Orange's (ORAN) CEO Stephane Richard on Q4 2015 Results - Earnings Call Transcript

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Q4 2015 Earnings Call

February 16, 2016 2:30 AM ET


Stéphane Richard - Chairman & Chief Executive Officer

Ramon Fernandez - Chief Executive Officer Delegate

Pierre Louette - Chief Executive Officer Delegate

Marc Rennard - Senior Executive Vice-President

Fabienne Dulac - Senior Executive

Thierry Bonhomme - Senior Executive Vice President Orange Business Services

Gervais Pellissier - Deputy Chief Executive Officer


Nicolas Colisson - HSBC Bank

Andrew Lee - Goldman Sachs

Frederic Boulan - Bank of America Merrill Lynch

Nawar Cristini - JPMorgan Securities

Dimitri Kallianiotis - Redburn

Stéphane Beyazian - Raymond James

Stéphane Richard

So, good morning, everyone. Welcome to this presentation of our 2015 results. As usual, I will talk a little bit about the highlights of this year that has been a year of turnaround for Orange. And then I will ask Ramon to give you more details and information about our results.

So, let's see maybe the overview of 2015. 2015 has been clearly a very important critical year for our company. First, with the announcement of our new strategic plan, Essentials 2020 was in last March. We also acquired Jazztel in Spain. We now consolidate Méditel, our Moroccan operation. We have launched, in 2015, the sale of Everything Everywhere that has been fully completed early this year. So, clearly, with a lot of dimensions, this 2015 year has been a year of turnaround.

I would like to also highlight the performance of the stock. With a total shareholder return of about 14% in 2015, we have over-performed the sector and the market benchmark by more or less 5 points each. So that is the reason why I am very happy to sit in front of you that our strategy, which is focused, as you know, as to deliver the best possible customer experience all over the world brings now some results. And I think that our 2015 achievements are a nice evidence of the fact that this strategy is relevant.

So, let's overview the main figures. As I mentioned, this year has been a year of turnaround. And the first turnaround is on the top line, on the revenue. We are at €40.2 billion, which is almost stable year-on-year, and a slight growth of 0.3% excluding regulatory impacts, we have recorded in the fourth quarter of 2015; the second consecutive quarter of net growth in the top line.

The second nice achievement is about the EBITDA, which is at €12.4 billion, slightly above our guidance and with a slight growth, 0.1%, compared to 2014, 30.9%, of EBITDA margin. This means that, in fact, we have been able to stabilize or even to return to growth both in revenue and EBITDA, a year ahead of our midterm plan.

We clearly have been able to reach those results. Thanks to a very active policy of CapEx investments mainly in our networks. We have invested €6.5 billion last year, it's 9.3% year-on-year growth. We are at 16.1% of our revenues dedicated to CapEx. It is clearly thanks to this that we are now able to differentiate from our competitors based on the quality of our networks and services. The customer base rose to 263 million customers. It is an increase of almost 6 million customer’s year-on-year.

Our guidance, EBITDA guidance has been overachieved at €12.4 billion. Let me remind you that it is the first time since 2009 that full-year EBITDA slightly increases. The EBITDA margin is at 30.9%. Its 0.1 points ahead of 2014. What is, I think, important to see is that, if you compare this achievement in terms of EBITDA with the comparable perimeter as with 2014, we are ahead. And if you include the new acquisitions, Jazztel and Méditel, we are also ahead. And this is also, I think, a very good result and news that we can share altogether this morning.

The contribution of our acquisitions, Jazztel and Méditel, especially Jazztel, are significantly better than expected. We have been able to deliver more synergies than we announced to the market. And we are very, very happy about the integration of Jazztel in Spain.

In terms of balance sheet, we closed the year with net debt-to-EBITDA ratio of 2.01, meaning that we are clearly perfectly on track with the midterm target, which is around 2. Meaning that we have been able to deliver those results by keeping a very strong balance sheet. Clearly one of the strongest of the industry. And as you know, we have new operations in the beginning of this year that will even give us more flexibility especially with the closing of EE with some additional cash, €4.5 billion and 4% of British telecom.

As far as the dividend is concerned, of course, the set of results enables us to confirm the €0.60 dividend per share that has been decided previously, meaning that we will pay €0.40 in June. The board has confirmed, of course, this decision.

In 2015, we have been very active in managing our footprint with, as you know, our vision and our priorities, which is for us to be convergent everywhere where it is necessary to be convergent. In Europe, acquisition of Jazztel in Spain, I've mentioned this. We are very happy about this strategic move and the execution of the integration between Orange Spain and Jazztel.

We have also decided to acquire some operations in Africa and the Middle East, Burkina Faso, Sierra Leone from Airtel, Cellcom Liberia and recently the acquisition of Tigo in Democratic Republic of Congo, which will lead us to implement the consolidation in this country, which is also very value creative.

We have consolidated Méditel from the second half of 2015. We have completed the disposal of Everything Everywhere. And launched the disposal of Telkom Kenya and Orange Armenia, meaning that we are very active in the management of our portfolio looking for value creation out of our operations.

Our plan, Essentials2020, has been launched in March. As you know, it is organized around five priorities, five levels: offering enriched connectivity; reinventing the customer relationship, which is so critical in our industry; building a company model that is both digital and caring for our employees; supporting the digital transformation of our business customers, which is for the B2B division; and diversifying by capitalizing on our assets, mobile banking, Internet of Things.

Maybe, we can see the first outcome of this plan in this short video that I suggest you to watch with me.

[Video Presentation]

Well, let's focus now quickly on our 2015 investments. To reach our objective to offer the best quality network and services, we invested in future growth through CapEx spectrum, but also selective content and innovation. So, the CapEx, overall, has increased by 9.3% at €6.5 billion last year.

Out of this, two-third of this CapEx is dedicated to our networks. And more than half of CapEx increase has been dedicated and linked to fiber deployment. Orange is today the European Telco, which is the most active in fiber rollout all over Europe. But we also continued our 4G expansion. We are now over 80% of 4G coverage in France. And we have added five new countries in Africa and Middle East to our 4G network.

We also continue to enrich our offers with attractive contents. And for instance, we purchased broadcasting rights, we think, at reasonable cost in Spain for the soccer championships and also for the Champions League for 2015 and 2016 season. This has been clearly a very strong support to develop our IPTV customer base in this country, but also in Europe.

We have decided also to rollout an IoT network based on the LoRa technology. It is part of our strategy to become a strong player in the IoT ecosystem, which is, in fact, being built today. We have also been very active and very successful in spectrum acquisition. As you know, this is a raw material of our industry, the mobile part. And in quite a number of countries starting with France clearly, we have been able to consolidate, to strengthen, to enrich our spectrum portfolio in those countries.

But we have also been active in investments in the digital innovation ecosystem by investing in a series of interesting startups. You have a few examples here. Let me mention, for instance, Actility, which is a very promising young company startup, dealing with the IoT area based on, once again, on the LoRa technology, which is the choice that we made.

I will now say a few words about the commercial performance across the group, with a few illustrative figures of what we've been able to achieve last year starting with 4G customer bases, doubled in one year. And we are now a strong leader in 4G in France, in Spain, in Belgium, where we have 99% of coverage. And clearly, 4G is the driver of our recovery and back to growth in the mobile service area.

We have accelerated a lot in fiber rollout, both by connecting more homes. We have more than doubled the number of connectable homes in Europe, but also by increasing, in fact, we multiply by three our customer base in fiber offers. We are now, in this beginning of 2016, around 2 million customers. And as you know, we have recently recorded 1 million fiber customers. So, we are clearly in a very strong acceleration trend in fiber. In Africa and Middle East, still some growth. In the mobile customer base, we have today one African out of 10 who is a customer at Orange.

And in the Enterprise segment, the two domains where we decided to really invest and we consider as our strategic priorities, security, cyber security and cloud-based services. We have achieved double-digit growth in 2015.

So, in a world, I would say that those results, the set of results in 2015 are very promising. And we see this as clearly an evidence that our strategy is delivering, being back to growth both in top line and in EBITDA last year. Once again, one year ahead of our midterm plan.

I will now ask Ramon to give you full details about those results. Ramon?

Ramon Fernandez

Thank you, Stéphane. Good morning. So, we're going to turn to slide 13, where you can see that we had a very encouraging fourth quarter. It's the second quarter in a row with positive growth in revenues and EBITDA. And over the full year, revenues almost stabilized at minus 0.1% compared to minus 2.5% in 2014. This improvement, you can see, has been driven by better trends in France, in Europe, in the Enterprise segment, and is also supported by a solid performance in Africa and the Middle East with plus 5% of growth.

If you look at product lines, the main drivers of this very good performance were both the continuously improving trend in mobile services and the ongoing growth of fixed broadband services, mostly in France and in Spain. This better trend in revenues contributes to the EBITDA growth as illustrated in the next slide.

In Q4, the EBITDA increased for the second quarter in a row with a plus €43 million. For the full year, EBITDA grew by €10 million. So, we reached, as Stéphane said, our objective of stabilization one year in advance compared to what we had announced in March with the Essentials2020 plan. This performance is the result of both strong improvement in revenues and of ongoing efforts on our cost base.

The graph on the top-right provides some details on the full-year EBITDA evolution. You can see that first the revenue decrease was limited to €47 million. It was minus €1 billion in 2014. Second, our total costs were down €57 million. Direct costs were up by €62 million. But this is sustaining our activity with more interconnection, more content, more connectivity. And this is partly mitigated by a strong reduction in commission. This is an effort we have engaged in, which is delivering results.

Second, we continued to reduce indirect costs, which were down by close to €120 million, mostly driven by a decrease in general expenses and in group head count down by close to 4% year-on-year.

In 2015, our Chrysalid program, which has been renamed Explore 2020, already enabled significant growth savings, €953 million in line with our renewed €3 billion ambition of gross savings between 2015 and 2018. Our previous plan was a real success. And with this renewed Explore 2020, we will continue our efforts to identify how much operational efficiency we can get within the group.

I will give some examples further down the road on, for instance, digitalization of our customer relations, which now account for more than 20% of our commercial transactions in France, which is a strong increase. Its 4 points more in 2015.

Let's turn now to investment. Stéphane already discussed our CapEx efforts. And it's clear that this commercial performance is very much supported by the increase in our investments, which reached €6.5 billion in 2015, CapEx to sales ratio of 16.1%. We increased our investments in 2015 by €552 million. And this effort has been mainly focused in France, which accounts for more than half of this increase.

We accelerated, obviously, our investments in fiber. And as a result, we have now more than 5 million connectible homes in France, which is 1.4 million more since the beginning of the year. In Spain, following Jazztel acquisition, we reached close to 7 million connectible homes with fiber. And our target is to reach 10 million by the end of this year 2016. In Poland also, we added more than 400,000 households, which are eligible to VDSL for a total base of 4.7 million customers.

So, in mobile, we have also made a lot of progress. Orange continues to be the leader in France with 4G, with over 80% coverage of the population. This is 6 points more in 2015. And this performance is also seen in other European countries. In Spain, for instance, we reached 85% of the population. And this goes up to 99% in Belgium.

All our countries in Africa and the Middle East have now access to 3G. And we have six countries benefiting from 4G services with an important effort in terms of mobile sites. We increased the number by 6% this year, more than 1,275 exact sites to cover the population.

Also, in terms of investment, we have done some real estate investments. And we have deployed 21 smart stores in 2015 in six countries. This performance has led to a consolidated net income increase of around €1.7 billion. And we reached €3 billion in 2015, with a net income group share multiplied by almost three at €2.6 billion. This very good result is coming from three elements.

First, obviously a better reported EBITDA, which is reflecting the improved underlying trend in our activities. Second, lower taxes compared to 2014 where we were impacted by taxes linked to the sale of Orange Dominicana and also the impairment of deferred tax assets in Spain. And third element, the increase of net income from discontinued activities in the context of the EE disposal.

You can see also that in 2015, the increase in depreciation and amortization level reflects the change of perimeter following the consolidation of Jazztel and Méditel, which is partly offset by lower impairments and financial expenses.

Turning to the net debt evolution. You see that excluding acquisitions, we reduced our net debt by €850 million in 2015, reaching €25.2 billion during this past year. And including acquisitions, which is essentially Jazztel, the net debt reached €26.6 billion.

Let me remind you that we had put €2.9 billion under escrow in 2014 in order to finance the acquisition of Jazztel. And, therefore, the net impact of the €4 billion enterprise value of Jazztel was around €1.1 billion at the end of 2015. As a result, in December 2015, our net debt to EBITDA ratio was at 2.01 compared to 2.09 at the end of 2014. And this is fully in line with our guidance of a ratio around 2 in the medium term. Our liquidity position also remains very strong at €12 billion including €5.5 billion of net cash.

Let's now look at our traditional business review by main segment, starting with France. France had a good fourth quarter confirming the improvement of revenues trend, which were close to stability in the fourth quarter. If you exclude the regulatory impact, the Q4 total revenue was even growing by 0.3%.

Fixed broadband revenue growth accelerated in the last quarter at 3.2%. It's obviously driven by the fiber customer base growth. The convergent offers discount continued to slightly impact the broadband ARPU, but it was largely compensated by an improvement in the retail customer mix. Thanks also to the PSTN price increase in March 2015. The decrease in fixed narrowband revenue slowed down at minus 9.7% in Q4. The fixed wholesale revenue stabilized in the last quarter. It was even plus 0.1%. Thanks to fiber B2B accesses and backbone transmission services growth which helped to compensate the impact of unbundling retroactive adjustment.

Mobile revenues, including services and equipment, grew by 0.5% during the year. This is supported by an increase in the contract customer base and also a sustained equipment sales including during the Christmas period, despite a very strong competition.

Mobile service revenues evolution in this fourth quarter was also positively impacted by a phasing effect in the booking of the national roaming agreement that negatively affected the Q4 of 2014, which was a comparable basis. And despite the end of the back book repricing, there were still some adverse factors, mostly SIM-only penetration, which is growing, I will come back to this, and also a change in special numbers billing. So these factors will continue to have some impact in 2016.

EBITDA in France was back to growth in 2015. We had close to €100 million growth in the second half, €99 million. And we also have an improvement in the EBITDA margin in France which is notable. Revenue loss slowdown associated with the ongoing efforts on costs enabled this return to EBITDA growth.

In France, total savings in terms of costs in 2015 reached €223 million. Direct costs slightly decreased, thanks to a better location of acquisition and retention costs and also a reduction in distribution costs. Indirect costs continued to fall, driven not only by labor costs decrease but also by network optimization and by the increase in digitalization of customer relations.

If you look at the commercial performance, and first, mobile, well, you can see that despite a very competitive environment, our mobile customer base grew at a strong pace with 4 million additional 4G customers year-on-year, which was also supported by our convergence strategy. We have 46% of the consumer voice contracts on open offers at the end of 2015. The low-end segment was still under pressure. But the high-end offers performed very well, which is contributing, improving the success of our value strategy.

SIM-only offers continued to be predominant in our acquisitions. We have now 52% of our customer base, which is on a SIM-only-offer basis. And last but not least, you can see that in Q4, we had, again, an improvement in our churn rate, which is now at 13.4%, which is the lowest level since 2010.

On fixed broadband, again, a record quarter in terms of net adds, fully supported by our fiber strategy with 133,000 fiber net adds of which more than half are new Orange customers. All in all, the broadband customer base increased by 3.7% year-on-year with the fiber penetration increasing to 19%. This is 4 points more during 2015. And you know that our objective is to reach 25% in 2018. So we are well on track.

83% of our eligible Orange customers have already migrated to fiber, 83%. Fiber, combined with convergence, continued to be a strong tool to conquer and upsell customers. 76% of our new convergent customers were either new mobile and/or new fixed customers. It's the highest level ever. And in addition, we increased by 4 points the share of our premium customers.

Let's now look at Spain, which is, as you know, the second main country and more and more important. In Spain, in Q4, we see the revenue trend continuing to improve, with a decrease limited to 0.7%. It was close to minus 4% in the first half of the year. Mobile service revenues were back to growth, at plus 0.7% in Q4. And this is driven by an increased data usage and growth in the contract customer base.

And in terms of fixed broadband, revenues kept growing at a very strong pace in the fourth quarter. It's close to plus 7%, 6.6%. This better trend in revenue combined with the very successful integration of Jazztel led to an increase in EBITDA of 6.2% year-on-year in the second half versus minus 9% in the first part of the year, with an EBITDA margin improving by close to 2 points during this same period.

The investment effort is ongoing also in Spain. CapEx were increasing by 5.3% in 2015, and this is reflecting the acceleration of our investment in fiber, which now covers close to 7 million customers in Spain, 7 million households. In Q4, the commercial performance was very strong fueled by very high broadband. As of the fourth quarter, we have more than 20% of our broadband customer which is on fiber and we have more than one third of our mobile clients on 4G. So all these figures are contributing to a very nice turnaround in Spain.

We also multiplied by close to three times our TV customer base and this is driven by the success of football offers. As you know, we have participated in November at the tender on football rights and this is a very strong component of our policy in Spain.

Turning to Poland. In Poland, revenue trend in mobile services is improving. It was improving for the second quarter in a row. With momentum continued to build up in fixed very high broadband with net additions growing including from fiber activities. Mobile service revenues eroded by less than 2% in Q4. So it is still a negative figure but it was more than 5% in Q2. So there is a clear improvement. And we had net contracts on mobile, which were improving for the third quarter in a row to 274,000 customers. The competition in Poland is quite tough on fixed, especially from cable.

So fixed revenues were still under pressure, minus 8.5% in Q4. So in order to improve the situation here, we are pressing ahead first with our convergence strategy. We have now 35% of our broadband base which is on convergent offers. And also, we have in Poland also a very high broadband strategy with an investment plan in fiber. We've now 15% of our base on VDSL or FTTH.

Let's look at Belgium. In Belgium, we have revenues going up in the fourth quarter for the second quarter in a row. We've a base which is accelerating. It was 2.3% in the fourth quarter compared 0.6% in the third quarter. We had a very strong contract net adds performance in B2C with close to plus 30,000 net adds excluding M2M in the fourth quarter. And we have also an ARPU which is growing in Belgium, second quarter in a row. Always a plus 3.6%. Very good performance. And also, churn still going down in Belgium. So this is a very positive momentum. We are going to build on this momentum. Mobistar is now ready to launch its convergent offers through a regulated access to cable. And Mobistar is also ready to embark on a new stage in its life under the Orange brand.

In our Central European countries, we also had very good news in 2015 with positive revenue growth in 2015. In Q4, revenue growth in this sub-segment was a solid 2.9%. And this is essentially driven by Romania, which is representing 60% of the total segment and which posted a very strong growth of 7.4% in the full year.

In this part of Europe, we also moved forward in our convergence strategy. In Romania, we have signed an agreement with Telekom Romania to get access to fixed services. And following this agreement, in all our European countries, we will be fully convergent in 2016.

In Africa, in Africa, you can see that we still had a very good performance in 2015, more than 5% increase in revenues. In Q4, the performance in revenues was slightly lower than in previous quarters mainly due to a strong Q4 in 2014. This is driven by a very good performance notably in Ivory Coast, in Egypt, and the Democratic Republic of Congo, Mali, Guinea. In Q4, we also have seen a cleaning of our user database. This happens from time to time, and it resulted in a reduction of the number of customers in some countries, mainly Morocco, Cameroon, and Mali.

But despite this cleaning of database, our mobile base has been up by 4.4 million customers in 2015, which is a growth of more than 4%. And Stéphane talked about the acquisition in four countries, which is going to bring us 13 million new customers and around €450 million additional revenues.

Last but not least, before turning back to Stéphane for the guidance for 2016, the Enterprise segment, where revenues were at minus 0.4% in the fourth quarter, which is better than the early trend of minus 0.9%. And this improvement is supported by favorable trends in some activities, strong growth in IT services. And as a result, we have EBITDA stabilization.

So we can see that data services continued to improve, supported by volume increase of IPVPN accesses outside France, lighter price pressure, and also in a market which is evolving towards more and more services, cloud and security is continuing to grow and to be a driver for OBS revenues. It was plus 7% and 14% in Q4, a bit less than the yearly performance of 10% and 24%, but there is here the impact of the calendar of large contract deliveries. Stéphane for 2016.

Stéphane Richard

Well, 2015 has been a year of turnaround. I will say that 2016 will be a year of consolidation. I am not saying of the consolidation. And we have clearly a main target which is to consolidate our return to growth, first by delivering an EBITDA this year in 2016 above 2015 in comparable basis. So we are fully dedicated to keep this positive trend in EBITDA generation, and our target is clear to have an EBITDA this year above 2015. We want to keep a strong balance sheet with net debt to EBITDA around 2 times, which is our medium-term target. We want to confirm and to sustain our payout policy by delivering a dividend of €0.60 out of our results with the first interim payment of €0.20 in December of this year. This level is clearly the right balance between the recovery trends of the company but still the necessity to invest and to dedicate resources to our CapEx.

And then, in terms of M&A, we will still try to explore the opportunities that are really right in our strategy, convergence in Europe, expansion in Africa and the Middle East. Being very selective and clearly 100% focused on our existing footprint. We don't have any kind of plan or project outside our footprint.

We have also, as you know, a big project in preparation in the company, which is our Orange Bank that we want to launch early next year. So, this is, overall, what we want to deliver this year. EBITDA growing, increasing, strong balance sheet, attractive and sustained dividends and very selective M&A policy.

We are now ready, with Ramón but also the other members of the executive committee, to answer any question that you might have.

Question-and-Answer Session

Q - Nicolas Colisson

Thank you. Hi. Nicolas Cote-Colisson from HSBC. I've got two questions, first on France, the second one on Africa. On France, there's a clear pressure to develop fiber in the less dense area to sort of place where the local authorities are building their own networks. So I was wondering how you can reconcile the interests of all the stakeholders when you build in these regions. And also, if you can provide us with an indication of what is left to be built in the very dense area. So that's for France.

And regarding Africa, should we still think about an IPO of the business if markets ever recover, or do you have other plans for your African holding? And last on Africa, I was wondering, from a cash flow point of view, I can see how you stream up the cash from Sonatel through dividends. I was wondering how you get the cash from other countries back to Orange SA? Thank you.

Stéphane Richard

Okay. So I will first maybe ask Pierre to make an update on the fiber rollout mechanisms, especially in the less dense areas with the local authorities. Pierre?

Pierre Louette

Yeah. So regarding those areas, we're talking about a zone of 12 million households. So it's an area in which our market share in copper is really strong today. But we're looking forward to a period in which new actors are going to be active in this region.

There are a lot of competitions open, about 70 projects, 75 projects coming from different departments, and [indiscernible] different communities putting the efforts together in this part of the country. And we have decided to tackle this issue because we want to be present, obviously, in those areas in the future. So we are increasing now the amount of money that we are ready to invest in building the networks or being clients of the networks. We found out actually that some of our competitors are investing in those areas. We cannot allow ourselves to be absent, so we are increasing our efforts, and this is going to be, I think, quite fruitful in the future. We're also looking to other solutions like having other solutions to bring high bandwidths to those rural areas.

We know that the cost of bringing fiber to the last isolated farm is going to be extremely high, and everybody knows this today. It's a very political target. Actually, it's rather fiber to the politician than fiber to the house. So it's something that everybody talks about in France. And we want to find out about those new solutions, some of them we're using now like [indiscernible], which is adding bandwidths on copper networks. And we're also trying to do this by building collect, networks of collecting fiber that is going to be reusable for the FTTH in the future.

Stéphane Richard

All right. Maybe Ramon for the future of our African holding, and Ramon and Marc.

Ramon Fernandez

Yeah. Maybe a few words and with Marc. On the potential IPO of the [indiscernible] a new holding company, we have always said that this was not the near-term project. I think we are all very much focused and I'm talking - looking at Marc and Bruno on integrating successfully the four countries that - well, the three new countries and the new operation in DRC that we are going to close in the next month. And we have signed these deals with Airtel in Burkina Faso and Sierra Leone which we are going to operate and manage from our operations in Senegal and Côte d'Ivoire. And we are going to focus in Liberia and on Tigo integration in DRC. So this is the main challenge. We have growth in Africa. We are developing Orange Money, we gave the figures. It's now €80 million of revenues with Orange Money we had in 2015. And we are planning to keep augmenting this figure.

So, the real priority is to be successful in managing these new operations in 2016. I would say that looking at the future of the shareholders is something that is not an urgent matter. First, we have to do what we have done in Spain with Jazztel, a big success in terms of integration.

In terms of dividends, we don't have cash pooling in Africa. We have profits coming through dividends or reimbursements of loans that we could have given to our subsidiaries there. I don't know, Marc, if you wanted to add something.

Marc Rennard

Regarding dividend collection, we never faced any specific difficulties to - I don't know where you are, sorry. We never faced any difficulties to collect the dividend. I will be with Bruno tomorrow in Sonatel to share with Board of Directors. We have no issue. We'll vote the dividend that will be approved by the General Assembly on April 14. We never faced any difficulties, but I have to say also that we never faced any specific difficulties to collect dividend in any countries because we have specific protection rules and it's a normal way of managing business.

Stéphane Richard

Good. [Indiscernible] Sure.

Unidentified Analyst

[Indiscernible] First question on content. It seems that you are more open-minded to move from a pure distribution business model. And if it's the case, what were the reasons? You could buy some contents and be successful after the prediction of content cost at a range. And a second question on fiber. Are you pleased with ARPU and churn evolution for the clients after the 12-month discount promotion period?

Stéphane Richard

Okay. Regarding contents, what we have decided is clearly to review our strategy and our options regarding content. As a matter of fact, the landscape is moving. There are new players coming into the game. We see also the sports rights, especially soccer rights being more and more expensive with a lot of competition around this.

So what we want to do is clearly to review completely our strategy and options. We have decided to spend to organize a seminar of the Executive Committee which will be dedicated to the content strategy. It doesn't mean that we are going to invest or to buy such or such player. It also means that we are very pragmatic. And in fact, our main concern is to secure the sourcing of critical contents for our customers. So we are clearly still considering ourselves as mainly a distributor of contents, certainly not an editor or a producer of contents, even though we still have our pay-TV channel, OCS, which clearly is, I think, a nice story and delivers attractive results. But we have no intention to move into the contents edition or content production sector, but we are still - we pay a lot of attention to, once again, secure the sourcing of the key contents everywhere in a context where we have to put more money to contents to reach these targets.

Regarding the fiber views, ARPU and churn, I'd ask maybe Fabienne to provide you some answers.

Fabienne Dulac

So we already sell fiber with a gap of €5 from - compared to ADSL office. So it's a good result for us. The churn is not worst behind the promotions, so we are confident. And the [indiscernible] I can maybe explain, 57% of our customer fiber make the choice of premium of fiber. So we are very confident on this strategy on fiber.

Stéphane Richard

Yes. [Indiscernible]

Andrew Lee

Thank you. It's Andrew Lee from Goldman Sachs. I thought your M&A criteria is really clear. Last time we met, you talked about Pan-European consolidation. You basically laid out, I think, quite a clear argument there that you need all IP in a single European regulator for it to make sense. Given those two things fill a long way off, I wonder if you could just give us an update on your thoughts on Pan-European interests?

Just secondly on the indirect costs, you trimmed down €520 million this year on an underlying basis. Should we be thinking about similar level of opportunity into 2016? And then, just lastly on CapEx, the CapEx looks like it's a bit - it's running at a higher run rate than we may have expected at the CMD. Is that just bringing forward your CapEx plans in terms of timing and acceleration of that timing in the near-term or have you raised your expectations for total CapEx over three years? Thank you.

Stéphane Richard

All right. So I let maybe Ramon answer on the indirect costs and CapEx. And I try to give you some remarks or comments on the European landscape. First, what I see in Europe is still consolidation, mainly based on convergence, fixed mobile. And for instance, the today announcement of Vodafone and Liberty Global in the Netherlands is one more evidence that the game is around convergence between fixed and mobile.

I definitely think that the players that are mobile-only or to some extent fixed-only will have strong difficulties in the future, if they want to be competitive in the European markets. So our first target in Europe is still clearly to be convergent everywhere where it is meaningful. And as you know, in Spain, in Belgium, in a few days, we are going to launch, I think, a very competitive, very attractive fixed offer and convergent offer based on cable as this has been mentioned. We are natively convergent in Poland and we are going to be convergent in the other countries, Romania, Slovakia, especially.

Now, when it comes to Pan-European moves or consolidation, well, I think that in the long term, the prospects of viewing a more integrated space in terms of regulation and competition approach in European Union is still a prospect. As you know, it takes time, a lot of time to have new rules, new regulations. There are projects in Brussels between the Commission and the Parliament. What I think is that there is a political will at least in France and Germany to try to make progress towards this single space in Europe, but I do think that we will have to wait for a number of years before seeing something concrete to that regard, but this is still the prospect.

Then there is the technology aspect with the move of incumbents or former incumbents towards all IP networks and also, to some extent, the convergence between fixed and mobile technologies that are going to provide, altogether, higher bandwidth and based on full IPTV - IP, sorry, networks. So this is a clear, now, reality in our technology.

To be honest, I don't think that those elements, the technology and the prospect of having a new frame in Europe are near enough and close enough and strong enough to justify big moves between the big European players. As I have said, I think regularly previously, I think that this kind of Pan-European deals are very complicated, are not delivering value creation clearly, are not based on an equity story which is simple, clear and easily understandable by anyone.

We are facing many political deals or political approach. And to be honest, I think that politics is not the best friend of business, as you know. So that is why I - we remain very cautious. I am not saying that we won't see anything in the future, but I do think that for still a number of months, the priority will be to strengthen the business, to invest in the networks, to consolidate when we can consolidate and be convergent. I don't think that the time has come to see a big Pan-European combination.

Ramon Fernandez

In terms of indirect costs evolution, we had said in March 2015 when we launched Essentials2020 that our target was to reduce the ratio of indirect costs to sales by 2 points between 2015 and 2018. We stick to this ambition. And so, we are going to continue our efforts to work on this cost base.

Of course, the good news is that perspectives in terms of revenue growth is better. We are in advance compared to our plan. As Stéphane said, EBITDA is at its low point one year before our initial expectation. And in terms of growth in revenues, we are close to stability already in 2015. So we will continue to work on costs whether direct or indirect.

Dynamics in different regions will not always be exactly the same. For instance, in Africa, you will have an evolution which will be more costs driven. In [indiscernible] we have also the inflationary pressure, taxes which are not on the decreasing mode. But all this is going to remain under control. In terms of group indirect costs effort, it will remain in the same order of magnitude. So [indiscernible] program is going also to be there to drive operational efficiency in all the areas of our group. So we are well on track with what we had in mind when we talked last year.

Looking at CapEx, you're right to say that we are investing more than what we had initially anticipated, slightly more. But we still are on the same perspective, which is, basically, to reach the peak around 2017 and then it will slowly go down.

We may in 2016 invest a wee bit more than what is currently the consensus. I think the consensus must be somewhere around €6.7 billion. We invested €6.5 billion in 2015. The important element is that this is really delivering great results, and it's investing in the network, it's investing in customer experience, and you have seen the commercial impact of these investments in 2015.

When you say, for instance, in France that you are going to have 4G in high-speed trains, in highways, in [indiscernible] stations for those who will have the pleasure to go there, well, people know that Orange will deliver this and they will come to us. So it's good investment, delivering results.

Stéphane Richard

Okay. We'll take a question from London maybe by telephone.


We will now take our first question from Frederic Boulan from Bank of America. Please go ahead.

Frederic Boulan

Hi. Good morning, gentlemen. First question on Bouygues Telecom, if I may, if you could explain the rationale of potentially using shares - issuing shares to Bouygues with stock trading at [indiscernible] low valuation versus the target, and your current leverage, which as you pointed out, is very much under control, why not pay cash and let Bouygues acquire a stake in Orange with the proceeds, if they want to?

And secondly, in terms of dividend commitment, if you could confirm that your €0.60 dividend will be maintained in any scenario with Bouygues Telecom including an increase in your share count? Thank you very much.

Stéphane Richard

Okay. So this is an opportunity for me to update very quickly the Bouygues Telecom affair. Well, as we made it, I think, very clear, early this year, we have decided to explore with Bouygues the conditions of possible combination between Bouygues Telecom and Orange. When I say combination, I mean acquisition but of course, clearly this acquisition implies that a wider discussion could be organized with the two other players in the market.

I think everyone is aware of that. What I can say is that those discussions are still ongoing. As I think everyone can realize, it is a relatively complex process, but the discussions keep going. There is a good momentum. I don't want to mention any kind of time constraint or schedule, or agenda for those discussions. But as I have already mentioned, I think, that we must go as quickly as possible to be able to make a decision, yes or no, depending on what is the possible deal and we will decide ourselves based on a few very simple and clear parameters.

The first is to create value for our shareholders including, of course, the cash versus equity aspect of the deal. So, to me it is clearly one of the dimensions of a value creation approach for our shareholders.

The second is to have human resource treatment, let's say, of the deal and of the integration that will be as good and even as exemplary as possible for all the Bouygues Telecom employees and of course for Orange employees, but clearly it concerns firstly Bouygues Telecom employees. And it is also because I think, about them that I think we have clearly an obligation to go quickly. We cannot let this company in this kind of uncertainty on the future very long.

And the third condition is about the execution of such a complex operation. We want to be, I would say, reasonably strong in the execution risk, execution process of such an operation. So, once again, ongoing discussions and the matter of few additional weeks probably to be able to make a decision.

Now, you mentioned the cash versus equity aspect. It is one of a lot of, say, aspects of this deal. And what I can say is that we have not made any kind of decision regarding this aspect. I think that I can say that our purpose is to present a nice and attractive operation for our shareholders, creating value, re-rating, maybe, the stock. That is the purpose.

I think all of us are perfectly aware of the sensitivity of the cash versus equity dimension. So it is part, of course, of the technicalities of the deal, possible deal, would-be deal. But, once again, the purpose is to have the best possible value-creative operation for our existing shareholders. This is one of the aspect. It is not the only one. But we have, clearly, this in mind.

Regarding, now, the dividend, well, I think that it's quite clear that the return to a slight growth in revenues and EBITDA, I think is a nice achievement of 2015. And once again, we are very happy about that.

We think that it is too recent and still too fragile to decide something regarding the dividends. So we think that we need a few more quarters to be sure that we are back to this positive trend before reviewing eventually our payout policy. So it means several quarters, consecutive quarters of growth in EBITDA before maybe reviewing our dividend level.

Once again, we are one year ahead of our plan. So maybe the prospect of seeing a move on the dividend might be closer than previously expected. But we are still in this recovery trends, I would say early recovery trends. And we clearly want to be stronger and sure that the dynamic in terms of revenues and EBITDA will be confirmed in the next quarters before deciding a move, a positive move of course, on the dividend.

Frederic Boulan

And just to clarify my question. So can you confirm that this €0.60 commitment will be there in any scenario including...

Stéphane Richard


Frederic Boulan

...the higher number of shares?

Stéphane Richard

Yes. I confirm. I confirm this. Clearly, we will deliver €0.60 a share in any kind of scenario including if there is a capital increase.

Frederic Boulan

Excellent. Thank you very much.


We will now take our next question from Nawar Cristini, JPMorgan. Please go ahead.

Nawar Cristini

Thank you very much. Nawar Cristini from JPMorgan. Thank you for taking my questions. So my first question is related to the ongoing consolidation talks. In particular, in terms of market repair, it would be good to get your thoughts about how you view market repair post that potential deal. What are the areas where you see most, the most attractive opportunities? And in the case of the mobile market, how do you think about competitive dynamics with an improved proposition at Iliad, thanks to the network and spectrum.

And my second question is on the B2B markets, there are a number of moving parts with Numericable-SFR still working on the integration with Bouygues, which is small in that market but is pushing harder on - thanks to the 4G offering. It would be helpful to walk us through the competitive dynamics there and also to tell us more about any impact that we should see following the Antitrust Authority fine that was issued in December. Thank you very much.

Stéphane Richard

Okay. So regarding your first question, I don't see any market repair. I think - I hope that it is perfectly clear for you. I don't see any market repair. This operation is not based on market repair approach. You can have your own estimates of market repair. Everyone can have his own calculation or opinion about the matter, but Orange is not looking to any kind of market repair through this consolidation, possible consolidation. We are looking for optimizing our CapEx. We are looking for optimizing the fixed costs related to networks, fixed and mobile, and optimizing also the fiber rollout plan.

We think that the French market given the size of the country will be more efficient for everyone for the consumers, for the enterprises, for the local authorities based on three strong players instead of four players, among which a number of them will have some difficulties to become clearly convergent in the midterm. So that is what we think. We think that this move is first meaningful and good and positive for Orange if we can organize it based on the condition that I set, and that's it. And the purpose is clearly not to have any kind of market repair.

Now, the competitive dynamics I think you had a question about Iliad, and if I understood well, your point is given the spectrum purchase but also the possible purchase of the Bouygues network by Iliad, what will be the competitive dynamics of Iliad in France. Well, I would say that what is the normal prospect for Iliad is to have a fully autonomous network one day, okay, based on their own deployments of the network or maybe the opportunity to purchase another network. But one day, I think it was clearly the purpose of creating a license for a new MNO in France. One day, Iliad will have a fully-autonomous network.

So, we are talking about, in fact, for them, the opportunity to accelerate this network independence, if I may say so, but it is not something, which is so significant in terms of market dynamics to me. And so, I don't see any kind of impact or direct impact coming from this. I think it's a matter of timing, it is a matter of maybe optimizing also their CapEx in terms of networks and that's it.

Basically, we are clearly targeted as delivering the best network in France, mobile, clearly. For the fifth consecutive year, we are number one. And we plan and we intend to stay clearly number one in mobile. And we still clearly also target to stay the number one in fiber rollout. This is our policy, our target. And I don't expect any big change in market dynamics links to the network capacity coming from any kind of player including after a possible consolidation.

Regarding now the Enterprise, I think, unit, it was your third question. Maybe, I'll ask Thierry who is the Head of BS to provide comments.

Thierry Bonhomme

It's true to say that we benefited from a positive situation in France, but it's true to say as well that we grew the business outside of France with our legacy offers, mainly driven by the data MPLS networks. What the customers, they value very much within the B2B ecosystem, it's the confidence within the services and it's mainly driven by the quality of service, mainly driven by the quality of our assets. And in France, we are ahead of any competitor both within the mobile 4G networks and within the fixed area.

And the second element which is very much valued by the B2B customers is the relationship. The confidence within the teams when it comes to being very biased customers when there is an issue or problem either on the network or on the service. And I think that yes, clearly, we benefited from the relatively weak position of our main competitors in France, as Stéphane may reckon given they are the energy, they gave to their organization.

Nawar Cristini

Okay. Thank you very much.

Stéphane Richard

Okay. We'll take maybe one question here in Paris if there is any? One question by phone.


We will now take our next question from Dimitri Kallianiotis from Redburn. Please go ahead.

Dimitri Kallianiotis

Good morning. Thank you for taking my questions. Dimitri Kallianiotis from Redburn. Just three questions. The first one to come back on the CapEx point for 2016. You mentioned an increase compared to last year. I was just wondering in terms if you could you give us a little bit of just indication what sort of level are we talking about €7 billion? And also, what does that imply in terms of your expectation? Do you expect, basically, again, to be doing most of the fiber rollout or you expect your competitors as well to co-invest with you?

My second question is regarding consolidation. Previously, when you were asked, you talked about a 50-50 percentage chance of the deal happening. I was just wondering now that you've had more time to talk with all the involved parties, I mean, has that changed or you still think it's a 50-50 deal?

And my last question is regarding distribution network. You've started to do some restructuring. And I was just wondering in terms of longer term, what sort of impact should we expect distribution cost to come down, and also your total number of shops? Thank you.

Stéphane Richard

Okay. So, regarding CapEx 2016, Ramon?

Ramon Fernandez

Yes. In CapEx 2016, it should be less than €7 billion. So, once again, €6.5 billion in 2015. Our expectation is to do more, but not as much as going to €7 billion. So, maybe this should be enough to answer to your question.

In terms of co-financing in fiber, it is true to say that we have seen significantly less co-financing in 2015 than what being expected. We have compensated this through our own investments. We are also, by the way, seeing reduction in the costs of developing fiber. So, in 2016, it is probable that the same type of dynamics will occur, and we will continue to do our job. Very much encouraged as we have said by the success we are seeing in the rollout of fiber in France where the rate of conversion from connectible to connected is increasing, while ARPU, Fabienne gave a figure, is better than for ADSL customers, et cetera. So, we will continue to do our job.

Stéphane Richard

Regarding distribution policy and management of the different networks, maybe Fabienne some elements, please.

Fabienne Dulac

Yes. Currently, the distribution is reducing. We adapt our distribution to the digital behavior of the consumer consolidation. So, we will pursue in 2016 in the same way, and the cost will be in the same way. So they will reduce, too.

Stéphane Richard

Well, now regarding the chances of success of this French consolidation. What I would say is that, well, in my opinion, the previous attempts had low chances of success. We were probably more in the range of 10% versus 90% of chances of success. I think that at 50-50, it's certainly the best ever attempted pressure, but we are still at 50-50. So meaning that it is a difficult process, it is a complex equation. It implies that several players come to an overall agreement on the subject. And so my estimate is still on the 50-50 chance of a deal.

Dimitri Kallianiotis

Thank you.


We will now take our next question from Stéphane Beyazian from Raymond James. Please go ahead.

Stéphane Beyazian

Thank you. Two questions, if I may. The first one regarding Spain, the trends and the margin of 2015 in the second half of the year were pretty strong. Can you comment on the synergies on the margin expansion that is potentially left in Spain, and therefore, if we should see further positive momentum in 2016.

My second question is regarding banking. Can you comment a little bit more on your partnership with Groupama? I mean, to what extent is this accelerating or adding, let's say, to your target, which, if I'm correct, is €400 million of revenues from banking I think in 2018. And if you can put a little more color on what's going to be the strategy in terms of branding and potential balance sheet that you could commit in this activity?

And finally, just a small question on cash flows for 2016. Thank you for the clarification on CapEx. Could you also clarify what sort of cash taxes and any potential restructuring or specific items that could impact in 2016? Thank you very much.

Stéphane Richard

Thank you, Stéphane. So, I will ask maybe Gervais to answer on Spain.

Gervais Pellissier

Yes. Good morning. So, first layers of synergies that has been achieved in 2015 is the convergence of the networks. The fact that we have been able to connect Orange customers on the Jazztel network and vice versa. So, this is the first layer. Now, we should have, in 2016 and later in 2017, some cost synergies that will be now embedded into the business. So these are the second and third layers of synergies. So, which means that we will still have synergies to come. And if you refer to the announcement we made in September 2014 on the level of synergies will be clearly above.

Stéphane Richard

Regarding the bank. Well, as you know, we are actively preparing the launch of Orange Bank for the beginning of next year. It was a very important step for us to enter into those exclusive talks with Groupama around Groupama Banque. Groupama Banque will provide us the engine and the core banking system that we need to be in a capacity to launch this offer next year. We are currently working first to complete the agreement with Groupama around Groupama Banque. It's a matter of a few more weeks.

We are also working very hard in terms of marketing, in terms of internal organization between Orange France and the bank in order to be 100% ready to launch this in the beginning of 2017. So, I will not, today, give more details about what will be the offer itself. But what I can say is that we want 100% digital and mobile designs, natively designed offer. We want it to be disruptive in terms of uses, in terms of price, in terms of distribution. And we want to really take the maximum advantage of our assets mainly the customer relationship and the shops and the call centers in order to be as efficient and as relevant as possible regarding this new development.

And it was, once again, perfectly relevant regarding this strategy to look for a partner in order to go faster towards the launch of the bank. And Groupama around Groupama Banque is the perfect partner for us. That is the reason why we made this first step agreement.

Regarding, now, the cash flow and especially taxes, Ramon?

Ramon Fernandez

Well, on the operational cash flow, we had a €5.9 billion figure in 2015, which is a slight decrease compared to 2014 because of this effort made on investment. So, we should have in 2016 still a very solid operational cash flow probably because of this effort in terms of investment, building for the future, strengthening EBITDA, maybe a figure which should be slightly below the 2015 figure, but very close.

So, we are going to continue as you have seen to build on the very good results we had in 2015, and at the same time preparing for the future. We all know we have seen in this in March that we are going for a period of two years to three years where we have - and all our peers are doing the same thing at the same time, by the way, and next to our investment effort, this is building our strength for the future.

In terms of taxes, you have seen in the slides, we have distributed that we have in terms of corporate taxes, a slight increase due to an increased profitability but nothing which is extremely noticeable.

Stéphane Richard

Okay. We will have time for last question from Paris if there is one. Okay. So, thank you very much. Have a nice day.

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