Orange Belgium S.A. (OBEL) Earnings Call Transcript & Summary

Hello and welcome to the H1 2023 Call. My name is Caroline, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand over the call to your host, Mr. Koen Van Mol, the Director of Corporate Strategy and Investor Relations to begin today's conference. Thank you.

Thank you, operator. Good afternoon, everyone. My name is Koen Van Mol. I'm Director of Corporate Strategy and Investor Relations at Orange Belgium. I would like to welcome you to the presentation of the results of the first half of the year 2023. Here with me are Xavier Pichon, our CEO; and Antoine Chouc, our CFO. Following the closing of the VOO acquisition at the beginning of June, for the first time, we have included figures of VOO in the publication of our results. The main financial figures contained 1 month of VOO indeed. As usual, you should have received our financial communication this morning. In any case, you can also find all the relevant information on our corporate website. A Q&A session will follow right after Xavier's and Antoine's introductory statements, and I will now leave the floor to Xavier.

Thanks, Koen. Hello, everyone. Hope you are well. Welcome to this presentation of the results for the first semester of 2023. So of course, you know that this semester has been a major milestone for Orange Belgium. The beginning of June, we've closed the acquisition of the transaction of VOO making the beginning of a new chapter for Orange Belgium. Let's go now and dig into the section 1. So this slide -- and Number 5, I guess, and then we will give you more insight on our new strategy, lead the future. So as I told you, so we've been able to close the acquisition on June 2, which has permitted us to start the integration of the 2 companies. of course, which is very, very promising. We can say that already today, despite the fact that VOO and Orange Belgium are still 2 separate legal entities. But we have already acted -- we are already acting as 1 operator, and we advance progressively, and this is going to be more and more visible in the upcoming months. First of all, having a mobile and fixed network within the 2 entities, it's important to have a common underlying network strategy. It will allow us to execute our gigabit strategy, both on fixed and mobile networks, which is part of our new strategy, lead the future, as I told. On the commercial side, common operations and objectives have been defined. There won't be conflicting commercial act that would create inefficiencies. To enable efficiency, a new organization has been put in place that ensures there is a complete alignment between the management teams of the 2 entities. We can now say that the synergies that have been identified at the start are confirmed. And currently, we are doing all operations to ensure that they are and will be on track. Slide #6. Now let me go further in our new strategy called lead the feature. It is based on the concept and 3 pillars. The concept is that although we are 2 legal separate entities we have been a single operator since the beginning of June. This means that our teams in all areas can exchange, coordinate and work all together to build a current coordinated strategy to serve our customers. The 3 strategic pillars, and I must confess, that they have been the same since negotiation with Nethys and were already part of our proposal to win the VOO acquisition as are follows. First of all, by 2024, we will be the leader in gigabit networks and we will secure this multi-gigabit position over the long term, thanks to the Orange Group's recognized expertise in FTTH. By mid-2024, Orange Belgium will be the national leader in gigabit networks, offering 95% of the Belgian population access at speeds of 1 gigabit. Our Giga Boost program, a booster we will reach 100% of our customers with a speed of 1 gigabit by mid-2024, both in Brussels and Wallonia. Over time, Orange Belgium will maintain this leadership of its networks by evolving the Giga Boost program towards Giga fiber, which will enable us to offer our customers 10 gigabit speed. In addition, the agreement with Telenet will guarantee us access to its gigabit and multi-gigabit network on a long-term basis, both in the remaining part of Brussels and in Flanders. For our mobile network, we'll continue to deploy 5G frequencies, our 5G SA core network and implement further the RAN sharing. The second pillar is our excellence in customer experience operating in Belgium and our ability to offer multi-segmented and differentiated retail services will bring outstanding connectivity and value-added services to premium and access customers. Excellence in customer experience is a historical strength of Orange Group, Orange Belgium and VOO. We will continue to develop and improve our value proposition across all market segments, as I told you, premium access and of course, B2B as well. From a societal perspective, Orange Belgium and VOO are committed to becoming net zero carbon by 2040 and to promoting digital inclusion in Belgian society and regions. We also aim to become the preferred tech employer in Belgium by implementing modern management techniques and promoting inclusion and diversity. Now let's go into the highlights for the last and -- over the last semester. Slide 8. Orange Belgium has been selected by the Brussels region to carry out the development of the Brussels telecommunication network over a period of at least 10 years, renewable for 5 years, so 10 plus 5. The objective of the new public contract entitled IRISnet3 is to enable all public administrations in the Brussel regions to benefit from the IRISnet network and its catalog of services at competitive prices. With the collaboration of [indiscernible] , Orange Belgium and the Brussels region into prepare the region for the leading digital challenges. Such as the increasing data exchange of Brussels institutions, large-scale connectivity of citizens and protection and surveillance services in the public domain. Through the support of Orange Belgium, the Brussels region aims to become a European smart city at the forefront of digital transformation and connectivity. This ambition includes the creation of Brussels Smart City, a virtual cycle synonymous with innovative collaboration between the city's stakeholders, its inhabitants and companies. Slide 9. Orange Belgium has been selected by the Federal Government Department of Economy to conduct 11 Belgium pilots projects supported by 5G, which will run in 2023 and 2024. In doing so, Orange Belgium responded to the Ministry of Economy Project call to encourage the creation of new initiatives on 5G. The objective is to accelerate the rollout and the implementation of 5G use cases in Belgium. More than ever, businesses and enterprise are expecting telecom providers to not only offer connectivity at the office and remote, but also on a broader range of services as well as guidance on new future-proof technologies. In that context, Orange Belgium in consortium with different private companies and/or public services, presents 11 projects using its 5G stand-alone technology. These different projects show how 5G could be beneficial for companies and consumers in different areas, such as the health care sector, transport, logistics, audiovisual production, military defense and public security, production, smart cities. Thanks to these initiatives, Orange Belgium will be able to facilitate the innovation with local actors and demonstrate the full 5G potential based on its first class national network. Slide #10. Orange Belgium has launched the Livebox, its latest generation DOCSI3.1-HFC Gateway and its Wi-Fi 6 extended booster. The Livebox will also enable Orange Belgium to launch a new Boost Giga offering at 1 gigabit with 95% nationwide coverage by mid '24. The Livebox is the most advanced and sustainability build hybrid fiber coaxial gateway for the consumer and business market with an end-to-end Wi-Fi 6 solution. The gateway also includes EasyMesh technology and the new Wi-Fi booster extender for a seamless extension of Wi-Fi service. In addition, both the gateway and the Wi-Fi booster modules have been designed to reduce the carbon footprint, they are easy to refurbish made from 95% recycled plastic. Excludes single-use plastics and are packaged with recycled cardboard. This project is an additional proof of Orange Belgium's future-proof ESG enterprise model. Telecom operator has a long-term objective of reducing net carbon emissions to 0 by 2040. Slide 11. On the regulatory topics, we would like to highlight that the commission has approved the acquisition of VOO by Orange Belgium. Also the complaint of Telenet against the RAN sharing agreement was closed without further consequences for the project. This has both cleared the way for Orange Belgium for the execution of its convergence strategy. That being said, I will now pass the floor to Antoine, who will give you more details on the commercial and financial results.

Thank you, Xavier. Hello, everyone. It's a pleasure to have you on the line today for the presentation of our H1 results. So since the closing of the VOO acquisition, as already indicated by Xavier, organization has been put in place in order to address the market in a coordinated way. The structure we've put in place will ensure that the synergies which have been identified will be executed. Since the beginning of June, we are preparing operationally the execution of this synergy plan, and we are perfectly on track. We also confirm that over time will have a run rate of about EUR 85 million in EBITDAaL, thanks to these synergies. From a financial -- operational financial point of view, this transaction obviously is quite complex. One of the reasons is that VOO only integrated the activity of Brutélé just before the closing. Until then, Brutélé was an autonomous company with its own financial management. And in addition, both entities have to change their accounting standards from BGAAP to IFRS. And this result then had to be consolidated in the accounts of Orange Belgium. So obviously, adding the closing on June 2, just before the end of the half year. It gave only limited time to set up a complete financial reporting. We are, therefore, not able to report our H1 results, the financial results with the same granularity as we usually provide for Orange Belgium. For example, while revenue do include VOO and Brutélé revenues for the month of June, the bulk of VOO's revenues are included in the equipment sales and in the other revenues line. They are not split between service revenues and wholesale revenues. Obviously, all this will be aligned in the next financial communication will include 7 months of VOO P&L within the several reporting lines, as we've always done. Until now, as I said, VOO has reported on a BGAAP rather than the IFRS. And clearly, BGAAP offers greater flexibility than IFRS in terms of OpEx capitalization. To compare with the EBITDAaL reporting and the BGAAP, we've had to restate in OpEx some amounts previously booking CapEx. So it means less EBITDA, but also as much less CapEx and it was clearly identified, and it's not a surprise for us. If we go to the key achievements of the first semester, Slide 13, within our commercial figures, we report, as usual, the figures for Orange Belgium. But currently, the figures, but it's without the figures related to VOO. Our positioning contributed to a very nice commercial performance. We've increased our mobile customer base by 2.7%, reaching about 2.85 million customers. We added 21,000 new cable customers, reaching 464,000 customers, an increase of more than 11%. Our -- as I said, our global financial figures, they do include VOO for the month of June for the first semester, including June for 1 month, we've reached EUR 740 million, which is an increase of 2.9% year-on-year on a comparable basis. And for the EBITDAaL, we are a bit less than EUR 180 million, an increase of 0.9% on a comparable basis. Both on -- I'm moving to Slide 14, both our cable customer base and our mobile postpaid customer base have been growing. As said, these figures, they do not include VOO. So despite the fierce competition, we consolidate our mobile market share and we significantly increased our broadband market share. On Slide 15, you see the waterfall for the revenues for the first half of 2023. So it's as explained, it could be -- it's a bit more complicated than as usual because of the integration of VOO. In our OB only retail service revenue, we have seen an increase of almost EUR 42 million in comparison to last year. And this is, once again, these results are for -- the service revenue results are for OB only. The convergent service revenues and our mobile service revenue growth increased, thanks to the development of the customer base and the positive evolution of our ARPU. Also, the growth of our fixed customer base has contributed to the increase of our fixed and IT service revenue. Our wholesale revenues for OB [indiscernible] are on the decrease. And -- on a reported basis, the equipment sales and the other revenues have been increased mainly as it includes the VOO wholesale and service revenue for the month of June. As a consequence, the total revenue, once again, for the period increased by 2.9% on a comparable basis and by 9.3% year-on-year on a reported basis. And moving to Slide 16. The growth in revenue is not fully translated into EBITDA because of the high inflation of our costs due to the macroeconomic context, labor cost indexation, energy prices, as already explained, but we still achieved a year-on-year growth of our EBITDAaL on a comparable basis, thanks to a tight cost management. And all in all, our EBITDAaL grew by almost 1% on a comparable basis and by 7.1% year-on-year on a reported basis. Slide 17 for the CapEx -- eCapex. We increased our eCapex by 15.5% on a comparable basis and 27% on a reported basis to EUR 109 million, including the figures of VOO. The increase is mainly and explain by the implementation of the RAN sharing agreement with the Proximus, some seasonality in customer premises equipment and by the cable modernization of the VOO network. Slide 19, that will be the last one. Taking into account the integration of VOO as of the beginning of June, we have reviewed our guidance, including 7 months of VOO, the 7 months that will be consolidated by the end of the year in Orange Belgium accounts. We expect the combined EBITDAaL for 1 year of Orange Belgium and 7 months of VOO to be within the range of EUR 430 million to EUR 450 million. And for the eCapex, we expect to be between EUR 290 million and EUR 310 million. With this, I conclude with this presentation, and we'll be more than happy to answer all your questions.

We will now have a Q&A session where you will have the opportunity to ask questions regarding the results. So operator, may I ask you to open the floor for questions.

Sure. Thank you. [Operator Instructions] We will take the first question from line David Vagman from ING. Please go ahead.

Thank you. Good morning, everyone. First question on the VOO network. So I think in June, you've communicated your ambition to reach 2/3 of your network with 10 gigabit speed by 2040. [indiscernible] network in collaboration with partners. Can you explain us what that implies practically? What are the scenarios that you have in mind to get there? So I'm referring to maybe to a potential collaboration with Eurofiber or Proximus. What is actually doable from a legal regulatory point of view? Do you see any obstacles -- legal obstacles? And then second question on VOO. Again, can you explain us -- can you help us to better understand the impact of VOO this year maybe on a 12 months basis. So what does the new guidance implies for VOO in terms of EBITDAaL and CapEx? How much [indiscernible] there and how does it compare basically to your own business plan? And then sorry, third question. On the integration costs, the transaction costs and the synergies. So can you quantify first the cost related to the transaction. I think we've seen a bit of fees in H1 and then the integration costs that we should expect? And the final question on Orange ahead. Can you update us on the benefits that you see for this year? And that's it for me.

Thanks, David. Hello. So I'll take maybe the first one and maybe -- sorry, the fourth one. Okay, so on the first one, so you're right to say that we -- actually, we announced 2 things and 2 which short term and long term, of course, milestone. On the first track, so we are aiming to lead the gigabit position nationwide, okay, by up, I would say, by 2024. Thanks to an effort on the DOCSIS HFC network, DOCSIS 3.1 HFC network in every single area. So this is something we are working on and VOO guys started to work on this early, I would say, early 2023. So this is it for the short term by mid-2024. On a long-term basis, what we said exactly what you said. And that's a call, I would say, for action from Orange to the BIPT. We told that this is some I would say, discussion around the areas in which we could have partnerships. And as we said, I would say, last month or a couple of months ago, of course, we are calling for having the larger, I would say, capabilities to partner with, I would say, anyone or everyone when it makes sense. And when, of course, it is permitted on the regulatory, I would say, front. So we are calling for that. We are calling for having the larger capabilities of partnering. We did that with, of course, Telenet wire in the north and in the north of Brussels. And we are aiming to, I would say, do everything that could be done with partners as soon as it is, of course, accretive for Orange and VOO, and it creates value. So this is it. We know that BIPT is working on that, on this framework definition. And we are calling for having the larger capabilities to do so. On the question number 4, I guess, it was -- so what you call Orange really is our -- I would say, former strategic plan, now it's lead the future. So sorry, maybe just to make sure to catch your point? You're talking about the efficiencies or David?

Yes. every, let's say, self help initiative that you have to -- let's say, to improve your profitability to lead the future. Probably to lead the future, I am sorry about that.

Efficiency stream of the Orange -- so I'll take the point. Maybe I'll take your 3 last questions, David. First, the impact of VOO this year, I think you can deduct quite easily from our guidance, including 7 months of VOO what would be the main contribution of VOO to our figures, knowing that clearly with the closing in June, we don't expect much synergies in 2023. So the guidance we shared does include only very tiny synergies. We are preparing the ground for being able to deliver all the synergy in 2024 -- in 2023, but clearly not included in 2023 results. So that means that we are adding around EUR 70 million to EUR 75 million in EBITDAaL for 7 months, which means that the EBITDAaL, the EBITDA contribution of VOO will be around EUR 120 -- between EUR 120 million and maybe EUR 120 -- EUR 130 million in EBITDAaL. That's more or less in line with the pro forma that was communicated, I guess, for 2022. And for eCapex, we are also adding around EUR 70 million to EUR 80 million of CapEx for 7 months, meaning that the eCapex for 1 year is between EUR 130 million and EUR 140 million, if you've made the calculation, which is increasing compared with the pro forma communicated for 2022. And that's obviously explained by the start of modernization of VOO network and the upgrade to DOCSIS 3.1 and to -- and fully consistent with our promise to have a gigabit network as soon as possible all over the VOO footprint, as mentioned by Xavier. Maybe on your question about the transaction costs. We -- it's -- we are only talking about legal fees, banking fees of some -- also fees for the due diligence. So it's partly integrated in our acquisition and restricting costs for this year. So you have the figures in the press release. So it's around EUR 22 million for this year with some usual restructuring fees, I might say or some one-off, but that are not linked to the transaction. So it all represents EUR 27 million of structuring and acquisition costs for this semester. I hope it answered your question, and we don't expect any other costs, significant cost due to this integration after the closing. It's mostly -- we are mostly talking about costs that were engaged before the closing as part of the transaction. And for your question about Orange [ red ] -- what I can tell you is that it has clearly helped us not to deliver net savings because of the inflation, but all the -- our efficiency as part of the Orange [ red ] program was an absolutely key enabler to keep our indirect cost base under control in a very high inflation context. So we -- I can't give you figures of net savings because that's not what happened. But clearly, without this program our costs would have significantly higher because of the inflation. And -- but for instance, we had as part of the -- following the energy crisis, very, very important program within the company to reduce our energy consumption because the higher cost, and we achieved to decrease our energy consumption year-on-year between 2023 and 2022. While at the same time, we have rolled out more sites because of RAN sharing. We implement 5G, which obviously lead to more energy consumption. So reducing our energy consumption while we still have to deal with an increase in traffic was a very huge achievement and generating a lot of savings for Orange Belgium in view of the very high energy prices.

We will take the next question from Nicolas Cote-Colisson from HSBC.

Just a follow-up on the synergies. You confirmed the number, the EUR 85 million. Can you also confirm that the synergies will kick in from year 7? And if yes, I'm just wondering why it takes so long to get the full synergies developed and whether it would be earlier, if you were to own 100% of VOO. And then on your move to fiber, what would you save when you own the cable infra? I mean, in case you eventually go for co-investment, how much can you reuse of your cable infrastructure? I mean [indiscernible] amplifier rooms and so on. Or maybe the other way to ask the question is how much of the DOCSIS upgrade cost will not be of any use in the future? And then I've got another quick question on the indirect costs and the pickup because it looks like close to 26% of sales compared to '21. So just a bit more light on that. And a very short question on the cable subs plus 21 seems pretty low, at least below the pace we've seen in the previous periods. For Orange Belgium standalone. Just wanted to see how -- if you have an explanation around that. And if you can provide us with some indication of momentum at VOO.

So on the question to the move to fiber. That's a very interesting question. I guess maybe you've seen that elsewhere in Europe or in the world. So having some, I would say, cable [ bro ] overbuilding its network with FTTH. That's something we are currently, I would say, studying. It depends also on the areas. So the topic we've talked about it before on the regulatory upfront. This is something, okay, which will impact, of course, whether we might have access or not with FTTH in dense or mid-dense or low dense areas. So of course, question would be linked to the footprint as well. So we can't, at the moment, answer your question. So we definitely need to see what scenario is okay, will be put in place. And then, of course, we'll come back to you on that side. The question for us is to -- starting to lead the gigabit, I would say, domain by -- on a short-term basis to make sure that, of course, this HFC network acquisition and modernization, okay, will be related in terms of value creation. For the commercial performance, maybe your question number 4. Actually, we are happy with that. We are very happy with the figures we have provided to you on the, I would say, Orange side. We're not providing figures on the VOO side, as you understood, including the ARPU. But the question would be seen as well -- dynamic in the market, okay? And we say that and we've already said that dynamic is a bit slow since COVID. But regarding the market and regarding the trends, I think we are very, very happy with the commercial performance we've done, if we calculate what could be our, I would say, share of net adds for Q1, we are very, very happy with that. So we'll see what will be the figures for Q2, but on the Q1 figures, okay, we took a huge part of the market share of net adds.

I'll take the 2 other questions. And Nicolas, maybe on the first question about the synergies. First, I can tell you, and I think it has already been said by Xavier that having 2 separate companies, Orange Belgium and VOO, doesn't and won't prevent us from delivering the synergies as we anticipated then. So that's -- we are acting as 1 operator in this market. We are already having an operational and organizational model, enabling some significant cost synergies. We have, for instance, 1 purchasing team working together. And -- so it's clear, it's not and it won't be an obstacle to the synergies. Regarding the timing of the synergies, that's rather good news. I think we were rather conservative in the timing of the synergies we communicated. And today, we guess that we'll have run rate of synergies sooner than the year 7 than that was previously communicated, and I think we should have a run rate of synergies rather around the year 4, I would say. Some synergies are -- will depend on what will be done in terms of brand portfolio. And clearly, the brand portfolio will evolve -- won't evolve in the very short term. So it will -- that why some synergy will take a bit more time than others to be unlocked. But we really think that as from year 4, we'll be able to deliver the amount of synergies that we already committed to deliver. On your question about indirect costs, I would say, 2 main effects for -- and it's a bit different for OB and VOO. But obviously, we are all impacted and very strongly impacted by the inflation. In Belgium, 10% of wage indexation. Our energy prices have more than doubled in 2023, if you compare with 2020 with the prices we had in 2021, for instance. And we have also a strong increase between 2023 and 2022 because we were only partially hedged for 2023 before the crisis. So -- but that's -- part of this effect is quite cyclical. We are hedged for 2024 at prices that are very significantly lower than the 1 we have in 2023. So it's -- there is, I would say, a cyclical effect on the cost base. And the second point I'd like to highlight in my answer is that the -- I would say the VOO has been a bit more impacted by the high inflation experience in the Belgian market than Orange Belgium. First because they did not implement -- Orange had efficiency plan that we had. Also because the weight of the labor costs in VOO's direct cost base is a bit higher -- it's significantly higher than OB, meaning the impact of the wage indexation is proportionally greater at VOO than at OB. And also because VOO prices have not been increased in the last 18 months to the same extent as those of I would say, the other operators in the market and especially Orange Belgium. That also explains why this -- the situation on the direct cost you were pointing out, but that's obviously room for -- there is obviously some room for improvement, and we'll tackle that as part of the synergy plan.

Thanks so much for all the details. If I may, a very short follow-up. So given your comments at the very beginning about the HFC and the upgrade to DOCSIS 3.1, does it mean that we should expect a lower capital intensity, all other things being equal, talking about fiber in 2024.

Lower than what? Sorry -- Nicolas, lower than...

I mean if I take the CapEx intensity in 2023 based on the other 2. Well, actually, I'm more thinking about 2024 because I'm just trying to assess what is the I mean the cost of going to your 1 gigabit speed for all the footprint by mid-2024.

I guess the -- we will achieve the 1 gigabit speed at let's say, at the beginning of mid-2024, but the main impact in terms of CapEx intensity as from 2024 -- beginning in 2024, is that we will start rolling out fiber. And so we should not expect a lower CapEx intensity in 2024 compared with our figures in 2023. I'm not sure. I don't know if it's completely answer to your question, but...

No but that's a good indication. I appreciate that.