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Edited Transcript of ILD.PA earnings conference call or presentation 7-Mar-17 8:00am GMT

Thomson Reuters StreetEvents

Full Year 2016 Iliad SA Earnings Presentation

Paris. Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Iliad SA earnings conference call or presentation Tuesday, March 7, 2017 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Maxime Lombardini

Iliad SA - CEO

* Thomas Reynaud

Iliad SA - CFO and Head of Business Development

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Conference Call Participants

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* Nicolas Didio

Berenberg - Analyst

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Presentation

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Maxime Lombardini, Iliad SA - CEO [1]

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Bonjour. (Interpreted) Hello everyone. Thank you for being here this morning. Thank you for those who are also online with us.

Today we're presenting the 2016 Group results with very good results and figures, both in terms of commercial figures, where you can see that for landline activities, nice growth, both the overall worldwide base. And on FTTH with a subscriber volume considerably higher; 310,000 subscribers.

Mobile also nice growth there leading, in terms of recruitment, for the twentieth quarter in a row. In other words, Free is the leading recruiter for mobiles since its launch; an additional million subscribers to reach 12.7 million subscribers -- 18% market share.

The indicators are good also in terms of rollout. We're reaching our objectives; the 90% coverage 3G for January 2018. We're there a year ahead of time which is a considerable performance. We covered much faster than our competitors in the same time.

The economic indicators are excellent also; reacceleration of growth in terms of revenues and, in particular, in Q4. We have mobile for the first time reaching to EUR1 billion for the year from activity launched five years ago, which is a really true performance. Profitability indicators are also good. 35% EBITDA margin. Growth always strong.

And EUR400 million in excess of off net income. Thomas will tell you more detail later. We have new guidance's, quite ambitious in terms of investments, and in also connecting FTTH sockets in the coming years and the coverage of our own network. We will also tell you a bit about Italy which is a huge growth opportunity.

In 2016 the Group has 90 million subscribers, 4.4 million FTTH connectable sockets, so on fiber the dynamics are very positive. In mobile progression of usage is very, very significant, as you can see here. Six million subscribers on Free mobile, or 4G subscribers, with huge consumptions per month; one of the highest in Europe.

And the growth of 4G -- of the 4G base is considerable; an additional 2 million subscribers.

High investments for the Group, both on fixed activities, and on mobile. To do so we've recruited considerably. You can see that the staff numbers are high. And we have also recruited in other areas.

FTTH, we send employees to our subscribers to connect them to the networks, to the fiber. And in terms of mobile, both what is being completed and our ambitions for the current year, mean that we actually need field teams and considerable ones.

As each year, a few moments of self-congratulation. Here you have a non-exhaustive list of awards we've received, both on the landline activities, the mobile activities, the distribution networks, the customer relations. It's always very important for us.

2016 Free is the first leading alternative operator for landline activities. This is important for us. We are the historic operators' challenger. And all this met without ever doing mass-market promotion.

We just occasionally have special offers on private sales to energize the market in specific moments. And, as you can see, our landline base has increased in 2016.

Free has always been a pioneer in terms of audio-visual services. Today our offer is probably the most extensive in the market on all segments, 4G, Forfait, ethnic channels, local channels, premium brands.

And in September 2016 we made a strategic choice. And that was to launch an offer combining our Freebox Revolution deal and our TV by Canal, which was the basis Canal deal beforehand, which gives the best of the French brands at an exceptional price.

Because, at EUR39.99, in this combination you have the best pay-TV offer with the best box on the market.

In this offer most of the major television brands; often as an exclusive. And it is also combined with a very exceptional product which is called My Canal -- it needs a bit more marketing - where you can find your channels both in real time and replay on whichever device you choose.

And that within the EUR39.99 deal. Every EUR39.99 subscriber can access those.

Free has, therefore, become in 2016 the first distribution of Canal+ offers with an excess of 3 million subscribers. And this makes us a pay-TV distributor; one of the leading ones.

2016 is a nice year in terms of FTTH for us. A reminder of our roll-out plan. The French market is always a bit complicated to understand, because it's broken down into different zones, with different rollout terms and conditions.

Targeting 9 million connectable sockets by end 2018. And 20 million by end 2022. This is a large percentage of our investments until the end of 2018.

In 2016 a few key figures. Horizontal rollout eight million lines. 4.4 million of them are connectable. And this figure is rising fast, via co-investment, in particular. And 310,000 subscribers connected in -- by end of 2016.

So, this is a huge growth, in terms of fiber. So, in terms of coverage, but also in terms of our ability to connect subscribers.

2016 is the beginning of the connecting industrializations in terms of co-investment. So, we work alongside the historic operator, and the migration of subscribers is working well. However, these connections will be faster and more efficient, once the regulator has looked at how things function with Orange.

There have been offers on the table in the last few weeks. And we truly hope that in this respect there will be progress. Currently the historic operator has much more information via its teams that rollout the networks. But the co-investors do not have the same information. So, the processes are not equal, and can be prejudiced to the co-investor.

This historic operator, for example, knows a few months ahead of time where each of the co-investors will start marketing, which is a strategically important piece of information to know where your competitor is going to start selling.

Whereas we, as co-investors, find out the day the actual marketing begins. But the historic operator has information that the co-investors do not have. So, we believe that this should be resolved, by the regulator. Same information. Same tariffs. Same knowledge.

Mobile business; five years after the launch, as announced, in terms of simplicity and freedom we still have two offers which are always being improved. In five years we recruited 12.7 million subscribers. That's about 18% of the French market. We remain the leaders in terms of recruitment since the launch in 2012; 20 quarters.

In the improved mix, we talked about it already six months ago with the growth of -- driven by the growth of 4G, there's a migration effect of the two EUR20 deals which is continuing further. Thomas will tell you more about that later.

Our mobile rollout is -- network is fast. There's -- we -- January 2018 is the last 90% mark in terms of coverage. And we will -- we are already meeting that close to a year ahead of time. Our rollout target for 2017 is ambitious. We should finish the year with in excess of 12,000 3G active sites.

It took [BRI] Telecom about 10 years to reach that kind of figure, whereas, we should reach that in 8 years. This demonstrates that our rollout is fast and the investments are efficient.

In terms of 4G it's now close to 80%. And we're very confident with regards to the evolution of the coverage because, as you'll see, we're going to increase the number of sites. And, on the other hand, we will further use the 1,800 frequencies as they -- as we get additional 700 frequencies we will also improve our coverage and increase it.

On the lower part of this slide you can see an indicator which is quite interesting. Our frequency portfolio compared to the number of subscribers is very -- may be a simplistic figure. But if you look at that in further detail it's even more favorable for Iliad because there is no 2G currently.

So, the frequency portfolio is significant. And we have more frequencies per subscriber than the historic operator.

Our 4G network has excellent bandwidth, which is also important, because there used to be a mix of roaming and so and own network. When you're on Free you have the best and that's increasing. To-date the 1,800 and 700 that are ongoing will only improve that further.

A few words about Italy. It's an amazing rollout for us giving -- demonstrating knowhow and innovation with progressive investments. The conditions are different to what we experienced in France for Free mobile five years ago. But the Italian market is very attractive in many areas.

It's a considerable market with not many quadruple-play players. Three players on the market; fairly equal market shares, so one-third each, approximately. It's easier to position yourself than when you have one huge operator. And the subscribers are -- the market is dominated, for fiscal reasons, by prepaid.

Our development is supported by a package of solutions; very favorable roaming, with access to significant capacity at a more attractive pricing than that in France. Four times more frequencies than when we started with Free mobile.

And a large number of sites, which is particular to the Italian market compared to the French one, where we already have thousands of sites to offer practically national coverage with the partnership agreements we have in place. And there're also several power companies that can contribute in excess of 10,000 sites.

So, in terms of rollout, the landscape is very favorable. And lastly, economically speaking, this package is structured in such a way that it -- that we can move from a variable-cost to a fixed-cost model once the rollout is moving forward.

So, to conclude, before I let Thomas [take it] -- give you information, 2016 confirms the attractiveness of our offers, because the commercial sales are there. Free is clearly the leading alternative operator on landline activities and the first recruiter for mobile.

A huge growth of mobile coverage and fiber, both eligible or connected, subscribers. The progress is good. The dynamics both in terms of financial aspects and commercial is great. And Italy is a great option, although we can't say much about it to-date. But the development feels both good and well controlled.

I will pass you over to Thomas.

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Thomas Reynaud, Iliad SA - CFO and Head of Business Development [2]

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Merci. (Interpreted). Thanks Maxime. Good morning to you all. This morning we're announcing very solid results, both from a sales, and economic standpoint.

One point that I really want to focus on is our unique growth profile in Europe. Our revenues are up 7% in 2016 which is higher than 2015. And we've seen throughout 2016 a re-acceleration of revenue growth with an [exonal] Q4, up 8.6%, which is quite unique.

Mobile revenues; we celebrated the five years of Free mobile launched in 2012. 13 million subscribers. Revenues up 12%. And we're continuing to lead in terms of market-share gains. 2016 is really a turning point because, henceforth, the growth of our subscriber base is concentrated on our EUR20 offering.

Same performance on to be found in landlines. Excellent Q4, up 5%, in a market that's highly competitive with countless promotions. But we see that steadily we're managing to recruit about 250,000 new subscribers net of churn.

And we're confident for our landline business in 2017 in terms of momentum. Sales are off to a good start thanks to the offering of Canal Panorama.

In terms of profitability all our indicators are up. EBITDA, that's probably the key performance indicator, delivers a margin above 35% for the first time since the launch of Free mobile in 2012. Over the past two years we've notched up 5% of EBITDA margin which demonstrates the relevance of our strategy.

What's important, notably, on mobile is that we're seeing coverage of our own traffic that's significantly up which is really on a par with our investment efforts. But, more interestingly, we're seeing a gradual transformation of our business model on mobile.

Initially 2013, 2014, 2015 our business model was essentially a variable-cost model. And it's shifting gradually to a model of almost fixed costs. And as we migrate the EUR2 to the EUR20 subscribers it means that the revenue into incremental growth is generating profitability and cash.

On the landline we were hurt by certain regulatory decisions. I'm thinking of the un-bundling costs or the increase in the [QP] tax and that penalized us over the past -- last two months of the year. The dilutive contribution of Canal Panorama offering.

In any event, we're very confident that we'll reach our target of EBITDA margin in France of 40%, which is the target. That was the guidance we gave you a few years back. The target on operating profit, that's continuing to grow the amortization cost, notably, with the entry into service of the 700 and 1,800 frequencies, are a good piece of news.

Our net income up for the second consecutive year by 20% delivering a record level of EUR403 million. We now have a positive contribution of Free mobile that is going to grow. And, furthermore, a sharp decrease in our financial costs.

Turning now to what is probably the key announcement this morning, we've decided to set new targets in terms of the rollout of our super-fast network, to accelerate our independence and to generate more cash on fiber. You know what our plans are for horizontal rollout.

What's important is the number of subscribers that we've connected to fiber. And we've set objective targets, ambitious targets, this morning.

Q4, 2016, was a turning point in terms of subscriber migration. New subscribers; we plan to connect over 200,000 new fiber subscribers. And in 2018 between 300 and 500 new FTTH subscribers. We're the second operator in fiber in terms of ambition number of subscribers.

For mobile we're also going to move up a gear. As Maxime said, we have this new target of over 12,000 sites by the end of 2017, but also to complete the rollout of 1,800 frequencies by mid-2018.

So, our CapEx package between 2017 and 2018 will be between EUR1.4 billion, EUR1.5 billion. Shows confidence in our ability to continue to grow and improve our profitability. That's why, for the first time, we're committing here a significant commitment in terms of cash generation; EBITDA minus CapEx above EUR1 billion in 2020.

So, to deliver this plan, a strong financial structure is clearly an asset. We have a debt ratio that's slightly below 1 times without any accounting artifice. We have access to over EUR2 billion in cash.

Cost of debt sharply down last year thanks notably to two new issues, a bond issue, seven years, with a coupon of 2.1% we announced at the beginning of the week. A new loan from the European Investment Bank at attractive rates. A long maturity; 13 years. And we have no major debt maturity before 2021. So, Italy will be exclusively funded from debt.

A word on the Italian project. This is a project that's going to generate considerable value very soon. We'll have a mobile network with a low fixed cost which will allow us to [reach us] in France. Breakeven with a market share less than 10%.

As part of the Italian project we've added intangible assets of EUR920 million; EUR450 million for the sums due to wind and [H3], EUR240 million to renew the 1,800 frequencies. And, lastly, EUR230 million that we've included, EUR230 million, that's updating the annual fees of the 900 and 2,100 frequencies due over the 2020, 2029 period.

And, clearly these cash-outs are over the long term, as you can see here and pose no problem to our balance sheet. And these amounts are to be related to the EUR32 billion in revenues in the Italian market.

So, in conclusion, the three key takeaways this morning are, on the one hand, the robust sales model. 19 million subscribers who place their trust in us. We continue to gain market share. Secondly, accelerating CapEx in ultrafast broadband, which will secure our independence, make our offers more attractive, and boost profitability.

Final key point; for the first time we're giving you specific targets in terms of cash generation for the midterm. Clearly, we're making strong, significant commitments here. And, as in the past, as you can see on this slide, we will deliver on that.

Thank you.

Together with [Xavier] and Maxime, we'll be happy to take your questions.

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Questions and Answers

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Unidentified Audience Member [1]

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(Interpreted) Hi. Just to pick up on the Canal deal, the deal with the -- with Canal, I assume that the EUR2 that you're billing the subscriber don't cover all the costs that you revert to Canal. Can I have confirmation about that and the equivalent impact in 2017?

You must have some additional -- some information on the offer since it's been launched; some feedback. Do you think it's going to generate net adds? And also possibly generate your -- from your entry level to your high-end offer to perhaps ease the promotional pressure?

So, all items, that could contribute to boosting the profitability of your investment in content.

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Thomas Reynaud, Iliad SA - CFO and Head of Business Development [2]

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(Interpreted) I'll answer on the economic aspect of this fine offer that has allowed us to achieve a significant commercial success at the end of the year. As I said in the presentation, it has a dilutive effect on our margin.

But, related to the EUR2 billion generated by our landline business, it remains marginable.

On the offering that -- we constantly add to our offers a number of things. You'll see next week on mobile we'll be doing significant things that change the market or change the market format.

What we decided? Well, we've decided to have the best content, with a variable price. We have some competitors who decide to invest dozens or hundreds of millions without being sure of success. We've decided to make it variable. And also to be able to deliver all content available on the market.

So, what's the upshot? Today we have about three million people who've signed up to the offer, Canal+, a major partner. We're the leading distributor of Canal. We're the leading recruiter of Canal channels.

I don't know if that was the case over the past 10 or 12 years, but it's truly a genuine partnership, over the long term.

And so for our subscribers to have access both to the content online through linear or delinearized replay channels via the mobile app is a genuine plus at a financial cost that our subscribers will [bear] (inaudible). It's slightly dilutive. But it's down to us to work to make sure that that's no longer the case.

But all these items that we're systematically adding to our offers ease the promotional pressure. At Free it's the lowest in the market. You can go on our website. We've never done a single promotion. Our peers are about 300 days of promotion on their website. We've done no promotion.

I mean, we do have some targeted promotions a few times. for landline; three, four times, 10 days we have targeted on a third-party site with a discount. That's to say that the bulk of our subscribers are recruited via a website without any promotion. So, we're not addicted to promotions.

And we don't end up with a sense that we are, as it were, invaded or having recruitments that are solely based on those promotion offers. We don't have that sense. All that was done deliberately, so that never on our website we end up in a situation where we're depending -- dependent on these promotions, contrary to our peers.

If you take the content I think it's interesting to drive ST -- FTTH. That's to say that to sell FTTH we need to have a unique selling proposition on FTTH versus ADSL. The fact that we're bringing high-bit rate TV channels, to deliver them on FTTH, is obviously a unique selling proposition.

But we're continuing to seek to enrich our offers so as not to depend on promotions and to upgrade our subscribers to high-end offerings.

Was there a direct impact due to migration? We can't see it directly. [We try]. Every day have new things to integrate in our offers. We can't say why our subscribers are migrating. Is it linked specifically to Canal or other things?

We can't determine that. We see a positive trend in our recruitments. We know that there's a very positive trend in our fiber recruitments. You'll see that for the current quarter when we publish our results in April.

All this, of course, contributes to the increase in the broadband subscribers and FTTH and migrating broadband to FTTH subscribers. But we can't distinguish the impact of the items that we add to our offers that are key.

One thing that's very important is that when we incorporated this offer we increased our price. And the question that you should have asked us, but you didn't ask us, is; when you increased your price did you lose subscribers? Did you churn? Because, our peers, when they do that they have an important, significant, churn.

SFR that's upped its prices has major churn on landlines. We've increased our prices without having a higher churn in the month compared to the rest of the time for the subscribers.

So, we're in a situation where we have this pricing power. We have subscribers where we add something who are aware of the value of what we add. And who believe that the Free brand isn't there to deceive them but there to give them a quality offering with excellent price.

When we do our internal surveys on the French domestic markets we see that our customers believe in this and not saying that; you're an operator who's there to systematically fleece me.

When you look at our peers it's not quite the same thing. They're in a situation that's the opposite. We don't trust them. The service is poor. And, what's more, they're expensive. And that's the opposite of how Free is perceived.

We haven't had churn. We have pricing power both for landline and for mobile because for years we're respecting our subscribers; never price hikes without offering something more.

There will be price hikes for landlines in the coming months. But it'll always be with something. Sometimes it'll be slightly dilutive, strongly accretive, but the customer's saying that what Free has given me for this price, well, there's genuine value and it's worth it.

So, that's our aim. To continue to have the confidence of our subscribers, who've been with us for 15, 20 years. We want to continue with that in a relationship based on trust where we don't have price increases without having something that's beneficial for the customer.

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Unidentified Audience Member [3]

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(Interpreted). Hello. JPMorgan. Three questions please.

First on the CapEx. Is the guidance, the CapEx guidance that you give today, does it take into account your maximum [catch] or your maximum capacity for FTTH per year number of lines? In other words, as you draw out the lines and the process is industrialized, do you see leeway to accelerate your rollout?

The other question is the reduction in bandwidth of the Orange network. Have you seen an impact in your mobile clients? Today your commercial performance is good. You -- we can't see an impact there.

But we're interested to know if you have feedback from your clients who've noticed the change.

And, lastly, the consolidation. I wanted an update on that. And it would be interesting to find out if the presidential elections can impact this.

Thank you.

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Maxime Lombardini, Iliad SA - CEO [4]

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(Interpreted) So, we're going to answer your questions backwards. With regards to the consolidation I think our competitors talk about it better. So, I'll let you look at what they say, and I won't say anything (inaudible).

The elections don't impact this. If it happens one day it'll happen before, after. It doesn't -- there are talks. But it's not correlated.

In terms of the reduction in bandwidth we -- there are -- we don't see any impact. And you have -- what you have to look at is something important. Today our 3G coverage is 90% of the population. So, it's very considerable coverage. So, the use of roaming is low, and is dropping daily.

So, that's where the low and not huge impact comes from. We're coming to 12,000 antennae. We've rolled out three times as fast as our competitors. It took us five, six, years to do this. Whereas, it took them 15, 16 years to do the same thing.

Our ability to place antennae where we need them and, except in specific areas of Paris where we may have problems, we're finding solutions. But it's to know our geography well enables us to go fast.

And you're going to say but why --? How do you roll out faster and better? Well, our model is different. Everything's internalized here. The roll out of antennae for our competitors is subcontracted. Whereas, when we do it, we do it internally from this building. And we have hundreds of people rolling out these antennae.

And this enables us to control this better. And enable processes to be simplified where we don't have orders and commercial exchanges and so on. So, we go and look at the sites and this is where we roll them out.

There was no impact on our subscribers. The major part, not 100% but not far, of the data consumed by our subscribers is on our own network. This increases monthly, significantly, monthly. No impact. And there will be no impact due to the drop in this bandwidth.

For your first question in terms of CapEx, so EUR1.4 billion, EUR1.5 billion, investments, of course, accelerate the rhythm of connectable lines, both for [the end] 2018 and following years. Our investment rate is up in fiber.

But also mobile seeing -- considering that in -- by 2020 we will have finalized our mobile network. And from mid-2019 there should be a drop in our investments in mobile network. Why? Because we'll be looking at intensifying but we won't be creating several thousand, nearly 4,000 high points, this year.

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Nicolas Didio, Berenberg - Analyst [5]

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(Interpreted) Nicolas Didio, Berenberg. I have a couple of quick questions on VAT.

I think we saw that BRI Telecom was preparing offers for mobile, SFR, and -- on VAT. Do you also plan to launch press -- with press titles linked to the key shareholders? And what are -- and the input of the finance ministry on VAT for telecoms down the road to bring [Salud] closer to BRI -- with Iliad?

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Thomas Reynaud, Iliad SA - CFO and Head of Business Development [6]

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(Interpreted) On VAT we don't -- we're not in the habit of disclosing our offers to investors. So, we'll stick to that principle, today. And we're, of course, very vigilant on this matter of VAT.

And it's our practice not to launch into offers that are aggressive that are going to generate high margins for a couple of years and then to be rapped over the knuckles by the tax authorities. And so EUR500 million that's been paid up, you want us to up our dividend.

You've noticed that this year we've begun to increase our dividend to go from EUR0.41 to EUR0.44, an 8% increase, a total dividend of about EUR30 million. So we're not yet at the EUR500 million mark but very short term.

I don't plan to share that dividend on small -- if that was your question. So there's no such issue today on the cards. These are units with separate management teams, separate modes of operation.

My real work is at Free; I have an office on the sixth floor. You can see me there every day come in in the morning and leave in the evening.

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Nicolas Didio, Berenberg - Analyst [7]

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(Interpreted) Hello, Oddo. A few questions with regards to landline activities and particularly fiber. On the one hand there are more promotions on the French market than in the past, but also increase in prices with now operators with their boxes or increase in prices for media offers.

You also disclosed objectives, ambitious objectives, in terms of fiber. You said historically that you could aim for 8% to 9%. The historic operator increased prices last year and your 8% to 9% didn't take into account an increase in the ARPU.

So in the coming months, you said we had to expect the prices increasingly slightly. This seems to be the case. Could you tell us what you think the ARPU will do in the coming years with regards to fiber and media? Is fiber driving this?

And secondly, could you comment on the TRS you expect in terms of regarding the -- considering the evolution.

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Thomas Reynaud, Iliad SA - CFO and Head of Business Development [8]

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(Interpreted) I'll let Thomas comment on TRI. For the ARPU and increase in prices, again it's not increasing the prices just to increase the prices. We believe it's fairly destructive for the -- Bouygues' EUR9.99 offer and then you realize you've got an additional EUR8 to pay because you're not in the right area and now EUR3 for the box.

So what you paid EUR19.99 at the end of the month has cost you more than a standard market; often you pay EUR31 or EUR32 or EUR31. So this is exactly -- we want to do the opposite.

This is not what we want to do. We don't want to increase the prices just for the increase in prices without actually changing our offer.

Well if you look at the increase of the prices, it can be on the current base or on the offers, but we will not increase the price of an equivalent service for our consumers because everything we do is based on this confidence between our subscribers and ourselves.

You talked about the promotional activities in France. This has not been the case for us. We did one less one-off private sales in 2016 so we have a number of days on third party websites but never directly on our own website. And this is dropping and dropped in 2016.

We're continuing with the same idea of thinking that our quality/price ratio has to be good, and if we offer a quality offer, we can increase the price. And it's what we did with Canal and it's what we intend to continue doing.

When it's possible, and we can invent things that will enable us to increase the ARPU, then we do that. We know that the incremental increase in ARPU generates margin, but it's not always something that's doable. We don't always have a new idea or the capacity to create things that can be as marking for our subscribers.

We have to be able to share the value creation intelligently between the subscriber, the Company and the shareholder, and always move forward in that frame of mind for everything to go well, for our subscribers to continue appreciating us, for the employees here to be happy and feel happy within the Company, and for our shareholders.

And you know that the management and the shareholders should all be linked in a healthy combination and not do what's been done on the market beforehand where everything's directed towards the shareholder and in favor of the shareholder.

So this happened on the market beforehand when people were thinking only of the shareholders. This isn't a communist idea -- vision, but we just have to share things intelligently between these three stakeholders.

We can continue increasing and growing and generating cash. We don't want to touch the price of our offers without offering our subscribers something for that additional amount.

For the IRI and fiber, we're not changing anything in our parameters. On the one hand, we have an investment to connect our subscriber, then we have an economy on unbundling costs, EUR10 to EUR12 per month and per subscriber.

To date we don't integrate any potential positive aspects which would reduce our churn, thanks to fiber optics or the additional services sales. But we're very confident with our fiber plan for the next two, three years.

Today's announcement, and in particular the increase in our investments obviously to accelerate our DSL towards fiber migration, but also to differentiate ourselves a bit further in terms of our offer and always be in this dynamics of market share increasing.

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Unidentified Participant [9]

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(Interpreted) HSBC. Just to pick up on what you said about your strategy prices for landline, enrich offering and increase your prices. A question on your 4K offering. Do you think it's necessary to keep a reference offer around the current price of 4K but can you enrich the offer and increase the price?

Another question on Canal Plus, just to return to what you've already told us. But on possible increase in the wholesale price for Canal Plus, because at constant product you won't be able to increase your price, what might be the impact or when will the wholesale price for Canal -- might they change and impact your gross margin?

Final question on your CapEx target in France. If you're tempted to launch a new box on the French market, would that guidance change or would it include that development?

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Thomas Reynaud, Iliad SA - CFO and Head of Business Development [10]

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(Interpreted) Well once again, 4K is like Canal. We're offering it today at low price; we're not -- we have HDR that's coming on stream and so there'll be long story on TV offers.

The question -- 4K, the consumer, is he prepared to pay more for it. There's a fine indication is your 4K TV sold more than your HD TV. A few years back marginally yes, but it's not going to drive the price significantly. And in fact, our 4K offer is cheaper than the 3G offer which gives -- seems strange.

On Canal Plus, it's a long contract so we're pretty protected in that aspect.

On CapEx, we're one of the few telcos to give guidance long term and our CapEx package, EUR1.4 billion, EUR1.5 billion for 2017/2018 isn't set to change.

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Unidentified Participant [11]

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(Interpreted) Bank of America. I just wanted to discuss your comments on investments, a slightly longer-term perspective beyond the figures you give us for 2017 and 2018. Last year at the same time you were talking about the CapEx to sales normalized and standardized in the long term. Where are you with regards to that on mobile?

And for Italy, could you share some aspects in particular for 2017 what we can expect in terms of initial investment on the project?

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Unidentified Company Representative [12]

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(Interpreted) For our CapEx, clearly we're at a high point. Our ratio CapEx to sales this year and next year will be between 27% and 30% where the rest of the industry is close to 14%, 15%.

This can be explained by the fact that we're developing our mobile network and accelerating fiber optics. But one point in particular, revenue base is also increasing.

So for mobile, from mid-2019 and 2020 the ratios of investments will be closer to the average telecom operators, 15%. Considering our specific model and the CapEx to sales ratio, we'll probably be lower than those 14%, 15%; however, on landline activities we'll still be slightly above. But in the long term, ratio of investment 14%, 15% at Group level is maintained.

Free cash flow and the EBITDA and this CapEx for 2020, this will come mainly from three components, the drop in our roaming costs, which is dropping and due to drop further in the coming years.

The second is the finalizing of our mobile network, and the third aspect, which will be very important in terms of cash generation, is migrating on fixed cost EUR2 subscribers to EUR20 where incremental sales transform to cash.

For Italy, on the one hand there'll be disbursements relevant to the frequencies, and we've given you fairly precise figures for the six, seven years to come. We are currently establishing our organization, looking at investing.

We already have a backbone of close to 8000 kilometers of fibers in Italy. We're setting up the core of our network and setting up interconnections with our future competitors and with [Wind] on the other hand for establishing our [MOCN] partnership.

We believe that the investment cost outside the frequency payment will be close to EUR100 million.

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Unidentified Participant [13]

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(Interpreted) On, the last point. You were saying 8000 kilometers of fiber in Italy. How have you got that? Have you signed an IOU or have you made an acquisition? If you can give us some details.

And in terms of fiber migration in France, can you give us an idea of the reduction of your wholesale bill to Orange by 2020 for the wholesale fixed access cost? Today you pay around EUR800 million, EUR900 million, I don't know if the figure is right.

Can you give us a broad idea of the potential reduction that you may assume longer term? Thank you.

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Unidentified Company Representative [14]

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(Interpreted) Well on Italy, as regards the network which will be the backbone of our mobile of 8000, we've signed with a supplier. It's not the acquisition of a company; there are various fiber suppliers in Italy. And fiber, the wholesale invoice, is that the unbundling costs -- I'm not sure I've understood correctly -- or the co-financing?

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Unidentified Participant [15]

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(Interpreted) (Inaudible).

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Unidentified Company Representative [16]

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(Interpreted) Unbundling is way above EUR200 million. As of Q2 2018 with significant migration we'll be seeing, there'll be a reduction of this unbundling cost.

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Unidentified Participant [17]

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(Interpreted) Banque Leonardo. There are a number of studies on the market that are based on the lack of satisfaction with regards to the French regulator for the roll-out of fiber until the FTTH until the home, which was expressed several times in the press.

Furthermore, regulators explain if regulations don't change, if the consolidation doesn't happen, alternative, like yourselves will not gain any -- there is no gain in going any faster. What do you think of this pressure from the regulator and the market situation that's slowing down, the [FTTH] roll-out, and you can see that France is quite behind?

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Unidentified Company Representative [18]

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(Interpreted) The regulator's role is to request additional investment, and he does that and they do that very well, (inaudible). So with respect to that, it's a record high at the moment. I can't say we're behind in that respect.

Whichever the consolidation, the fiber dynamics will continue for the simple reason the historic operator has become an essential axis of the strategy, a component of it. So I can't see that slowing. So these are the networks of the future and the conversion is well started.

The regulator is just saying that the discussions mustn't slow the roll-out. However, the framework -- the evolution of the framework is something you don't mention. The regulator mentions the fact that the historic operator has different information and there should be a non-discrimination implemented on the market, and I think we all agree on that.

And in terms of France being behind, I think it's linked to what's measured in the European barometers, the bandwidth is 30 megabytes, and indeed, in that respect, most of the European countries that have modernized their equipment have a penetration of what is a sort of fake ultra-fast broadband.

I don't know many countries that roll out FTTH as fast as France does, and I believe that in a few years' time, if the statistics are as it should be and things are as they should be in gigabytes, France will be exemplary actually.

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Unidentified Participant [19]

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(Interpreted) Second question. You have a competitor who's pretty vocal as regards activities such as banking. But a telco such as yourself, do you have ambitions in activities remote from telecoms that might be of interest today?

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Unidentified Company Representative [20]

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(Interpreted) Our ambition for 2017 is truly to continue or to add just under 4000 antennae for mobile, to roll out our FTTH network at unparalleled speed and open up Italy. So we have our work cut out for this year and I don't think we're going to have the Free Bank this year.

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Unidentified Participant [21]

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(Interpreted) (Inaudible) visibility about your ambitions in a volatile market. If you -- what is the let's say biggest surprise you have got in the recent months, looking more in that [data] venture, what is the biggest element of downside maybe.

How things have changed compared to July last year when you got the package, what makes you more bullish or more cautious about the [current] venture.

And also, if I may, what is the biggest element of risk on a successful execution of your fiber plan in France? Thank you.

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Unidentified Company Representative [22]

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(Interpreted) So for the roll-out of fiber in France -- for fiber in France, really it's a straight line. We've been rolling out fiber for 10 years and it's -- and there are zones where there are dense where we are rolling out our network ourselves.

There are less dense zones where we're co-investing with Orange and in non-dense areas where we'll be acquiring companies that we call [RIPs] which are a mix between Government and privatized.

So it's something that's really industrialized today. We think we'll get 200,000 subscribers on fiber this year. Everything's in place set to go. There are not really any true difficulties and it's not complex to work out. Of course there are some issues of abuse from Orange that's processed and sorted legally, but things are rolling out well.

For Italy, what we're interested in -- in France there are 66 million subscribers and a EUR15 billion market. In Italy 60 million consumers, and if I don't -- if I'm right, EUR16 billion market.

So the same value as the French market with 10% less inhabitants. We know that on the French market we're 30% to 40% less expensive than our competitor, so there is on this market an opportunity, if we apply things different to what we've done in France, but we have everything in our hands to go and develop something that's differentiating, giving the consumer a bit more transparency and maybe a bit stronger honesty.

But Italy is one of the only places in the world where the monthly invoices is invoiced on 28 days and there are a number of things that have been integrated into the offers to display face charges that are quite low, but the Italian operators are those that are the most detested by their subscribers in Europe.

We want to develop something that creates value for the consumer, that works, and that enables us to become closer to the people who are our consumers. So it's come to Italy and develop this relationship and link.

So we need to develop an offer which is close to the consumer that the will like, the consumer likes the brand, where the word to mouth will support it and it will -- it's something that's worked on different markets. But we -- it's something we know how to do. This is one of our specialties.

In Italy there's something specific. It's the [Pisano] law which is a law where you have to identify the consumer, highly identify the consumer, before they become a subscriber. So it creates a number of difficulties. It's a market where the distribution networks are more important than in France.

Now it's different in north and south of Italy; the south of Italy a lot of small outlets who know how to collect money for you. So there are a lot of specifics, so we're going to move with them.

But our aim really is to offer the consumer something they can like and to support the digitalizing of Italy.

You're on a market that today the operators haven't really pushed the digitalization of the market because they've developed -- offered -- did not meet this. It's up to us to offer this and to be successful in that area.

We know the market; we're studying it for a long time. It's one that feels very complementary to what we do in France; it's an extension of territory and of know-how.

Our mobile teams are already the ones that are in the south of France and there's proximity. We're going to establish in Milan, we're recruiting, we're developing teams. We're going to roll out again 8000 kilometers of fiber to cover part of the territory and we have access to a number of antennae, about 10,000.

And then we've been able to negotiate the roaming with the experience we had in France and with the knowledge of that past experience.

So we have everything in our hand to create something that differentiates us on the market with our own values and we hope that the consumers will adhere to.

Maxime was saying earlier, we're very lucky in that there are three operators that are more or less the same size. Two of them have considerable debt; the other one is sort of losing market share.

So we're quite comfortable in this kind of environment to offer something that is attractive to the Italian consumer, and it'll be a success for Iliad to move forward in this direction without any specific surprises, bad surprises. So there are good surprises.

At one point it felt like all the operators had agreed that we were not welcome so they're mellowing slightly. So yes, those are good surprises.

And we'll move forward, open towards the end of the year, I don't know if it will be the end of this year or the beginning of next year, but with something that's disruptive offers but in line with what we know how to do.

We're also supported by public authorities. The regulatory authorities and so on support us because they're aware that the existing operators didn't really respect the consumer. And it's good; we are the people who can support the digitalization of Italy.

So we're moving in that direction and you can expect opening within a year but with disruptive but positively disruptive -- positive for the consumer disruptive offers. And for Iliad we'll be creating value, in line with what we're used to doing and know how to do.

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Unidentified Participant [23]

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(Interpreted) Another question from Berenberg. Three questions. An update on talks with TF1 on the carriage fees. A question on the platforms. Can you -- wholesale network with Netflix, it's a bit like Canal and will have Netflix or Amazon Prime on the Freebox.

Third question. You mentioned opening 90% of population 3G. What about usage, average usage of the Free network versus average total usage?

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Unidentified Company Representative [24]

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(Interpreted) Talks with TF1, your question is should the Free signal become payable for some. This is a request that we view as unacceptable.

When a Group relies on public resources that are frequencies to establish a channel, it's not possible to establish discrimination that you will pay for free access etc. at this stage. And I can't say that negotiation is progressing on the linear signal.

We have talks on all the associated service, replay, enriched advertising etc., that's the right route, creating value together to see how we can bring more advanced services rather than trying to push our way through with arguments that we don't view as particularly solid.

OTT platforms, Netflix and Amazon Prime, our [primary issue] is always the same, to deliver them. Are you prepared to share the value created when a content operator is prepared to do that. We have the huge pleasure of teaming up with him and generally to lead him to success.

You look at the Netflix numbers, you see that it's not successful in France, that [below] the launch strategy worked in other countries but not in France because France is an advanced market box-wise in terms of content.

So that's where we're at in our talks. We're pleased to see our friend Reed a few times a year to restate our position.

He gives us his position; they make little jokes by putting in place measures that we have a bad network, that if we were to work with them there could be room for improvement etc., things that are perfectly normal, some legal work to obtain compensation.

But we're saying that at one point in time we don't want to deliver platforms without having acceptable remuneration.

SFR Sport, ditto for them. One of the content -- the contents available for our subscribers directly via the net. We're an accelerator of commercialization. So people are [prepared] to share this value creation, we're there to help them and support them in value creation.

If they don't want it, it won't work. And you can look all the platforms that are unsuccessful for delivering content in France, all those that don't work are those that are not available on the Freebox.

So there you have it, that's our discussions. You want to succeed in France, you have to go via the Freebox. Why? Because we have the numbers. Five million people every day only look at content via the box. If you want to be successful, you can't rule out 25% of the market.

With TF1, if TF1 doesn't want to be present with us, it doesn't matter, but you can expect to have a problem in terms of the audience. I think they understand that.

And talks with TF1 are far more constructive than those we have with Netflix, but we know that if a content wants to be successful in France, it needs to be delivered on 25% of the product used by people who consume broadcasting content with them.

On coverage, 3G coverage, we cover 90% of the population. It's up significantly this year. I'll repeat the answer I gave earlier. Significantly more than 90% of data consumption and volume is on our network and not on roaming.

So the portion of data that runs on our network is significantly higher than the 90% of 3G coverage. We have 4G coverage below 90%, 78%, I don't know the number, with a target to achieve 85% at the end of the year. We're 78% on 4G.

Tending to our 3G coverage level, we'll do that with the roll-out of the 700. Today we have 900 megahertz in 3G. We also benefit 700 megahertz. We can't open them everywhere in Paris. In many other places in France we have openings quarter after quarter.

This delay in opening 700, there are regulatory reasons, but as we open that it will skyrocket our 4G to better penetrate buildings, in basements etc. 4G will continue to work in that direction.

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Unidentified Participant [25]

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(Interpreted) Just to complement what you've just said in terms of coverage, if we forget 5G for the moment. What's the dimensioning -- the ideal dimensions considering your portfolio frequencies? Your competitors have 18,000 to 20,000 sites. Considering your portfolio, do you aim for the same kind of coverage, or could that be different?

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Unidentified Company Representative [26]

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(Interpreted) We already have 3 million antennae, so we already have the largest network of femtocell. So we've learned a lot from that and we've a huge competitive advantage on developing 5G because what is 5G, it's a mix of 4G plus small cell and microcell fixed.

So we have that know-how already, and this gives us an advantage competitively with regards to coverage and quality of services compared to our competitive environment. And there was a cost, you saw it in our past CapEx, developing this equipment and the teams to run the equipment.

It was something considerable. So our objectives today, we're just over 12,000 antennae, and I think Thomas said that in 2018 it would be CapEx which would be equivalent to what we'll be displaying in 2017. So there's no reason for the distribution of this CapEx to change, and he said afterwards it will drop.

So without giving you any figures, it gives you an idea of where we're going, where we want to go. It's very simple: the roll-out of an antenna, a mobile antenna, we've always said is close to EUR100,000, EUR120,000 more expensive in towns and less in less dense areas.

So you can deduct the cost of the mobile roll-out this year if you add -- if you add an additional 4000 antenna you see the impact on CapEx. You can see where we want to go.

And when you look at the CapEx trajectory, we're not giving you a specific figure; we're giving you a direction for the coverage. But with the support of the femtocell that have a considerable contribution to traffic for us.

And as your colleague asked earlier, our coverage, our own coverage is greater than that measured by the regulator because the regulator doesn't measure our femtocell coverage.

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Unidentified Company Representative [27]

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(Interpreted) Thanks. Have a great day.

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Editor [28]

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Portions of this transcript that are marked (interpreted) were spoken by

an interpreter present on the live call. The interpreter was provided by the

Company sponsoring this Event.