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

Q1 2019 Orange SA Earnings Call

Paris Cedex 15 May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Orange SA earnings conference call or presentation Tuesday, April 30, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fabienne Dulac

Orange S.A. - Deputy CEO of Orange France

* Helmut Reisinger

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

* Laurent Paillassot

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

* Ramon Fernandez

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

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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

* Jeremy A. Dellis

Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst

* Mathieu Robilliard

Barclays Bank PLC, Research Division - Research Analyst

* Nick Delfas

Redburn (Europe) Limited, 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

Raymond James Euro Equities - Former European Telecoms 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 Orange's First Quarter 2019 Results Conference Call. Today's conference is being recorded. The call will be hosted by Mr. Ramon Fernandez, Deputy CEO, Finance, Performance and Europe, with members of Orange's executive committee for the Q&A session that will start after the presentation. Thank you. And let me hand over to Mr. Ramon Fernandez. Please go ahead.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [2]

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Good morning, and welcome to the presentation of our Q1 2019 results. Before we get to the performance review, I would like to remind everyone that starting from this quarter, we are reporting under IFRS 16. Applying this new framework for the first time this quarter, we adapted our indicators. We will now use EBITDAaL instead of adjusted EBITDA, eCAPEX instead of CapEx. As a result, operating cash flow is now EBITDAaL minus economic eCapEx, and we are moving from net debt to telecom adjusted EBITDA to net debt excluding all IFRS 16 leases to telecom EBITDAaL as explained in February.

So let's now move to the Q1 presentation, where, as you can see, in a still very promotional environment in our 2 main geographies. Q1 results turned out flattish at minus 0.1%, with EBITDAaL growing plus 0.7%. Excluding the impact from the end of the promotional period for the ePresse AudioBook offers in France, group revenues grew by 0.4% with most segments posting positive revenue growth, compensating a slight revenue erosion in France. Group EBITDAaL grew by 0.7%, of which 1.2% for the telecom activities. Excluding the impact from the ePresse AudioBook offers, group EBITDAaL grew by 2.8% and group telecom EBITDAaL grew by 3.3%. eCAPEX, economic CapEx, amounted to EUR 1.6 billion, up 8.4% as we stepped up this quarter the pace of our FTTH investments in France. In 2019, eCapEx will drop to levels consistent with our full year guidance of a slight reduction compared to the 2018 level of EUR 7.2 billion. This level excludes the impact of the network sharing deal announced last week in Spain with Vodafone, a topic to which I will return later on.

Before which, the next slide, Slide #5 illustrates the impact of our investments. We have a strong focus on networks in order to keep our competitive advantage in connectivity. Growth was mainly driven by the acceleration of fiber deployment in France, with plus 2.8 million new connectable homes year-on-year. Overall, we reached a total of 33.7 million very high broadband connectable homes, of which 14.1 million in Spain, up 15%; 12.4 million in France, up 29%; 3.5 million in Poland, plus 32%. The group also strengthened its leadership position in mobile, particularly in 4G, where we reinforced our capacity in dense areas and increased our coverage in less dense areas.

Overall, Orange now covers close to 100% of the population in Belgium and Poland, in France 99% and in Spain 96.9%. Now let's have a look at our commercial performance. Our ongoing investments in mobile, very high-speed broadband networks and content enabled us to support our leadership position in Europe in 4G and in FTTH. We now serve 59 million 4G customers and 6.7 million very high broadband customers, an increased by 31% thanks to France, which posted the highest ever first quarter for fiber net adds, and thanks also to Spain. As part of our multiservice strategy, that combined with convergence aims to strengthen our presence in the household and offer our customers an unmatched experience. We have just launched in France 2 new services: Connected Home, that through the Livebox enables connected objects to be installed and monitored very simply; and Protected Home, an easy to use home security monitoring system with significant growth prospects. Both services are manageable remotely through an application that enables a number of scenarios and brings simplicity, flexibility and comfort. Turning to mobile financial services. In France, Orange Bank reached 287,000 customers and enhanced its offer with the launch of a premium card. In line with the road map we communicated in December for other European countries, we launched in Romania with Orange Money the first stage of our banking offer that already includes a digital mobile wallet and a debit card, classic or platinum, with many interesting benefits included. This offer will be enhanced in the coming months. As a result, Orange remains the #1 convergent operator in Europe, with 10.5 million convergent B2C customers, growing at plus 5%, and convergent revenue growing by nearly 5% now representing close to 40% of the total European retail revenue. This demonstrates once again the relevance of our convergence strategy as a key driver of revenue growth, supporting our value approach in a very promotional environment. As you know, convergence remains a strong acquisition and retention tool with lower churn, higher ARPO and increased volume as illustrated in our Slide 18, showing convergence metrics.

Let's now turn to the business review, starting with France on Slide 9. In Q1 -- it's maybe even Slide 8. In Q1, total revenues decreased by minus 1.8%, impacted mainly by the end of the promotional offer for ePresse AudioBook and the decline of equipment sales. If we exclude the ePresse AudioBook impact, total revenues in France were at minus 0.7%. If we exclude those 2 impacts, ePresse and equipment, total revenues were almost stable. In order to better assess the underlying performance, let's analyze our retail activities, excluding the ePresse AudioBook effect. Retail services excluding PSTN, probably the best proxy of our performance relative to our competitors, increased by 1.6%, in line with Q4 2018. Convergent services revenue grew by 5.6%. Thanks to the growth of the broadband B2C convergent customer base at plus 3.2%, convergent ARPO grew by EUR 1.30 (sic) [EUR 1.31] at EUR 66.80, driven by the increase in the number of lines per convergent offer and the price increase of last autumn. Mobile Only ARPO grew by EUR 0.14 over one year to EUR 16.90 in Q1, driven here also by the price increase and a better mix.

To conclude on retail services, B2B only ARPO fell by EUR 0.32 year-on-year to EUR 36.30 due to the higher Sosh mix.

Equipment sales decreased by 6.4% in Q1, this is minus EUR 20 million, mainly due to a weak performance of high-end handsets; and wholesale revenues grew by 0.9%, driven by fiber line rental, maintenance and construction revenues in the PIN areas, which offsets the decline in unbundling and national roaming.

Turning to the commercial performance. This was another quarter with intense levels of promotional activities in both fixed and mobile, with our 3 competitors offering plans with lifetime discounted prices. Despite that, we posted a good commercial performance in broadband and a strong resilience in mobile. Convergence remained a strong retention and acquisition tool, supporting our performance both in fixed and mobile. 80% of new convergent customers were new, fixed and/or mobile customers. On fixed, we recorded 49,000 broadband net adds, out of which 43% -- 43,000 convergent, which means open net adds, helping to improve the broadband high-end customer mix. This solid performance in the broadband is also supported by a record quarter in Q1 on fiber with 168,000 net adds, boosted by convergent offers that contributed nearly half of fiber net adds this quarter, leading to 2.8 million fiber customers and also by the success of the Sosh 2P offer. On mobile, despite intense promotions on the low end of the market, we registered plus 19,000 net adds with the high-end mix improving by 1.3 points year-on-year. We managed to improve the churn of our mobile contracts by 0.7 points year-on-year and 1.5 points quarter-over-quarter. Last point, in line with our strategy of being present in all market segments and to offer our customers more flexibility, you know we launched the Sosh 2P box in Q3 2018, strengthening our presence in the low end of the market with a nonconvergent offer. At the same time, for the sake of simplicity, we stopped commercializing the Sosh 4P offer, where we were adding mobile and Livebox. Such an offer was until last year counted in the convergent base. Now the mobile plus Livebox client base is split between Mobile Only and Broadband Only, and we will report from now on convergence only through open contracts, now representing 55% of the broadband B2C base, with 5.7 million customers growing in Q1. If we add the kind of legacy Sosh 4P base, the convergence rate would be 59.4%.

Turning to Spain. Total revenue continues to grow at plus 0.4% this quarter, supported by resilient retail service revenue growing at plus 0.7%, thanks to a strong performance in fixed very high broadband. Convergence remains a key growth driver at plus 1.2%. And in Spain, the decrease of equipment sales at minus 17% is compensated by growth in international traffic that contributed to a plus 17.7% wholesale revenues increase. In terms of commercial performance, Q1 posted a negative 22,000 fixed broadband net adds with an increase of churn versus Q4 2018 due to the end of a promotional period despite the continuous success of our fiber offers, with plus 114,000 net adds this quarter. On mobile, we recorded negative net adds at minus 59,000. In the context of strong promotions in the Spanish market, we remain focused on value growth as demonstrated with the acceleration of convergent ARPO growth at plus 1.8%, thanks to the enhancement of our customer mix driven by new offers in the Orange and Jazztel brands. As you know, we have 5 brands in Spain. Next slide is about the recent agreement we have signed with Vodafone last week in Spain. As announced last Thursday, Orange and Vodafone have decided to strengthen their existing network sharing partnership to enhance the network coverage and capacity to be ready for 5G and to improve network efficiency, generating significant OpEx and CapEx savings. It is an active multi-technology network sharing at national level except in 23 main cities and metropolitan areas. Each partner will manage 50% of about 15,000 shared sites. Consequently, 2/3 of our Spanish network will be actively shared compared to a current level of 1/3. This will enable Orange to significantly improve the existing mobile coverage and capacity and will generate at the same time important savings. It will, as I said, also enable both Orange and Vodafone to deploy 5G faster and at a lower cost. And it's a clear example where network sharing helps to deliver better services to the benefit of our customers and to all stakeholders. The project will generate cumulative growth savings to Orange of around EUR 800 million over the next 10 years, with an investment of around EUR 300 million over the first 4 years and less than EUR 100 million in 2019.

All in all, we expect an incremental IRR of the project higher than 3x of our Spain cost of capital. Let's now turn to our Europe segment, where total revenues grew by 1.4%, supported by ongoing positive momentum in retail services, up 3.6%. The 8% drop in wholesale services is mainly due to the well anticipated end of the Lyca and Telenet MVNO contracts at Orange Belgium. This momentum in retail services reflects first, our ongoing focus on convergence with revenues from convergence which are currently 16% of total retail services, so convergence is maintaining a strong 43% growth rate this quarter; and second, we have an acceleration in IT and integration services, growing about 30% year-on-year compared to 22% over the full year 2018. Our focus on convergence was also visible in our commercial performance, with positive mobile contract net adds at plus 26,000 this quarter and strong fixed broadband net adds at plus 56,000, a growth in the customer base above 9%, both outcomes supported by a steady improvement in the share of convergent contracts.

From a country perspective, we are reporting a third consecutive quarter of revenue growth in Poland, accelerating to 2.6% this quarter. And in Belgium, we have plus 3.8% growth this quarter in revenues, despite the end of the MVNO contracts I just mentioned. This performance is driven by a strong plus 13.5% growth in retail services, with both better mobile contracts and convergent net adds resulting from attractive unlimited mobile and convergent offers.

In Africa and the Middle East, we have a very solid revenue growth, increasing by plus 5.3% in Q1, driven by a very solid growth of retail services, around 8% this quarter again. Retail growth was fueled by robust drivers that are with 17.6 million 4G customers. This is an increase of 50% year-on-year, representing more than 2/3 of the mobile-only revenue growth. And Orange Money with a base of active customers of 15.5 million, this is an increase of 20% year-on-year, and revenue increasing by 29%. This positive result was also supported by the stabilization of outgoing voice, thanks to abundance offers. The mobile client base, stable at 120 million due to a value-oriented approach in the context of know-your-customer strengthening also fueled the top line growth. The customer base quality improved, reflected by an increase of 5 points in the charged base rate and also a reduction of 2 points in churn.

From a geographic perspective, the 4 2016 acquisitions contributed for more than 1/4 of the top line growth, and the top contributors to total revenue continued to deliver solid growth. Sonatel Group grew by 8%, including Senegal with the strong retail; Egypt at 6.5% growth, sustained by data development; and Morocco with close to 3% growth.

Turning to the Enterprise segment, Q1 is the second consecutive quarter of growth, with revenues increasing by 0.6%. In line with our transformation strategy, this growth is driven mostly by IT and integration services, growing by 4.6% with a very strong momentum of cybersecurity growing by 30%. Fixed Only services are still negative, with a minus 1.1% of revenue growth. This represents, however, a trend improvement due to data growing at plus 1.5%, mainly driven by SD-WAN development. As an illustration in Q1, we signed 2 major contracts to roll out SD-WAN internationally in more than 20 countries, and Gartner nominated us as a leader for global network services in their Magic Quadrant. This comes in particularly for having delivered successfully flexible SD-WAN customer references.

Those positive effects are mitigated by the mobile decline of 2.3% year-on-year. And lastly, pursuing our transformation towards IT and integration services, you know we acquired in February the biggest independent managed cybersecurity service provider in the U.K., SecureData. This acquisition constitutes another step to strengthen our expertise and our global capacity to deliver cybersecurity services.

I'm now going to Slide 16 and our guidance for 2019. But before this, I would like to share with you the thinking behind the update I'm about to present, looking at the Vodafone deal in Spain. When we assessed the network sharing deal with Vodafone, which is clearly value creative but has a short-term impact on our economic CapEx, we faced the following choice: option 1 was to consider our CapEx guidance as a stepping stone, whatever the opportunities for more value creation. And consequently we had either A, to cancel some other programmed value-creating projects to make room for the Vodafone deal; or B, to turn down the Vodafone deal. This was option 1. Option 2 was to take on the Vodafone deal above and beyond our other projects, meaning on top of our eCapEx guidance for 2019. We decided for option 2, trusting that the market will understand and support our choice.

With this in mind, let me now recap our guidance for 2019, which now excludes all impacts from this network sharing deal with Vodafone. Firstly, we expect EBITDAaL to slightly grow in 2019. Second, economic CapEx will start to slightly decrease in 2019. Third, operating cash flow, which is EBITDAaL less eCapEx, is set to continue to grow in 2019. Fourth, the ratio of net debt, excluding IFRS 16 lease liabilities to telecom EBITDAaL, will stay around 2. And finally, regarding the dividend for fiscal year 2019, we confirm our previous guidance of at least EUR 0.70 per share with the final amount based on 2019 actual results and future outlook.

This concludes my presentation. And with my colleagues, we are 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) Our first question today comes from Nicolas Cote-Colisson from HSBC.

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Nicolas Cote-Colisson, HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology [2]

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I had 2 questions, please. First, in France you speak about intense competition but at the same time, you also indicate a lower churn in mobile. At the group level, I cannot foresee lower commercial costs as a percentage of sales compared to last year. So can you tell us a bit more what you're observing in terms of pricing environment, both in Q1, but also in April, and how do you position yourself in France? And my second question is following up on your comments on the guidance on the Vodafone deal. Can you tell us what is -- what could be the impact in terms of OpEx on the full EBITDAaL in 2019 from the implementation of the deal?

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

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Maybe we'll start with the question on the price environment in France with Fabienne Dulac.

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [4]

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Thank you, Ramon. Good morning, everyone. So I start it by the Q1, Q2 is little bit early, but Q1. The mobile market has been, again, really very turbulent during this first quarter, with 2 dynamic, as we expected. We have an intense promotional activity and supported by the offers with discount for life. We discovered this kind of promotion last year and Q1-- in Q1, this kind of discount has been extended. It's sadly, what we expected. So we expect the same kind of intensity of promotional activity in the year. We don't observe a significant decline in promotional activity. Yet we can observe that the disparation (sic) [disappearance] of the 5-year was -- the plan 5-year was for life, for 10-year was for life, but in the same time, we can observe a period longer of promotion. So we expect a very aggressive year discounted all the time. In the same time, we can observe, and it's a good news, some attempt from our competitors to -- and with recent price increase in the back book and included book option. This is a good sign, it's a sign that the current promotional intensity added cost and we must -- that must be compensated by pricing power. So you have 2 dynamic. We -- it's exactly what we expected for the year and we are prepared for that, and we will resist in this context.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [5]

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Thank you very much, Fabienne. On the question on what deal and the impact on EBITDAaL, I think Laurent Paillassot is on the call, so he will follow up. But I will just repeat that the impact, initial and for the first period, is more on -- much more on CapEx, as I explained and the impact on EBITDAaL is negligible. But maybe if Laurent is with us, it's good listening also to him to explain the rationale of the deal, which I'm very much convinced is a great deal for Spain and for the group. Laurent?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [6]

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Yes. Basically, on the question on the impact on 2019, this is -- really the implementation will start basically end of Q3. So the impact is none in term of the OpEx reduction in 2019. As you understand, this is a decommissioning program. The program is around 3 years long, but the overall impact on the existing technologies, which is from 2G to 4G is above 20% of the total side costs. But we will take -- this will kick in progressively as we roll out the program over the next 3 years. That's basically the impact on the existing OpEx and obviously then, you had to add on all the impact on the future deployment of 5G, which obviously will ramp up with the deployment of 5G.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [7]

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Thank you. Thank you, Laurent. Maybe Fabienne wanted to come back to the churn point.

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [8]

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Yes, I forget to answer your question about the churn because it's a good point. The churn on the mobile despite the intensity of the promotional activity is very low. We lowered our churn on a year-on-year basis, and even we succeed to manage to reduce it sequentially. This is due to 3 points, the benefit of the convergence, the proactive retention policy, the quality on the network. And the last point, we have revamped our offering in October, we gave more for more, more gigabits for more euros, but this is the value from one of our services that will be reward by customers. So it's very important for us to maintain this low churn rate on the mobile and this is a really good performance.

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Operator [9]

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Our next question comes from Mathieu Robilliard from Barclays.

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Mathieu Robilliard, Barclays Bank PLC, Research Division - Research Analyst [10]

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With regards to the deal you announced in Spain, which clearly seems value accretive, are you considering similar deals in other countries in Europe, and I'm thinking about France, where potentially that could be also a source of savings? And second, if I could question the competitive environment in Spain. I think you highlighted also that there's a bit more competition, but maybe if you could give more color on what are the trends there.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [11]

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We will go to Madrid with Laurent on the second question. On the first question, as a general answer, I would say that if we have other possibilities to generate efficiencies, savings when we deploy our networks in any of our geographies, we will consider taking these options. The key for us is how we make the difference when we compete with our competitors. And situations in different countries are very different, depending on your market position. Maybe Fabienne will comment further for France, but in countries where we are challengers or where we are not leading the market, if we have other possibilities such as the one we took in Spain, of course we would be ready to take these options. So this is what I can answer at this stage, and maybe we will go to Madrid to look at the competitive Spanish environment.

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [12]

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Yes. Thank you. Well, if you look at Q1, basically it's been an environment of quite high promotions from most of the players. We are also seeing a proliferation of offers in the lock up segments with new brands coming in like O2, Vodafone Beat, but also the [yamaya] and the DIGI playing on these low-cost segments. And we also have a trend of high abundance offers that are kicking in. So basically very strong and competitive market on the Spanish environment. We are, on our side, maintaining our focus on value creation. We are not fighting for volume. Again, it is easy to do volume in Spain if you lower the prices. We are trying to good keep -- maintain a good balance in term of growing value as well as maintaining the portfolio of customers. And our trends, as we speak, is of overperforming the other competitors on the market.

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

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Maybe just to come back in France and to remind you, we are leader in France and the premium network is a very significant asset as we can say just before on the low churn and on the activity. But I just want to explain maybe, currently 25% of the mobile sites are sharing with the other competitors. And in accordance with the new deal agreement, we will have more in the future. So the situation is really different than Spain.

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Operator [14]

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We now move on to a question from Stephane Beyazian from Raymond James.

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Stephane Beyazian, Raymond James Euro Equities - Former European Telecoms Analyst [15]

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Two question, if I can. The first one is, I think that Eastern Europe is declining a little bit. So could you say just a few words on the weaker trends that we see from these countries? And I'm excluding Poland in the question. And regarding handset subsidies, I think there was a new court decision. I was just wondering whether you expect any significant change in the market. And related to that, how important is today your channel distribution in terms of shops -- in terms, sorry, of the mix of customer additions every quarter? How important is that, your number of shops in the distribution?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [16]

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So Fabienne will take the second question. On the Eastern Europe and if your question is more focused, as you said, on Poland, no, it's not. I think you got the wrong picture. If you look at Poland, we had a 2.6% growth in revenues this quarter, and this is to be compared to 2.1% growth in Q4. So in Poland, convergence is really the key. As you know, we are heavily investing also in a fiber network in Poland. Convergence has been growing by 27% this quarter. And drivers for performance in Poland, but they are communicating today their full quarter, so you will have plenty of information on Poland from [Maciej]. But key drivers were non-connectivity revenues and equipment sales also in Poland. So Poland is doing quite okay. Fabienne, second question?

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [17]

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Yes, on second question so, -- sorry?

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Stephane Beyazian, Raymond James Euro Equities - Former European Telecoms Analyst [18]

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My mistake if I wasn't clear. I was excluding Poland, it was on Romania, Slovak, and Moldova. Sorry for not being clear.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [19]

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Okay. So, okay, well, if you look at the other countries, there is a slight slowdown in growth but it remains, as you can see in the global figures, a positive evolution in most countries. So we can have at some point, a deep dive on each and every of these countries. In Romania, you have some impact on wholesale due to on MTR impact. You also have less national roaming in Slovakia. So in different countries, you have some different impact. Equipment sales also were going down. I think it's at minus EUR 4 million in Romania, following a very strong growth in 2018. So different element in different countries. But overall, I would say that in the region, the dynamic remains positive. Sorry for the first answer, which was not exactly focusing on the countries you were interested in. Maybe now we can go back to our handset subsidies.

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [20]

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Yes. Your question is relying on, I think, the recent judgment concern as a dispute between Iliad and SFR. This dispute regarding specific whole offers in SFR, and Orange is not concerned by this dispute and there is no impact. The subsidized handset, also the capacity for customers to acquire high-end handsets, so they acclaimed this kind of solution. So there is no impact for us and we don't want to change. There is a move in the market from a long time because now, 75% of the -- you have 75% of sim-only on the market, so the move is behind us and we are stable today. So there is no impact for Orange and it's still a significant strategy for us, especially with the high-end handset we can see on the market, and there is no change in term of distribution for the future.

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Operator [21]

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We now move on to Andrew Lee from Goldman Sachs for our next question.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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The first question both on France, the first question was on the -- what you can do to improve -- to help improve the market environment. So the most successful reinflationary trends we've seen in Europe have been driven by incumbents. You made small price increases to small segments of your customers in 2018 but have not followed SFR or WIG's modest price rises in 2019. So what should we expect from Orange in 2019 in leading the rationality rather than being a price taker? And then secondly, you felt the impact of the competitive pressure in France later than the other players, so wondering if you can help explain why is this? Is it a particular player that has been hurting you and should we therefore expect a more delayed impact from any benefit of recent improvements in market dynamics?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [23]

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Fabienne will answer, but I'm going to give a first answer, which is, in French we say l'hopital se moque de charite. I'm not exactly sure how you can translate this, but the hospital making fun of charity, which means what? Which means when you look at who is driving the price environment in France when in fact, we were in autumn 2018, having with some price increases, including on the bank book on some contracts and more generally for the new contract. We were the first movers, in fact, to increase prices with EUR 2, and this is what I was mentioning in my presentation. When you mention some price increases in 2019 of our competitors, the reality is that these 3 competitors have been at the same time making these EUR 2, EUR 3 price increases but at the same time massively, systematically going into lifetime promotion plans. Systematically, the 3 of them. So when you look at who has been resisting to this deflationary environment, this is Orange. We have absolutely refused to go in this direction constantly and all the signals we have given to the market is that we were not going to go in this pure volume approach, which is value-destructive. This is absolutely crystal clear and everybody knows this. So the reality is that -- but your -- the message you are sending is a message for the 3 of us, and we are doing this every day, every day. So I just wanted to say this and Fabienne will go into more details, but to me it's a bit of a joke to think that some of the players are increasing prices and that we would not be following. The reality is that in lifetime promotions, which exist close to nowhere except France, is a game of SFR, WIG and also Iliad. And this is destroying value for the whole French market in reality. We don't want to do this. We are not going in this direction. Fabienne?

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [24]

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Yes, just to complete and to be concrete, we maintain our strategy to be very cautious with Sosh and with the level of promotion. We have a limited recourse to promotion still, even if we have in front of us a high level of promotion with EUR 5 plan for life or EUR 10 plan for life. We refuse to follow the competition with these kind of offers. So this is the first point. The second point, we have revamped our offers last October by introducing more flexibility and in the same time, we raised our price in upping them by EUR 2 and in mobile then. So we try to be peaceful in this market and we try to raise price to be -- to defend value and push more value in this market. And when we have revamped our offer, we have no impact on the churn and we are very satisfied with this result because we improved the mix and the growth hub. So customers are ready to pay for quality and more for more. We are convinced by this point, we need to convince the others.

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Andrew J. Lee, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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Yes, that's very clear. So do you think the competitive environment is -- will be such that you can repeat your October 2018 assets at some point in 2019?

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [26]

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I forgot to -- let me -- it's too early to answer your question, but we look at this point. Yes, if we have an opportunity to raise price, we will do with always the same strategy, give more for more, more price but more services. So yes, we work in this way all the time. Maybe for the second question, France benefit from market environment and there's -- or wait, yes, I think in France, maybe for the incumbent as Orange, we anticipate the risk of a high level of competition a few years ago, with 2 significant decision to be the first on the fiber and we have -- and we benefit of the first mover advantage on the fiber. And we decide to have a strategy very strong around convergence, and the convergence is still the key success for Orange to have the best low churn rate, to have a level of acquisition. 80% of the net add on the open are new customers on mobile or on broadband. And at the end, it's an opportunity for us to excel in the same time, because in household we can propose more services and more revenue. So I think this is maybe the particular situation we have in France. Ramon, if you want to complete.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [27]

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No, I think it's very clear. And once again, we will stick to our strategy, the strategy delivering results. We are enriching the services for our customers. We have these new offers with Protected Home, Connected Home, which are also improving the quality of what our customers get when they go to Orange, and we are going to continue and stick to this value-oriented strategy based on the quality of our services. It has been working, it will continue to work and you can see it in the share of the premium parts of our market share, which is extremely solid and increasing quarter after quarter.

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Operator [28]

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We now move on to Thomas Coudry from Bryan Garnier for our next question.

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Thomas Coudry, Bryan Garnier & Co Ltd, Research Division - Financial Analyst [29]

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Actually a follow-up on the previous discussion about premium strategy with a focus on fixed. It seems like the ARPO is down in fixed even excluding ePresse effect, driven by the success of your 2P Sosh offers. How is this compatible with the premium strategy that you are putting forward? Because it seems that you're resisting on the fixed side, thanks to this low cost offer. And more broadly, what room do you see in the fixed market to create value? Is there other plans to follow the delta type of offer that was launched by Iliad to try and grow more a premium bundled market across multiple services?

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [30]

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Yes, I can start and Ramon will follow. You're right, the broadband on the ARPO is impacted this year by both the negative impact of AudioBook offer and the Sosh mix. We decreased by 2.9% year-on-year and excluding e-book, it decreased only by 0.9% year-on-year. This is mainly due to a mix effect, you're right, between Sosh and Orange. Because more and more customers, Orange customers are subscribing to convergent offer, that explains why convergence is growing, growing in ARPO, growing in revenue, growing in customer base. So this is a successful strategy, okay? And that impact the broadband only where the Sosh [ways] is increasing in the Broadband Only customer base. It's important to understand we -- the market is moving and you have new customers they want only 2P. So it was necessary for Orange to launch the box Sosh. It's a success and we need this box to acquire new kind of customers. And 60% of the net add on box Sosh are new customers. So this is opportunity for Orange to target new kind of customers we didn't have in the future and we don't have with the Orange brand. So it's not incompatible, it's compatible to have 2 strategies, 1 with different value and this is the majority of the reserves we have. And to have a tactical answer with Sosh on the mobile and on the box to address, focus the [net million] new customers. We don't have them in the customer base in Orange. And if I can highlight another point, if -- you're right, the broadband ARPO is decreasing, but despite this, Orange recorded the best broadband ARPO in the French market. We booked more than 80% of our [whole hard] above EUR 20. And the same time, we succeed to improve the broadband [ihand] customer mix by 1.4%. So it's compatible if we are tactic and we have a tactical strategy between Sosh and Orange as we use it in the mobile.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [31]

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If I may just complement on what Fabienne said. First, we have, by far, the highest ARPO on the French market on broadband. So we are clearly ahead and we have the best ARPO in the market. Second, as Fabienne said, we are extremely strong on the premium part of the market. We are increasing our market share on the premium part of the market on broadband and this market is growing. We are increasing the number of customers on the premium with open contracts. Third, we have launched this 2P Sosh offer in order to address a segment of the market which is not necessarily demanding to have TV, and this is successful. It is getting 60% of new customers to Orange. The 2P Sosh customers are 60% new customers who are -- so we are attracting new customers as well as with fiber. With fiber, as you know, we also get new customers to Orange, so we are addressing a specific dedicated part of the market. And lastly, you know the Sosh penetration, the total broadband part of the market is only at 7%. It has been slightly growing but it is only 7%. So the mix is extremely solid and we are very strong on this part of the market.

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [32]

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Just maybe to answer your last question. I don't think Iliad is more aggressive on the broadband market. [He] try all the time to preserve value to given difficult situation in this moment, but it's not the player who is more aggressive on the broadband market currently.

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Thomas Coudry, Bryan Garnier & Co Ltd, Research Division - Financial Analyst [33]

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My question was more about, was the initiative of Iliad on the premium and on the premium market. Could this initiative be replicated to try and grow the premium market with the high-end offers with premium -- with bundles such as the data?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [34]

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Well, that's where we are on the premium part of the market as we, I think, tried to explain. That's us, in fact.

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Operator [35]

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We now move on to Nick Delfas from Redburn for our next question.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [36]

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Just two ones, please. First of all, on enterprise, I don't know if you can give us the underlying growth, excluding the acquisition. So obviously you've given it and if you could give us the underlying growth excluding the acquisitions. So obviously you give it on a comparable basis, including the acquisitions but do you know what the growth is without base [farm and business] in the decision? And secondly, just to clarify on the Spanish joint venture, what exactly are these costs in the early stages, because obviously you will be sharing things 50-50, so I'm a bit surprised that the integration costs are as much as EUR 300 million. So could you clarify it a bit more, what that spending actually is and whether that's going to result in an immediate improvement in service or it's just the cost of getting to the benefits later on?

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

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Okay, so we'll go back to Madrid and explain once again, the composition of this CapEx delta for the first 4 years. But Helmut Reisinger, CEO of OBS is going to take the first question.

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Helmut Reisinger, Orange S.A. - Senior Executive Vice- President of Orange Business Services [38]

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Yes. Thank you, Nick, for your question. Our reporting policies are seeing that we always net out -- in the first year of the acquisition, we net out the external growth. So that's why the acquisitions are not counted in the numbers that you're seeing, and therefore this is all organic growth what we are showing here for the Q1 2019. And we are quite happy with the growth that you see also in IT integration services, 4% to 6%. I would like to remind you maybe with 1 number as well, you see the total number of 0.6% growth. This underlying is as well that this includes an ERS equipment resell that is going down by 3.2%, whilst services are up around about 1%. If you compare this, if you look to the lower part of the enterprise section chart there, you see last year the comparable quarter was at minus -- totaled minus 1.3%, while ERS was actually growing plus 2% and services was down. So we continue, like was said also in the consumer segment, our both transformational as well as our value strategy. I hope this can answer your question.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [39]

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Sorry, just to be clear, the comparable basis that you show 1 8 2 1, last year it was 1 7 2 6 that you reported, so I thought that actually the comparable basis includes the acquisitions.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [40]

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Yes, but at 0 value, yes.

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Helmut Reisinger, Orange S.A. - Senior Executive Vice- President of Orange Business Services [41]

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The growth is netted out. The growth is only at 0 for the external acquisitions. Sorry if I was not clear.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [42]

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Oh, I see. So you're saying they didn't contribute to growth?

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Helmut Reisinger, Orange S.A. - Senior Executive Vice- President of Orange Business Services [43]

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The external acquisitions here in this case are netted out in terms of growth. Is that clear?

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [44]

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Not really. The plus 0.6%, that includes the benefit of the growth of what you acquired?

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Helmut Reisinger, Orange S.A. - Senior Executive Vice- President of Orange Business Services [45]

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I'll try to say it in other words. New acquisitions are consolidated but they are assigned 0 growth by our convention, yes? So the prior year's at the same level as last year -- as the current year, sorry.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [46]

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Laurent?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [47]

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Yes. So the -- come back to the investment, the 300 million. Obviously, we are modernizing the network at the same time. In order to get Vodafone on our towers, we need to modernize the equipment, which is putting more capacity. We're also taking this opportunity to modernize the fiber-to-the-node, the FTTN network. It's in -- its anticipation on the 5G deployment. We also have to decommission roughly to 2,000 sites, again which are the ones generating most of the OpEx sitting on the existing technology. And keep in mind that overall in OpEx plus CapEx, we are devoting roughly EUR 800 million over the 10-year period, which if you just look at the CapEx avoidance for the 5G radio access network, we are talking about fully [to send] avoidance in the footprint that we are sharing.

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Nick Delfas, Redburn (Europe) Limited, Research Division - Research Analyst [48]

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Just to clarify, how much of the EUR 300 million is site decommissioning as opposed to capacity improvements and new investments for improved service?

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

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Well, no, we're not going to be communicating on that figures.

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Operator [50]

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Frederic Boulan from Bank of America has our next question.

It appears that he has stepped away from the telephone. We move on to our next question from Sam McHugh from Exane.

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Samuel McHugh, Exane BNP Paribas, Research Division - Analyst of Telecom Operators [51]

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Just 2 quick questions, please. And sorry to follow up on the Spanish network sharing. More simply, when do you expect EBITDAaL minus CapEx to be positive? Is it kind of year 1, 2, 3 or 4? And then including this CapEx at a group level, is 2019 now the new peak CapEx year? And then secondly, just on the premium end in France, do you think there's an opportunity to a better network position with an acquisition in the 3.5 gigahertz spectrum later this year or early next year? And conceptually, do you think it's important to own 80 to 100 megahertz of this spectrum?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [52]

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On Spain, Laurent?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [53]

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Yes, 2023, where the payback is very short. It's 4 years but yes, 4 years. 2023, basically.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [54]

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And once again, don't forget this very nice return on investment we get with this deal. Once again, more than 3x the cost of capital. Very comparable, by the way, to the rate of return we get on the fiber investment in Spain. So really value-creative deal here we have. On maybe on France, but Fabienne can complement, but we will have a 5G auction coming at the end of the year, and we are not going now to go into more details given that the rules of the game are not yet known. The regulator, ARCEP, is still waiting to get some guidance from the government. Mr. Soriano was commenting on this yesterday. So we will have the time to come back to this.

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Operator [55]

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(Operator Instructions) We now move on to Jerry Dellis from Jefferies for our next question.

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst [56]

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First question is on Spain. I was just interested to understand the accelerating growth rate in the convergent ARPO number that you report. It's not very clear to me where that's coming from. If I understand it, you didn't put through a back book price increase on the Orange brand in Q1 this year, which you did do this -- did do in the previous year. But you did sort of rebalance some front book prices, mainly on lower ARPO tariffs, introducing a low end Love Lite product and also rebalancing some of the Jazztel front book tariffs. So none of that would seem to be something that would cause the ARPO growth in Spain to accelerate. So I'd be interested, please, if you could clarify what's going on there. And then a question on CapEx. My understanding is that one of the reasons why CapEx came in sort of [ahead faced higher] in Q1 was because of the fiber deployment in France, but fiber deployment in France running at about 600,000 new premises connected looks rather similar, actually, to Q1 last year. So again, please if you could clarify, that would be very helpful.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [57]

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Laurent, on the convergent ARPO growth?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [58]

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Yes, well, basically we are working -- the [strude up] is not done so much of [it's a grade] that we've done in the previous years. It doesn't mean we don't have opportunities this year, so we are obviously -- will seize every opportunity. But it's true that Q1 was not the time for doing it when you look at the level of competition. We have, however, been quite -- we've been changing the portfolio of both Jazztel and Orange. As you know, we started to introduce the Jazztel offer in the range of the Yoigo segment, I would say, quite aggressively in Q -- middle of Q4, which is giving us a quite significant increase in the Jazztel ARPO. We are also introduce a new portfolio of Love at the high end, which is also driving for more value. If you look -- it is more for more but only limited at acquisition. As well at the same time, as you mentioned, we are also introducing in Orange entry points, different entry points because we think there is room for growth in volumes. Again, what we are trying to achieve is playing with all our brands and you could have included Amena, which we are now pushing Amena in the very low cost segment. We are trying to optimize the mix of value and volumes and in every brand, but we are definitely strong in term of brand positioning with Orange in the higher range of value packs with the content with football with Jazztel which is playing a lot on the promotion -- on the abundance and not so much on promotions. And we have the Amena lockup segments, which today is a good opportunity for us to grow in volumes with quite significant ARPOs also. So we are balancing volumes and value as much as we can. So this is the result of this strategy and we think there is still room for improvement of the acquisition ARPO in all our brands.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [59]

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On the CapEx question and the rhythm of deployment in France, maybe what I need to do is to re-explain first that investment is not something linear quarter-after-quarter. There is, as you know, an acceleration of the fiber deployment in France in order to grow to the objectives that we have committed to reach by 2021. And so we are there in still a very rapid deployment phase and there will be a number of elements which will intervene over time during 2019 and you will see this as quarters go by, including through the activation of several levers such as disposal of assets of lesser value to Orange, such as for instance, real estate or of nonstrategic assets which will improve the value to Orange of our asset portfolio. And this is within the economic CapEx indicator that we have embarked in 2019. So once again, over the full year, we fully maintain our guidance on eCapEx with the caveat of the Vodafone deal that I explained. But you will see quarter-after-quarter how we can achieve this, when at the same time we are on track with our commitments to accelerate the deployment of fiber in France but also in some other European countries, still investing in Spain and in Poland.

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Jeremy A. Dellis, Jefferies LLC, Research Division - MD & Senior Telecommunications Analyst [60]

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Could I just ask a quick follow-up on Spain? The new focus on some lower end offers and on -- more on the pushing the sub brands, does that reflect perhaps, a bit of a change in strategy relative to where Orange was thinking 1 or 2 quarters ago, perhaps stimulated by the more aggressive stance of Vodafone in the last few months?

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Laurent Paillassot, Orange S.A. - Senior Executive Vice- President of Orange Spain [61]

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No, it's really looking at where is the market going and what are the movements and the opportunity for us to capture and to grow. We haven't introduced last year Amena in the convergent low-end market because we had already identified it was an opportunity. And obviously, we are trying to optimize the value creation of every brand, it's -- so it's more of the same, but it's true that the market overall is a lot more competitive with churns level which are the highest historically. And therefore, we need to compete with every potential brand that we have. But again, in every segment, we try to maximize the value.

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Operator [62]

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We take our last question today from Frederic Boulan from Bank of America.

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Frederic Emile Alfred Boulan, BofA Merrill Lynch, Research Division - Senior Analyst [63]

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The question is on France, revenues were down almost 2% in Q1. Can you shed a bit your ambition for this business in 2019 for the full year? Do you think you can drive a recovery and what could be the driver of that?

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [64]

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Fabienne is going to answer obviously, but I'm just going to say one thing first, which is that when you look at the minus 1.8%, which is minus EUR 82 million, you could look at 3 elements. First, the VAT ePresse impact, this is EUR 52 million; the PSTN impact is EUR 54 million; the equipment is EUR 20 million. So you can make different analyses and we tried to explain what was the fundamental dynamics. But if you take away VAT and equipment, it's nearly flat. If you take PSTN and VAT, in fact, we are growing. So we have these specific headwinds, which at some point will be behind us, obviously. And the growth of the new drivers are there, including the wholesale business, which is -- which has been growing. So just to recall these big figures, because of course there is this decrease in revenues, but which are very much located in very specific and identified places where some other elements are clearly growing, such as the PIN area, fiber evidently, and all the premium part of the market once again, which is very strong in France.

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Fabienne Dulac, Orange S.A. - Deputy CEO of Orange France [65]

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Yes, regarding the point highlight by Ramon, our ambition is to grow the top line this year. Thanks to our growth driver, fiber, on the retail, but also on the wholesale; thanks to the convergence and thanks to the multiservice. We launched 2 new houses 2 weeks ago, Maison Connectée and Maison Protégée. And we are confident because on the telco core business, we are well oriented. And I want just to remind, the retail services, excluding PSTN and negative e-book impact, is growing by 1.6%. Convergence service revenue grew 5.6%. This is what we have to compare to the other player and in this part of our activity, we are really well oriented. This strategy is the right one and we are confident for the future. So our vision is to grow the top line and concerning EBITDA, if you have a question, we are comfortable with the consensus level of a flattish EBITDA, but we are really, really confident that we can resist in this market very intensive with a very high level of promotional. And the strategy with convergent is the right one, the high-end market is preserved and the value is preserved currently.

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Operator [66]

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If there are no further questions in the queue, I'd like to hand back to the speakers for any additional or closing remarks.

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Ramon Fernandez, Orange S.A. - Delegate CEO of Finance, Performance & Europe [67]

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Well, thanks -- just to thank you for your attention. I think this is a quarter which is very resilient, in fact. When you look at France, we have more customers, the premium part of the market is increasing, the churn is going down. So it is a very competitive market but the fundamental strengths are there and playing their game. And in Spain, there has been -- since all the questions were essentially on France and Spain -- there's a very good deal with Vodafone, with an impact of less than EUR 100 million on CapEx this year and a very value creative deal. Once again, when you can get 3x your cost of capital and even in fact, more than 3x, it's a very good deal. So we are moving ahead and I look forward with my colleagues to meet you in the following weeks to discuss further all what we could describe this morning. Thank you very much.

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Operator [68]

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Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.