U.S. Markets closed

Edited Transcript of PROX.BR earnings conference call or presentation 30-Jul-19 12:00pm GMT

Q2 2019 Proximus NV Earnings Call

Brussels Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Proximus NV earnings conference call or presentation Tuesday, July 30, 2019 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bart Van Den Meersche

Proximus PLC - Chief Enterprise Market Officer

* Dominique Leroy

Proximus PLC - CEO & Director

* Guillaume Boutin

Proximus PLC - Chief Consumer Market Officer

* Nancy Goossens

Proximus PLC - Director of IR

* Sandrine Dufour

Proximus PLC - CFO

================================================================================

Conference Call Participants

================================================================================

* Alexandre Charles-Edouard Roncier

Exane BNP Paribas, Research Division - Research Analyst

* David Vagman

ING Groep N.V., Research Division - Research Analyst

* Emmanuel Carlier

Kempen & Co. N.V., Research Division - Research Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nawar Cristini

Morgan Stanley, Research Division - Equity Analyst

* Nicholas Prys-Owen

UBS Investment Bank, Research Division - Equity Research Analyst of European Telecoms

* Nicolas Cote-Colisson

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

* Paul Sidney

Crédit Suisse AG, Research Division - Research Analyst

* Roshan Vijay Ranjit

Deutsche Bank AG, Research Division - Research Analyst

* Stefaan Genoe

Banque Degroof Petercam S.A., Research Division - Head of Equity Research

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good afternoon, ladies and gentlemen, and welcome to the Proximus Q2 2019 Results Conference Call. For your information, this conference is being recorded. At this time, I would like to turn the call to Madame Nancy Goossens, Director, Group Investor Relations. Madame, please go ahead.

--------------------------------------------------------------------------------

Nancy Goossens, Proximus PLC - Director of IR [2]

--------------------------------------------------------------------------------

Thank you, and good afternoon, ladies and gentlemen.

(technical difficulty)

and that you have been able to go through the results. We keep our usual format for this call, meaning that we will use most of the time to answer your questions. I have here with me the CEO, Dominique Leroy; and CFO, Sandrine Dufour; as well as other members of the Executive Committee. They will all be happy to take your questions in a minute. But before we get to that, we will first listen to the introduction.

Dominique, please go ahead.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Nancy, and hello, everybody, and welcome to our second quarter conference call. And if you've been reading our announcement of this morning, we managed to further grow our customer base in the second quarter, strengthened by our dual brand strategy, and this in a market which remains highly competitive. We further attracted new customers to our main products, growing our customer base both for Fixed Internet and TV, and this for both Proximus and Scarlet.

On the mobile side, the Proximus consumer segment returned its growth in mobile postpaid back to normal, increasing its mobile postpaid customer base by 19,000 customers. More and more of our customers take both fixed and mobile subscription. Hence, our convergent customer base progressed further. This was especially driven by enticing families to our all-in offers Tuttimus and Bizz all-in, but also on our Minimus offer and the Epic combo offer which is more oriented towards millennials. As a result, the average revenue per household showed a further slight progress and grew to EUR 66.8.

On the enterprise side, we also achieved to further grow our mobile customers on an already high base. Competition is, however, increasing in this domain, which is reflected in the net mobile customer growth and ARPU. On the fixed side, we see, however, encouraging support from our point-to-point fiber park, benefiting the new data connectivity solutions and therefore softening the impact of the ongoing erosion of legacy services.

On the ICT front, we continue to post a positive revenue variance, including the support of acquired highly specialized companies. Revenue from ICT is typically more volatile, more precisely for one-shot projects and services [rebranding]. We posted higher revenue too in Advanced Business Services, essentially for our subsidiary Be-Mobile, active in the field of smart mobility and benefiting from its acquisition of Mediamobile.

With positive commercial drivers in both the Consumer and Enterprise segments and revenue pressure partly on low-margin income, we kept a sound underlying domestic direct margin. Remember that in Q2 2018, we benefited from significant tailwinds. This aside, we would see our direct margin being slightly positive year-on-year. This in spite of regulatory impacts with lower fixed termination rates and since mid-May, also lower international calling rates impacting our margin.

As we further progress on our digital journey, we are able to materialize cost efficiencies in our Domestic operations, which have helped to achieve a stable cost level despite the higher personnel costs related to ICT. For the second quarter, this has led to our Domestic EBITDA to be 0.8% lower compared to a high base in 2018.

For BICS, the international carrier segment, the trend of moving from voice to data continues, and we saw again a strong support from TeleSign, showing a solid increase in the application to personal messages. The direct margin of BICS was up year-on-year, yet more than offset by some higher OpEx cost, amongst others, to support the current and future growth of TeleSign.

Based on the achievements so far, we reiterate our full year guidance. For our Domestic revenue excluding terminals, we expect the next half of the year evolution to be in line or slightly better than the first half, depending on the more volatile parts of the ICT revenue. The group EBITDA is expected to be stable, within the mix, a slight increase of our domestic EBITDA offset by a lower EBITDA for BICS. So far, the announced renewed agreement with MTN, which foresee this progressively insourcing by MTN of the Africa and Middle East operations, did not have a significant impact on mix. We expect a more pronounced impact as from Q3.

Our CapEx outlook of the year remains unchanged as well. So we expect to end 2019 with CapEx stable to the previous year, excluding spectrum-related CapEx. On a different topic, as you can imagine, the next months we will work hard to further develop the outlined mobile access network sharing agreement with Orange Belgium. We were pleased with the 11 July announcement, seeing the numerous benefits it will bring for our customers and for us as a company.

As a final point on the regulator consultation on cable wholesale tariff issued early July, I have to say we were surprised by the low cable wholesale pricing. We are now awaiting the consultation on the fiber pricing, which we expect in the course of September. As we have clearly stated before, we consider a fair regulation, which means that the conditions to invest remain appropriate as a key for any future decision on our fiber deployment. We will give more news on that with the full year results of 2019.

With this, I have covered my introduction and propose we now start with your questions. Thank you.

--------------------------------------------------------------------------------

Nancy Goossens, Proximus PLC - Director of IR [4]

--------------------------------------------------------------------------------

Operator, can we start the questions, please?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We have one first question from Mr. Michael Bishop from Goldman Sachs.

--------------------------------------------------------------------------------

Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Just 2 questions from me, please. Firstly, you mentioned that you were quite surprised by the low cable wholesale pricing. Do you think that provides any read across in terms of the FTTH pricing? Or do you think the direction could be independent? And maybe just a quick follow up on that, how much do you think [that -- really] even if the FTTH pricing is higher, the fact that the cable pricing has now been cut or proposed to be cut by so much, so that provides a disincentive to invest from your side. And then secondly, I was just keen to get any early signs on how you're seeing the uptake of the Epic combo deals, particularly with relation to Orange Belgium also announcing its stand-alone broadband offers recently.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [3]

--------------------------------------------------------------------------------

So concerning your first question on the cable wholesale price versus Fiber-To-The-Home, I mean, the regulator in Belgium and already in these market [analogies] has come with the hypothesis that there were 2 markets in Belgium: 1 market which was the fiber and copper markets and another which was the coax market. And I think they will do the [cost model differences] on the 2 sides. On the coax, the fact they come with a low price is very much linked to the fact that everything which has been amortized is not taken into account in the cost model, which was a surprise for us and will, of course, be the comments we will make on the consultation period, which is open now till the end of -- [at least till] September 6 is, say, what we see here. So on the coax, it's mainly amortized costs which are not taken into account, and this will be mainly the comments we will give.

I don't think there will be a read across on the fiber because on fiber, there is not a lot that had been amortized. So in that sense, we guess that the wholesale price for -- from the regulator for fiber will be higher and more in line with what we currently have as commercial price. Of course, the issue is [if] the market is not 2 markets, then that's fiber and coax are one market. And so the read across you can do for the fiber investment is most probably that will be more complicated for us to attract wholesale customers on our fiber networks because the coax will be sensibly cheaper than the fiber. So that's why we are now currently waiting indeed to have the final fiber prices. We will also wait to have the final coax price, and we will then come back to the market with our fiber deployment plan, which will most probably be together with the year-end results that we will bring February 2020.

For the other side, on the fiber, we are currently continuing the deployment. We are currently in 11 cities in the country. Deployment is proceeding according to plan. Win back and migration is also proceeding according to plan. So I think from a business perspective, fiber deployment and fiber [take-ups] are in line with our plan. I think the main uncertainty which is still open for the future acceleration or not of fiber is mainly linked to regulation. I'll let Guillaume answer you on the Epic combo question.

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [4]

--------------------------------------------------------------------------------

On the Epic combo question, first, just to [review] the strategies that we are trying to deploy, we want to drive conversions through a segmented approach with a [witty] brand strategy. So what we did in the previous quarters and before the announcement of Orange that we did 2 main things. First, for the true price seekers, we launched the new 1-P Scarlet offers to reinforce the leadership of Scarlet for the price seekers, and we launched that in early -- end of May this year. And prior to that, we indeed launched our new Epic combo offer for the higher end of the market. And also for a segment of [new ones] that are looking for worry-free mobile data vendors and Internet access. So a double-play mobile [correspondent]. And it's way too soon to say how everything is performing as we speak because the Orange launch is very recent. But what we can say that we are growing on every segment of our customer base, both Scarlet, Proximus and Epic.

And last but not least, the way we designed Epic combo, we think it's much better positioned for this [type of] segment. Why is that? Because on top of mobile [efficiencies] and broadband access, we also provide OTT TV, which is very important for this segment of the market including, of course, live streaming of television and broadcasters [station centers] on all devices. So we think that we are very well prepared, that we anticipated very well the competitive move of Orange and we are quite confident that we'll be able to continue growing on every brand at the end of the year.

--------------------------------------------------------------------------------

Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

--------------------------------------------------------------------------------

So can I infer from that, basically you're not really seeing a big increase in the proportion of gross adds coming through the Scarlet brand? I think in the past you've said it was around 10%.

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [6]

--------------------------------------------------------------------------------

Sorry, could you repeat the question because it was a little bit noisy here.

--------------------------------------------------------------------------------

Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

--------------------------------------------------------------------------------

Yes, so I was just picking up on the Scarlet points and just asking if we can infer from that, that you're not seeing a big increase in the proportion of gross adds coming from the Scarlet brand. I think from memory, you've said in the past that it was fairly low proportion, around 10% or so?

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [8]

--------------------------------------------------------------------------------

We don't see any major evolution of the [shelf] Scarlet gross adds within the total mix of Proximus. That's correct.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

We have another question from Mr. Nicolas Cote-Colisson from HSBC.

--------------------------------------------------------------------------------

Nicolas Cote-Colisson, HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology [10]

--------------------------------------------------------------------------------

Can I come back on what I'm reading as kind of a weak mobile net adds in the quarter especially for EBU considering that you had, if I remember well, a big contract win in Q1 which was supposed to have some spillover effects in Q2? So if you can give us a bit more color on the trend and who do you think is the most active competitor both in business but also in the Consumer segment?

And a similar question regarding ICT. I hear what you said, Dominique, about the volatility of the business there. But given there is still one effect of -- some effect of acquisitions in Q2, it seems that there's very little organic growth left here for the quarter. So if you can give us more color about longer trend -- sorry, longer-term trends here.

--------------------------------------------------------------------------------

Bart Van Den Meersche, Proximus PLC - Chief Enterprise Market Officer [11]

--------------------------------------------------------------------------------

Okay. So this is Bart speaking. I hope you can hear me because we have here some problems with the conference call system. Well, it is indeed so that in terms of mobile adds, we still grow in this quarter with about 5,000 net adds. But it is also true that we had a large contract with the Flemish government of which most of the products have been activated in Q1, but still an important product has been activated in Q2. So you're right in the sense that as Dominique already indicated in her introduction, that competition is increasing on mobile in Enterprise, but we don't keep growing in the same pace as in the past quarters. It's not such a surprise given the higher market shares that we have in this environment. So that is for mobile.

On your question on ICT, indeed, ICT is a volatile -- more volatile market. And you're right. From one side, we still have the impact of the M&A of Codit and Umbrio mainly. But -- so what you see is that the M&A impact is not fully, I would say, leveraged in the ICT results because there is -- next to that, there is lower results in the core ICT market. Now what is important in that sense is that it's mainly products, low-margin products, and [launch of] services. And I think what is important is that we keep growing in the higher-value services especially in those affiliates so that we get to a better mix in terms of profitability, and that is completely reflected in the direct margin evolution where we see a direct margin evolution of plus -- more than 3% direct margin growth just given we have those higher-margin services and a better mix in the portfolio.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And Bart, if I may, just to follow up on your first point on EBU and mobile. So you're mentioning that there's a fight for subscribers and that is -- that's -- how does this go in terms of negotiation -- pricing negotiation? Can you give us a feel of what type of a discount you have to offer to companies in order to win big contracts? Obviously, Orange is not giving secrets away.

--------------------------------------------------------------------------------

Bart Van Den Meersche, Proximus PLC - Chief Enterprise Market Officer [13]

--------------------------------------------------------------------------------

I didn't get your full question, but I think your question was: One, who is the main competitor? And two, what are the discounts that we have to give to keep winning. The main competitor of mobile in the enterprise market is certainly Orange, but also Telenet [executives], but its main competitor is Orange. In terms of the discounts, well, I can only say you have seen that our ARPU had a decline in mobile and the decline is, from one side, linked to the competitive pressure; from the other side, linked to the move to bundles where we have [less out of] bundle. So those are the 2 impacts that we have in terms of pricing.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

We have one question from Mr. David Vagman from ING.

--------------------------------------------------------------------------------

David Vagman, ING Groep N.V., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

First, if we can come back on regulation and the, let's say, your interpretation of the word [field] cable rates, the pricing and the cost model. Should we understand that, let's say, that these models and pricing, [I'd like to confirm], should we understand that you would be ready to slow down your whole fiber rollout because of regulation? What kind of conclusion should we draw?

And then secondly, on consumer mobile and on the commercial momentum, could you help us understand the dynamics of the Q2 performance? So let's say, distinguish between Scarlet on one hand, Epic combo to normal Proximus offer also. And then finally, let's say, the collapse of the Mobile Vikings client base. So I think they lost something like 100,000 customers in Q2. So did you see a flow of Mobile Vikings clients?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [16]

--------------------------------------------------------------------------------

Coming back on the regulation, I didn't say we would slow down the size of rollouts. I think what we have said very often to the market is that we were considering to accelerate potentially the deployment of fiber, and that's something we would consider based on the deployment cost, the business case win back and migration upsell and the regulation. So I think what we see now is that on the parameter we can control, I think we are in line with our business case. If we look at regulation, it doesn't help the fiber case to have a coax regulation, which is extremely low in terms of price, because on the fiber, of course, we have always planned to roll out our own fiber, but we were also looking at having wholesale customers on our fiber.

And today, you know that Orange is on the coax, which is the biggest wholesale in the Fiber-To-The-Home business. I think on the fiber-to-the-enterprise, I think all fiber and all copper are still very much answering the needs of our own customer but also on wholesale customers. So the debate is currently mainly on how will we be able to attract potential wholesale customers on our fiber deployment for the Fiber-To-The-Home. And that's something if prices stay on the coax as low as it is, it will be probably more complicated. So in that sense, we will have to renew the whole [lot], which was foreseen by the end of the year, and we will come back to you with more information by then. So I think so far, we continue to plan as it is, and we will come with an update by February next year with our full year results to give more color on our further fiber rollout. But at this stage, nothing has been changed to the current deployment plan of the fiber.

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [17]

--------------------------------------------------------------------------------

On the dynamics of the Q2, you know that we are not disclosing precise numbers in the evolution of every brand and some brands. But what I can say that we are growing both on the Proximus brands, including Epic combo, and on the Scarlet brand. This is for broadband and you see also true for mobile.

So on broadband, I think we were quite happy with the performance of Q2 thanks to good acquisition, but also a stable churn on those products, and we achieved this without being very aggressive in terms of promotion. So it's been for us despite very intense competitive environment for us. [This is despite unreasonable] promotions activity. So we are quite comfortable with also the remaining part of the year where we think that we can also play a good position on this very competitive environment.

--------------------------------------------------------------------------------

David Vagman, ING Groep N.V., Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Okay. And maybe on (inaudible) and Mobile Vikings, did you see any [differences]...

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [19]

--------------------------------------------------------------------------------

On Mobile Vikings, the impacts are rather minor as we speak, and there's no massive impact of the launch of Mobile Vikings on the market. So I would say it's too early maybe to see what could be the traction for this kind of offer. But so far, we see no impact really on Scarlet nor on Proximus.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

We have next question from Mr. Emmanuel Carlier from Kempen.

--------------------------------------------------------------------------------

Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

A couple of questions. First of all, on the subscriber additions, so I think it's fair to say that the trends remained quite soft. If I remember well, in the Q1 call you guided that momentum would improve in the coming quarters partly driven by more aggressive marketing from your end. Is that still something that you expect? And if not, why not? What has changed? That's the first question.

Then the second question is on the launch of Orange Belgium's Love Duo offer. So I think it's fair to say that broadband on a stand-alone basis is still not that popular in Belgium. But could you share your view on how important this market might get in a couple of years' time and how you believe you can avoid, I would say, unbundling and also avoid value getting lost here?

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [22]

--------------------------------------------------------------------------------

So as you said -- on net additions, as you said, we think Q1 -- that Q1 generally for -- traditionally for Proximus is not the best period of the year because we have the churn rates of the -- the big volumes of the Christmas market. And as foreseen, we improved significantly the performance on mobile with a little bit more marketing activities, but without being excessive in the domain. So we managed to go back to the normal pace of growth of Proximus mobile without being very aggressive in terms of promotion, which is important to note.

The second part of the year, of course, is back-to-school, then you have Black Friday and then the Christmas market. So in terms of promotional activities, it's always for Proximus a much intense period. So we do think that it's going to be the same this year. So it's -- nothing different from what we did in the previous year. But for sure, it's going to be more intense in terms of marketing means and commercial activities on both brands, both Scarlet and Proximus.

Now on your question about the size of the 1-P market, for sure, it's not going to be more than 20% in terms of a maximum market size for our 1-P-only offer in the medium term. And for us, what is very important is to work on the brand, on the positioning of the brand, on the relevance of the brand. This is why we did announce major innovations the 30th of June, our positioning of the brand with the Think Possible tagline and also a lot of new services around gaming, around digital services that could help in the future -- help the brand as a Proximus brand and (inaudible) brand, being relevant for our customers. And in doing so, we should sustain the value creation for our customer base.

So this is the way we want to differentiate ourselves, being innovative, launching relevant digital services including gaming and pursue brand transitions around convergence and digital services. And of course, for the price seekers and those people that wants to really have a 1-P offer, we do have today the best offer on the market with a 1-P broadband offer at EUR 32 per month, which is really attractive and that is today, with Scarlet meeting its audience.

--------------------------------------------------------------------------------

Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

But if I look at unbundling, is that something that you expect in the coming years? Because if I look at what clients want, so basically just want fixed broadband, fixed mobile. Maybe they want a bit of TV content, but they don't want to pay a very high price for that. So that is the main risk, I would say, to the sector. And with the cable regulation, it's a bigger threat in Belgium probably than in other markets. So could you share some thoughts on not next quarter but really on a 3- to 5-year view, how you think about this topic?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [24]

--------------------------------------------------------------------------------

I think -- I will try to answer a bit on this question. I think -- I don't think the Belgium market is so different from other markets. I think Belgium has been a market which has been a market with a lot of convergent quite early, and we see that trend is still there. What you see on convergence is that even on convergence, you see to start some more segments. You have people that really want the full product with the 4-P content where they can find that in Tuttimus. We see indeed more people now wanting to have a triple play: mobile -- a fixed offer with mobile, Internet and TV. And that's what we currently offer on the Minimus proposal. And you see more millennials which are more engaged in the mobile fixed Internet and with an OTT proposal, which we offer on the Epic combo.

The broadband-only segment is a segment that has always been available both under Scarlet and Proximus. Scarlet has broadband at EUR 23 and EUR 32, with the unlimited offer at EUR 32. We see that, that offer is increasing, but it's not increasing more today than it was over the last few years. And so we -- I don't think that you will see a lot of unbundling. I think unbundling will be there for a small part of the population in Belgium. Like millennials, they will take unbundling but not pure broadband-only. They want broadband and mobile and OTT content, and I think that's what we offer. And if you look more at families, they want more content because they have kids. They have teens. They want gaming. They want content.

So I understand your question and I understand it comes from probably some talks that have been recently hold by Orange on the launch of their proposition. But I am not convinced that there is such a big market for broadband only. I think the market is segmented according to the various segment of the population. And I think with our portfolio, we are probably the only player in the country that is able to really offer the right solution for each segment. And I think that's what makes us way more resilient than some others to all the movements in the market, and that's what makes us confident that we can still continue to grow our customer base and drive value in the Belgian market.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

We have another question from Mr. Roshan Ranjit from Deutsche Bank.

--------------------------------------------------------------------------------

Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Two for me, please, on the mobile side. And just referring to your network sharing announcement with Orange Belgium, can I just check on the open tower regulated structure? Does that apply to both macro sites and rooftop sites? And therefore, if so, will the incremental sites that you are looking to build, I think [around 800], will the open tower regulation apply to those? Part of that question, how are the discussions going? I believe -- I think Telenet was looking to get involved with your partnership with Orange Belgium and yourself.

And secondly, Dominique, you mentioned the scope for maybe accelerated the fiber rollout. Now given your agreement with Orange Belgium on the mobile side, and I think there's still keenness to potentially co-invest, is there still an opportunity for that to happen and therefore accelerate your fiber rollout?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [27]

--------------------------------------------------------------------------------

Okay. So I'll try to answer all your questions. Concerning the mobile network sharing and the tower regulation, it's indeed true that in Belgium, you have a massive sharing obligation which is built for the macro antenna but also for the rooftop antenna. So that's something which is there and which will apply to all the sites. So that's for big and small sites.

Concerning the request and the demand from Telenet to join, I think that's something we are open to, same as Orange. I think what we will need to consider in that is that is there a technical feasibility to host on the new equipment for the 2G, 3G, 4G and tomorrow 5G, 3 operator on one site, which is not obvious. But of course, we will look into that.

So far, the discussions with Telenet has not really started. There is holiday period. We are looking at all the NDA process because as you know, all these network sharing between competitors needs to be taken care of extremely carefully because there is a lot of sensitive information. So it's all about setting the right process and the right structure. So today, we are more looking at how to organize ourselves to have Telenet trying to join the party, and then we will look how to do it, what is the feasibility and if indeed it makes also economical sense. But we are open to look at that.

On the fact that we are now a bit closer to Orange thanks to the network sharing, that's true. But we are still strong competitors. And while we found a deal on the mobile network sharing because we think there we can really create value, first, for the customers because we will have better coverage -- better indoor coverage and faster rollout of 5G. So the main goal is to bring indeed the best network and the lowest cost but as fast as possible, also 5G. We remain strong competitors, and we remain strong competitors in the mobile, but we also remain strong competitors in the future fixed. And I think there, we, of course, would like to co-invest with OBEL or having OBEL on our fiber network, but that will be a discussion based on economical reality and also on the wholesale pricing, which we are still waiting for. And then I refer to some of my answers of previous questions.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Next question is from Mr. Ulrich Rathe from Jefferies.

--------------------------------------------------------------------------------

Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [29]

--------------------------------------------------------------------------------

I would like to address the question of customer intake, in particular, as regards to the split between [the X play]. It looks as if the quad-play intake slowed down further from the first quarter. And I'm just wondering whether that's sort of an element of saturation in the market or whether that's just the way you direct your marketing efforts at the moment or whether that's indeed a competitive issue that you think could be transitory. That would be my first question.

The second one is you highlighted the underlying growth in the gross profit, and I think the Domestic business grew when you exclude the one-off, I think, on your numbers. That's obviously [a key point why] the revenue declined. Do you think that sort of stable-ish gross profit can be carried over and to roll into the second half of the year and then maybe even into the -- in 2020, if you're already willing to discuss at that level? Or is the revenue decline at some point going to affect gross profit and really put the cost-cutting measures in OpEx sort of under pressure?

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [30]

--------------------------------------------------------------------------------

On the first question with the slowdown of 4-play on that quarter, I would say it's a bit too early to speak of weird trends on this one, but we do see indeed a nice tick up on convergent 3-P to [conversions] mobile (inaudible) 3-P offer. What is very important for us on the longer term is to stimulate conversions being through 3-P mobile or 4-P. And we're going to drive our strategy to grow the average revenue per home. And as long as the average revenue per home is growing, I think that we are doing a good job on the customer value-based management. And this is what we're going to do in the future, focusing on the value of our customer base and focusing on conversions being 4-P of 3-P. The main obvious reason for that being that a convergent customer or home being 4-P or 3-P as (inaudible) than the other customers.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [31]

--------------------------------------------------------------------------------

On your second question, I think it's a bit early to discuss the 2020 trend. But if I focus on the second half of the year when indeed, we had a bit of a soft revenue at this business consensus. But as you saw, we were able to cope quite well at the level of direct margin. And this is also linked to the fact that part of the revenue which is under pressure comes with low-margin between the ICT or we discussed, there were some trends in the mobile with inbound revenues which is decreasing and have no impact with our margin. So when we look at the second half of the year, we aim to continue to have a very good cost control as we did deliver in H1 so that we are in a position to deliver on our guidance of a slight growth at the level of the domestic EBITDA and stable at the level of the global group EBITDA.

--------------------------------------------------------------------------------

Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [32]

--------------------------------------------------------------------------------

If I may follow up on that answer. I think there's a difference between having to offset declining gross profit with OpEx measures because that's the sort of treadmill in telecoms, but it's a different thing if you essentially drive efficiencies and you have more or less stable gross margin. So (inaudible) willing to give us any indication on the gross margin -- or the gross profit rather, in the second half of the year then?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [33]

--------------------------------------------------------------------------------

Well, if you exclude the one-off, it shouldn't be very different from H1. That's in terms of expectation for the second half.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

We have another question from Mr. Alexandre Roncier from Exane.

--------------------------------------------------------------------------------

Alexandre Charles-Edouard Roncier, Exane BNP Paribas, Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

I was just wondering if you could update us on the current negotiation with the unions, if you were seeing progress here? Or when were the next date we could see any announcement perhaps?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [36]

--------------------------------------------------------------------------------

So concerning the discussion with the unions, we started the beginning of January with information and consultation phase. So we had a lot of explanation, discussion, dialogue on the various plans. As from beginning of June, so the 10th of June, we started in a negotiation phase. But due now to the holiday, I mean, we were not able to go very far in the negotiation also because we also had the network sharing, which was also a moment where we had some discussions with unions. So we are now still continuing from all sides, preparing all necessary documents and detailed plan so that we can start back with the union negotiation on hopefully a much faster speed as from 20th of August. And our objective is then to end -- to land a negotiation certainly before the end of the year so that we can hopefully have already some of the benefits of the fit-for-purpose plan for next year.

What you see in this year's cost control is that we still have some waste of the former early lease plan, which still impacted 2019, and we still have some departure beginning of 2020. And we, of course, this year in the cost control, we are also not hiring as many employee as we used to do. So if we have natural lease and natural attritions, we tend to cope within on the short term to be able to then, through the fit-for-purpose plan, train and re-skill people and fill then the vacancy as we go so that we can then have potentially a lower impact on dismissal and a lower number of hirings by trying to re-skill, retrain our own employees into the vacancies we have and we will have after the next quarter.

So I hope that gives a bit more clearness and -- and clarity, sorry, on where we are, but we will resume the negotiation 20 of August and we hope from then to be able to go fast because we will already have -- a lot had been discussed and a lot will be ready in terms of detailed documents.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

We have next question from Mr. Paul Sidney from Crédit Suisse.

--------------------------------------------------------------------------------

Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Just 2 questions for me, please. Just the first one on the balancing customer acquisition and profitability. You obviously lost a bit -- a little bit of traction H1 '19, and I know some of that was Proximus' own decision. But how should we think about the balance between profitability and your desire to maintain EBITDA stable or even grow EBITDA in the future and balancing that with subscriber growth in an increasingly saturated market?

And just secondly, coming back to the cable wholesale debate and your own FTTP ambitions, I mean, if the FTTP rates are significantly lower than you originally planned and the rates that were proposed in December, what can you -- to what extent can you resell cable from a practical point of view, from a regulatory and a political point of view? I know obviously the June '18 ruling. But if you don't build any of your next-generation network, does that mean you can potentially sell cable across most of Belgium? Just wondering how to think about that.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [39]

--------------------------------------------------------------------------------

So I'm not sure I fully understood your first question, but I think for me it's end-to-end. I mean we need to continue to have strong customer acquisition. And I think everything we do, both on developing new solutions for the Enterprise business and building a strong brand platform with Think Possible and BICS and the whole segmentation offer at the CBU side, should help us and drive us into further customer acquisition. And at the same time, like most of our colleagues, we are really trying to see where can we generate more profitability, more efficiency, drive our cost down by being more efficient, doing things first time right, doing more digitalization, doing more automation, doing sharing deals as we have done one with Orange on the mobile. So for me, I would not oppose one versus the other. I think we should continue to get good customer acquisition, and we should continue to get costs down and drive profitability as we have been doing over the last years.

On your second question, so concerning the access for -- of Proximus to coax, I mean, unfortunately, we do not have a freehand there. We have fought a lot to be able to have access to coax in the past. After a very long legal battle and debate, which lasted several years, we have now been granted what we call a reasonable access to coax. And what is currently defined as reasonable access is that we would be able to get access to coax in zones where we are not able to provide 30 megabit per second network speed.

So, so far with the quality of the network we have, it's not a lot of Belgium. I think it's currently estimated between 5% and 10% of the population. So the possibility for us to get on to cable and resell -- or proposition on cable is there, but it's relatively limited. And that's, of course, also something we will need to see as we evolve and as the needs of the customer evolve, is there anything we can do about that limit of 30 megabit per second. But so far, it is quite restrictive. So we will do that, and we have said that we would be interested in having access to cable. But on the short term, it's a relatively small part of the Belgian population.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Next question is from Mr. Stefaan Genoe from Degroof Petercam.

--------------------------------------------------------------------------------

Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [41]

--------------------------------------------------------------------------------

Two follow-up questions. On the trends we see in the market today with lower television, that's the launch of the Epic combo product and the trends we're seeing in the market today, how do you believe this mix or what do you anticipate this mix to impact your direct margin, let's say, for the coming 2 to 3 years purely from this point of view? And secondly, on the union negotiations, did the network sharing deal have an impact on these negotiations? And have you, I would say, reviewed your initial anticipations of savings from the union deal versus the start of the negotiations?

--------------------------------------------------------------------------------

Guillaume Boutin, Proximus PLC - Chief Consumer Market Officer [42]

--------------------------------------------------------------------------------

So firstly, on the raw TV net adds, what we are seeing in the market that indeed in Q2, we did a little bit less TV net adds and broadband net adds, which means that we sold less set-top boxes on the market. It doesn't mean that we are not selling less access to OTT TV and FTTP platforms. What we foresee for the coming quarters (inaudible) sell TV access without having a box to rent or set-top box to give to, to our customers due to the new ways of consuming television services. So it doesn't mean that it's going to be less value for us. Maybe less hardware, but not less value for us in the coming 2, 3 years, especially if we are quite good in executing optics platform strategy, which means to provide relevant traditional TV but also innovative services around a Proximus platform, around content and entertainment. So I don't see this having an impact on direct margin. On the contrary, we saw an impact on the cost to serve and to (inaudible) because we're going to have less hardware to provide to the homes of our customers.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [43]

--------------------------------------------------------------------------------

So on your question regarding the network sharing deal and the impact on our cost plan, well, first, the [cost ambition] we gave was for the years 2019 to [2022 including EUR 40 million] gross OpEx reduction is a program for the next 3 years, including 2019, while the ambition that we have given as part of the network sharing deal in terms of global CapEx and OpEx reduction was a 10-year ambition. But the beginning of the savings will not be visible within this 3-year span because it takes time to put the enablement and to change the -- to create the [common grid]. So that we do not change as of now the program of our reduction cost for the next 3 years.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

We have another question from Mrs. Nawar Cristini.

--------------------------------------------------------------------------------

Nawar Cristini, Morgan Stanley, Research Division - Equity Analyst [45]

--------------------------------------------------------------------------------

So I have 3 questions, please. Two follow-ups, a quick follow-up on network sharing to start with. In your announcement, you have not mentioned that this network JV would need -- is subject to regulatory approval. So it would be helpful to hear your views on -- in terms of any possible intervention from the antitrust authority. So that's the first question. Then secondly, some operators elsewhere in Europe have been excluding high-density urban areas from their network sharing, and they've been citing that it's because of data traffic management issues. So it would be helpful to hear your thoughts on this particular issue.

And lastly, we've been talking about possible changes of ownership at VOO for many, many years now, but it seems that things are moving on that front. If that change of ownership were to crystallize, how would you think about protecting the business? In particular, would this give any relevance to your fiber plan?

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [46]

--------------------------------------------------------------------------------

(technical difficulty)

on your first question (inaudible) [mainly the challenge]. I mean in that sense, there is no (inaudible) approval. So in that sense, [we'll still have questions from the regulators] (inaudible) this could not anticipate and the (inaudible) continue, of course, the (inaudible) for all questions of [authority]. But there is no possibility for us to ask for approval before setting up the JV. So it's indeed a potential risk. But we think today in the current setup, with the size of Belgium, with the competition that is still there, with the fact that we are just doing more on network sharing and if we keep the core separated, the spectrum separated and all the offers we bring in the market will remain very competitive offers from both sides of the table, we don't think there will be a major issue on the (inaudible).

I think -- yes, excluding parts of the high-density or the spectrum, I mean, we have looked at the different opportunities. But I think Belgium is a very small territory. So as soon as you start to exclude part of the territory, it's extremely difficult to define what would you exclude. And also the fact that we want to go faster and deploy faster 5G, which is one of the main driver of creation of the JV, it's also very difficult for us to exclude any other frequency band because you know today TV is [an unknown] stand-alone network and you need to have the integration of 3G, 4G and 5G to be able to build the right 5G. So that's why we have proposed and we have agreed on the network sharing, which is for the full country and all frequency bands, but of course limited to the active network equipment.

Concerning VOO, yes, I also read this through the paper, as you most probably do, and we read indeed that VOO is [definitely] preparing (inaudible) [separation entity which has been] (inaudible) over the summer. They are in discussions with the (inaudible) to integrate fully the Brussels cable business into the new company. And we hear as well that there would be discussions to sell the entity even potentially to a private equity, which is also mentioned next to the obvious other Belgian player.

Would that impact -- would the sale of VOO impact our plan? I would say no. I think today we have our own strategy of deployment of fiber. We have our strategy of deployment of 5G together with Orange on the network sharing. And I think in that sense, a sale of VOO will not impact the strategy of Proximus and would most probably not impact short term or (inaudible).

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

We have one last question from Mr. Nicholas Prys-Owen from UBS.

--------------------------------------------------------------------------------

Nicholas Prys-Owen, UBS Investment Bank, Research Division - Equity Research Analyst of European Telecoms [48]

--------------------------------------------------------------------------------

I just had a couple of follow-ups on the early question around the ICT business. Firstly, just on the performance in Q2, I wondered if you could help us disaggregate the impact between the weakness in the low-margin products this quarter versus the impact of the 2 acquisitions that you acquired in 2018.

Then just on -- I suppose you've chosen to highlight the volatility in the ICT business a bit more this quarter. I suppose it wasn't really mentioned in Q1. So I wanted to clarify how much, if any, of the weakness in the low-margin revenue with the timing effect do you expect to support the Q3 ICT growth.

And then just finally, given your comments around the revenue guidance and the volatility in ICT, I wondered if you could perhaps give us some more color around what portion of the ICT revenue base you have good visibility on for H2 and what portion of the revenue base is accounted for by revenue streams you think of as volatile?

--------------------------------------------------------------------------------

Bart Van Den Meersche, Proximus PLC - Chief Enterprise Market Officer [49]

--------------------------------------------------------------------------------

I'll take your first question, so on the impact of the low-margin ICT business. So when you look into our figures, you see that ICT is still growing overall. Now the impact of the M&A, which has been highlighted, I think, in the last quarter by Sandrine also, I mean, it's still relatively small figures in the total. I think you should take that into consideration. So (inaudible) the impact of the raw margin profit (inaudible) is there (inaudible) which is especially not in the margin. You should also take into consideration that we had in Q2 of 2018 relatively high product revenues also in ICT. The impact (inaudible) I think -- I believe the question together with the revenue guidance (inaudible), Sandrine?

--------------------------------------------------------------------------------

Sandrine Dufour, Proximus PLC - CFO [50]

--------------------------------------------------------------------------------

On the guidance for revenue, I don't think that we can be much more precise at what we share. Certainly, we look at H2. We expect in H2 about the same level of performance that we had in H1. That could be improved if our -- what we see in the pipe of ICT is being delivered. So definitely, we have better pipe in H2 than the one we had in H1. Now there are elements of timing which can play. So I mean, we -- I cannot really venture a number, but it can be between around EUR 10 million revenue that can be in the next H2 or slip over the next year, just to give you a sense of what we're talking about for the second half of the year. And that gives you a bit more understanding as to why we phrased the revenue guidance as we phrased it. But again, I want to insist on the fact that the impact on our profitability will be minimal, and I think this is important that we are comfortable on our level of direct margin and level of EBITDA guidance.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

We have no other questions. I give you back the floor for the conclusion.

--------------------------------------------------------------------------------

Dominique Leroy, Proximus PLC - CEO & Director [52]

--------------------------------------------------------------------------------

So thank you, all, for participating on this call. [We] realize we have quite some audio issues. So [thank you, everybody] (inaudible)

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you, all, for your participation. You may now disconnect.