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Edited Transcript of ORA.PA earnings conference call or presentation 25-Jul-19 6:30am GMT

Q2 2019 Orange SA Earnings Call

Paris Cedex 15 Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Orange SA earnings conference call or presentation Thursday, July 25, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eric Debroeck

Orange Polska S.A. - Member of the Supervisory Board

* Fabienne Dulac

Orange S.A. - Deputy CEO & CEO of Orange France

* Helmut Reisinger

Orange S.A. - Senior Executive Vice- President of Orange Business Services

* Hugues Foulon

Orange S.A. - Senior Executive Vice- President of Strategy & Cyber Security activities

* Jérôme Barré

Orange S.A. - Senior Executive Vice- President of Orange Wholesale & International Networks

* Laurent Paillassot

Orange S.A. - Senior Executive Vice- President of Orange Spain

* Ramon Fernandez

Orange S.A. - Delegate CEO of Finance, Performance & Europe

* Stéphane Richard

Orange S.A. - Chairman & CEO

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Conference Call Participants

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* Andrew J. Lee

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Frederic Emile Alfred Boulan

BofA Merrill Lynch, Research Division - Senior Analyst

* Giovanni Montalti

UBS Investment Bank, Research Division - Executive Director and European Telecom Equity Analyst

* Jakob Bluestone

Crédit Suisse AG, Research Division - Research Analyst

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Nicolas Cote-Colisson

HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology

* Samuel McHugh

Exane BNP Paribas, Research Division - Analyst of Telecom Operators

* Stephane Beyazian

MainFirst Bank AG, Research Division - Analyst

* Thomas Coudry

Bryan Garnier & Co Ltd, Research Division - Financial Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Orange H1 2019 Results. For your information, this conference is being recorded. (Operator Instructions)

Good morning, ladies and gentlemen, and welcome to the Orange First Half Year 2019 Results Conference Call. The call will be hosted by Mr. Stéphane Richard, Chairman and CEO; and Mr. Ramon Fernandez, Deputy CEO, Finance, Performance and Europe, with other members of Orange Executive Committee for the Q&A session that will start after the presentation. Thank you.

And let me hand over to Mr. Stéphane Richard.

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Stéphane Richard, Orange S.A. - Chairman & CEO [2]

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Good morning, everyone. So I will start with a quick introduction before asking Ramon to go into more details about our H1 results. So in a nutshell, in a still highly promotional environment, especially in our 2 key markets, France and Spain, Q2 2019 was a solid quarter, with progress in both revenue and EBITDA. Group revenue resumed growth at plus 0.5 versus minus 0.1 in Q1, while EBITDA growth improved at 0.9% versus 0.7% in Q1. If we exclude the impact from the ePresse Audiobook offers in France, EBITDA grew 1.5% in Q2, representing a 0.2 point improvements in EBITDA margin.

Looking at the 6 monthly figures, EBITDA grew plus 0.8% in H1, which is consistent with our full year 2019 guidance. H1 eCAPEX grew EUR 182 million to EUR 3.5 billion, mainly due to the acceleration of fiber rollouts in France and Poland, and to a lesser extent, to greater investments in Africa and the Middle East and OBS. We've maintained our guidance for 2019 eCAPEX to fall slightly below the 2018 peak level, excluding the impact of over EUR 100 million from the network sharing deal with Vodafone in Spain.

At the end of H1 2019, the group's eCAPEX reached EUR 3.5 billion, an increase of 5.5% or EUR 182 million year-on-year. Most of the growth was linked to the acceleration of fiber deployments in France with 1.7 million new connectable homes this semester compared to 1.2 million in the first semester of 2018, strengthening Orange position as the largest fiber network in France, with 13.5 million connected homes. The number of FTTH connectable homes reached a total of 34 million, a growth of 23% over H1 2018, maintaining our leadership in Europe.

Outside France, 1.7 million new very high percent connectable homes were added in Spain, almost 900,000 in Poland and 400,000 in Africa and the Middle East, of which half in Jordan.

On Mobile, the group achieved a 4G coverage above 94% of population in all of its 8 European countries. In Africa and the Middle East, 4G is available in 15 countries, totalizing 20 million customers. The group continues to move forward to be 5G ready. As you know, our network in France is already compatible with 5G, and so far, the 4G mobile backhaul in France has already more than 90% of the radio sites connected by fiber. And this semester, we took a step toward 5G commercialization by realizing the first 5G test with mobile terminals. All these investments are consistent with our ambition to provide the best quality network and thus support organic growth. As already said, our eCAPEX guidance is reiterated and will be achieved through asset position in H2.

Let's move to commercial performance. These investments allowed us to consolidate our leadership position in Europe in 4G and in FTTH. We now serve, at group level, more than 60 million 4G customers and close to 7 million FTTH customers, an increase of 28%, thanks to France, which posted the highest ever, ever second quarter for FTTH net adds; and Spain, which reached an FTTH 75% penetration rate in its broadband customer base. Orange remains also the #1 Convergence operator in Europe with 10.6 million Convergence B2C customers, growing at 4% and Convergence revenue growing by 4% year-on-year in H1 '19, representing close to 40% of the total European retail service revenues. This proves, once again, the relevance of our Convergence strategy as a key driver of revenue growth and supporting our value approach in a very promotional environment. Thanks to the quality of our exclusive content such as Game of Thrones. OCS, our Pay TV channel, posted 400,000 net adds in Q2, contributing to the TV customer base increase by 5%.

In H1, we also pursued our ambitions to offer an unmatched customer experience through connectivity, enriched innovative services and customer relations. We continue to implement our strategy to become a multi-service operator. First, through mobile finance services in Europe and in Africa. Orange Bank reached 320,000 customers in France at the end of H1 '19, with a robust improvement of user ratings at the Apple Store. We moved from 3.1 to 4.4 as a rating in Apple Store. And for the second year in a row, Orange Bank was ranked the best digital banking offer in France by D-Rating. Orange Money customer base kept growing, reaching close to 42 million customers.

Second, we started paving the way to develop future 5G use cases by bringing together more than 1,000 enterprise customers at our Enterprise Service in Paris in April. This collaboration was illustrated through the announcement of several joint innovation projects with companies that are market leaders in key sectors of the economy, such as the manufacturing industry, energy or transport. We can mention, for instance, Renault, for the connected car projects or SNCF for mobility use case.

Third, we made very important steps in order to accelerate our development into cybersecurity. Since 2016, this segment has been growing organically above 15% on a yearly basis with an outstanding H1 2019 at plus 22%. This strong organic growth has been strengthened by the acquisitions of SecureData and SecureLink in H1, after Atheos and (inaudible) a few years back. These acquisitions, together with organic growth, double our size as the cumulative annual revenues of SecureLink, SecureData and Orange CyberDefense is now more than EUR 600 million in 2018 and established Orange as the leader in the European cybersecurity industry, with a presence in 12 European countries and a portfolio of 3,700 customers.

Let me now hand over to Ramon, who will go into more details on our financial and operational performance.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [3]

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Thank you, Stéphane. Good morning. So turning to Slide 9, you can see how we were back to revenue growth in Q2, following a slight decrease in Q1. Q2 Group revenue increased by 0.5%, with Middle East, Africa growing by 5.8%; Europe by 1.2%; and Orange Business Services by 0.7%, which all together more than made up for the 1.6% decrease in a tougher Spanish market, while France achieved revenue stabilization in a still challenging environment, after a minus 1.8% drop in Q1.

From a product perspective, growth performance mirrored our strategic focus areas with IT and integration services growing by 7%, and the Convergent services growing by 3.6%, while mobile only stabilized at plus 0.1% and fixed-only eroded by 3.2%.

Turning to the EBITDAaL of telecom activities, Q2 grew by 1% or plus EUR 34 million. In Q2, excluding the impact of ePresse and audio books, EBITDAaL would have grown by 1.6% on telecom activity. The H1 EBITDA growth was driven by the outstanding performance of Middle East, Africa, plus 10.5%; growth in Spain, plus 2%; and resilience in France at minus 0.4%. In France, if we exclude the impact of ePresse and Audiobooks, EBITDA grew by 1.8% or plus EUR 56 million year-on-year, including thanks to a decrease in labor costs.

Thanks to our cost efficiency plan, we made gross savings of EUR 255 million in H1. Just to give a few examples, in France, we managed to reduce call rates by 7% and to improve efficiency in technical intervention with cost reductions at minus 4%. With digitalization of customer care, these efforts contributed to a total gross savings of EUR 108 million in H1. In Europe, we reached nearly 10 million customer care actions through bots in H1. It was only 3 million for the full year 2018. And in Middle East, Africa, we achieved more than EUR 50 million of gross savings, thanks to improved network efficiency, energy savings through solar farms and lower commissioning costs of Orange Money through increasing [sales top-up]. These efforts, along with the positive revenue trend helped fuel the EBITDAaL margin telecom activities. It increased by 0.3 points in H1. This performance led to a consolidated net income of EUR 1.1 billion that grew by 29.4%, and this is mainly the result of growing EBITDAaL and also a better financial result that includes less depreciation of BT shares than in H1 2018. I recall that a group has sold its remaining stake in BT in June.

In H1 2019, our net debt-to-EBITDAaL ratio is in line with our guidance at 2.06, with net debt reaching EUR 26.7 billion at the end of June. This excludes the proceeds of the BT shares. The EUR 543 million cash received from the disposal of the BT shares, which was finalized on June, will only be settled and was only settled in early July. So if we adjust from the timing effect, the ratio would be 2.02 at the end of H1.

The evolution of the net debt on the semester reflects our continuous investment efforts and the usual seasonality of the business as well as the dividend payment in June.

Overall, our liquidity position remains strong with EUR 14.6 billion at the end of June, including EUR 8.4 billion in cash. And our debt maturity profile remains balanced, with an average maturity of bonds of 7.8 years.

Now let's turn to our business review, starting with France on Slide 14. In Q2, total revenues were flat. It would have been plus 0.4% if we exclude the impact of the ePresse/Audiobook. In order to better assess the underlying performance, let's as in Q1, analyze our retail activities, excluding the ePresse/Audiobook effects. First, Retail Services, excluding PSTN, increased by 1.5% in Q2, it was 1.6% in Q1. Convergent Services revenues grew by 5%, thanks to both the growth of the broadband B2C Convergent customer base at plus 3.1%, and a solid Convergent ARPU, growing by nearly EUR 1 at EUR 66.9, driven by the increase in the number of lines per Convergent offer and for price increase last autumn. Mobile-only ARPU grew by EUR 0.11 over 1 year to EUR 17 in Q2, driven by the price increase of last autumn and a better mix. While the broadband-only ARPU fell by EUR 0.36 year-on-year to EUR 36.5 in Q2, due to the higher Sosh mix. And to conclude on Retail Services, it's noteworthy that the 3 ARPO Convergent, mobile-only and fixed only, all grew on a quarter-on-quarter basis.

Equipment sales decreased by 4.4% in Q2, mainly due to the Huawei crisis and to a slowdown on the device market as the customers tend to switch less often their devices. Wholesale revenues grew by 3.3%, driven by growth in visitor roaming in mobile and FTTH in fixed, which offsets the decline in unbundling and national roaming.

Turning to the commercial performance. In France, this was another quarter with intense levels of promotional activities, notably in FTTH, even if the recent period signals some positive moves. Convergence remained a strong acquisition tool, supporting our performance both in mobile and in fixed, the latter fueling the Convergent base now at 5.7 million of Convergent fixed customers. On Mobile, we registered 61,000 net adds, with the high end mix improving by 0.7 points. And the mobile churn is down by 0.8 points at 10.9% and even minus 1.4 points sequentially, which is quite remarkable in this environment.

On fixed, we recorded 41,000 broadband net adds, with high-end customer mix improving by 1.2 point. And this solid performance in the broadband is supported by a record quarter in Q2 on fiber with 160,000 FTTH net adds, leading to 2.9 million FTTH customers, and also by the success of the 2P Sosh offer, which was launched in August last year.

Now in Spain, we are facing a very competitive environment with revenue decreasing by 0.6% year-on-year in H1. Retail services were impacted by the level of promotions as intense as in Q1 and by the counter-effect of lost service upgrades conducted in H1 2018, resulting in a revenue decrease of 3.9% in Q2 and 1.7% in H1. Equipment revenue is back to a better trend in Q2, with a revenue decrease by 1.3% as opposed to minus 17% in Q1, and this is thanks to the corrective commercial actions we took. And wholesale posted a solid growth with close to a plus 10% in Q2, 9.8%. In this context, in Spain, we focused on protecting our customer base in the second quarter. We managed to reduce the churn quarter-over-quarter on both mobile and fixed. On mobile contract, we tactically used our brand portfolio targeting all market segments, including middle and low end brands, while improving the trend on the Orange brand. We thus came back to positive net adds in Q2 at plus 38,000, which is a 97,000 increase when you compare it quarter-over-quarter.

On fixed broadband, the net adds were a negative at minus 27,000, but we increased the FTTH penetration rate to 75%. And as a consequence of a more competitive environment, and of the counter-effect of the service upgrade we did in April last year, with subsequent out of bundled consumption reduction, the Convergent ARPU decreased by 1.1% year-on-year to EUR 57.5.

Last, in order to maintain our focus on value we implemented a bank book repricing end of Q2 on both Orange and Jazztel brands based on a service upgrade approach.

Overall, in this evolving environment, we managed to keep EBITDAaL growing at plus 2% in H1, demonstrating our resilience and our ability to rationalize the cost base in the wake of digitalization.

Let's now turn to our Europe segment, where total revenue grew by 1.2% in Q2. This is a rate comparable to last quarter, supported by ongoing positive momentum in Retail Services, up 2.5% versus plus 2.1% over the whole year 2018.

As explained in Q1, the 5.8% drop in wholesale services is mostly due to lower MVNO revenues at Orange Belgium. And this momentum in retail services reflects first, our ongoing focus on convergence, with Convergent revenues maintaining a strong 36% growth rate. Convergent revenues now represent 17% of total retail services. And second, our continuing success in IT and integration services increasing sharply to plus 23%.

Our focus on convergence supported our commercial performance with 62,000 mobile contract net adds and 38,000 fixed broadband net adds this quarter. And now looking at 2 countries from a country perspective, where revenue grew in Poland for the fourth consecutive quarter at plus 2%. Beyond the continuing success of convergence, with revenue up 21% this quarter, the other drivers in Poland were IT and integration services and also equipment sales. Also important was the more for more commercial initiative triggered by Orange Poland in Q2, which strengthens our confidence in the success of the turnaround in Poland.

Our revenue performance at Orange Belgium should also be highlighted, as we post plus 1.9% growth this quarter despite lower MVNO contracts. This performance was driven by a strong 9.6% growth in retail services with better Convergent net adds and stable mobile contracts compared to Q1 2018.

Turning to profitability, EBITDAaL eroded by 1.8% in H1 as the result of 3 main effects: First, lower MVNO revenue in Belgium; second, higher content costs to support future growth in Convergent offers; and last, higher access costs to third-party fixed network in Belgium and Romania as a result of Convergent growth. We expect this drag to decrease as soon as wholesale access to cable in Belgium is set to become less expensive following the regulators' draft analysis. This is an important point in Belgium which will support us, and because we will also soon be rolling out our own FTTH infrastructure in Romania. Looking to the future and always in search of better serving our customers while building value creation, Orange Belgium and Proximus recently signed term sheets to reach mobile access network sharing agreements by the end of 2019. The aim of such an agreement is to enable both companies to meet increasing customer demand for mobile network quality and deeper indoor coverage. It will also allow a faster and more comprehensive 5G rollout in Belgium.

Orange Belgium expects its agreement to deliver cumulative OpEx and CapEx savings of EUR 300 million over 10 years, with set-up costs expected at EUR 130 million over the next 3 years. Overall, we expect a return over 10 years in excess of 3x Orange Belgium cost of capital.

Let's now turn to Africa and Middle East. As we highlighted during our last Africa Day in June, our operations in this region bring a strong contribution to the overall group performance. This semester, Africa and Middle East was the main contributor to growth, with revenue increasing by 5.8% in Q2 and 5.6% in H1, resulting in an outstanding EBITDAaL growth at 10% plus 5% in H1. The revenue performance was driven by a very solid growth of retail services, around plus 8% this quarter, again, fueled by robust drivers, representing more than 90% of total retail service revenues; First Data, with now close to 20 million 4G customers, growing by 54%; and Orange Money, with an active customer base of 16.5 million, up by 21% year-on-year. Fixed broadband is also growing with around 1.1 million customers, up by 23% year-on-year. This positive result was also supported by the stabilization of outgoing voice. And from a geographical perspective, it's worth noting that the four 2016 acquisitions contributed to more than 1/4 of the top line growth. And the top contributors to total revenue continued to deliver solid growth in Q2 with Sonatel Group growing by 5.5%, including Senegal with a strong retail performance. Egypt was growing by 9.2%, sustained by data development and Ivory Coast has been recovering from last year fire incident and QIC process. (inaudible) has been growing at a 6.1% rate. Last, more than 50% of this solid revenue growth translated into EBITDAaL and margin rates also increasing by 1.4 points to reach 31.7% this semester, thanks also to an efficient cost monitoring.

Turning to Enterprise. Q2 is the third consecutive quarter of growth, with revenue increasing by 0.7%. This performance is driven by IT and integration services that kept its growth trajectory at 6.6% in Q2, fueled by the double-digit growth of cyberdefense at plus 15% and cloud business at plus 20% in Q2. This semester, Orange has been awarded a Rising Star on Managed Hybrid Services and as a French Leader in multi-cloud by independent research firms, thus confirming its role of a key player in the cloud business.

In H1, IT and integration services reached 35% of the enterprise segment revenues, which illustrates our strategic move towards these new growth drivers. And it's exactly, by the way, what we were aiming at in 2015 when we said we set the strat plan Essential 2020. And this trend will be amplified by the recent acquisitions of SecureData and SecureLink that position Orange as one of the European leaders in the field of cyberdefense. At the same time, legacy service are still under pressure, with voice decreasing by 7.5% year-on-year in Q2, while data is flat. And this semester, we signed with Sony our biggest contract to date in SD1 services to implement our Flexible SD-WAN solution in 50 countries, thus confirming our leading position in this field.

Let me now hand over to Stéphane, who will wrap up today's presentation.

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Stéphane Richard, Orange S.A. - Chairman & CEO [4]

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Thank you, Ramon. So a word on our 2019 guidance. Just to say that no surprise, we can fully confirm our guidance for 2019, namely EBITDAaL growing slightly versus 2018; eCAPEX decreasing slightly below its 2018 peak level, excluding the impact from the network sharing deal with Vodafone in Spain; operating cash flow continuing to grow in 2019; net debt ratio, excluding IFRS 16 lease liabilities to telecom EBITDA remaining at around 2; and finally, regarding the dividend for fiscal year 2019, we confirm our previous guidance of at least EUR 0.70 per share. The final amount will be based on 2019 actual results and the future outlook. I can announce that we will pay a EUR 0.30 interim dividend on December 4, 2019.

Before taking your question, I just want to invite you on next 5th of December this year. It's -- we will organize an Investor Day, and we'll update you on our 2025 vision. This will be organized in Paris, once again, on the 5th of December. Thank you for your kind attention, and we're now ready to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Stephane Beyazian from MainFirst.

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Stephane Beyazian, MainFirst Bank AG, Research Division - Analyst [2]

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Two questions, if I can. The first one is regarding the 2025 vision. It's obviously probably too early for you to tell too much, but is there any color you could share with us? And I guess what I'm trying to understand is how the 2025 vision plan works with the raison d'être project, which is probably more around the headcount in France. I guess I just want to understand if one could have implication on the other, for instance, if raison d'être could imply some changes in your headcount strategy, and therefore could have an implication for your financial target for 2025? And my second question is regarding cybersecurity. You made a quite important acquisition there. How do you plan to integrate that division with Orange Business Services? Because now, I think you have quite strong different divisions, but you need to make it all work all together. So I was wondering whether you could share anything on that. And for the cybersecurity, if -- is there any specific targets you could provide to us?

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Stéphane Richard, Orange S.A. - Chairman & CEO [3]

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Thank you, Stephane. I tried to make it clear regarding the 2025 vision and the raison d'être process. The 2025 vision is really the strategic, let's say vision and roadmap that we want to set for the group with this prospect of 2025. Meaning that we will detail next December our priorities in terms of investment, in terms of market position, in terms of new businesses, in terms of maybe development in areas like Africa and the Middle East. So clearly, it's too early to unveil what will be the content of this, but it's -- the exercise is clearly to share with you our views on our future as one of the big players in this telecom industry in a moving environment, with technology, with regulation, but also we have to meet social expectations.

When I say social, I'm talking about society. And this will also be an important part of this 2025 vision. The raison d'être process is something different. It's an opportunity that has been offered to us by a new law in France, which is to define, in a few sentences, what is our, let's say, identity, values, projects, in a formula that will summarize what we are, in fact, and what we want to do. So this is something which is going to be permanent. It's not a 2025 vision, it's a permanent definition of what we want to be as a company and as a group. This exercise will be led through different streams, work streams, one implying our employees.

And I have already started to ask our own employees to contribute to this raison d'être definition. And then in September, I will ask other stakeholders, including Board members, but also investors and maybe yourself in order to offer you also an opportunity to tell us what is your view on our raison d'être. Is there any kind of implication or relation with the jobs, the number of jobs in the group or in France, and the reduction of headcount? Clearly, no.

Once again, raison d'être is something which is our permanent definition of our mission in the long-term prospect. And so it has no impact of any kind with what will be the policy of the group. In so far as we have to adapt to our environment, especially to our competitive environment. We have to also look for the best possible performance in terms of results, in terms of cash generation, in terms of return to shareholders. And the headcount -- reduction of headcount trajectories that we have been able to manage, especially in France in the past years will remain in the future, taking into account also the fact that it's not only a quantitative approach.

But as you know, we have to prepare also for new technologies such as artificial intelligence or data expertise. Generally speaking, we have to lead also the -- to manage the OBS migration, strategic migration between a pure connectivity business into a more hybrid mixed business between IT integration services and connectivity. So this requires also new skills and re-skilling of our people. And this is what we will have to do by 2025. Maybe for the second question, I'll ask successively, Hugues, who is in charge of cybersecurity and maybe Helmut for OBS to give you some content about this.

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Hugues Foulon, Orange S.A. - Senior Executive Vice- President of Strategy & Cyber Security activities [4]

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Okay. Thank you, Stéphane. On cybersecurity, what we can say, that we just closed SecureLink's deal a few days ago, 2 weeks ago exactly. And no, we have -- we got some funding from Orange cyberdefense business, which was mostly French business at 75% to a Pan-European one. So now it's high time to work on the integration process with Orange CyberDefense plus SecureData plus SecureLink, trying to build a European leader. And our goal is to reach EUR 1 billion revenue by year 2022, focusing on organic growth in the coming quarters. Second point, we are very closely linked with OBS, of course, with strong synergies on the marketing side and the sales side, of course, and also in delivery. So we are working very closely with Helmut's team on OBS. And of course, we have dedicated team on fiber in each country. We just mentioned with Stephane, but we also have a worldwide presence within OBS salesforce. Maybe, Helmut, you can say a few words on that.

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Helmut Reisinger, Orange S.A. - Senior Executive Vice- President of Orange Business Services [5]

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Yes. Thank you, Hugues. Coming back to Stephane's question as well. So the synergies we see, together for our customers is in the area of product, it's in the area of go to market, and it's in the area of our global operations. There is no Industry 4.0 project, there is no cloud project without taking care or software-defined networking project without taking care of cyberdefense, that's why we closely work together to make sure that our customers can, as of today, also rely on 24x7 approach wherever they are operating, thanks to 9 CyberSOCs that we now have around the globe. And with this, we try to synergize the end-to-end offering for our customers in this Internet of Enterprises.

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Operator [6]

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We'll take our next question from the line of Cote-Colisson from HSBC.

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Nicolas Cote-Colisson, HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology [7]

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I will start with France and fiber. Can you tell us a bit more about the market share and churn dynamics when other operators join the local public interest network or also in the medium-dense area? And my second question is on network sharing. You just took 2 deals in the recent months in Spain and Belgium, so what's your view regarding France? Do you see any opportunities or is it too late, given the 5G process? And if you don't see any opportunities in France, can you tell us what makes this market different from Spain and Belgium?

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Stéphane Richard, Orange S.A. - Chairman & CEO [8]

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Thank you for the question. Fabienne?

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Fabienne Dulac, Orange S.A. - Deputy CEO & CEO of Orange France [9]

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So it's too early to answer your question exactly for the Q2 and the market share because we have another disclosure result of the competition. But what we see, we are still very solid under fiber. We reached 160,000 net adds on Q2. This is a best quarter ever recorded on Q2. So even if -- from the beginning of the year and from 1 year now, we have an intense competition on fiber.

The fiber is for Orange still very solid in acquisitions. And this is the level of acquisition, of retention and of (inaudible). I think the market share is around maybe 35%, 40%. And it's a very high level with a hard competition in face of us and with a high level of promotion of around EUR 15. It's not the case we have in Orange, you know that. And the churn is still well oriented, very low and lower quarter after quarter on all our markets: mobile, broadband, fiber and convergence. Specifically with convergence, we record this quarter the best -- the lower, sorry, churn rate from a long time.

The other question is deep dynamic where other operators to join with Orange. This is true on whole -- my sentence are true on very dense area -- middle dense area. And on the weak area, it's a little bit early to answer because this is the beginning. We have some very small REAP area available on fiber. But where the fiber is available around maintain its market share -- the network share, sorry.

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Stéphane Richard, Orange S.A. - Chairman & CEO [10]

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The second question?

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Fabienne Dulac, Orange S.A. - Deputy CEO & CEO of Orange France [11]

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It's a good question. I think it's too early to answer this question. We have just received the asset condition to deploy 5G rollout. We are reflecting an analysis of this point. Orange is a leader in France on the mobile and the quality of the network. We are still the first, and we want to maintain the differentiation and the leadership so we will have a reflection. But we -- all the time, we'll maintain the leadership in our network and especially on mobile. So we will see.

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Nicolas Cote-Colisson, HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology [12]

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Okay. I just have a quick follow-up. During the presentation, Ramon said you could see fiber better signals recently. Can you just elaborate on that? What was the positive signals from a pricing point of view?

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Fabienne Dulac, Orange S.A. - Deputy CEO & CEO of Orange France [13]

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Yes, we observed, maybe for the first time, some positive signals, 3 of them. It's why we start to say that we observed a slight improvement in Q2.

The 3 points we observed is the launch of premium set-top box from 2 operators, from 2 players as Stéphane, you know that. And I think it's a good signal because behind you have a premium attempt in the market. The second point we observed some back book prices increase as Orange started them last year, but in the other back book competitors. And the third point, we observed a discount plan that -- we observed that the discount plan are just a little bit less generous with less data abundance. So even if the market is still very competitive, that maybe prove that the players are slowly switching to a value strategy and we hope that.

At the same time, we observed in Q2 and in Q1 in the market customers are less sensitive to promotion. We can observe this in the momentum and when you observe all those sales made on Q1 and Q2, and when you observe, too, the decrease in churn on our mobile base and all churn we have and all churn we recorded.

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Operator [14]

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(Operator Instructions) We'll take our next question from the line of Giovanni Montalti from UBS.

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Giovanni Montalti, UBS Investment Bank, Research Division - Executive Director and European Telecom Equity Analyst [15]

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If I -- I mean, obviously, I understand you cannot give any advantage to your competitors. But if you were to, let's say, highlight the 2, 3 key stats you will take going forward in terms of commercial action to try and support the encouraging trends you were highlighting for the French market, what would be these 2 or 3 key moves you would like to implement in the market?

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Fabienne Dulac, Orange S.A. - Deputy CEO & CEO of Orange France [16]

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We did it. We -- maybe I can start and Stéphane, you can follow. But we were the first to sustain the efforts to encourage the better trend in France. Last year, when we raised the price in the back book, we were the first to do that. We have been the first to have a limited recourse to promotion. We have been the first to launch a new box and a premium box with -- and we maintained our price in the back book, in the front book and the promotion. We have a limited recourse to search all the time. We never launched a promotion at EUR 5 for 50 gigabits. So I think all the signal we gave to the market from 2 years are there. Stéphane, if you want to follow.

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Stéphane Richard, Orange S.A. - Chairman & CEO [17]

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Just keep in mind the fact that if you look at our total net adds since the beginning of this year, we have only 15%, 1-5 percent, of our net adds coming from promotions. The average for the competition is 70%, 7-0 percent. So we are clearly the player in the market which is doing the minimum in terms of promotions to manage, I would say, our dynamics in the market and to ensure our volumes.

We are the one with clearly the most virtues in the French market. We are doing much, much, much less promotion than anybody else. We are the ones that have sent the first clear signals in the market for service upgrade, both in fixed and mobile. And we have, today, still a very important price gap between the average of our offers and the competition.

So we are certainly not in the position of the player who is pushing or is putting some pressure in the market in terms of pricing. We are the ones that, much to the contrary, are trying to consolidate what seems to be a better environment or better trends in the French market. And of course, we'll take maximum advantage of this in the coming weeks and months and months. And we will try to do our best to facilitate and to consolidate what we see as positive, let's say, signals in terms of behaviors and marketing strategies coming from the competition.

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Giovanni Montalti, UBS Investment Bank, Research Division - Executive Director and European Telecom Equity Analyst [18]

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And if I may, a very quick follow-up on Spain. How concerned are you to see new, let's say, growth in competitive intensity and promotional intensity in Q3 with the launch of the new football season? Last year was a pretty nasty quarter. Do you foresee this -- do you expect this promotion intensity to come back again?

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Stéphane Richard, Orange S.A. - Chairman & CEO [19]

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Okay. Thanks for the question. I will ask Laurent Paillassot, our CEO in Spain, who is on the call, to maybe elaborate a little bit on the Spanish market because I think that this is something of common interest. I will say, it's clearly an important market for us and which competitive environment has moved in the recent months.

I do think, and I want to start with this that the performance of Orange is very, very solid in this market. More challenging market, but still very solid, relying on clear and important assets. And -- but I will let Laurent maybe elaborate a little bit on the Spanish situation. Laurent?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [20]

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Yes. Thank you, Stéphane. Yes, that's true that the Spanish market is quite competitive. If we really look at what's going on, on the Spanish market over the recent quarters, basically, we've seen clearly a slowdown in terms of the net adds on the market. Just to give you one figure. If we look at the same period, January to May 2019 versus last year, the net adds on the global market, as reported by CNMC, has been going down by 55% in mobile and 40% in fixed. If we look at portability, it's also down Q2 versus last year by 8%.

So basically, a market which is slightly slowing down, which translates into higher promotions and discounts. And it is -- this obviously has negative impact in terms of value creation, and we see that in the trends. Obviously, they were there already in 2018, and Q1, Q2 is confirming these trends.

So that's for the overall market. In this market, I think, Spain, we have been focusing, as usual, on value creation. So even though we have a slight decrease in the revenues by 0.6%, we are still posting an increase in EBITDA by 2 points, and we are even improving close to 1 point the EBITDA margin.

We're focusing on value -- of value acquisition with content with very high-speed offers in 4G, in fiber. We increased the penetration of fiber by 20%. We are also driving value in retention, applying value base that had driven retention [authorization] policies, which allow us to reduce churn. And we've reduced churn significantly, and we're also driving our costs down with putting a lot of efforts on automating the operating model and more digital optimization.

If we look ahead, obviously, we plan to capitalize on the good trends on the mobile. You've seen that in Q2. We are posting net adds, significant net adds, positive net adds in mobile. And this is due to a revamping that we've done beginning of Q2 of our portfolios. So we think this kind of give us drive and especially on the Orange brand.

And when we look at the fixed, as in 2018, the football season will play a key role in the back-to-school. And our objective is to replicate the performance that we've had last year and to catch back on the convergent customer base because we will be having the football with Telefónica.

So what's going to be the environment in terms of promotions? We hope that it will not deteriorate. Last year was very tough in terms of promotions. Our expectation at this stage, it's going to be a little bit less tough as obviously most of the customers that have left Vodafone would not require so much aggressiveness on the market. But we need to see. But obviously, our expectation is to catch back on the convergent base, thanks to the football in H2.

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Operator [21]

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Our next question comes from the line of Mathieu Robilliard from Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [22]

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First, with regards to France, I think at the Q1 results you indicated that you're confident the trajectory would improve throughout the year. And then indeed, we've seen that in Q2. And I was wondering, in the context of the Q2 and the recent competitive development, are you still confident that you can stabilize the top line in France for the full year or thereabout?

And then I had a question with regards to Spain again. I wanted to understand what is your wholesale strategy going forward. So obviously, you've been very successful in signing a partnership with MÁSMÓVIL in the past, and I think that's been a great contributor. I was wondering, what is your stance versus potentially new players such as Euskaltel that maybe want to expand in the country and how would you position yourself? Would you be ready to act similarly than you did with MÁSMÓVIL or is that a different situation for you?

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Stéphane Richard, Orange S.A. - Chairman & CEO [23]

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Thanks for your questions. Regarding France, French market, we are comfortable with our forecast and guideline, which is a slight growth of the top line in France this year. Taking everything into account, retail, wholesale, convergence, the multi-service also developments. So this is what we can say today. We are probably more comfortable with this slight growth target of the top line in France this year than 3 months ago.

Now regarding your question in Spain and wholesale strategy in Spain, I will come back to Laurent. Just a few seconds to have Laurent back. Laurent? (foreign language)

(technical difficulty)

I think Laurent has been disconnected, so I will take the answer. So with regards to the wholesale question, we have -- as you have seen, we are already quite successful on the wholesale front. So in H1, we have been growing by almost 14%. And with regards to the question of Euskaltel, what you need to be reminded is that we have already a long partnership with them and indicates that Euskaltel will extend to the national front. It will be in the network of Orange.

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Operator [24]

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We'll take our next question from the line of Sam McHugh from Exane.

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Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [25]

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Two quick questions. Just firstly on France and kind of the idea of pushing the market up to more premium. We've seen your MVNO net adds double from a year ago. And in Q1, we saw the asset data break. Have you changed your strategy to MVNOs in the last 12 months, and what you think is driving the growing competitiveness of the MVNOs?

And then just on Spain, you mentioned the wholesale revenues there. They did slow in 2Q. Just be interested to hear a little of your thoughts around the phasing of the contribution of the Yoigo deal, and whether we think we should see the peak Yoigo revenues already kind of in your numbers now. And then how we should think about the contribution from [FTK's] wholesale revenues and whether they can continue to contribute to like high single-digit, double-digit growth in wholesale revenues in Spain.

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Stéphane Richard, Orange S.A. - Chairman & CEO [26]

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Okay. On your first question, MVNO strategy in the French market, reminding that this is very small in terms of volume related to the whole business in France. And ask Jérôme, who is the Head of the Wholesale Business.

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Jérôme Barré, Orange S.A. - Senior Executive Vice- President of Orange Wholesale & International Networks [27]

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Okay. So back to your question concerning MVNOs. As Stéphane said, a small market in France. This market is almost stable. You see there is no major trend in this movement in this market. And at the moment, we stabilized our market share. You know that we have very big agreements with some major MVNOs in France. And so, so far, we maintain -- we just maintain the level of market share we have and so the revenues we get from that market. And there is nothing more to say about it, yes.

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Stéphane Richard, Orange S.A. - Chairman & CEO [28]

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Okay. Thank you. Back to Spain, is Laurent -- are you here, Laurent?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [29]

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Yes, I'm back. Sorry for the...

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Stéphane Richard, Orange S.A. - Chairman & CEO [30]

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Yes. You can take the question.

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [31]

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Yes, the wholesale -- yes, I heard the question. On the wholesale, the decrease is really due to the international traffic, so nothing to do with the Yoigo-MÁSMÓVIL partnership. And we are not at a peak because basically as volume grows and their activity also, the contribution grows. So we are not expecting that to slow down for the future. And in fact, we are working on other dimension of partnership with them, transmission issues and all that. So basically, the wholesale revenues and the trends are quite stable, and we are not at all in a peak.

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Operator [32]

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We'll take our next question from the line of Andrew Lee with Goldman Sachs.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [33]

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You mentioned the word reflection as to what you're doing in France and that you want to maintain network superiority. And so just wondered, does that mean more tower sharing to densify the network rather than any kind of thoughts on decommissioning? Are you done in Spain or is there more to do there? And would you ever think about selling your towers or stake in the tower assets?

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Stéphane Richard, Orange S.A. - Chairman & CEO [34]

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So maybe starting with Ramon and then Fabienne.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [35]

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So on the French market, Fabienne will elaborate. I would say that probably your question is more looking at what we can do with infrastructure, I guess, on the general purpose?

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Yes, exactly. And just other reasons to think to drive higher returns on top of your...

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [37]

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We are convinced that networks are absolutely strategic. So we do not intend to sell significantly network assets. And we're convinced that what we are seeing on the market with some operators is more triggered by balance sheet or debt pressure rather than a strategy. And we are not in this position. This does not mean there is nothing which can be done in order to have, let's say, a more agile way of financing our infrastructures. And so we will be looking at potential opportunities to do so.

The line sharing agreements, for instance, in Spain and in Belgium are one part of this strategy, which is going to help us to roll out more rapidly and more efficiently mobile networks with 5G coming. And you may see some of our instances of this kind or of other kinds, which will contribute to the efficiency of our network rollout in mobile and also in fixed. So this is a general stance. And if there are some opportunistic options we can take on a more tactical basis, we would also look at what can be done.

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Operator [38]

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We'll take our next question from the line of...

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Fabienne Dulac, Orange S.A. - Deputy CEO & CEO of Orange France [39]

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Yes, I'm sorry. (inaudible) maybe to highlight one point. Currently, we share 25% of our towers in France. And this trend is increasing impacted by the new deal, especially in the rural area. Shared towers is not a problem. The question is for us all the time, maintaining the leadership on the network, on the quality of the network and be the first on the quality of the network.

And we succeeded in the past, and we will succeed in the future even if we have more shared towers because this is not only the point when you deploy or when you roll out a network. So we will be, as explained by Ramon, attentive to all opportunities. But with one point, and for me, the most important because this is where we create value, to be the first and to have the best quality on the network, on the mobile network in France.

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Operator [40]

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We'll take our next question from the line of Thomas Coudry from Bryan Garnier.

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Thomas Coudry, Bryan Garnier & Co Ltd, Research Division - Financial Analyst [41]

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Just a question on 5G. So we -- there is the consultation from ARCEP going on before the process of the allocation of the new frequencies is launched by the end of the year. In today's document, there is an objective of covering between 20% and 25% of the nonurban areas. I would like to know how you view this objective. Is it very aggressive? And in particular, together with the coverage obligation along trains and main roads, is this likely to have a risk on your ability to decrease CapEx over the years? And could this justify -- I'm coming back to the network question. Could this justify maybe, along train lines or roads, some level of 5G maturization there?

And then my other question, still on the consultation going on, on 5G is about the megahertz. There is 100 megahertz cap on the frequencies that you would be able to get in this allocation. How do you view this cap? Is it likely to limit the ability of Orange to differentiate from its competitors? And in the same idea also, would you be comfortable with having the minimum amount of frequencies reserved per bidder at 60 megahertz versus 40 megahertz?

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Stéphane Richard, Orange S.A. - Chairman & CEO [42]

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Okay. So maybe starting with Ramon to provide the general comments on the 5G next auction, and then I will ask Eric Debroeck with the Head of Regulation Office here to give you more details. Ramon?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [43]

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Yes. Thank you, Stéphane. The point, I think, is important to make before getting into details, is that in France there is from the government and the regulator a very strong willingness to have a balanced approach, which is going to get, of course, some fiscal revenues for government. But at the same time, and this is very important, the capacity for the telecom players to have sufficient space to invest and roll out the network.

And so it's clear that what we have seen, for instance, in Italy or in Germany is for the French authority something they don't want to see. They don't want to see hyperinflation in the cost of spectrum because clearly this has an impact on the capacity to roll out 5G at the same time. And this is really the balance that ourselves and the government is trying to reach. And what we have been seeing in the asset consultation paper is this balanced approach where you will have an important, more than half, in fact, of total spectrum, which will be attributed to a fixed price with some commitments to roll out, but looking at the right equilibrium or balance between financial revenues for the government but also the capacity to offer wide services to the customers. And this is, I think, the most important element in what we are seeing in this July and August consultation process where we have to give our answers by the 4th of September. I just wanted to make this point, which -- because I think it's critical for what we will be able to do.

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Stéphane Richard, Orange S.A. - Chairman & CEO [44]

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Eric?

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Eric Debroeck, Orange Polska S.A. - Member of the Supervisory Board [45]

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Okay. Perhaps already many things have been said by Ramon. On your 2 specific questions regarding the 100 megahertz cap, you have to take into account the fact that there are only 310 megahertz available for 4 operators. So, so far, we don't see this 100 spectrum cap as really, let's say, demanding or excessive as you have 4 operators.

And regarding the other question, on the number of the percentage of sites in less than 3 areas that operators would have to deploy. Certainly, we will comment on our answers on this point. You've seen that you have 2 figures between brackets, so it is [22, 25]. So there is a little place of -- margin of maneuver in -- let's say, even in the document. And you've seen also that in the document, it's not only less than 3 areas, but this is a resource question, if it's less than 3 areas or enterprise, enterprise-specific areas, there also, there is some margin in the text. Definitively, we will comment on our answer, taking into account also the fact that this -- we have to deploy with 3.5 gigahertz and 3.8 gigahertz, which is not certainly the best frequency in order to cover very low dense areas. So we will comment on it and we will see how, let's say, the process will go further.

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Operator [46]

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We'll take the next question from the line of Frederic Boulan from Bank of America.

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Frederic Emile Alfred Boulan, BofA Merrill Lynch, Research Division - Senior Analyst [47]

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Two, if I may. First of all, on Spain. So you made some comments on repricing of the back book towards the end of Q2. We've seen revenues worsening quite a fair bit, and we've seen broadband and TV adds under quite a lot of pressure, which does contrast with some of the trends reported by TEF this morning. So just wondering on the -- in terms of content strategy, whether if you think about sizing the approach? Are you happy with what you've seen so far? It seems like it's driving a little volatility for broadband and TV. And what can we expect in terms of midterm revenues considering the big drop in Q2 and the repricing action you've taken during Q2?

Second question, more on the cash flow dividend side. So H1 cash flow was pretty weak. There was a big negative working cap, CapEx payable. There is usual seasonality here, but if you could help us navigate those components for the year.

And then just a clarification on your language on the dividend. So in the press release this morning, you stated the Board would propose a dividend of EUR 0.70 for 2019. While on the call, Stéphane, you said that the final amount would depend on the future outlook, so I'm -- if you can clarify on that.

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Stéphane Richard, Orange S.A. - Chairman & CEO [48]

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Okay. So I'm staying back to Laurent.

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [49]

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Yes. So I think the question was on the content strategy and the transport for H2. On content strategy again, a little bit like -- or exactly like 2018, we had H1 where we have negative net adds on the fixed convergent market and we catch back and we finished the year with a positive contribution. So basically, our expectations for 2019 are exactly the same in term of trends. We will catch back on the conversion base thanks to the content and the activity -- commercial activity that we'll have by the end of the year.

Regarding the trends on the revenues and the EBITDA. Again, our focus is not so much on the revenue in the context of the market but really on the EBITDA. And our objective is to maintain a positive trend on the EBITDA, which means growing on EBITDA at the end of the year. So that's really the trade-off we are making, which is focusing on the high-value segments, trying to avoid to go into the pitfall of the pricing strategy and the low cost. That's why we're also using content to differentiate. So we are the only one with Telefónica which can offer a football, which is a driver for value and the sole driver for the overall telco business, and that's what we have been achieving last year. And that's what we intend to achieve this year. Even though that the content issue is a little bit more complex. As you see the -- basically, the move from Vodafone from the higher part of the segment to the lower hand of the value.

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Stéphane Richard, Orange S.A. - Chairman & CEO [50]

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Thanks, Laurent. Ramon, on the cash flow dividend side?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [51]

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Yes. On the cash flow, there is the traditional seasonality that we see in H1. There is nothing really new here. One point which is contributing to the trend, of course, is the level of CapEx which is growing in H1. But as we said, there is also a seasonality here. And so you will see an H2 and Q4 which will be leading us to the guidance we gave on CapEx. And this obviously will have an impact on the cash flow. You have a traditional sequence of dividend payment, of a tax increase payment in H1 versus H1 2018. So once again, there is nothing unexpected in the trend we are seeing in H1 on free cash flow.

In terms of the dividend, we can just reiterate what we have constantly said since the 2018 full year publication, which is that we have a new floor at EUR 0.70, which is now the floor, and we will see when the time comes what is the final outcome. But this is the floor, clearly.

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Operator [52]

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We'll take our next question from the line of Jakob Bluestone from Credit Suisse.

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Jakob Bluestone, Crédit Suisse AG, Research Division - Research Analyst [53]

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Just maybe just staying on the sort of H1 versus H2 topic. Can you maybe just remind us what some of the main drivers are that essentially could lead to a stronger EBITDA performance in the second half of the year? I mean, if I look at Slide 14, where you break out the ePresse contributions by quarter in 2018, they were fairly significant still in Q3 and Q4. So it doesn't look like that's sort of a huge change in the comps. So if you can maybe just sort of remind us what are the things to kind of bear in mind in terms of whether EBITDA growth can accelerate in the second half of the year or not.

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Stéphane Richard, Orange S.A. - Chairman & CEO [54]

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Ramon?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [55]

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Well, we said this morning that what we saw in terms of EBITDA growth in Q2 at 0.9%, which puts us at 0.8% on the first half, is consistent with what you could expect for the full year. So I'm not quite sure you need to see a significant acceleration to be where we need to be because we are today in an area which is consistent with expectations.

Now there will be, of course, a number of elements contributing to these evolutions. One is the one you just spotted, which is that we will be in H2 without the VAT impact we had on the ePresse element which contributed significantly to previous evolutions.

So all in all, I think one, you see that with what -- the growth rate of EBITDA you see in Q2, you are in the area that is in line with expectations; and second, one of the element would be the VAT aspect. And then there are thousands of other elements which will contribute to our full year performance.

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Stéphane Richard, Orange S.A. - Chairman & CEO [56]

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All right. So maybe before closing the call, since I think we have no more questions, I would like to stress 3 messages.

The first is to highlight the overall performance of Africa and the Middle East in the first half of 2019, both in terms of top line and in terms of EBITDA generation. And this is just to remind everyone that Africa and the Middle East is really one of the growth engines of Orange, and we are very confident in our capacity to keep up this level of performance in the next quarters.

My second message is about France and the French market. Just to tell you that we are clearly more confident in the trends of the French market, more confident than 3 months ago for a number of reasons. But we see that the market dynamics in France are getting better, are getting better. And this makes us also more confident in our capacity to fulfill our 2019 targets.

And my last message is just to remind you that we will have an Investor Day beginning of December, 5th of December. It will be a great opportunity for us to share with you our vision by 2025, but also, of course, to get back on 2019 and to give you fresh views and prospects on 2020.

So thank you very much, and we, all of us, wish you a very good day. Happy early days, yes. Thank you.

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Operator [57]

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That concludes today's conference. Thank you all for your participation. You may now disconnect.