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Executives

Gervais Pellissier – CEO Delegate, Finance, Information Systems, United Kingdom JV

Stéphane Richard – Chairman and CEO

Delphine Ernotte-Cunci – Deputy CEO, Orange France

Analysts

Nicolas Cote-Colisson – HSBC

Jakob Bluestone – Credit Suisse

Hannes Wittig – JP Morgan

Dimitri Kallianiotis – Citi

Vincent Maulay – Oddo

Antoine Pradayrol – Exane

Nick Delfas – Morgan Stanley

Stéphane Beyazian – Raymond James

Frederic Boulan – Nomura

Jonathan Dann – Barclays

Jerry Dellis – Jefferies

France Télécom SA (FTE) Q2 2012 Earnings Call July 26, 2011 4:30 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to France Télécom Orange 2012 First Half Results Conference Call. The call will be hosted by Stephane Richard, Chairman and Chief Executive Officer and Gervais Pellissier, Deputy CEO and CFO, with members of FT’s executive committee for the Q&A session that will start after the presentation.

Thank you and let me hand over to Stephane Richard.

Gervais Pellissier

Yes. Thank you very much. Good morning to everybody. I will start with the presentation of our figures and Stephane will be – will conclude our session of today. So we have decided to have this conference quite early to leave space to our colleagues because we know that this end of July a lot of people will publish their results especially some of our peers in this sector, Telefónica, just afterwards.

Just a few comments first and I would like to start with page 10 of the presentation just to come back on the main figures we have. This is revenue minus 1.9% decrease, mainly the consequence of regulation. Excluding this effect, the revenues are almost stable at minus 0.1%, and I think we can observe that there are countries where revenues are under pressure. But at the same time in our footprint we are quite happy that regions or countries are still growing, especially Spain, emerging markets, and the international carriers activities.

EBITDA still penalized by €100 million reduction linked with regulation, turned slightly above €7 billion. Erosion has been limited at 1.6 points out of which 0.3 points coming from the retirement and pension issue for the French Public Servants according to the decision made by EC and which will be applied by the French Government this summer.

Net income is reflecting the EBITDA decrease and the impairments of goodwill in Romania for €159 million. At the same time, Group has not slowed down its investment since we spent 1% more in H1 CapEx compared to last year and the CapEx represents 11.3% of our revenues.

The level of operating cash flow at €4.5 billion makes us comfortable to meet the year and Stephane will explain to you this in our – in his conclusion. At the same time, we have maintained a solid net debt to EBITDA ratio at 2.11 times, which is stable compared to the end of the year and this makes us also quite confident in coming back to a level of 2 in the medium term.

Revenues by geographies are described on page 11, and they are with penalized point coming from regulation minus €400 million. The effect has been quite sensitive in France, and H2 may be even more impacted than H1.

Revenue decrease in France is minus 2%. In Spain, the performance has remained quite high and in Poland revenue decrease was limited to 1.1%, thanks to the ICT revenues. In the rest of the world, revenues are increasing. African countries keep posting impressive revenue growth rates like Ivory Coast or Niger and more than 5% growth for EMEA in the second quarter of the year.

The Animals after launch in Belgium is quite encouraging for the last two months in Belgium and Romania is back to positive growth. Enterprise segment’s revenues are down by 2.6%, which is penalized by the legacy solutions whilst other domains are growing, which means that if you look at the revenue picture in total, we are I think quite good compared to what is happening with other big incumbents in Europe when we look at the first published results from our colleagues.

EBITDA is under pressure. However, with the pressure limited to 1.6 points, as I explained, and with 22% of the decrease coming from regulation. In terms of segment, legacy operations are for sure more suffering than others. In France, EBITDA is down by €400 million; in Poland by €52 million. In Enterprise €36 million. However, we had good contributors coming from Spain, €74 million increase, and in rest of the world especially thanks to EMEA performance.

If I go to page 13, the trends in EBITDA are mainly coming from the revenue impact, use revenue as it was explained, and out of which the regulatory impact is €101 million.

Regarding the cost structure of the company, we had some small pressure on the labor cost; however, (inaudible) compared to what could happen for groups like us, especially considering there is slight salary increase in the company in France for this year.

The cost saving programs, which have been implemented, especially Chrysalid, are helping us keep a better situation for EBITDA and Chrysalid is affected in this very low increase of cost on the IT&N, property and G&A, where we have the benefit of Chrysalid that you find on page 14, with – for Chrysalid savings of €252 million in OpEx and a total savings of €310 million for the total of the Group.

I’ll just remind you, we might comment that in the Q&A that the Chrysalid program is recovering. All the cost structure reduction we can operate in this company through network sharing, through improvement of our processes. And this is what is described on page 15, where you see that we’ve taken some illustration of the project with RAN sharing in Poland, transmission costs in Spain, or mass market customer relationship in France, where we try to optimize our processes to share the means with our competitors when it is feasible and this too has a better success of the future and not just generate savings for the year.

Regarding CapEx, as I said, we had a slight increase in CapEx, but we have mainly focused the CapEx on the strategic aspects we need to focus on, especially IT for deployment, fiber to the home for the French market and change also of swap 2G, 3G in the other geographies. And if we look at the increase, we had 6% increase of the net gross spending for the Group. We had 2% increase in IT. We have gradually installed our CPE in the Group with the exchange of Livebox we did last year and which is now quite determined and as well we have been decreasing the investment in this area.

In terms of geographies, you see that there is a slight increase in France, increase in Spain, because we are accelerating some of the exchange of the structure for our 3G network and a slight increase in the rest of the world.

To conclude for the first half results for Group as a whole, we have the situation of the cash flow and the debt, and we are still reducing the debt by €1.1 billion in this first half coming from €32 billion to €31.2 billion at the end of H1 and this is due to the level of cash flow generation, operating cash flow, € 4.5 billion in line with our full year guidance. And on top, we had some positive contribution with €1.4 billion coming from the Orange Switzerland disposal and €225 million net debt reduction as a result of the new agreement reached with our core shareholder, Mr. Sawiris in Egypt.

Positive effects which are negatively affected by €920 million of interest, €748 million of cash tax, which is an increase of about €400 million compared with year ago. And €600 million negative change in working capital mainly due to the investment sales of the company and that’s vis-à-vis the suppliers.

We have also paid the balance of the dividend at €0.80 on the 13th of June, and we have in the other financial returns €216 million non-monetary effects due to accrued interest.

Our last comment on the debt is that we continue to refinance our debt with best in sector conditions and the – at the end of June we have kept our liquidity positions after dividend payments with nearly €16 billion liquidity position. We have continued to prepare the future by reinvesting the credit quality into the strengthening of our balance sheet anticipating future redemptions and keeping diversifying our funding sources.

We have reduced the average cost of our debt, thanks to the debt refinancing best in sector condition. In January, we have faced a window of opportunity in the dollar market and issued a $900 million 30 years bond at 4.86%. In June we have issued €1 billion 10 year loans with a record-low coupon at 3% and this contributed to decrease the average cost of debt in bonds on 5.29% – from 5.48% to 5.29% at the end of 2011 and we have increased the maturity of the debt by half a year in this first semester of the year.

Now I leave the floor to Stephane to present the conclusion of this result and I will come back on the results by geographies afterwards.

Stéphane Richard

Good morning, everyone. Let me give you a few major information about our performance in this first half 2012 and then Gervais will come in to more details country by country, market by market.

So we can go to page five, where we have the main figures and the main results. I would like to begin with our French results by saying that we have been able at the end of this first half to stabilize our market share at 38.1% in the mobile retail market.

The good news in this market as per the entrance of a new player is that we have divided by four the number of customer launches between Q1 and Q2. And we are even back to positive net adds in June, 27,000 new customers.

This has been achieved mainly thanks to the success of Sosh, our web-only, sim-only offer that has been able to attract 367,000 customers, but also through a very powerful marketing tool which is the quad-play bundle Open with more than 2 million customers. We have also simplified a lot our Origami offers, which is the classic debt offers in the mobile market.

Those results have been achieved also thanks to the contribution of the enterprise area with positive net adds and especially boosted by significant M2M contracts. And resulting from this is a limited revenue decrease in the mobile market at 4.5%, even 2% if we exclude regulation. This is for the overall French operation. Clearly those figures has been also kept under control. Thanks to the roaming agreements that we have signed with the fourth player.

On the broadband markets, we have in a very challenging conditions we have been able to keep our market share around 24% in Q2, so in the first half we are not far from that level, which is I think very satisfactory performance in a very aggressive market.

At the group revenue, the overall revenue, as this has been mentioned by Gervais earlier, is almost stable with especially strong performance coming from emerging markets, was 6.2% excluding regulation and in Spain and this has led us to keep control of our EBITDA margin erosion, which is limited to 1.6 points. This has been also made possible thanks to a very active management of commercial cost, but also with tighter OpEx control, thanks to the Chrysalid program, we’ll come back later on those big programs.

As far as the debt is concerned, we are very stable around 2.1 at the ratio debt-to-EBITDA. And last but not least, those first half results are totally consistent with our yearly guidance in terms of operating cash flow, close to €8 billion, that I can confirm very clearly today. We will come back also on the post-paid.

Let me give you a few information achievements that show that we are very consistent with our Conquests 2015 plan, and very steady in terms of implementation of this plan. I will start with the network priority by saying first that our network CapEx has still been increasing in the first half at yearly rate of 6%. We have recently launched our 4G first institute operation in Marseille at France. And we have three other cities that are planned in the second half of this year. We plan to launch our first offers, 4G LTE offers early 2013 at the time when we have set of devices that will be compatible with our 4G.

We have now launched 3G services in 14 out of 20 emerging countries and this is very clearly an important first priority in those countries to differentiate by the quality of the network and the quality of 3G services. We are rolling out fiber network in France very much according to the plan, the overall plan that we have presented, announced eighteen months ago and we have also started to roll out fiber network in Spain.

We have built and we are going to open the first big – large data center for cloud services both for enterprise and residential customers in France. And this will be opened in autumn. And last, even though this is not clearly what I could call an achievement in terms of network priority, we have managed our network outage in France a few days ago, I think, as efficiently as possible and we have now a situation, which is back to fully normal and we took less than 12 hours to fix this major incident, I think without any significant consequence or damage on our customer bases.

In terms of people, we have received in 2012 several top employers labels in France, Belgium, Poland and also in the Dominican Republic. We have good results from our social inquiry in France that really show that the climate, the working environment is perceived as much better than it used to be in the past.

We have been able to come to I think a decent agreement in terms of French salaries in the beginning of this year. And our senior part time plan in France is a big success and with new rules regarding the retirement plan in France, we will be able to add 1,300 more people entering in this senior part time plan.

As far as customers are concerned, this is page seven, I have already mentioned the success of our main new offers in France; Open, the quadruple play, Sosh and new Origami bundles. We have launched sim-only, web-only offer in Spain, which is branded amena, used to be the brand of our business in Spain a few years ago. We have rebranded our Polish fixed activities in Poland and today in Poland all our services and products are under Orange brand and we have been I think very successful in delivering communication services for the UEFA 2012 championship in this countries.

Orange Money in Africa and in the Middle East is still very success with now over 4 million customers. Overall, we have a customer bases still increasing by 3.6% to 224 million customers and this has been achieved keeping commercial and company costs under control and even down by 1.4%.

International development has been highlighted by our efforts to clarify the shareholding structure of our business synergy which is now done. We own more or less 94% of Mobinil, our Egyptian operation and this operation has enabled us to spare more than €270 million of cash-outs. And we are now focusing on integrating new operations in Iraq with Korek or in Democratic Republic of Congo with CCT.

At last, the B2B revenues in emerging markets have grown by more than 10%.

I now let the floor again to Gervais. Thank you.

Gervais Pellissier

Thank you, Stéphane. So may be now a few comments on our different geographies. First to start with France, and in France, so I’m coming on page 20. In France, as anticipated, the supplies continued to slow down, this is something that Stéphane commented. And this is in spite of the positive contribution of our fixed broadband activity, energy, domestic roaming agreements with Iliad.

Regulation continued to weigh on the top-line, this represented €290 million of positive declines. We have explained one month ago. In fact, it’s mainly coming from MCS cuts from Swiss franc to euro cents to €0.015 in the first half 2012. And just to keep in mind that excluding regulations, mobile tariff revenues were slightly growing at plus 0.5% while the roaming agreement is compensating the decrease of retail activity.

In home usage revenues, the trend is improved year-over-year with a decline of €190 million year-over-year, which is 30% less than what we had in the first half 2011 while the loss of PSTN lines is decreasing and broadband revenue are back to a significant growth level.

The margin has been efficiently managed in a difficult situation and Delphine is with us to answer your questions if you ask later on. Keeping in mind that the margin has been managed by really managing the commercial expense, which have been optimized through gain value customers while continuing as we announced spend in handset subsidies. And at the same time, the indirect cost on French operations have been stabilized, thanks to the Chrysalid program, which has generated €115 million of savings, mostly on customer management.

Regarding some of your questions, KPIs on page 21, looking at mobile first. We observed a swing to positive consumer contract net adds which was underlined by Stephane in June with total net customer launches divided by four in Q2 compared to what was lost in Q1, mainly thanks to the attractiveness of our new offers and the reshuffling of our tariff for the Origami offer.

We managed to stabilize our retail market share at 38.1%, which means stable market share in Q2 compared to the 1.5 points loss in Q1. And the 2Q contraction went down by 9 points to 18% in Q2, compared to 27% in Q1. The good news is that we’re coming back to normal, that’s the way on the market with four operators. We had a higher level of share than what we had in the market with three operators. But I think we are now quite confident that we can manage the situation in terms of markets.

We reported 1.750 million gross adds in Q2, which is the best performance ever on the French market, which means that you should not also forget that the French market is still sustained in terms of commercial activity.

If we look now at the value of our customer base, ARPU was down by 6% as anticipated. And this is mainly the consequence of our offer adjustment and of regulatory impact. It was out of the 6% decrease, we should not forget that there’s about two-thirds coming from the decrease of regulation.

Regarding the fixed line indicators, home segment continued to report good commercial figures with 24% net share from credits that was – the figure was given by Stephane just a minute ago. And we consider that in the environment where it is – where there is also with the competition on mobile, an increased competition on DSL, this is a good acquisition, especially taking into account the really aggressive commercial offers that have been proposed by some competitors.

At the same time, the ARPU from DSL continued to grow and the PSTN line losses continued to decrease. We are losing about 100,000 less lines in this quarter than what we had a year ago.

For Spain, good results underlined by this second quarter with revenue growth of 2.5% in Q2 after 2.3% in Q1, which is even after excluding regulation, 4.5% growth, mobile revenue still growing at 1% over H1 plus 3.9% in Communication. And I think compared to the results that are published or were published by our competitors, this is really a very strong achievement. It is mainly driven by data service and equipment revenue and achieved despite of a slowdown in voice usage that we observe on the whole market. The data service is reduction of voice traffic for all operators in Spain.

The contract customer base increased by 7% and in terms of portability around Spain has been the market leader in this second quarter with at the same time reducing its subsidies and its commercial cost in the move that by the way is underway on the Spanish market.

For the fixed line revenues, growth is 9% which is quite impressive, nearly 10% in Q2. Fixed broadband revenue are growing by 17% and represent two-thirds now of the revenue of the fixed line business in Spain with 11% growth of the broadband customer base and 4% increase of the ARPU.

This has led to a very impressive improvement of the first half EBITDA, plus 19%, coming from the data service growth on the lower level of commercial costs and from the efficiency improvement in the fixed line division.

Poland, which published their results yesterday, the second quarter has been marked by an improving revenue trend and steady commercial KPIs. We have proved indeed this plan activity in our (inaudible) as said by Stéphane a minute ago. We had also the event of the global foot – the Euro soccer competition, which by the way, as you can see, some increase in revenue in terms of services provided to this competition. And I think we have kept also our value market share, our position of number one on the Polish market in value market share whereas the home revenues are still challenged even if we continue to gain clients in DSL.

So the other geographies of the group, we had, in fact, mixed results between steady growth in emerging markets and I would say a situation for European countries, which is more comparable to what is the rest of Europe with the exclusion of Spain.

We had, however, on the emerging markets, a slight slowdown which is due to the deceleration in Egypt where second quarter is a little more challenging than what was first quarter, linked also with the political environment.

However, at the same time, very strong performance in some African geographies, especially Ivory Coast with 34% growth in the second quarter and full recovery of our operations in Ivory Coast compared to the very disastrous situation we had at the end of the political turmoil at the end of first half last year.

Also strong revenue growth from new operations around 36% growth, such as Uganda, Guinea-Conakry, Guinea-Bissau, Central African Republic and Niger. Overall, our Orange service has grown by more than 15%. And if you consider the mobile business only, our growth in Africa and Middle East is more than 7%. In Europe, first half revenue trends are down by 2.2% and turned to a flat revolution if we exclude the regulatory impact, we have in most of the countries.

The slowdown in Q2 is due to a slight deteriorating trend in Romania, after a good first quarter and in Belgium where pressure is still there with the change of the business model on the market within provisional subsidy and also the markets which is also constrained by macroeconomic condition.

Mobistar reports however encouraging for commercial KPIs at the end of the quarter with a return to positive postpaid net adds since May, whereas the first half of the semester was more difficult. EBITDA has increased by 2.5% for the other geographies of the group, mainly supported by the emerging markets.

And last but not least, the enterprise division, our Orange business strategies, with the revenue decline of 2.6%, lower revenue decline in Q2 compared to Q1. However, still a strong pressure on the legacy businesses. We observed by the way more pressure on the B2B for legacy activities and what we see in the consumer business.

And also mature networks with low revenue growth with (inaudible) equipment of most of the businesses with IT solutions. Growing networks are still with a strong revenue growth, 8.4% with a strong host of voice-over-IP revenues and a strong growth in advanced net growth revenues such as WiFi and satellite. And services, which are accompanying our connectivity offer, are growing nearly 4%, which is not too bad in an environment where IT services are not growing that fast in Europe.

While at the end of Orange we keep our leadership in terms of margin in this business compared to our competitors, especially if you see again the last published results from operators who are active in the B2B field. But this is impacted by the revenue pressure and a changing business mix; this explains why we have lost 1 points of EBITDA rate, which is not so bad for this first half.

And again, yesterday, we’ve published the results of Everything Everywhere, our JV with Deutsche Telekom, with good commercial performance, a good, let’s say, implementation of the synergy, especially on the network. But still some pressure on EBITDA, mainly linked with the high competition on the British market in terms of subsidies as a full reseller commissions or through SAC initiatives, which is quite different from what we observe in other European markets. The pace of subsidies continued to increase on the British market and the opposite of what we observe on some Continental Europe markets. Now, Stéphane?

Stéphane Richard

(Audio gap). Today and even to including within this guidance, the impact of the French pension new regime which has been set by the European Commission that we clearly contest. But in the meantime, we have included the impact – the financial impact of those decisions within our guidance and despite this, we still confirm the eight – close to €8 billion operating cash flow guidance for the year.

And this combined with our debt management, as it has been explained and shown and also the cash generation of the company enables us to announce the payments of the interim dividend at the levels that had been announced previously, €0.6 per share.

Now, when we look at the rest of the year, I would say that we expect still some pressure on our revenues and mainly in the French market where we will have the re-pricing effect of – which is linked to (inaudible) arrival later on in the year and next year. But in the same time, we are now confident in our capacity to protect our market share and to that extent what we have been able to do in June is I think is very important. We have been able once again to regain commercial momentum and to increase our customer bases in this very competitive market. And it is, I think, the proof that our marketing strategy reshaping the Origami offers and using Sosh and Open in the French market is a relevant strategy and efficient. And this makes us reasonably confident on – in our performance in the French market for the coming months.

In the same time, we have clearly accelerated our efforts to better master our cost structure, especially thanks to the group program that we have implemented. And we will not sacrifice our investment, especially investments in the networks. We are going to accelerate the 4G/LTE rollout in France. And we will just do what we have committed to in terms of fiber rollout. So, we will invest in the networks because we see this as clearly core business and – for our future.

And this is the main things that we can say about 2012. So, I would say clearly, the confirmation of our guidance – all our financial guidance are very serious management of our debt position because in the current times in Europe, it’s clearly an absolute priority for the team in terms of the use of cash also for the company.

And then what I would like to do is to give you the next rendezvous when we announce our third quarter results, so end of October. This is the time where we will give you some outlook on 2013. We think that after the summer, we will have a much more relevant comprehensive view on especially on the French market, hopefully, in the momentum of the end of the first half.

We will have also better knowledge and information about may be some new laws in France after the first interim finance law that is currently under discussion in the French parliament. And so at that time, we will be able to give you, I think, some views, information, guidance also on next year results of the company.

That’s it. So, I think we are now available, ready for your questions. The whole team is in this room around me. So, we are ready to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We take our first question today from Nicolas Cote-Colisson from HSBC. Please go ahead.

Nicolas Cote-Colisson – HSBC

Thank you. I’ve got two questions, one on fiber and there is one on the French mobile market. Just on fiber, I wonder how the new European regulation because of the current government consideration on fiber manufacture plan. And if you can update us with the CapEx budget and also coverage target for phones?

And for the French mobile, are you still factoring in the 10% after decrease for the full year?

Stéphane Richard

Regarding the fiber regulation, we have had I think a very good positive news few days ago with the new set of recommendations coming from European Commission, which is I want to underline this a major move in the European view of regulation and this very concretely includes a recommendation to stabilize the copper prices for the networks in Europe, and this is I think clearly a good news for our French business.

In terms of figures, regarding fiber rollout, we are at the end of first half 2012, at an amount cumulated of €319 million. And if I take the cumulated amount invested in fiber on period of two years, 2010 to 2012, the amount is €504 million. So we’re on track with our plan of investing more or less €2 billion by 2015.

In 2012, we will invest twice what we have invested in 2011. In terms of coverage, let’s say, ratio, we are at the end of June at 1.3 million homes passed by fiber networks. And again, last year, I can give you is that the Group today stands for 80% to 85% of private fiber deployments in France. So we are, I would say, totally on track with our plan in terms of fiber rollout.

Regarding the Mobile figures, yes, I can confirm at that stage, the order of magnitude of 10% of decrease in ARPU for 2012. We are at 6.1% of decrease in Mobile ARPU for H1. So I think it’s consistent with this order of magnitude of 10% of decrease for the full year. This is by the way very much close to what we had in mind a few months ago. So there is no bad, I would say, surprise regarding this parameter.

Nicolas Cote-Colisson – HSBC

Okay. Thank you.

Operator

Thank you. We now move on to our next question from Jakob Bluestone of Credit Suisse. Please go ahead.

Jakob Bluestone – Credit Suisse

Hi, there. Two questions as well, please? And firstly, on your French fixed line margins, which are down sort of 300 basis points year-on-year, could you maybe give us a little bit of a sense of where do you see margins heading in the French fixed line?

And then secondly, last quarter, you very kindly provided a bit of a color on how the mobile development has changed during the course of the quarter, so it’s challenging at the beginning of Q1, better at the end of Q1, would you be willing to give a little bit of color on how Q2 developed and so was it fairly stable throughout or was there a significant improvement through the quarter as well? Thank you.

Stéphane Richard

Maybe I will let Delphine give you some explanations about the margin in the fixed line business. Delphine?

Delphine Ernotte-Cunci

Yes. The margin churn on the fixed markets will be on the same trend in H2 then it is in H1; so no change in the trend. We are still controlling the decrease of the normal – classic telephone lines trends and recovering in the broadband market because we now are increasing the revenue. We are after last year where the – all the traffic to mobile were included in the offers in the market, they were slowing down in the ARPU. Now, we are recovering, thanks to new content offer and also a very good mix on the broadband markets.

Jakob Bluestone – Credit Suisse

And that’s in regarding the prospects of the Mobile market in France?

Delphine Ernotte-Cunci

Well, yes, in Q1, there were the first effects of the fourth entrant’s entry and we’ve lost 615,000 lines. In Q2, there were very – a slow down since March in fact. And the good news is that in June, we are recovering positive net adds on the contracts, 85,000 new net adds, including machine-to-machine, of course, but still we see a change in the Q1 trend, of course, and we have divided the losses by four, which is a real slowing down.

Jakob Bluestone – Credit Suisse

Thank you.

Stéphane Richard

Thank you.

Operator

Thank you. We now move on to Hannes Wittig from JP Morgan. Please go ahead.

Hannes Wittig – JP Morgan

Yeah. Good morning. I’ve got two questions. Just following on the discussion of the French mobile market momentum, you put through some price cuts on the July 1 for the smartphone prices and I just wondered whether you’ve seen any impact related to that in terms of market share momentum beyond what you’ve already mentioned as a positive development at the end of the second quarter?

And the second question is whether given the news flow we had from KPN and Telefónica, and the changes in the French government, the discussions you are having with the government, there is a chance that you would maybe reconsider your dividend policy in order to maybe accelerate investments in certain areas and maybe too early to ask this question, but maybe you have some thoughts that you can share at this point?

Stéphane Richard

On the first point, Delphine.

Delphine Ernotte-Cunci

Yes. So, on the first point it’s true that we are very tightly monitoring our SAC and SSCs. But we do it on a weekly basis in fact. So our main concern is to stretch the SAC and SSCs and to focus on very high end customers, very loyal customers and reduce SAC and SSCs for not lower but less attractive customers. So every week there could be changes. Of course, we are considering what other competitors are doing at the same time. So there is no big change in our SAC and SSCs policy nowadays.

Stéphane Richard

For the second point regarding the dividend policy, first I would like to emphasize that we do not announce today that we will not pay any more dividend. It seems to me that it makes a difference – maybe between France Télécom and other players in the industry. The second point is that, I think that the main focus of European players is probably more the debt position and the financing of the balance sheet than the real CapEx question. And probably if some companies, in fact, decided to reduce dividend payments to increase CapEx, it would be some extent different than reduce dividend just to be able to refinance debt.

Fortunately, we have – as this has been constantly steadily mentioned over the past quarters, we have been able to manage very seriously our debt position. And we have been able also to maintain our cash generation. And so, we are not in a situation comparable to other players and there is no pressure on the dividend payments for this year.

Now, we have not entered so far in specific discussions with the French government regarding the dividend policy. I would like just to also stress the fact that, after the new – the elections in France and the new political majority, the issue of the 2011 dividend was raised and that we had this discussion with the new government and clearly, it was confirmed – the new government confirmed the commitment that had been made previously.

So, we will see all the parameters of this question in the coming weeks and we will come back to the market as I mentioned, in late October, at the occasion of Q3 results. This is the time where we will provide you with more certainties regarding the distribution policy – the remuneration policy. But once again, I want to really stress the very major differences in my view between what has been a very constant, steady speech and policy of this group regarding its shareholders compared to other players in the industry.

Hannes Wittig – JP Morgan

Thank you.

Operator

Thank you. We now move on to a question from Dimitri Kallianiotis from Citi. Please go ahead.

Dimitri Kallianiotis – Citi

Thank you. I’ve just got two questions. Maybe, if I can just come back to the last question on the dividend and your answer, just wondering, in terms of the – with respect to the credit agencies and your willingness to go back to two times net debt to EBITDA and if you got any sort of timeframe by which you want to go back to this two times and if you would consider even if it’s just temporary to reduce the dividend to go back immediately to two times. So, if you are happy to just continue this – the same dividend policy of paying 40% to 45% of your free cash flow?

And then my second question was on the – in terms of the fixed broadband, the market share of net adds has been a bit weak over the last couple of quarters, clearly a lot of promotions from some of your competitors. I was wondering, if you were willing to go down that route and make more even temporary promotions? And also, if you could update us on when we should expect a new triple-play box from Orange? Thank you.

Gervais Pellissier

On the first question, Gervais. So – maybe we have said earlier this year that we would like to come back to the net debt to EBITDA ratio of 2 in the medium term. For us the medium term doesn’t mean that we want to go there at the end of this year, will give us a timeframe which is probably 18 months to 25 months to go there, because we need to keep our investment base as it is and we want to have some consideration. We think that – and it was clearly said just a minute ago by Stephane, we don’t think that a swing from dividend to zero, then maybe back to dividend is exactly the best we can do. So, this is why we are quite careful on that.

However, what we have said is that coming back to this objective is to this level is important and that we will do what is necessary to go there. Today, in our plans, we are assuming that this route can be with the distribution policy as it is, with as a prospect for this year. We have no policy and we have no continued risk for 2012. We have to see what’s happening for the future.

Stéphane Richard

Regarding the broadband market in France, first I think it’s useful to remind that the most powerful tool that we have at our disposal is the quadruple-play bundle Open, which is very successful. It’s probably around Open that we will still try to improve our offers in the next weeks. We will have a new set-top box by the end of this year. It’s in our roadmap. And then we will have more or less in the same time or beginning of next year, a new network. This is what we are focusing on. Delphine, do you want to...

Delphine Ernotte-Cunci

I just wanted to make a comment to say that, I don’t find our broadband network market share weak. If you compare it to last year, we were at 27% of net-adds market share. This year we’ll have three with a sort of quadruple-play offer and we managed to have 24% market share. So in my opinion, it’s not weak, maybe it could be deceptive for you, but it’s – for us it’s a good result considering that we have not launched a new set-top box already, but we are going to do it in H2. And besides, as you can see in the figures, ARPU is increasing as well. So for us it’s not a weak result.

Stéphane Richard

No. It’s a good result and I just recommend you to wait for the figures that will be provided by other players in the market.

Dimitri Kallianiotis – Citi

Thank you very much.

Operator

Thank you. We now move on to our next question from Vincent Maulay from Oddo. Please go ahead.

Vincent Maulay – Oddo

Hello. Two questions. The first one on, if you could give us an update on the number of (inaudible) compared to the 400,000 at the end of Q1. So, could your drive net proceeds in further quarter or are you confident in further net adds in contract maybe you will demo with the iPhone 5 in H2?

The second question, your level of confidence to maintain your premium on the high end of growth in mobile in France that is tiered I know that you are being in line with tiers in the mid range?

Stéphane Richard

Thank you. Two questions for Delphine, I think.

Delphine Ernotte-Cunci

So, on the first question, we have two points, 1 million Open customers of which 350,000 (inaudible).

On the second question, it’s – are we confident on our premium mobile offer? Well, yes, we’ve noticed in the first half of the year that our high end offers were very resilient compared to the low end offers. So, in fact, we have researched this point in evaluating – while revamping our Origami offers and maintain quite – contains the pricing reducing on the high-end offers. Besides, we are stretching our SAC and SSC policy and focusing our main strategies on high end offers. And so, we’re quite confident on the fact that our high end offers are resilient.

Vincent Maulay – Oddo

Thank you.

Operator

We move on now to Antoine Pradayrol from Exane. Please go ahead.

Antoine Pradayrol – Exane

Yes. Good morning, everyone. I have two questions please relating to M&A. The first one is I think I saw in a statement or some quotes from you on Bloomberg saying that you were looking at potential small acquisitions. I just would like to understand whether there is a change in your appetite for M&A? And also, what is your framework in terms of debt, I mean you reiterated the target to reduce debt to EBITDA to two times, but would you be ready to increase that temporarily and to which extent? So that’s the first question.

And the second question also relating to M&A is, do you think there is a change – because you mentioned the fact that the European Commission has changed its stance on fixed time regulation. Do you think there is a change on mobile regulation or more like the ability to consolidate market? In market consolidation, do you think the European Commission will be more open to – in market consolidation in mobile? Thank you.

Stéphane Richard

Thank you for the question. Regarding M&A, there is no change, clearly no change in our views and policies. You probably referred to some isolated statements in press article. But in fact, when a journalist ask you, if there is a very attractive opportunity in Europe taking into account the fact that, there could be some in market consideration in Europe, in big countries where you are, will you look at it? You have two options, either you say no, and nobody probably believes you. Or you say, maybe, yes, if it’s really makes sense for us, in respect of the guidance that we give to the market in terms of debt to EBITDA ratio and financial structure.

So that’s it, I mean, we have no change in our M&A view. Clearly, this time is not a good time for big M&A operations. And our first priority is to keep robust balance sheet for the group. And that’s it. So there is no change in our M&A. If, of course, we have very nice opportunities that are still, once again, compatible with our financial guidance. we will look at them and that’s it.

Then, regarding the European regulation on mobile consolidation, in fact, in the set of recommendations that I mentioned earlier, there is nothing concerning mobile market. It’s only fixed line business. But, we have discussed little bit about mobile situation with the commissioner. And I think that they are now aware that we – that there is no more room for augmenting the number of players in mobile markets in Europe.

So, at least if – there is now – I mean, if everyone in Europe is aware that it is time to stop the increase of number of players in mobile markets, it’s a good news. And yes, I think that even though this is not explicit in European Commission, there is a difference – there will be a different view and look on consolidation operations if we see consolidation operations, because everyone is aware that there are some players that are going to get into trouble with the competition situation as it is in some countries. Look at what’s happening in Austria, it will be an interesting case to watch. And yes, I think that there is some move in the way European services are viewing the telecom industry as a whole.

Antoine Pradayrol – Exane

Okay. Thank you very much.

Operator

Thank you. We move on to a question now from Nick Delfas of Morgan Stanley. Please go ahead.

Nick Delfas – Morgan Stanley

Yeah. Thanks so much, indeed. Two questions, could you explain the ICSS loss and what is going on in that division. And secondly, on Sosh, what proportion of the customers that you have on Sosh are previously Orange customers versus new. And what proportion of the previously Orange customers are prepay? Thanks very much.

Gervais Pellissier

Gervais for the ICSS, EBITDA. So ICSS, this is where we gather international carriers, through the international wholesale we do, plus the support functions of the group, cooperate and support. In fact, there is a pressure on the EBITDA because this is where that we have located the €60 million of additional pension cost after the European Commission decision. So this is – we did not include that into the operations yet, it will go to the operations later.

And on top of that, we have seen an increase of the cost of benefits for French labor, which is so called France Sociale, which has increased by 20% and the €30 million further increase. So you should take those amounts. You have €90 million, which are those exceptional amounts, which impact the margin of the cost structure of ICSS.

Stéphane Richard

Thank you. As far as French customers are concerned in the Sosh net adds, you have 65% of migration coming from other Orange offers, but we’re talking about people that would have left Orange to go to another player. So, it is a powerful retention tool to have the Sosh offer and we have 35% of the new customers that are real acquisition. We have increased our customer base, Sosh customer base by 157,000 new customers on Q2. And the total amount of customers is 367,000 at the end of H1.

Nick Delfas – Morgan Stanley

Okay. Can I just follow-up on the special costs for the European Commission decision and also the part time for seniors. Are those – are all those costs that you put into the half year relating just to the half year or do they relate to other periods as well?

Gervais Pellissier

The €60 million are related to the half year, then there is the additional reserve which has been taken on the senior part time people and this is covering all the potential departures for the future. I think it’s covering 1,300 people that could leave earlier with a chance of age retirement for some people in France. But – and this is the result. This is an actual. Whereas the €60 million, I mentioned in the first statement, the €60 million just for the first six months of the year. This will be the cost that will be taken year after – month-after-month of every year.

Nick Delfas – Morgan Stanley

Perfect. Thanks very much.

Operator

Thank you. We now move on to a question from Stéphane Beyazian from Raymond James. Please go ahead.

Stéphane Beyazian – Raymond James

Yes. Good morning. Three questions if I may. The first one is just on subscriber acquisition cost. Is it possible to have more color on the outlook? They are coming down, at the same time, I think the debating in France is now moving to the subsidies business model. So can you help us to understand the risk and opportunities there and where’s the right balance for you to further reduce subscriber acquisition cost but at the same time maintain some differentiation versus the fourth entrant in the market.

The second one if I may is regarding the roaming agreements with Iliad. It seems like you almost have said most of the mobile repricing in the second quarter. I was just wondering whether there is, let’s say, a fixed part of that agreement, which could be booked in the second quarter and which we should not extrapolate in our French mobile forecast going forward.

And the third question, if I may, and last one. Regarding Mobistar, with the market value of your asset significantly dropping over the past month, I mean there are clearly couple of issues but I think one of them for the market is probably the market positioning of Mobistar. There’s also some possible M&A that could be happening. As the main shareholder, how do you view the current situation and possible action that you could take to help and support your asset in Belgium? Thank you.

Stéphane Richard

Okay. Thank you for your questions. On the first one. I’ll ask Delphine.

Delphine Ernotte-Cunci

So with – now that we see the market divided in two, classical offers and SIM-only offers. We expect SIM-only offers to exempt 30% of the market. We benefit from those growth as we’ve no subsidy to sort of reinvest on the high-end subsidies in order to be really competitive on the high-end subsidies. Even if in H1 2012, we have – the growth adds were 30% higher than expected in the – compared to last year. And even if commercial adds were higher, we managed to reduce the commercial cost so the overall goal is to manage and reduce commercial expense.

Stéphane Richard

Thank you. On the next two questions, Gervais.

Gervais Pellissier

So on the roaming agreements with Iliad, even if there is a fixed part and a variable part, as regards the fixed part, we accrue in our revenues the fixed part along with the traffic development and the tax. So there is new accounting of 100% of the fixed part, start investing is the second part. This is dealt with currently as we where we don’t communicate the split between both parts and we don’t communicate the precise amount. This is a confidential agreement between two parties.

Regarding Mobistar, we knew the situation. I think, first – our first feeling is that market is – so it’s slightly overreacting compared to the operational performance of Mobistar, maybe we have to see regarding Mobistar colleagues being the main shareholder of how we can probably have a better dialogue with the market on this situation because I would say besides the fixed financial performance, a lot of things are changing on the Belgium market, and I think the fact that Mobistar is part of the Orange Group, is a very strong asset to better adapt on this market, which is now entering into a subsidized market at the same time, subsidization, at the same time limitation of the duration of the contract without subsidy.

And the team has been working a lot with the Group, but I can tell you that we confirm our position of long-term shareholder being not only the long-term shareholder, but the controlling shareholder and we think that what’s happening in the Belgium market is an occasion to better integrate in terms of marketing Mobistar within the Group work as we did in Spain, as we did also efficiently in Poland and I think those markets which have been quite challenging, the fact that the two companies belong to the Orange Group is helping them to better perform against the competitors.

Regarding M&A, we understand that effectively the sub-operator is for sale. By the way, coming back to the previous question on consolidation, we have got the feeling that the Belgium regulator will allow one of the two big players as (inaudible). So we don’t see any potential consolidation on this market in the short-term.

Stéphane Beyazian – Raymond James

Thank you.

Operator

Thank you. We now take our next question from Frederic Boulan of Nomura. Please go ahead.

Frederic Boulan – Nomura

Hi, good morning. Just a quick question on the cost developments in the French business. If we look at what’s happening in Mobile and in Fixed altogether, you’ve lost almost €600 million of EBITDA in the first half of the year, if I exclude the Iliad roaming contribution, can you tell us where you are in terms of plans to resize the cost model, especially going into 2013, wherein in the Iliad contribution year-on-year will probably not be as strong as what you are currently enjoying. Thank you very much.

Stéphane Richard

Thank you. Delphine?

Delphine Ernotte-Cunci

So, we are working on two main costs, first of all the commercial costs and of course second is this is – but also distribution cost. So we have a plan to reduce our external commercial cost, and also working on our own efficiency with the Chrysalid plan working on customer management, quality of service. For instance, we’ve managed to reduce the customer calls to our call centers for after-sales purposes by 20% in one year. So we’re working on those fronts in order to reduce our cost.

Frederic Boulan – Nomura

Okay. Thank you.

Operator

Thank you. We now move on to a question from Jonathan Dann of Barclays. Please go ahead.

Jonathan Dann – Barclays

Hi, there. I have two questions. The first is, can you – it’s a follow-on on costs and commercial costs, could you help us, I know you publish churn and SAC, SSC, but are commercial costs in French Mobile, are they flat, up, down in the first half of 2012 compared to last year?

And then my second question, looking at your expectations or looking at expectations for CapEx in the second half, could we assume that full year 2012 CapEx will be below full year 2012 – sorry, below full year 2011 and that second half CapEx will be broadly similar to the first half or could you give us some guidance around CapEx?

Stéphane Richard

Thank you. The commercial cost in Mobile French market, Delphine.

Delphine Ernotte-Cunci

So, our commercial cost in H1 are below those of last year, €55 million lower. Even if commercial adds were 30% higher, so we’re effectively reducing our commercial costs.

Jonathan Dann – Barclays

Thank you.

Gervais Pellissier

Regarding CapEx for the Group, CapEx for 2012 will be slightly above – they reduce – slight increase compared to CapEx 2011 and it will represent nearly 1 point of revenue more than what we had a year ago. This is what we said. We were (inaudible), so this is what the CapEx that increased compared to a year ago.

Jonathan Dann – Barclays

Thank you very much.

Stéphane Richard

And the last question if there is one.

Operator

We take a question from Jerry Dellis of Jefferies. Please go ahead.

Jerry Dellis – Jefferies

Yes. Good morning. I’ve got two questions please. Following on from your recent meetings with government ministers, some of whom – some of which have been obviously reported in the press, there seems to be some sort of a political shift from pro-consumer to more pro-employment. I wondered to what extent you think that’s a real shift in political attitudes and what tangible measures this may lead to.

And then the second question is just on French mobile ARPUs. As we look at contract ARPUs minus 6% this quarter compared to minus 4% in the previous quarter, how much of that sort of ARPU trend dilution is the results of lower ARPU machine-to-machine? And how much of it is really sort of repricing or associated effects such as the change in mix towards sim-only? Thank you.

Stéphane Richard

I suggest that Delphine answer to the second question and I will then take the first one and give you a final word about that.

Delphine Ernotte-Cunci

And you’re right, minus 4% in Q1. It has nothing to do with machine-to-machine in fact it’s mainly the reprice effect of our response to free entries in January, which has an impact on the growing ARPU. And the calculation I made out without M2M. So it’s really Q1 mobile ARPU without M2M.

Stéphane Richard

Now, regarding your first question and more clearly speaking the government – the new government’s approach on our industry and our sector. What I would say is that we have decision makers that are aware that we – there is no more room once again to change some rules regarding the relationship or the rights that are given to consumers in our sector. And that the priority should be clearly given to investments.

This is I think a positive move for us and for the industry. Do we expect any tangible measures that would represent, I mean, some change regarding the current consumer rules? To be honest, not so much, because I think that politically it’s not very easy to – I mean to manage this kind of decision. So I don’t expect significant or tangible measures that would – I mean go back to in terms of consumer rights in this country, but if the result of this, is that we have no more new set of rights or measures given to consumers, it will be a very positive news.

So you know I have a limited expectation regarding what we can expect from I will say legislators or the government, but I am still very happy to see that we have today people that are aware that if we want to have powerful operators and able to invest in the network that we need to develop digital economy. It’s – there is no more room once again to expand consumer rights in this industry.

Stéphane Richard

Now, I think it is time for today, so I want to thank you very much all of you for your attention, for the interest that you have in our company. And for those that are in London, I would like to take this opportunity to wish very happy Olympic Games with a lot of medals. Thank you very much.

Operator

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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