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France Telecom (FTE)

Q2 2007 Earnings Call

August 2, 2007 8:00 am ET

Executives

Vincent Benoit - VP, Head of IR

Gervais Pellissier - CFO

Bernard Ghillebeart - EVP of Orange U.K.

Louis-Pierre Wenes - SEVP of NexT Transformation

Sanjiv Ahuja - SEVP of Orange

Barbara Dalibard - SEVP of Enterprise Communication Services

Analysts

Damien Maltarp - Cazenove

Nick Lyle - UBS

Matthew Bloxton - Deutsche Bank

Laurent Gerald - Broadband London

James Britton - Lehman Brothers

Nicolas Cote-Colisson - HSBC Securities

Jonathan - Bear Stearns

Terry Sinclair - Citigroup

James Ratzer - New Street Research

Remi Thomas - Cheuvreux

Mark Cardwell - Stanford C. Bernstein & Co

Fred Boulan - Morgan Stanley

Frederic Doussard - Oddo Securities

Antoine Pradayrol - Exane BNP Paribas

Jerry Gutter - Sedual Inc.

Presentation

Vincent Benoit

Good afternoon ladies and gentlemen, Vincent Benoit speaking, and welcome to France Telecom's first half 2007 results conference call. The call will be hosted by Gervais Pellissier Chief Financial Officer also members of FT senior management, who are also with us, for the Q&A session. We will start by a 40 minutes presentation followed by a Q&A session (Operator Instructions).

The presentation contains forward-looking statements and information on France Telecom's objectives, in particular for 2007. More detailed information on the potential risks that could affect France Telecom's financial results can be found in the document de reference filed with the Autorite des Marches Financiers and in the Form 20 F filed with the U.S. Securities and Exchange Commission.

Market share figures at June 30, 2007 included in the presentation are France Telecom estimates, pending the release of official figures for the period from national regulatory authorities.

Thank you, and let me handover to Gervais Pellissier.

Gervais Pellissier

Thank you Vincent. Good morning to some of you, and good afternoon to the others, and good evening to a few participants. And thank you for attending this conference call where I am going to present, briefly, the results I guess you already know. So, I would like to shorten the presentation, which will leave more time for the questions.

Let me first try to summarize in a few words the main achievements, and I will start with slide number nine, where there are a few highlights. I think the first good news of this first half is that we have been able to achieve what we wanted to achieve this is stabilization of our profitability and gross operating margin. On top of it a better revenue situation than what we had last year, especially in second quarter with a 2% revenue growth compared to the situation we had a year ago.

This puts us in a situation where we are clearly on-track to reach our 2007 guidance, regarding profitability CapEx etc. But on top of that to confirm also that we are able to commit on a stable organic cash flow for the period 2007/2008 as it was slightly up early in 2006.

Last point is that when we look at the situation of our different businesses, and what has been done the course of this first half. We think that we have developed enough action, never enough, but we continue to use for some areas. But we have developed enough action to sustain the performance in 2007, and also to lay already some foundation for 2008.

A clear roadmap of the products challenge of second half. We are continuing to arranging our processes within the Group in order to enhance the level of service, and to reduce our cost structure. And we continue to be on track to deeply transform the Group the line, with the strong and deep business transformation we had of technology transformation we had.

You remember we were speaking, two years ago, of the move within the enterprise business. The IT move is now completely in the consumer business of the fixed line, and we start shortly on the mobile with the first conversion of that product and announcing with some success like this.

So that's some of the main figures of the first half on the next page, it's the performance in revenue, with 1.9% revenue growth with €25.9 billion. And this comes on a compact booking in domestic fixed and mobile operations for France at the start of this achievement, some recovery in other European markets, a much better performance for enterprise than a year ago. And we have the sustained performance of the five growing markets, which continues to contribute to growth.

Regarding gross operating margin stabilization comes from, mainly from again, urban side in France, where there is a recovery in the profitability. And the continued contribution of fast growing markets, where gross operating margin continue to increase inline with the increase in revenue.

Regarding the level of spending in CapEx it is slightly below 2006 at the end of H1. However, on the basis of the products, which are underway, in terms of large investments within the Group, we confirm the full year objective up 13% to revenue. Down at the cash flow level we have an organic cash flow which is slightly increased over first half 2006, and thinking as able to confirm the full year objective of €6.8 bullion.

Regarding the situation of the debt, or that the organic cash flow has started, is mainly dedicated to the payment of the 2006 dividend, which explains that the level of debt remains rather stable compared to the beginning of the year, so in terms of the second half where the cash flow is for the debt (inaudible).

To comment on some key operational achievements in terms of number of clients, on the next page, the total customer base is 163 million customers, out of which 102.5 billion mobile customers, which is an increase of 10%. And what is also included that within the mobile customer base now 9 million mobile customers are broadband mobile customers, which is a multiplication by 3 for the course of the last 12 months.

As regards the fixed broadband business DSL, we have now 10.5 million subscribers. We remain the leader on the European market. And probably our base is probably one of the more, I would say, dynamic and technically benefited in terms of triple play, with 50%of the customer base equipped with Livebox, 35% of our customers using Voice-over-IP and 8% using IPTV we see that’s mainly in France, we are now 12% of the customer base, of our DSL customer bases in V-over-IP.

As regards to the enterprise business, on top of the global revenue performance, there is a continued development of the convergence of services especially Business Everywhere in France, with 525,000 customers about 20% compared to a year ago. The IP/VPN accesses with 273,000 also 20% on top of last year, and also the strong performance in services revenue, which is increasing by 16%.

Before I am turning to some of the financial figures, again, a few reminders regarding the strategy of the company. Remember that one year and half ago, actually two years ago in June 2005, when we announced the NexT strategy that's a huge part of the future growth would come on value added services on top of the access and from convergence services.

When you look at that slide you see that the path, which is coming from value added services including Internet access plus content, all the value added services invoice on top of the expense is now representing 23% of the revenue in the major countries, whereas it was representing only 18% of the revenues in major markets, in the western market two years ago.

At the same time traditional PSTN and voice access, which was representing 38% of the revenue in 2005, is now representing 29%. So there is a drop by about 10 points of the contribution of our legacy voice and access business to the revenue, whereas mobile has increased and are stable a little below 50% of the total.

Explain two things, first of all the fact that we were right to push of this technology move and technology revolution of our customer base, because this is one way to compete successfully in the future, and to maintain our market share with new businesses.

The second point is that this is also the explanation of this point pressure we have had on the margin, and the need to adjust our tools with this cost structure with this new technology. Same move but at lower pace is also observed in the fast growing markets. It is also an increase of, at that time, new services whereas mobile remains the main figure for revenue and for growth in those markets.

Regarding these fast growing markets, I am on slide 19; the situation is also a strong evolution in the global revenue picture of France Telecom. They are now accounting for 13% of our global revenue. We are representing 10% two years ago. Well this is slide 10; I have mistaken the numbers regarding the slides.

So now slide 11 in terms of evolution of the profitability you see on this chart the situation, and we are coming back to the stabilization at the level we had a year ago, which is also a performance we were expecting, but we had to work to achieve it.

And when you look at the GOM before commercial expenses you see that it has even slightly improved more in Q2 than the GOM as per commercial expense this has eroded, and additional fact SSGs especially in the mobile scene on some markets to reinforce our competitive position.

On slide 12, the results of this good margin evolution is mainly coming from the improvement of the cost structure on top of the revenue dynamics. Labor costs they have been decreasing by 0.4% of revenue one year. Interconnection costs has been much better managed in 2007, we had started to improve the situation at the end of 2006. If you remember, we had a deterioration our interconnect expense percentage point of revenue 2005 and first half of 2006.

And we have as it were a very positive growth of the mobile and UNIK business to improve the cost structure of our business, especially with the massive introduction of unlimited and other offers on our base, and to come down to 15% to revenue. Other IT net workers non-labor has remained flat, whereas the commercial expenses are slightly increased.

Regarding the general property and others the increase you observe is mainly linked with some accruals rules and reversals of accruals on some risk, especially a reversal of Lebanon in 2006, and some further accruals in 2007. Regarding the headcount situation, we have been able to reduce the headcount by a little less than 8,000 people in one year, since June 2006. Out of which 1,571 net departures has realized in the first part of the year in France, implying that 60% of our three-year plan is now achieved at the end of June 2007.

We are confident that we will achieve the three-year plan, which accounts for 17,000 net departures between 2006/2008. But we use that we had a very strong as it was in the first half, because we are using other management tools, and we are no longer with the retirement program. But we are using other tools, and you have to find other benefits especially there is some increase over the transfers to the public administration, what we call personal accompanied project and to help people in terms of have replacement.

Regarding the interconnect IT and network costs we have, when we measure them as a whole including the labor costs, we have improved them by €140 million compared to a year ago, which means this is more than 2% compared to last. This is an increase of better management of the gap between what we pay to other operators and such we take the full benefit of the termination rate cuts when they are there. But at the same time not to pay more in other situations and we got to increase our revenue or not to decrease the revenue.

We have some slight increase of the non-labor IT and network costs 8.3, which is linked with the deployment of the customer service platform, and the ongoing roll out of networks. Partially offset by the outsourcing of some of our dealers pushing Belgium and Netherlands. We found also some on other savings potential with the networking agreement that we start working in Spain in the second half of the year, and in 2008.

Regarding the operating income and the net income we have increased the operating income by €324 million at €5.5 billion thanks to -- half of the improvement is the increase to GOM improvement, whereas we able to increase of the capital gains on the assets disposals, with the sale of our remaining stake in the TDF and Eutelsat. But this was also partly offset by some increase of the depreciation on our fixed assets, also an increase in mobile investments Spain, and in the fast growing countries.

We are also taking as a hit certain part of the cost of the employee free share program that has been implemented in the spring. Net income, at Group level, increased by €3.3 billion benefiting from a solid reduction in the a tax P&L linked with the increase of deferred tax assets in France by the level of €600 million, and the decrease of the U.K. tax rate from 30% to 28%, which gained an additional €8 million proceeds in the P&L.

There is a reduction of the net income part of the minority shareholders, an increased sale of Yellow Pages, which is no longer in our account. To try to measure the net income performance on comparable terms this is down to the exceptional items, you see we have increased our net income by €108 billion compared to last year, comes to €2.4 billion.

As regards the cash flow I think I have not much to comment. The increase of the cash flow is mainly linked with the increased of the gross operating margin, to be at €3.3 billion compared to €3.1 billion a year ago. Again, this improvement made us comfortable to achieve a total year objective.

As regards the evolution of the debt, I said at the beginning that, we are on page 17, as regards the evolution of the debt there is no change regarding the debt, because as the totality of the cash flow has been dedicated to dividend payment, there are a few other movements in here, proceeds up sales of assets and some small acquisitions.

In terms of performance for the different regions, if we start on page 18 with, on page 19 sorry, with France, we have a good performance on the customer division on the mobile business; these are stable revenues, slightly above what it was a year ago. And a small recovery in second quarter compared to the execution at the end of the third where we are slightly declining. It has been done so we can increase our profitability. We are now at 40.2% gross operating margin rate to revenue, compared to 39.5% a year ago.

Regarding the situation of the market itself on page 20, we have been able to stabilize our market share in retail, and to come back to a very good level of market share, including the MVNOs at the end of first half of 2007. At the same time there has been a continuous strategic shift towards more pay monthly customers, which now represent more than 64% of the customer base. And also there is some dynamics in terms of broadband mobile with a interpretation by about three of the customer base, which is now already more than 20% of he total customer base.

Regarding the situation of the home business Internet plus fix this is on the page 21. We have indicated, if you remember, the first half where the (inaudible) of the first half, we have now been able to fully offset the decline of traditional PSTN by the increase in Internet and multiplay revenues, which appears on this slide. And this is good news, whereas, at the same time, the gross operating margin has increased from 32.4% to 35.4% in one year.

This comes from the good market performance on page 22, a couple of different factors. The first one is the fact that there is still an increase of the total number of lines, of telecom lines, on the French market. There is now more 27,840 lines, which is about 100,000 more than at the end of 2006. This creates whatever the situation of the line retail or wholesale; it creates revenue for our cost breakdown.

Second point is the fact that on the DSL market we have been able to keep our market share at 49.2% in installed base, thanks to good dynamics and acquisitions, because our market share of net adds has come back to deliver a 47.8% in the second quarter 2007.

Regarding the broadband ARPU which is standing at a little more than €30 at the end of Q2, which is an increase of 11% compared to a year ago, and this mainly thanks to the deployment of more ARPU on our customer base.

Here this is another interesting figure, which is new compared to a year ago, the figures from development up via the accesses, with 900,000 VOD accesses, paid VOD accesses, in the first half 2007, which is a multiplication by five compared to a year ago and a multiplication by two compared to the second half 2006. We have also launched (inaudible) just to see regarding prices on our continued deployment of VoIP, which is now sold on 46% of our customer base in France compared to 28% a year ago.

To this point regarding the market in France, one is the focus on Unik on page 23. In Unik there has been a strong increase compared to the situation at the end of '06. There is now 300,000 Unik terminals sold on our customer base. But also is increasing of the full range of models for the second half, which makes the product not only for specific customers, or specifications, but allows to increase the potential on the market.

On top of that we have also opened Unik on the 30,000 Orange Wi-Fi hot spots in France. Plus to connect also Unik phones on the Livebox of Orange DSL users, which makes the Unik, phone a real voice over IP and mobile phone depending on the location where you are on the French territory.

Regarding fiber, the fiber development is on track with the plan we announced at the end of last year. We've now a little more than 2,000 customers who have signed a contract, which is two times what we had at the end of last year. And 27,000 customers, potential customers, we have 27,000 plus where fiber is now available because agreements have been made with the building managers of 27,000 flats.

Regarding CapEx we have spent €10 million until the end of June. And we confirm that we are either in the course of installing or are about to install fiber in 10 cities outside of Paris. Regarding priorities and action plans for France, I just give you with the slide on the page 25. But we need to mention that clearly the focus on mobile is to maintain the market share in a situation where here is additional pressure with the number of possibilities which would effect second half of 2007. And we are still taking into account the roaming regulations, which is impacting all the news and quarter operating margins in this year.

Regarding the home division, we have to continue to push for better customer satisfaction, and we are clearly ahead of our competitors, but we need to act even better. And we have to target more and more fee service our customer base to really attach the offer to the needs of our customer, specifically between Naked DSL. Traditional PSTN subscription is to continue to focus on the dense areas, where Naked DSL is a fun tool to recover our market share.

Regarding the situation in the U.K. we have good revenue growth with 3.9% growth in the first half on the mobile business. This is an improved quality of our subscriber base. I remind you that we have a very competitive situation of the U.K. market; we have decided to focus on the high-value customers that wishes to remain the leader within the customer segment where our customers pay more than 35 pound per month.

We have also an increase -- and this is interesting, an increased proportion of data and value-added tariff revenue on the customer base linked with the development of 3G. And we are communicating equipment for the new linked with new national, the fact that we have the less prepaid customers. And we are giving more attention to loyalty and to subsidizing a little more in the euros old contract.

Regarding the situation in terms of operations on the mobile in the U.K. you see that they are doing a good recovery in the second quarter of 2007 with strong net adds in terms of contract base. This helping us to have a strong increase of the customer base in terms of pay monthly customers, a 10% increase at the end of first half, compared to end of first half 2006.

There is also a good level of ARPU where the ARPU remains especially at the highest level on the market of the contract customers, at the (inaudible). Whereas we are truly putting implementation plan we have to put more fuel to capture customers again in the prepaid area.

And a very important change on the U.K. market and you can remember it was one of our areas of concern of last year, and it remains a strong area of concern is personal distribution. This is on page 28, and there is a shift to us to have more direct distribution. Now direct distribution, as you know, presented 41% of the net adds on the first half compared to 30% a year ago, and to see a way to better margins of the customer base And it was to create more value of the customer base.

Regarding the situation of the broadband market in the U.S. Situation remains highly challenging selling and is -- with the revenue down by 4% this is mainly linked to the decline of narrowband whereas this remains difficult to continue to deploy the unbundling, and to acquire customers in DSL in the U.K. We have grown in spite of those difficulties we have grown our DSL customer base by 9% in one year.

And we try to keep the stable ARPU in a very competitive environment, where most of the new entrants are presenting DSL access or Internet connections as a kind of add-on on company as of the Pay-TV subscriptions, or the voice subscriptions or anything else. We continue to focus on quality of service.

We have also to mention that on the U.K. market, as I said in spite of a legal regulatory environment, which appears fair on the paper, situation in terms of unbundling remains not very great.

Regarding the action plan we have to increase and to recover in the prepaid market, but also keeping our high-value strategy on the prepaid market, not deteriorating value. We have also to pursue the development of loyalty within our customer base. And to continue to work very strongly on the cost structure including the infrastructure and network costs with the implementation of our network sharing agreements with Vodafone to prepare these customers divisions for 2008.

Regarding fixed and Internet, especially Internet. We lead and this has been one of our weaknesses in the past, we need to raise our brand awareness in terms of Internet access. Orange is a strong mobile brand, has not been seen as yet as a strong Internet brand, we have to work on that. We have also to take the responsibility of the launch of more aspects in triple play and to start from this triple play including TV offers at the end of the year, to compete against some market share.

In Spain, situation in mobile has in also better than we could have expected, especially with some increase in revenue, and some recovery on the gross operating margin in second quarter compared to the situation of first quarter, this is on page 31.

We had two negative effects on the revenue mainly link to some difficulties with some unlimited offers, which have created trouble at the margin and at revenue level. But this is recovering in the second quarter.

Regarding the operations themselves, we have strong net adds in first quarter and even more in the second quarter. However, you remember, and we mentioned that at the end of first quarter, we have been obliged to take into account the loss of the new start of DSL customers. And we have also decided to clean the prepaid customer base where there were a lot of inactive customers.

This doesn't change the global picture, where we have now a stable customer base compared to a year ago, and we have also stable ARPU compared to a year ago.

Regarding the situation of the Internet and fixed business in Spain we have very good growth in terms of customer base its 18% increase of the customer base. Strongly focused acquisitions, strongly focused on the under growth areas, we are now at 60% growth of the customer base in under growth areas.

We are declining the number of customers which are not in the under growth areas. This has not been enough to offset in terms of revenue. The strong decline of voice and narrowband, and we don't have enough revenue increase on the Internet to offset the decline in voice and narrowband. So it's a strategy to continue in this customer acquisition dynamic, including to then persist with the integration with Ya.com, and as we do that Ya.com has been finally acquired on July 31st.

If I come to the action plan in Spain, which is on slide 34, with a new management, you know that a new CEO has come on board at the end of June in Spain. We are going to keep the momentum in the customer acquisition in mobile, especially in contract. We have to continue and to finalize the coverage in terms of 3G, including doing it through our networking agreement with Vodafone.

We have also to continue our fight to limit the churn; we have decreased the churn rate compared to a year ago. And also to really launch the MVNOs, some MVNOs contract has been signed in the course of last year. We see now there is a potential to grow our customer base with MVNOs.

Regarding the home market, we need to continue to reinforce our DSL market share. Now with Ya.com we actually and from far the number one alternative to the incumbent, and we need to push on that in the course of second half.

On Poland I will be quite short because Sify have announced their results two days ago, so you already saw them. Just to say that we are fighting in a very difficult environment with a very good success in mobile, they are continuing to increase their market share mobile. And to maintain a very strong profitability with 38.5% gross operating margin rate.

Situation, I would say, a little more difficult on the fixed market, where the regulatory pressure has made a very strong hole in the decrease of revenue, and then the pressure on the margin. We, in spite of that, we are continuing to grow the customer base as per share for broadband, and we will continue to do that.

So the action plan for second half is on the back to continue, its on page 34, is to continue to remain ahead in terms of market share, which is to continue to grow our market share, to pursue the stimulation of the 3G usage and specific customer growth.

Regarding broadband, we have put in place a new offer that should be operational in September, and I feel able to re-launch the dynamics on the market in spite of the strong regulatory constraints.

Regarding the other countries, is on page 38, you see that growth comes from as Eastern Europe, Middle East Africa and Caribbean, where most of those countries are growing above 20% a little less in the Eastern Europe 17%. And we see the continued growth of the consumer base more than 50% growth in Middle East, Africa, Caribbean. Whereas our customer base growth remained at 17% in Eastern Europe. This helps to provide group with additional profit as the total GOM rate for both countries, including the Western Europe countries, is at 41.8% compared to the 42% a year ago.

Regarding the home market in the other countries, so this is on the page 39, what is a huge part of the customer base was represented by Orange Netherlands, which is on sale. But if you look at the broadband situation we have now not far from 100,000 customers in Ivory Coast, Senegal, Mauritius and Jordan, which is the beginning of the broadband Internet business in those countries. And we think that this is an area of development for the future on tope of the dynamics within mobile.

So, on page 40, action plan is mainly to keep the growth momentum, and to start to develop alternative networks including WiMAx or SGH in some of the countries.

Regarding the enterprise position, the revenue, as I mentioned at the beginning, has been much better than a year ago, with a strong improving trend, especially if you look at the position in the second quarter, where revenue declined at nearly 0.4% of revenue, where it was just 2% decline in the first quarter. And this increase is a clear decline of some of our legacy business, especially the voice legacy revenue in France and, the data legacy in France, and outside of France.

We have, in terms of advanced business network, a continued increase of the IP revenue, even if it is at slower pace than it was a year ago, which by the way helped to maintain the legacy revenues in spite of strong pressure as for international prices. ICT services have continued to grow at a higher rate of the market 15.5%, and in they now represent 24% of the revenues of the division.

Regarding the profitability of enterprise, there has been a decline of 2.5 points because it was last year, when we restated it to compare it to 2007, it was at 19.5%. It is below the figure that was published last year, it was in fact, we have reassessed our internal transfer price between enterprise and the home front division. It's an extensive adjustment up margin, and so you've got to take the historical figures so that -- make sure that all our competitors have to clear when they did pricing got that transaction within their different divisions.

In spite of that at 17% to revenue we remain clearly above our major competitors who are trying to act these enterprise field especially the British one and the German one.

Action plan for enterprise, is to continue to secure the legacy business, to pursue the enhancement of our portfolio on VoIP, and to streamline, to continue to streamline the cost base, because this is clearly the market where price pressure in remains there, but especially on the international parts of the business, and we have to continue to work on that, while continuing to improve our margins in the IP systems.

To conclude, just a few words on how profitable the future, how is the second half. And that's something that we would not really want -- we don't want to give guidance on revenues and if you are approaching us and it's not up to us to determine the revenue and the economy results of the future. But when you have service we think that environment, within the countries where we are operating, is not available in terms of affecting the second half that was one year ago. So, we don't expect the second half -- a big difference because of what has happened in first half in terms of revenue evolution.

In terms of profit situation is slightly different, because we know that there will be a little more regulatory pressure. As I have mentioned the roaming, which will have an impact on the gross operating margin after all on France.

We have the profitability number effects in France, which could create some pressure on the profit including the need to increase some of the subsidies to keep the customers.

We have clearly the difficulties of the regulatory environment that is in Poland, even with the decisions we know today we know that they are under pressure on the margin. And we know that in some countries like the U.K. or Spain, competitive environment will remain tough, also because the incumbent remains highly protected by the local regulatory authorities. Or because the nature of the market that there are too many players likely in the U.K. So, before consolidation happens there is still huge competition.

In spite of that, we confirm really our guidance for the second half in terms of margin, in terms of cash flow. And we will continue to work on our business portfolio finalizing some of the decisions, which have been made, like the sale of Orange Netherlands, and to continue to buy and to sell some of our businesses.

With that page, which is on page 46 is the confirmation of our guidance, so near stabilization of the gross operating margin. To maintain the CapEx rate at the level of 13%, and to maintain the organic cash flow at €6.8 billion in 2007, but also in 2008, including some investments that the decision is not made yet, but that could impact, their rate as cash flow the acquisition of the 3G license been achieved which is included in our figure.

Thank you, I am now available for your questions.

Question-and-Answer Session

Damien Maltarp - Cazenove

Thanks it's Damien Maltarp here from Cazenove, I've got a few questions. The first one, I was just wondering if you could comment on iLiads application for the fourth 3G license? Do you see them as very much a credible competitor to your mobile business?

And secondly, any thoughts on their proposal to deferred payment of the license fee would be of interest, and do you think that is something you could potentially replicate as well?

And the second question is just going back to the changes in the mobile number portability; it's been a couple of months now since that was introduced into France. Can you just give us an indication of what you are seeing so far? And, therefore what are the implications for cost going forward? Thanks.

Gervais Pellissier

Roughly, we didn't hear you very well, can you summarize quickly your thoughts first and second question please?

Damien Maltarp - Cazenove

Yes, can you hear me?

Gervais Pellissier

Half of the year '05.

Damien Maltarp - Cazenove

Can you hear me know?

Gervais Pellissier

Little bit better but if you can speak louder that would be nice.

Damien Maltarp - Cazenove

Okay I will try now. First question was on iLiads 3G license application. Just your thoughts on whether you see them as a credible competitor to you on the mobile side, and also any thoughts on their proposal for the deferred payment of the license fee?

And also, just the second one was on mobile number portability. We are a couple of months in just what you are seeing, the initial view on what has changed since it was introduced.

Gervais Pellissier

I will hand over the question to Bernard, so the first question is on what do we think of the iLiad position in terms of 3G license. And the second question is on the effects how do we see the effects of the number portability up to now.

Bernard Ghillebeart

So regarding iLiad as you have noted it, as they are the only one who has been candidate, but the proposals they have made so far in their press release, do not speak into the conditions that have been established by the French Regulator. So, it's now up to now the regulatory authorities to make their comments on the iLiad proposal.

And if they consider that it does not fit into the conditions that were set, they will have to consider that the bid for the license will have to be reopened, which would open a new period of four to six months of new process for the fourth license in France.

I don't think it's in our position to make much more comments on iLiad credibility to take your question regarding the deployment of the fourth network in France.

We can just all know that it would take a lot of time, and that as you know the French market is a difficult one for minor operators, since France is the biggest country in Europe with more than 500,000 square kilometers. It is, therefore, the most expensive to cover as we all know. Just to give you comparison, between our French operation and English operation the cost is almost 30% more to cover to provide an accurate 3G network. This is one comment.

The second comment to be made, as you know, there are growing environmental pressure for any unit work to be deployed, and this is clearly one of the state behind the subjects of the fourth 3G license in France.

Regarding number portability, we see that the need is to be very cautious since Gervais stated it, it's only two months now that the number of portability, new condition has been ready to place. Just as a reminder number of portability is in France already three years. But it was under a two-stop shopping process, and we have now operating under a one-stop shopping process.

So far we must also acknowledge that the first few years are better than what we could expect in terms of equilibrium regarding the Orange base of the effects on number of portability, especially for the business market, and for the value customers with subscription more than two hours, in which we have gained more than we have been loosing to our competitors for the number of portability.

So, therefore, up to now we consider that the news are quite good. But once again we remain very cautious, because we consider that the key changes we should see on the French market will occur during Q3 and Q4 on the French market.

Damien Maltarp - Cazenove

Okay, thanks a lot.

Nick Lyle - UBS

Hi, it's Nick Lyle from UBS. Could I ask three quick questions, just the first one could you explain the benefit from the lack of sale or rather the benefit from the lack of rebranding in the Q2 numbers, just to give us a rough idea of what's lack of rebranding and what's genuine savings?

And secondly you are talking about pushing naked DSL harder, does that mean you are now thinking about maybe increasing share of broadband, and how would the regulator view that?

And the final one is just a very quick one, you've mentioned Ofcom in the U.K. again as an issue with BT Openreach, how do you propose to solve that? Thanks.

Gervais Pellissier

Maybe Jacques (ph), could you answer on the question of the broadband market share, and your view on the Regulator.

Unidentified Company Representative

Well, I think today as the French Regulator considers that the broadband market is working well in France, and that wholesale offers are working very well. So, I don't think he cares too much about the difference or the duration that could happen on the retail market, given that the condition of offering of the wholesale offers are continued to be non-discriminated.

Nick Lyle - UBS

I am sorry, specifically on your market share though, is it possible it could rise above 49% or is the comment more that you would stabilize it with your aggression on naked DSL?

Unidentified Company Representative

So this is (inaudible) speaking, so far we are planning to stabilize it as we said, and we have no different plans for today, and this is exactly what we are currently achieving.

Gervais Pellissier

Regarding the rebranding we announced, if I remember, savings in the range of €100 million, last year the increase with the rebranding operations. We are achieving those savings in terms of savings regarding what we are spending on maintaining the two brands or the three brands apparently before.

But all in one we are spending a little more in terms of advertising to maintain our share value compared to competition in some countries. So it's true that we have some savings, and we are better than what we would have done versus, if we did not have rebranded.

However, you will not find in the global figures of our spending in A&C a decrease compared to a year ago. Regarding the U.K. market maybe Bernard you can comment.

Bernard Ghillebeart

Bernard speaking, yes on the Ofcom, just a quick comment on the side of that U.S. could be to compare the situation in terms of unbundling between France and U.K. to understand that we are very late in the U.K. compared to France in this respect.

And another comment is about the fact that we have been discussing the price quiz case, and that we had a very, very slow result in that area.

Nick Lyle - UBS

Thanks very much.

Matthew Bloxton - Deutsche Bank

Hi, it’s Matthew Bloxton here from Deutsche Bank. A couple of questions, just on Spain just wondering if you could remind us of the structure of your kind of ownership agreements, and whether there is any put or call options about the ownership, and if you have any desire over the medium term to buy in the minorities in the Spanish business?

Secondly, just wondering if you've got any specific thoughts for the likely proceeds from Orange Netherlands?

And thirdly just again relating to the fourth license process in France, obviously one of the issues that could arise if that license is awarded is that the 900 and 1,800 frequencies get reallocated, which I guess would mean that you would get slightly less of that spectrum.

I am just wondering whether that would create any temporary operational issues for you in terms of the amount of capacity you need to run your mobile network.

Gervais Pellissier

We did not catch your first question, we understood the question on the Netherlands and the fourth license. But what was your first question.

Matthew Bloxton - Deutsche Bank

Okay, sorry, the first question was just whether there are any puts or call options in place with the minority shareholders in Spain. If you can give us any summary of what those are, if there are any? And whether FT has an intention to move to 100% ownership of that asset over time?

Gervais Pellissier

In Spain there is, if you remember, it was announced at the time of the acquisition there is a liquidity in mechanism where we guarantee a certain price to the minority shareholders, but there is no obligation to buy. The fact that if we do not buy they can go to an IPO, so it’s a mechanism.

So there is no put and call in the sense you describe it. But it's true that on the medium term we have said this and I think it has to be discussed in 2009, we will probably go beyond the 80% were we are today.

Matthew Bloxton - Deutsche Bank

Okay.

Gervais Pellissier

Regarding Orange Netherlands, we are in the process of selling, it's currently in the phase of discussions between the local workers council and the potential buyer Deutsche Telecom. This is a phase that we hope to be concluded in the next week.

And then we have to wait for the green light of the competition authorities to conclude the sale that we expect to be concluded in the course of forum.

Matthew Bloxton - Deutsche Bank

Okay.

Gervais Pellissier

And regarding the fourth license I don't know if one of my colleagues wants to answer.

Unidentified Company Representative

Yes (inaudible) again, if I understood well, your question was, what do we think about the value of the fourth license would get some chunk of the 900 megahertz spectrum. Is that correct, was that your question?

Matthew Bloxton - Deutsche Bank

Yes, and just whether you can continue to operate. If tomorrow you had to give back some of your 900 spectrum whether that would create any capacity issues for you, given you've got a big customer there. So there is probably quite a lot of usage in those certain areas in France.

Unidentified Company Representative

Okay, so as you remember, one of the reasons why the fourth license process was reopened is because the French National Regulatory Authority wanted to solve this issue regarding this remaining 900 megahertz spectrum that up to now has been freezed.

So, we do not consider that as a difficulty, we don't have any issue regarding staff resources. The French Regulator has already given a green light for existing operators to reuse 900 megahertz spectrum for 3G network coverage, especially coverage beyond the existing coverage situation 65% of the reservation.

We will do tests by the end of this year, with the approval of the Regulator, test about the 3G coverage in the 900 megahertz bandwidth. And on a short-term admin term perspective, we do not see any shortage issue regarding the 900 megahertz bandwidth.

In the long-term issue it is clear that the move of traffic from 2G to 3G bandwidth with the perspective of the digital dividend, we think, we create a situation in which there won't be any long- term shortage regarding a spectrum for us in France.

Matthew Bloxton - Deutsche Bank

Okay, great. Just coming back quickly tell me on the Orange Netherlands issue, do you have any particular plans for the proceeds from that disposal or is it just going to go towards deleveraging for now?

Gervais Pellissier

On the European?

Matthew Bloxton - Deutsche Bank

On Netherlands, Orange Netherlands.

Gervais Pellissier

On the Netherlands we expect to get some proceeds, yes.

Matthew Bloxton - Deutsche Bank

But you don't have any specific plans for that distribution?

Gervais Pellissier

It's part of the overall financing picture of the Group, it doesn't change the cash allocation we have been mentioning at the beginning of the year. Allocation comes at the end of the year. Again cash allocations for this year (inaudible) and early 2008.

Matthew Bloxton - Deutsche Bank

Okay. Thank you.

Laurent Gerald - Broadband London

Hi, Laurent Gerald from Broadband in London (ph). A couple of questions. The first one on U.K. You reported a drop in DSL customers whereas your competitors reported additions. What are you doing wrong there? And what are you planning to do in order to counter that?

My second question was regarding Spain. Even Uno reported an up-trend in sales, but you are reporting in the fixed line a revenue decline when I think that the situation in Q2 was slightly better. Do you still believe that Telefonica is abusing its domestic position?

And if I could add a third one on the retail. It seems that the retail landline losses have accelerated in Q2. Do you think there is cannibalization between your wholesale services and your retail services? Thank you.

Gervais Pellissier

You can start with the question on, do you please Bernard.

Bernard Ghillebeart

Yes its obvious that we are not satisfied with the performance we had in broadband and we are of course more happy about our mobile results. What I would say is that you all know that we have been having some difficulties in terms of customer experience and with the fact that we care for our brand so our first priority has been to focus in improving our customer experience and in this we have done some progress during H1.

As an example, I can tell you that our service level in our customer service has been consistently over 90%, 90 which is quite a good performance. We've been also delighted by a factor of five, the number of single fold on their value. So the focus has been on the customer experience.

On the commercial performance, we are doing of course a number of things to come back in the market. We are preparing new propositions for H2. We are preparing a dual-play offer, triple-play offer, line rental and primary line voice bundle.

We are obviously preparing our IPTV. In this domain we are quite cautious there again because we know and I think that BT has shown that this is a challenge in terms of customer experience as well. But I can tell you that we are going to launch a friendly user trial on IPTV in Q3 and we are also obviously working on the content.

We are also working on our distribution and to strengthen the distribution in broadband and you will be pleased to know that we are now back in DSD and we have very good results from the promotion that is going there.

Laurent Gerald - Broadband London

Regarding the situation on the broadband market in Spain, on that could you answer?

Gervais Pellissier

Sure. Well I think most of you know that the situation in Spain is fairly unique. Telefonica enjoys an overly dominant position. Clearly we believe we've been saying all along that this has to do with the regulatory framework in which Telefonica plays in the domestic market.

But this opinion has been supported by competition authorities in Spain, which unfortunately have not carried much weight, and as you know, more recently by the European Commission. Vis-à-vis that what we are doing is three things first, make sure that we continue to do a good job in delivering the kinds of innovative services that Spanish customers appreciate.

Second is scale up our operations and so the recent acquisition of ya.com has to be interpreted in that light. Vis-à-vis a dominant incumbent and almost no competition it is important to scale up.

And third we need to leverage upon the recent decision by the European Commission to continue to ensure that the regulatory framework in Spain evolves in an appropriate equitable way and it becomes more in line with the regulatory frameworks in most other European countries.

Laurent Gerald - Broadband London

Regarding the French market and the regulation of the loss would stay within the lines we get?

Gervais Pellissier

Yes and you're right to mention this. The first point we have to keep in mind is that the number of lines in France has been increasing altogether which means that basically we're getting more revenue from more lines.

Now, you're right, the number of retail lines is currently declining but it's coming from several factors. The first one is the full unbundling which has I would say no real changes in the basics happening if you take season effect seasonality effect and this is almost something we know.

And there is the wholesale line rental. If you remember correctly, we've been launching this at the end of last year for us to be able to put some of our offers in the market. Nothing happened almost until Q2 this year. There was a bump in Q2 and then it's slowing down again. So it's very difficult to understand how far this will go.

Just let me add on that that when some first -- the customers were moved to the offer by our competition were almost not any more under our control because most of them were on a pre-selection. So the only contact they had with us was the fact that we were sending them an invoice for the subscription and that was it. And at the end of the day the difference for us in terms of ARPU is less than €2.

And of course if you look at the number of lines it makes a big number of lines. But for impact on revenue the third factor is naked ADSL. As you -- for sure you will remember, our competition was faster than us to do this because we wanted to do it in a very careful way, which was part of the explanation of our average performance in Q4 '06.

Now we are back on track at par with our competition. It's of course an additional factor compared to what's happened in the past. But for us I would say the result is very positive because it was the main mean we've been using to regain market share in the very dense areas, which are absolutely critical for us. And we have very good results for example in the last weeks in Paris, better than we've had for years. So altogether it's something we have to watch carefully, but so far we feel okay, with what's happening.

Laurent Gerald - Broadband London

Thank you.

James Britton - Lehman Brothers

Hello. It's James Britton from Lehman Brothers. The first question is just on the outlook statement. I know you didn't want to be pushed into the revenue outlook but can I just clarify, when you talk about revenue evolution not deteriorating in the second half, presumably you're referring to the revenue growth rather than revenues in absolute terms?

Second question would be on broadband ARPU, which is growing very strongly at more than 10%. Given that multiplays is just below 50% of this can you just break down the main components of multiplay ARPU for us to help us understand really what's driving that so strongly?

And then third on tax. You've recognized a deferred tax asset in France. Can you just explain why you're recognizing a deferred tax asset in a high profitable company now and do this have implications for cash taxes over the next couple of years? Thank you.

Gervais Pellissier

Bertrand, I will answer to the two financial questions and regarding (inaudible). Regarding revenue I was mentioning revenue growth so I, for the year in terms of absolute revenues that these revenues are different from one semester to the other. My comment was meaning in terms of growth compared to a year ago.

Regarding the tax. You know that depending on the countries, that on France we are recognizing within the balance sheet the tax asset with a timeframe of five years ahead. This means that there is remember at the end of last year there was €7 billion in total for the Group of deferred tax assets that we have not categorized in the balance sheet.

So it's just the fact that each year and each tax year we follow the Group and we look and we take into account in terms of tax movement what is the taxation in the start of the period and this consumes some of the assets and we include some of the additional assets when we are in development and based on the layer year-by-year of tax assets this figure that you have taken into account for the French environment.

Regarding the detailed broadband ARPU, we don't give it, but for your analysis is broadly true in terms of tax.

James Britton - Lehman Brothers

Okay. Can you just clarify on the tax and that you have €7 billion of unrecognized assets that you would expect to recognize over the next five years in that French business?

Gervais Pellissier

I cannot tell you exactly what the amount year-after-year for the years to come because it depends -- it's not really easy to determine but I just told you that there is still €7 billion out of which consume in 2006.

James Britton - Lehman Brothers

Okay. Thank you.

Nicolas Cote-Colisson - HSBC Securities

Hi. Nicolas Cote-Colisson from HSBC. I have a couple of questions on Unik in the French market. Amongst the Unik customers what is the proportion of clients who buy one of the voice options and I was interested in the proportion of clients buying the unlimited option at €20?

And more generally, my second question is about the proportion of Unik phones as a percentage of your mobile customer base in France that you would like to see in the next year or two?

Bernard Ghillebeart

You've seen on the Unik phone we had a strong increase on the handsets are based on the range. The proportion of people taking the option is significantly moving up since now seven months. And we are planning to have it increase it even more.

Now in terms of goal at yearend we always said that it would be €700,000 and you see that we're on that track because now we are already at €300,000.

Nicolas Cote-Colisson - HSBC Securities

Okay. If I can ask you another question, this time regarding U.K. What is the proportion of your client base in your mobile customer base, which gets broadband for free?

Bernard Ghillebeart

We have at the end of H1 '07 259,000 converged customers over a base of.

Nicolas Cote-Colisson - HSBC Securities

No, this number is fine. Thank you.

Bernard Ghillebeart

Okay. Thanks.

Jonathan - Bear Stearns

Hello. It's Jonathan from Bear Stearns. I guess three real questions. The first one is, looking at what's happened in mobile in Spain and the U.K. is there some -- do you guys have a sort of management policy? What sort of revenue growth versus margin dilution are you willing to accept in France to reinvigorate French mobile growth?

And secondly, in with Orange in the U.K. on the broadband side, what was the rationale behind not buying Pipex or not. I think at the last conference call you have talked about wanting to increase inorganically subscribers in U.K. broadband and Pipex came and went?

And then just broadly, do you separate or can you separate out the losses or profits from Spanish and U.K. broadband and how those will change over the next six to 12 months after the Spanish acquisition?

Gervais Pellissier

To start with your question on acquisitions. We are doing acquisitions and we think the conditions are fulfilled to make them successful. In our view, jointly on the U.K. market we have to implement revised organic growth dynamic before insisting on acquisitions.

When I look at the performance of some of the bigger broadband players, including the incumbents in terms of net add, for a start I am not sure size is completely of the matter in terms of growth dynamic.

So, as I said, and Bernard has commented it, also we are preparing our plans to improve our offer. We are improved the brand position for the second half. And I think through at the same time to manage an acquisition would completely jeopardize the internal focus and the focus on organic growth. So, again this doesn't mean that we never do anything but for the time being let's focus on how to improve the internal situation and to recover the absolutely vivid internal dynamic we have on the market.

Vincent Benoit

For the next question Louis-Pierre.

Louis-Pierre Wenes

Yes, I am not sure why you ask that question about reinvigorating the mobile market in France. Because if you look on slide 20 and we now have a market share, which is stabilized, we had a good Q2 improved over Q1.

And if you add our NVNOs we are increasing our market share in France while at the same time we're increasing our margin. So if we continue like this I would be very happy. So I don’t see why you're asking to us about reinvigorating the market especially if you consider that we've been doing this within the context of the number portability.

Jonathan - Bear Stearns

Okay. That's me put in my place.

Terry Sinclair - Citigroup

Good afternoon, it's Terry Sinclair from Citi. Two questions. First of all, the Spanish margin's down. Given your level of investment there, I mean your investment in customers, would you expect margins to improve in the next six to 18 months in Spain?

And secondly, I wonder if I could ask a capital return question again. Given that you reiterated your leverage target, should we expect an increase in the payout to equity shareholders once that leverage target is met?

Gervais Pellissier

Regarding the situation in Spain was that our plan, our target for recovery in the margin I hope will that happen in the second half of the year the later we will be more precise in terms of a standard communication but here that we are up targeting some recovery on the course of its bouncing rates on the next couple of years. These updates you could install the potential for the Spanish market to recover length of margin. And if that's the way even a slight market improvement in the second quarter.

Regarding the leverage to debt and cash allocation. I said in the Group, the slide that the guidance of two is a floor under which the management has no intent to grow. I want to consider some of the options you are mentioning regarding cash allocation.

Terry Sinclair - Citigroup

Thanks very much indeed.

James Ratzer - New Street Research

Hello, it's James Ratzer here from New Street Research. I have three questions please. The first one was just looking forward to your wireline business profitability in future years and you've had a good performance in the first half of this year coming off a lower base last year with revenues growing around 1% per annum. And do you think growth in that business can continue or are we going to re-enter another phase of investment at EBITDA level going forward?

The second question on the wireline business was regarding fiber. Back in December you mentioned that you were planning to spend around €190 million in 2008. Given that we're now eight months further on, has that changed and it's below what people like Iliad and Neuf are likely to spend. I wonder, if you could give some update on that?

And finally, I just had a question on point of details regarding two legal claims against you and I wonder if it's possible to get an update on them. I think there's still an outstanding European Union tax claim against you from '91 to 2002 that could be worth €1.5 billion?

And secondly, I think a case might be due to go to court starting September 19 from Gerhard Schmidt that could be worth around €7.5 billion. I was wondering if it's possible just to give an update on your thoughts on that, any chance you could settle on that case before it goes to court given the magnitude of the claim? Thank you.

Gervais Pellissier

Okay, regarding your first question on the wireline business profitability. Well to maintain the overall profitability of the wireline business that we have had and that Iliad started to demonstrate in the first half that we are able to absorb the shift of technology to our IT, to have full dependent of Internet and whilst maintaining, even increasing the margin. I don't guarantee that this will happen exactly the same way every semester for the years to come. However, this is a objective on the period to be in this direction.

Regarding FTTH, we are on track with our plans and we have always said that there will be an increase of investment at the end of the period with increase of developments and I trust in my view that in terms of new implementation amongst the different match players. We are the only one to have true paying customers.

Regarding the two issues in terms of legal cases you are mentioning, on the situation with the contract there is no change regarding what was the situation at the end of 2006. So the case remains pending in front of the European Court. And our case analysis is exactly the same than what it was six months ago. So no change on that. And regarding the situation with the former shareholder of MobilCom, there is also no change even if (inaudible) comes across on the other. And there is no change in the analysis of our position.

James Ratzer - New Street Research

Could I just check on the fiber spend, is your target of €190 million for next year stay intact or is there a chance that could increase when the regulation is finalized?

Gervais Pellissier

Its initial investment of €270 million has been decided on the next two years, 2007, 2008 and the split between 2007 and 2008 is not analyzed. It is by the way because we’ve said it’s an investment over the next two years and prove that this initial investment is independent of the regulatory decision.

James Ratzer - New Street Research

Okay. Thank you.

Remi Thomas - Cheuvreux

Thanks. This is Remi Thomas from Cheuvreux. Just to follow-up on FTTH, when I had some contacts with the people in charge of the FTTH deployment they told me that roughly you had gained 500 customers in March. And then June you had 2,000. So it seems to suggest that the average gain per month has been around 500 whereas I was hoping for an acceleration. So I don't know how much you can comment on this but could you tell us how good you feel about your progress in customer acquisition?

And then on the U.K. home market, you mentioned the progress you were hoping to achieve in terms of the quality of the network and how that will enable you to offer an IPTV service. Can you update us on your strategy in acquiring content? Because I think one of the main reasons why it's been difficult for BT to be successful in the field was the fact that Sky continues to have a monopoly on football and on premier movies. So how exactly are you intending to differentiate yourselves from Sky in the U.K?

Vincent Benoit

On the fiber question, we've given at BT. We have to do basically two things. The first one is to deploy the fiber industry, and this is going on according to plan. Then if you want to get a client, you first have to get the approval from the people who are running housings standings in French. We have now, we're almost now 3,000 agreements signed and when we have these agreements you have then to go out to the clients to have them sign on.

This is why at the beginning we're slow. We suspect that we should end the year with in excess of, largely in excess of I would say of 10,000 clients, which is exactly according to our plan to reach over 100,000 clients by the end of 2007 -- 2008, sorry.

Remi Thomas - Cheuvreux

Okay.

Gervais Pellissier

These are the position on the U.K. market and regarding content breaking. The first step is that Vince described is to get the implementation and to finalize the implementation of the right technology and right services to provide the content. That's the first step. We have announced of IPTV many of the competitors in the London area at the end of this year, 1%.

Then I don't think the issue in the marketplace U.K. is the translation of -- from the main content providers, it is to get the access to content, not content providers and what we’re trying to negotiating, to be able to get access to content, one-third platform will be replaced.

Remi Thomas - Cheuvreux

Okay, thank you.

Mark Cardwell - Stanford C. Bernstein & Co.

Hi, it's Mark Cardwell with Bernstein. If I could just follow-up a little bit more on the fibers side as my first question. I'm still trying to fully understand the strategy ongoing with fiber to the home. If I understand it correctly you're going to have multiple providers in Paris with fibers to the same building. I'm trying to understand how you expect that to survive from a pricing point of view in a reasonable way?

And secondly you're now talking about doing the first 10 cities outside of Paris. Have you got any kind of input yet from the regulator in terms of what the economics are going to look like for that on a wholesale basis, that gives you the confidence to go ahead and do it? Do we have any real input, can you give us an update on where you are behind the scenes with the regulators?

My second question is on U.K. mobile. I heard everything you said on the call. I'm still trying to understand what really drove the jump in subscriber acquisitions particularly in contract subscriber acquisitions. Do you have new plans, is it a roll-off from Flex TV a year ago, is there something else going on? What really led to those sort of change of the rate in acquisitions in U.K., if you could help us understand that better I'd appreciate it?

Gervais Pellissier

On the fiber you have to remember that in Paris, laying the fiber in the street is not a issue. We have no digging work so I would say it’s a very low cost, which means that several providers can have fiber in the same street. And what is costly is when you get into the building so it's connecting really the building to the street and then going into the flats.

And this is where we said that the first provider who comes in is cabling the building, basically laying the fiber in the building and then we will share that fiber with the other providers when they need to access the client. And this is currently what we've committed to and this is where what we are discussing on how to achieve this is the reasoned pragmatic way.

Now outside Paris we have been starting as we said in five towns and we will. Also as we said starting five other towns and so far what we -- again what we told almost I think more than six months ago there is no change. And we have no indication that this is an issue because again then we said that we are ready to share and to give access to distribution to the infrastructure we're laying out.

Mark Cardwell - Stanford C. Bernstein & Co.

But in both of those cases, if I can follow up, doesn't the fact that you're going to share more than anyone's going to share in the case of Paris, the fiber. Don't you need a very strong wholesale price to make the economics of that work, and do you have some assurance that you're going to get that?

Gervais Pellissier

We are currently discussing with the regulation authorities, as all providers, and to come to a mutual agreement on how we will handle that.

Sanjiv Ahuja

Okay, on mobile U.K. I can assure you there is no black magic. In fact we I as said at the end of '06 we have strategy of putting our distribution into order. Working with partners and you can incentivise them to churn actively our customers. So it’s direct increasing the direct mix.

We launched propositions that are compelling for the market and we have being, pulling the most of the advantage for the customers, as Gervais said, for the £35 price point and the strategy is about loyalty and we're beginning to deliver on this strategy.

In addition to that, we had a quiet Q1 and we were very focused on H2 to make all of this work and we are now seeing the first dividends of this strategy. So in this edition what the result you see is a result of what we have done as Gervais pointed our mix is increasing and in loyalty you see that our rolling churn has decreased from 29.4% to 24.4%. So we're not declaring a victory but I think that we are very happy with this results.

Mark Cardwell - Stanford C. Bernstein & Co.

So, were there new offers in 2Q that were behind the implementation of that strategy?

Sanjiv Ahuja

Not new offers because in fact this was the famous animal packages that you will love and we launched in August. What we did is that we expanded this unlimited position to the indirect channel but we did not refresh the offer in term of price not at all.

Mark Cardwell - Stanford C. Bernstein & Co.

Okay. Thank you.

Fred Boulan - Morgan Stanley

Hi, good afternoon, it's Fred Boulan from Morgan Stanley. A few questions from the costs side. Could you update us on your costs program, especially on the IT and network initiative, after only basis points of margin improvement?

Second point if you could elaborate on potential savings from network sharing deals in the U.K. and Spain. Vodafone have provided a few numbers so I'd like to have your views on that.

And lastly on restructuring cost, what we should expect for the year. Have you seen a decline in cost per leavers I think last time you updated us on that you were expecting customer departure to fall from 130,000 in '06 to 140,000 in '07. So what's your latest thoughts on that? Thanks a lot.

Sanjiv Ahuja

Okay, concerning the IT costs as Gervais mentioned we are perfectly on track with what we announced beginning of the year. We announced that we were saving between €500 million to €800 million compared to 2005 in term of OpEx. So we are on track. As you understood we have a decrease of bit more than 2% for first half of this year. We expect this kind of decrease for the next part of this year. So this is globally IT cost so we are on track, no problem with that.

Concerning the network sharing agreement. We have this agreement with Vodafone in Spain, which is implemented now. We start to extract the first benefit of this networking sharing agreement. In U.K. we are finalizing it, the network sharing agreement with Vodafone for U.K. and we are starting to study if it make sense to make also our network sharing agreement in other countries. But we said during the last investor day that to do that we need to find a partner we can go with.

Unidentified Company Representative

This is (inaudible) speaking. As far as restructuring costs are concerned we are online with what we said in December 15th. We said that the cost has been divided by four globally one for each of the departments.

Fred Boulan - Morgan Stanley

So what do you expect in terms of restructuring cost for the year divided by four as last year or that's really what I understood from the recent trend?

Gervais Pellissier

We said, if you remember that it was a statement we made last year, that in terms of cash impact we not have more cash impact with the new departures than what we have to pay until last year in terms of cash spending for the balance as it is indicated. Now we see that it's fairly below that you are spending, now we can give you the users announce that is a few thousand million euro more or less that it doesn't change anything after that. Okay.

Fred Boulan - Morgan Stanley

All right, thanks.

Frederic Doussard - Oddo Securities

This is Frederic Doussard from Oddo in Paris. So two questions, first regarding Spain. You said that you had a strong recovery in margin in Q2 versus Q1. So can you tell us what was the margin in Q2 and what was the margin in Q1? And does the improvement come only from your new adaptation of unlimited offers?

And regarding Spain do you think that your margin share strategy prepaid will bring fruit as soon as H2?

Gervais Pellissier

Look again at the margin strategy you have on side 31 on the right. There was a small diagram with the split between Q1 and Q2 and you see it moves from 20.9% in Q1 to 26% in Q2. So, you have it on here.

And the major reason for improvement is the better management of the interconnect and of unlimited offer. But there are other focus of improvement including a continuous work on the cost structure on top of what has been obtained over the year and of exceptional items.

Frederic Doussard - Oddo Securities

Okay. And you think that the margin could improve with your anti-churn prepaid strategy as soon as H2 or…

Gervais Pellissier

I answered already to that question. So I said that we expect the margin improvements now we as I said it will come. Here we are not give you the information of guidance, if you remember.

Frederic Doussard - Oddo Securities

Okay. And then a last question regarding the Enterprise business. So I'm not sure that the pro forma margin in H2, 2007 that was 19.7% or there will be a change, because there was a change for H1. And is there a reasonable change regarding the pro forma H2 '06 margin? So, that means that the margin has declined by 200 basis points in H1 '07. So do you thing the trend will continue?

Barbara Dalibard

Okay. So, this is Barbara Dalibard, so first let me of course explain precisely the evolution of GOM rate on the comparable basis. First as mentioned by Gervais, there was some changes in service prices between Enterprise and home and this thus represents something that is around €60 plus million just by this change. Okay.

Secondly impact from the pro forma basis it links ForEx, which represents a zero to four points impact when you compare H1, 2006 and H1, 2007, okay. So overall the pro forma represents a decrease of 2.1 point between H1, 2006 and H1, 2007.

And then of course due to the evolution of our business there is a decrease that is directly link to the evolution of the business, the first one being of course the connectivity where we still have very important competitive pressure on the data international prices.

And second one being the transformation of our business mix. As you have seen we have quite some company, we have done I think a rather good job in deploying our service business with nearly 16% of growth. We know that there is a change of mix in our GOM rate, related to the change between connective services and this new IT service fee.

So if I come back to now the evolution, if I compare H2, 2006 and H1, 2007 on the same basis we have had slight decrease and we expect to still have the same kind of increase going on.

Gervais Pellissier

Again it's a question of communication, we have not committed outside the H2 for March to speak yet, can you imagine the situation we see (inaudible).

Frederic Doussard - Oddo Securities

Okay. And when do you think you could stabilize the margin in this business?

Barbara Dalibard

As I said, if I compare H2 2006 and H1 2007 on a pro forma basis, we have a slight decrease around the 5 point and so it's we will go on with this kind of trend.

Frederic Doussard - Oddo Securities

Okay, thank you.

Antoine Pradayrol - Exane BNP Paribas

Hi, it's Antoine Pradayrol with Exane, with two questions please. The first coming back on the margin for fixed line business. Is there any -- and more precisely on the question on the outlook for the margin on the fixed line in France. Is there any reason why we should expect the margin to decline year on year in H2 '07? And margin was up strongly in H1, is there any reason, which could reverse the trend in H2, in particular in H2 '07?

Second question on the margin Mobile U.K. You said I think that you need more fuel, I think in the presentation, to re-boost the prepaid performance in mobile U.K. Should we expect an impact on the margin in H2 '07 of this additional fuel? I.e. can we expect a flat margin year on year in H2 or could the margin go down or can it go up?

Gervais Pellissier

(inaudible) in France, again I remind you what I said regarding any countries, we don’t give detailed outlook by country. So if you try to get that, we don't communicate. We try to give you an indication or help you but regarding France. We don't see any deterioration of the margin pressure in France compared to second half compared to first half.

Speaking to consideration, however the seasonally period and you know we have different profile of spending elaborating the second part which I release the margin lower the second half as one increasing the first half.

Second point however to be mention and if you come back to the situation of last year, there was already a pickup situation in the second half of last year compared to the first half. We have already some the improvement already taken into consideration in the second half and I am curious for which you can detect where we think we would go regarding prepaid.

Sanjiv Ahuja

First of all thank you for giving me the opportunity to comment on the prepaid because we say that we are looking grand, in fact we are loosing at bit of momentum. I would not give too much significance to the number of customers because first of all we have somewhat conservative way of accounting for active customers in prepaid.

And second I think that what we see, the flooding on onlay (ph) cards on the market, it's difficult to distinguish active and inactive customers. So what is relevant is the revenue and I can tell you that we still have positive revenue growth at the end of H1 '07 compared to H1 '06 in terms of prepay revenue growth.

This being said on the margin as Gervais said, we do not give guidance, precise guidance. And just can tell you that the first all, if you compare GOM end of H1 '07 to '06 it might not be the most relevant comparison because if you remember well in H1 '06, we were in the price war with T-Mobile and we have been suffering and loosing market share.

So we had less capital investment and better margin. So, probably around this respect the comparison with H2 '06 is more relevant. This being said, our goal is to keep the growing margin around full year '06 level. At the end for the full year '07 margin.

Vincent Benoit

Now perhaps we can take the last question. If there is any.

Jerry Gutter - Sedual Inc.

Hi this is Jerry Gutter from Sedual Inc., Paris (ph). So, most of my questions have been asked, but two points nevertheless. Going to back to enterprise, can you tell us where you think the profit will be. You did indicate that maintain margins higher than competition. Where, beyond H2 '07, where do think eventually the margins going to trend to?

And then secondly on the Home France margin improvement that we've seen quite dramatically in H1. Can you be a little more specific and elaborate on how it relates to the €200 million transformation cost of H1 '06? How much has been kept on or has been basically removed from the cost structure? Of the ATNN (ph) cost cutting process as well and then the staff count. If you could a little breakdown the different impact on the quite remarkable margin improvement we're seen in Home France?

Vincent Benoit

Jerry, we didn't catch very well your first question could you repeat it.

Jerry Gutter - Sedual Inc.

The question was just on Enterprise, Mrs. Dalibard just indicated how there could be a slight erosion again in H2 of the margin but it's difficult to good visibility on this business. Where do you think eventually the margin could stabilize for that division for you in the context where you said that you still keep a margin level higher than competition?

Barbara Dalibard

I think what it is, one of the main parameter and I think I have already elaborate on this one during one of the last calls, is going to be the Voice-over-IP speed of implementation within our customers, is something that we do not master entirely.

What we can say that for the time being the migration to Voice-over-IP has stabilize at, I would say, peaceful rate meaning that and one of reasons of the stabilization of our GOM related to the French operation because our customer are a little bit cautious and we have kept I would say a very stronger logistic base. It is I think good news and we see that and for the future months as an ongoing basis.

Now of course the impact of the Voice-over-IP migration and fiber to the home is a long one so that's another impact. So for the time it's a little difficult forecast for the next three years it's steady evolution of the GOM. What I can just say is the fact that for the time being we will continue on the same rate migrate well for new IT obviously in the space of network related provinces as we have planned during our next plan. And for the half to come we do not expect major change in the evolution towards voice over IP, meaning that we would (inaudible).

Gervais Pellissier

In the execution of the transformation cost you mentioned, you're right, in France on the first half 2006 we have shown (inaudible) of costs. We do not mention it this year because through that, it was as I mentioned at the beginning of my speech, we're fully in the ongoing process of transformation this year.

And now it's part of those costs and part of the structure especially all the costs to support the Telecom France are now embedded in the process and as some of you know we have worked they come down, explains some of the improvements we have.

I'm now sure it's worthwhile to continue to focus on that but it's rather I think are now beyond this stage of transformation. Event if there's still a lot to go on the (inaudible).

Jerry Gutter - Sedual Inc.

So you would consider they are down to a fraction of what they were a year ago?

Gervais Pellissier

Yes.

Jerry Gutter - Sedual Inc.

Okay. And the bulk of the staff cuts impact of €5 million quarter on quarter and then can savings that were highlight, you would argue that to a large extent they would be allocated to Home France along with the new pricing arrangements with Enterprise segment?

Gervais Pellissier

I'm not sure I am completely -- no, I'm not sure that's completely right. But it was -- if you come from the (inaudible) you see the evolution Enterprise compare to the evolution on the French Home market, you see that the production of business are very different.

So the weights in the margin are different but important for the Enterprise division, less important terms, in fact for the Home France division because of the effective prices of the business, which cannot make comparison one for one for that front. The second point is that, I think this change of prices has already reached relief for clients and taken off the debate is also linked with the trend in the business. Yes, we can debate and dialogue a few internal debate with early timings, but also reflection of some of the price evolution of some the other parts.

Vincent Benoit

Thank you, and thank you all for having participated to this call. I'm really pleased with my colleague especially Francois and the Investor Relations team to meet most of you maybe just after your vacation. So those who are leaving I wish you a good vacation and I hope that these results we have provided to you -- you have good vacation. Thank you.

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Source: France Telecom Q2 2007 Earnings Call Transcript
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