce himself. Yes, so Thierry is the new Head of the Enterprise division within the group.

So thank you very much for attending this conference this morning. And we hope to see you very soon and to -- and we expect to read very positive comments from you after this presentation this morning. Thank you. Have a good day.

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