Orange S.A. (ORA) Earnings Call Transcript & Summary

Good evening to everyone in Europe. Good afternoon and good morning to those in the U.S. Just to introduce myself, my name is Andrew Lee, Head of the telecommunications team at Goldman. And this is the last presentation from the European side, at least today. And it gives us a great pleasure to welcome for another year, as Stéphane Richard, CEO of Orange. Stéphane, thanks very much for joining us.

My pleasure, and hello to everyone.

So the plan for the next 40 minutes or so is, I'm going to take us through a couple of broad-based opening questions. We're going to go through France and Spain operational trends. We're going to look at cost-cutting and CapEx plans and then some inorganic and returns outlook from Stéphane. As usual, for the audience, if you want to ask a question, you can via your computer screens. And I'll endeavor to ask them within those thematic buckets that I've mentioned to you. So again, thanks for joining us, Stéphane. Let's get going. It's a pretty kind of basic opening question, given the world we're in, but I just wanted to get an update from you on how the corona crisis has affected your business? And particularly how you feel it's affected your midterm growth in terms outlook? Any kind of commentary you can give us on that would be really helpful.

Well, what we can say so far is that the main impact of the COVID situation and the lockdown period has been on Q2. And for sure, the results that we gave to the market end of July, reflected, I would say, this impact. This impact is basically linked to roaming revenues that, of course, are sharply declining because of the COVID sanitary international crisis. Some impacts on the enterprise market, especially small enterprises that we have had and that we can plan in the next month. And also an impact linked to the fact that 2/3 of our shops were closed in Europe during the lockdown period. This being said, this global impact is first limited. And as you have kind of have seen was mitigated in our first half results by other drivers, positive drivers, the cofinancing deals in France, but maybe we'll get back to this, but also better trends in Africa and the Middle East. And even in France, where the underlying business trends are positive due to, let's say, marketing environment -- market environment in France, which is steadily improving. So all in all, the major impact of the COVID situation was in first half 2020. We are now in a different timing and we have not changed our guidance for the '21-'23 period of time. And I want to confirm tonight that our guidance is unchanged, in terms of revenue, in terms of EBITDA and in terms of organic cash flow. So we don't expect any impact due to the sanitary crisis for the period '21-'23.

Okay. So you just stole my second question, which was -- which was just to ask you about your confidence in that midterm growth. And that's good to hear that you're confident in that. What are the risks to delivery on that 2% to 3% growth? What makes you so confident, given we're in such a strange macro environment at the moment?

Well, I would like to maybe emphasize one of -- to me, the major part of this guidance, which is the organic cash flow target. As you may remember, we are committed to generate between EUR 3.5 billion and EUR 4 billion of organic cash flow in 2023, coming from modest EUR 2 billion. We were at EUR 2.3 billion in '19. We will be above EUR 2.3 billion in 2020, I think, significantly above. And the target is to generate EUR 3.5 billion to EUR 4 billion organic cash flow. So Orange is the stock, and it's a company with a prospect of nearly doubling the organic cash flow in the next 3 years, which is to me something absolutely major. And what makes me confident is that to reach this target, we can rely first on internal transformation and especially the net saving plan that we have launched this year, EUR 1 billion of net savings. This is the first time, I think, in recent history that Orange is committed on the net savings plan. And I want also to take this opportunity to say that we are going to report on a regular basis to the market on the achievement of this plan, providing more granularity, let's say, in this saving plan to our investors. So this is a very important point. The second maybe big trend that I'd like to stress is the CapEx trajectory. Because I know that it was one of the big concerns in the market. The fact is that first 2020, we will see reduced CapEx. So this is partially due also to the COVID impact because during the lockdown period, we were not able to build at the same pace, the fiber in front, but we have restarted the production now, full speed. But at the end of the day, in 2020, we will have less CapEx. The combined effect of cofinancing coming from our competitors in France. Infrastructure projects like Orange [Foreign Language] especially or the FibreCo in Poland and the fact that today, we have built the majority of fiber rollout in France. I'm not saying that, of course, this is completed. We still have in '21 and in '22, some CapEx for completing fiber rollout in France, but we -- the bulk of this CapEx is now behind us. So the prospects in terms of CapEx for Orange is good and is good. I mean, is for reduction, okay? And this is, to me, a big differentiation -- differentiator between Orange and other players in European markets where this question of CapEx, especially linked to fiber network is in front of them, not behind them. So cost discipline, CapEx trajectory. And the last point is market environment in our main market, which is France, where we have seen a steady improvement in market conditions basically due to, I mean, the whole competition that decided regular price increases, and we see that including back book increases. So I think that the overall market environment in France is steadily improving, and I'm confident in the stability of this trend. So all those elements combined, the growth in Africa, of course, also, should make me very confident in our capacity to reach the organic cash flow generation target. Now of course, there are risks. But our job is to mitigate risk. When it comes to cost reduction, it's really our -- in our hands, to do it. So I don't see any major risk. Of course, the market conditions, they can be different from what we expect. But I don't see today any objective reason to think that this might change. I see the contrary. And for instance, to take-private deals from at least or even from Iliad are positive also news regarding the discipline, the pricing discipline that we should see in France. So once again, I have a high level of confidence in our operational performance prospects.

Thanks. I think that's a perfect platform for the different sectors we'll look at during this conversation. Just before we do, I just wanted to ask on one of the concerns raised by investors on the B2B side when we talk about risk. So try not to be too negative, too early. And we'll be covering a lot of those bullish sentiments later. But on B2B, look, we've typically seen a lagged impact between recessions and B2B trends in the past, say, a decade ago with the financial crisis. What evidence have you seen on B2B today to make you more or less nervous about that kind of lagged impact into 2021? And how reliant are you on B2B stabilizing in 2021 to deliver the rest of your group guidance?

Well, in the B2B, first, you have to make a difference between large accounts and international large accounts and the SME segment in France. The SME segment in France, where we are very powerful, as you know, very strong with a very high market share, was not really impacted by the recent crisis, COVID crises, and we don't expect a major deviation on that part of the market. Now of course, there is the situation of large accounts. Regarding B2B, our numbers in the first half were clearly bad but -- in terms of EBITDA, but you have to keep in mind that it's in the B2B segments that the short-term impact of the sanitary crises and the lockdown was the most important. Starting with the roaming, roaming is -- well, significant revenue for the B2B side. And actually roaming during Q2 was largely impacted by the lockdown and by the COVID crisis. You have then some slowdown in maybe IT projects coming from some large accounts. But all in all, what we expect now for the second half of 2020 and next year, is coming back to, I would say, a normal situation in terms of B2B. So we expect that the Q3 results for B2B will be let's say, better oriented than what we've seen in the first half. And then we also work on mitigation plans to react to that situation. But maybe the last point is that the connectivity needs of enterprises are, of course, very, very important, maybe more important after the COVID crisis than before. The transition towards digitization and fiber also in connectivity will accelerate. And this crisis also raised our -- was the emergence of new needs for enterprises, working from home or remote working. Everything that we use now every day is generating new demand and new needs also for us. So it's -- this crisis is clearly a short-term impact, but it's also opportunities for the B2B segment. And of course, our thought will be to take those opportunities in the coming months. So all in all, will have an impact. But we don't change our prospect for '21-'23 in the B2B segment. And my forecast and my plan is to be back to, I would say, the strategic road map that we had said before very soon.

Yes. Okay. And so you're not seeing large corporates hold back on signing up to your bigger projects, bigger ICT projects into 2021 because of the environment. And you're not worried about kind of furloughing as furloughs come off on the SME side, give pressure there?

It's not so clear because, well, clearly, you have some sectors of the economy that are really very, very impacted by this crisis, like, I don't know, airlines or to some extent, the car industry. But in the same time, you have a lot of large accounts that have realized that they have to accelerate the digital transformation, the migration to the cloud, migration to a fully digital customer relationship. And once again, it means for us additional needs and opportunities. So in fact, it's a mix between clearly some sectors that will have to reduce their expenses, and this will have a negative impact for us. But other ones that will accelerate because the digitization, generally speaking, will be one of the outputs of this crisis, no doubt about that.

If we move into France now. So you've guided to midterm slight growth in France on the revenue side of things. What do you mean by that? And where -- what's really driving that growth? Is it volume, price, the mix of the two? What's giving you the confidence in that inflationary trend?

Well, in France, as you know, the guidance that we gave is a slight growth, but the regular slight growth in the top line and in the EBITDA in the next 3 years. And this is due to basically the retail service revenue trend that we see positive at the pace of between 2% and 4% every year on the 1923 period. If you exclude, of course, PSTN. PSTN is structurally declining revenue. So if you want to compare Orange with our competitors in France, you have to exclude PSTN. But we are very confident in our capacity to sustain such a growth in underlying retail service revenues. Why? Because first, fiber penetration is accelerating. And by the way, it's not a bad news for us to see all the competition going towards fiber, including through cofinancing because the whole market in France is now moving into full fiber. And this is very good for us because we have today the best fiber penetration, and the whole market is going to move probably more quickly than expected towards fiber. And this is a good news for ARPUs. This is good news for convergent offers because we will have a very powerful driver. We will put our efforts on the quality, of course, as always, and by the way, the fact that we are a clear #1 in Net Promoter Score in France today is a big advantage, and it's something that we are going to consolidate. It's a new situation, by the way. Orange was not the #1 in customer satisfaction for years. We are back to this #1 position, which is a very strong asset to take the whole advantage of this migration towards fiber. And then in the mobile segment, I think that the market dynamics are good, are positive. We have seen some price increase among the competition in the last months. We are going to have the 5G arrival in France in a few weeks' time. I think that there is quite sort of, let's say, convergence or consensus among the competition to maintain those positive trends. So if you take fiber penetration, a better market environment for mobile, and the quality, the quality and the premium in quality that we have today in terms of customer satisfaction and network leadership, I think that we have everything on our hands.

That's helpful. I have 3 quick follow-up questions on your comments. So just firstly, on the mobile side, I think, the market trajectory and pricing looks strong. We've seen a lot of front book price rises or reduction in promotional discounts. What about the scope for back book price rises? Do you think we can see a more systemic inflationary trends impact your back book?

Well, for the back book, our view is that what we try to do, well, as regularly as possible is a more-for-more approach. So we -- to be honest, we don't like a pure like frontal price increase on the back book with an equivalent service. I think this is the kind of short term strategy, which, in fact, you pay then in terms of customer satisfaction. And you can pay -- so what we want to do is a more-for-more approach. So typically, for such customers, for instance, or for some of our convergent office customers in France, what we are doing regularly is to give something in addition, like more data, for instance, and asking for EUR 1, EUR 2, EUR 3 more. And if you do that, you can reprice your back book. But it's something which is acceptable by your customers. So really, my personal line is to preserve the image, the position and the customer premium that we have, Net Promoter Score in France. And if we want to do -- if we want to be sure that we will keep this advantage, we have to prefer a more-for-more approach than the pure back book pricing, repricing.

Understood. And then actually the second and third question, we can lump together really. So you highlighted that we're seeing this greater take-up of fiber, it's accelerating, and you highlighted that as a good thing. I guess the 2 concerns for investors would, one, be that some of this fiber uplift is being driven by price discounts from your competitors, yet you are quite confident that it's an uplift for your ARPU. So why is that? And then the part B to that question is, on the wholesale risk, as fiber take-up accelerates, I think investors find it very hard to understand where wholesale revenues go from here. So any kind of color you could give today on that would be helpful as well.

Sure. Well, that is a very important question for sure. Regarding the promotions and evolution of ARPUs for fiber. The first thing that I want to say is that if you look at our ARPUs today, you will see that, first, they are much higher than anybody else in the French market. So we have a premium today in terms of ARPUs. And then they are evolving in a good direction. We are improving constantly our ARPUs, despite the promotions and despite the fact that there might be some functional more aggressiveness in the market in France. Then in the medium term, what in my view, everybody should realize is that the cost of fiber, the cost of migrating to fiber, makes it impossible to keep the kind of prices that you can see from time to time through promotions in the French market. The cost of the upfront investment, including cofinancing one day, decide to make cofinancing. But the overall cost of connecting a customer to fiber with the new box with the cost of the final -- of the last mile, which I may say so, this is -- this makes it impossible to have a sustainable business model based on very aggressive prices that you can see from time to time for promotions. So our strategy is very clear. We are working on improving the ARPU. Of course, we might react from time to time if we see an offer or a plan in the market which may be very, very aggressive and question the acquisition in terms of volumes. But basically, we think that we have a form of discipline in this market for fiber because of the cost structure for everybody. In fact, no one in this market can afford to be so aggressive, I would say, in terms of prices and promotions. Now regarding the wholesale, I know that it is a very important question. And by the way, we are preparing a full communication for the market probably as soon as Q3, on the wholesale business in France and trajectories because I know that it is, if not a concern, at least a big question in the market. What we are talking about is the migration of the wholesale model from the copper to the fiber, okay? Copper was a very simple like business model, windfall kind of activity. We were in a monopolistic situation, but we were dependent on our competitor strategy, and also on unbundling prices fixed by the regulator, okay? We are moving into a new world where, in fact, the power of the regulator will be much lower because we won't have any regulated fiber. It is a very important, in my view, elements of -- to understand what is the future wholesale model. Okay? The influence of the regulation in the future wholesale model will be much lower than in the former one, and it creates opportunities. Then the wholesale business in France is going to evolve. Basically, fiber will generate cofinancing revenues. And we've seen this year, we will see more cofinancing -- much more cofinancing in the next quarters. So it is part of the wholesale business model. And it's a good value for the company and for our shareholders. I want to be very clear about this because I know that the cofinancing deals that were in our accounts, first half accounts may have raised some questions. But in fact, first, there are good money. And very positive for the company. And second, this doesn't hide any weak underlying trends in the business. So this is, I think, important to once again to remind to everyone. So in the future wholesale revenues, we have a mix of cofinancing, at least, in the first phasing. And then wholesale revenues that will be more complex because it would not be only a rental price for line. We have other sources of revenues. We are working on that. But all in all, we don't expect any reduction in the wholesale revenues in the long-term due to this change, total change, in fact, because we are really going to switch from one model to a new one. And France would be probably the first large market in Europe with a totally different wholesale framework compared to other countries. So we are preparing for that. I think they are good news. And -- but clearly, our investors need to have much more elements to understand what's going on, what they can expect for the future, and we are preparing a lot of numbers and information to feed the market.

Okay. That's really helpful. I think that's -- I might be wrong here, but that's more positive in terms of the outlook on wholesale revenues than I've heard from you guys before, we expected a small tail off, not big, but yes. I think you've guided to a small tail off on wholesale revenues in the past. I maybe misconstruing that, but stable wholesale revenues over time.

What we think maybe in addition today, which is relatively new, is that we have identified opportunities to, I would say, find new sources of revenues in the wholesale business that maybe we had not totally identified earlier and which, in fact, are related to fiber, and to the way the fiber network will be managed. So we will have different sources of wholesale revenues, not only what we had in the past. And then in the sequencing of this, there is the cofinancing dimension, where we can have significant contributions in terms of cofinancing coming from our competitors. We've seen this in the first half. And once again, we will have more in the coming quarters. So it might design a different trajectory in terms of wholesale revenues. But once again, I think that there is more positive than negative.