Orange SA (ORAN) 2002 Q2 法說會逐字稿

Good morning everyone, this is Jean-Louis Vinciguerra, Chief Financial Officer of France Telecom speaking. Thank you for participating in this conference call, during which we will comment on France Telecom's first-half 2002 revenues. Together with me to present our first-half revenues are Marc Fossier, Executive Vice President in charge of regulatory issues and mass market fixed services; Jacques Champeaux, Executive Vice President in charge of corporate business and services; Bertrand Le Guern, Executive Vice President and Chief Operating Officer of TP SA, our Polish subsidiary; and John Allkins, CFO of Equant. Also attending the conference are Claude Benmussa, the Group Controller; David Smyth, Orange Group Director of strategic service and investor relations, Francois Goulet, head of Wanadoo investor relations; and [Werner Genovski], head of France Telecom's investor relations.

Given that Wanadoo already presented its first half revenues last week, and that both Equant and Orange have given a conference call today, my presentation will focus on the key points regarding those companies' contribution to France Telecom's figures.

As usual, we will be referring to the documents, which you should have received via e-mail and which are also available in the investor relations section of France Telecom's website.

I move to the next slide, and my first comment on France Telecom's 2002 first half revenues is that we have stabilised our market share in fixed telephony in France, with an 82.7% market share at the end of June for local calls. That is approximately a 1 point decline per month in Q2 this year, which compares with a 3.5 point per month in Q1 this year. So, it is clear that the event of the first quarter was a one-time event compared to the second quarter, and there is clearly a significant decline in the loss of market share now due to the pre-selection of local call. Marc Fossier will come back to this issue a little bit later.

Secondly, Orange and Wanadoo kept growing, with 32.7% growth for Wanadoo and 12.9% growth for Orange in France Telecom accounts.

In addition, we have consolidated TP SA activities in Poland as of 1 April 2002.

Overall, 2002 first-half revenues are in line with our full year expectations of double-digit growth for revenues and EBITDA, as well as strong operating cash flow generation.

We move to the next slide. Slide number three shows France Telecom growth in consolidated revenues. First half 2002 revenues stand at €22.5 billion, a 10% increase compared to the first half of last year. On a pro forma basis and at constant exchange rates, growth is +2.6%. This increase confirms the development of our international activities, with revenues rising 53% with the integration of TP SA, and +7.2% on a pro forma basis.

Revenues from business in France are stable. Our sustained growth in wireless revenues from Orange offsets the decline of revenues in fixed line services. So, the one shot effect of local calls pre-selection had an impact of €150 million on the first half of 2002.

I move to slide number four. This slide shows the pro forma number of subscribers in controlled subsidiaries. At the end of 2002, for the first time, the number of customers served worldwide by France Telecom topped 100 million, exactly 107.3 million customers.

You may not have noticed that our subscribe basis presented on a pro forma basis because TP SA is consolidated as of 1st of April this year, and Telecom Argentina with its subsidiaries have been de-consolidated.

There were 47.7 million mobile subscribers, which represents a growth of 20% compared to last year, with 41.4 million Orange customers; 49.1 million fixed telephony lines - showing a growth of 2.1%. France obviously constituted the main contributor with 34.1 million lines. TP SA added 10.5 million additional lines this quarter.

The next slide, slide number five, shows the traffic carried by France Telecom in France. This total traffic increased by 28.1% over the first half of last year due to new usage. ADSL traffic as a measure of active minutes is booming, as it multiplied by six in one year due to the number of ADSL subscribers having multiplied by four in a year, as well as the traffic per subscriber.

Let us look at the trends in traffic by different usage. With regards to mobile, traffic increased by 20%, and mobile outgoing calls increased by 25%. Internet traffic has a 24.2% increase of narrowband access, reflecting the growth in active customers, which reached +38.3% during the last 12 months.

ADSL traffic is now larger than narrow traffic. Traditional usage decreased by 15.5%. As expected, traditional usage has been affected by the opening to competition of local calls through automatic carriers pre-selection.

I move to slide six, the ADSL domestic market. You see that there were 730,000 ADSL subscribers at the end of June, which represents an increase of more than 143,000 in three months, despite the Conseil de la Concurrence - the antitrust authority in France - barring the distribution of Wanadoo eXtense in France Telecom retail outlets. As you probably know, this bar was cancelled last week. We maintained our target of 1.3 million ADSL lines for the year 2002 and ADSL subscription in France represents a conservative revenue of €159 million in the first half 2002 versus €43 million in the first half last year.

I move now to slide number seven, on the Orange Group. You know the figure, and most of the attendants probably already attended the analyst conference of Orange, so I will not elaborate a lot. If you want to raise questions, you could do so to David Smyth later.

Orange Group contributed revenues of +13%; the customer base is up 17% year-on-year; recurring GSM network revenues are up 18%; positive trends in annual average revenues; Rest of World progresses strongly after successful re-branding in several countries.

If we move to the next slide, slide eight, you see that the customer base of Orange increased by 16.6% to 41.4 million customers in Group-controlled subsidiaries. You see that France increased by 17%, to 18.6 million; UK increased by 8% to 12.8 million and the Rest of World increased by 29% to 10 million customers.

I now move on to slide nine, which shows turnover of Orange. You see that Orange enjoys a 13% turnover growth, with a total turnover of €7.8 billion in the first half of 2002; +12% in France and UK, and +16.5% in Rest of World.

Next slide shows average revenue per user. Clearly, in France, there is more stabilisation and 12 more [rollouts], while ARPU decreased by 1.5% quarter-on-quarter. For contract as well as prepay, ARPU have been negatively impacted by the 15% reduction in fixed mobile termination rates effective from 1 March 2002.

In the UK, 12-month rolling out of ARPU increased for the second consecutive quarter. There has been a 2% increase on Q1 2002, suggesting that we have passed the inflection point of the ARPU in the UK.

If we move to Wanadoo on page 11, I will not give a lot of detail because you would have probably attended the analyst conference call of Wanadoo.

As you see, all the figures are positive and fast growing. Access, Portal and E-commerce segment - +62% in terms of revenue; 6.8 million active clients; continued growth in Freeserve's subscriber base, with +49% of high value added customers in one year; Growing E-merchant business, with +32% in revenues.

If I move to the next slide, slide 12, you will see that the Directories and Business Services segment increased by 5%. Revenues from online directories increased by 12%, with 225,000 advertisers on pagesjaunes.fr. Also, the online directory in Spain gained momentum.

I will not comment on the next slide, which is just growth in key indicators of Wanadoo. It is just a backup for you, and it has already been commented on by Nicolas Dufourcq, CEO of Wanadoo.

I move on now to the fixed line business, slide 14, and I ask Marc Fossier to present this slide.

Thank you very much Jean-Louis. Last time, we showed you the impact of the regulatory measures, which are the pre-selection on local calls and the one-time loss of traffic and market share. So, we expected and said to you last time that this was a one-shot effect. The curve will change, and you can see that. Following the local calls market opening to competition and pre-selection, we have kept at this stage today 83% of the local telephony market share at the end of June versus 86% at the end of March 2002, which shows stabilisation at the end of Q2 and that one-off effect of automatic carrier pre-selection is nearly completed. One of our main competitors made the switch to pre-selections later than the end of Q1, which explains the part of the curve after Q1. We maintain what we said last time, and we anticipate around 80% market share by the end of 2002 on local market.

On the long distance, where there is no regulatory effect, you can see a very remarkable stability of our market share, which amounts to 63.8% at the end of the first half of 2002 and shows the stabilisation of the market. One thing that is very important is that we did not expect any price war or any price decline on the market, and we are glad to see that prices have been quite stable for the first half.

To come back to the whole segment, you see the structure of fixed telephony, voice and data in France, which shows an overall decrease of -5.8%. But, this hides diverging trends and specific effects, which I will highlight in the following slide.

First, we can see stable revenues from subscription fees, and this could get even better in second half with the decision to increase the subscription fee by 3.6%, as you read in the papers, by the beginning of August/end of July.

I already talked about the one-off impact on local calls - the slowdown of carrier services and the sustained growth for corporate services.

On slide 16 we have highlighted, with a decrease of 5.8%, five specific effects, which amounts for minus 4.6 [effects] and are the main part of this decrease. You see the effect on the local call pre-selections as well as on the services to carriers, which I will detail. You also see the impact of the fixed-to-mobile tariff decrease, which is an impact on revenues, but which has very little impact on EBITDA since it is the equivalent of the decrease of the call termination for Orange and SFR. The impact of EBITDA is not in this segment.

I now move to chart 17. We have tried to draw the trends of those four specific effects. This slide shows the different trends we have anticipated and how we see them by the end of 2002 in the fixed line telephony service area. The subscription fees, which amounts for 38.4% of the fixed line telephony services, remain stable and show a slight increase with, as I said, the price increase. This impact is estimated at €150 million in increased revenues on a full year basis due to the fact that the line number is quite stable. For calling services we saw in Q1 of this year an opening of the local call competition with pre-selection, leading to a drop in the market share as well as in revenues. As I showed before, this was mainly a one shot effect with stabilisation in the second quarter. In the first half of this year this has had an impact on revenues in the order of €150 million.

On the third item, services to carriers, we have seen a drop in Q2 of 2002. This is due to price cuts, which are mostly regulatory effects that are the trend, as well as to an increase in the investment of our competitors in the restructuring of their own networks, which of course has had an adverse and mixed effect for us. These two effect have impacted the carrier services revenues, which are reported in the fixed line telephony services, by €166 million, as well as the subsection of the corporate services revenue line, such as the data services and in particular the lines provided to carriers and not only to end users and business customers, by €81 million.

The revenues for corporate clients, which will be commented on later on by Jacques Champeaux, keep growing.

On slide 18 we focus on the fixed telephony business in France. Just to sum up the key trends, you see on the chart the subscription fees, which are stable compared to last year's €2.7 billion. The calling services show a 10.5% decrease, or €334 million, compared to the first half of last year. This can be broken down as follows: €150 million due to the loss of market share on local calls, with €50 million in Q1, which was a major effect, and €100 million in Q2; secondly, the decline of traditional usage, which shows the same trend as we experienced before.

France Telecom still keeps a very efficient marketing effort, which explains our good resistance on long distance with no regulatory effects, even with an average price level that remains slightly higher than that of our competitors. We have launched very efficient calling plans. We have an ARPU strategy, since the bundles of minutes are low ARPU strategies, increasing the number of minutes instead of increasing the prices. The most efficient is what we call 'laisseur[?] local', which is a bundle of local call minutes. It registers at 1.8 million subscribers as of the end of June. We launched in the beginning of July a bundle of minutes for all of France, which we call 'laisseur [?] France'.

We are also working hard on services such as voice messaging. We have self-activating messaging through a short number with an automatic machine. This is very convenient for the customer. We also have a new service called 'Allo', which is a call signalling service for customers working on narrowband Internet. It allows you to take a call while you are surfing on the Internet through software that enables you to switch telephony to Internet surf.

The last point is carrier services. As I explained, this decreased by 18.2%. This drop is due to a new tariff structure of interconnection with the introduction and the main effect of what we call free echo, or capacity interconnection, instead of only minute interconnection. This is specialised for Internet traffic. We have discussed this before.

The effect on the restructuring of our competitors' networks should decrease for them for products such as lease lines. An exceptional €30 million to €40 million in additional revenue in Q2 of 2001, for those of you who make the comparison with 2001, was linked to a specific effect on incoming international traffic.

I then give the chair to Jacques Champeaux for Corporate Services

On Corporate Services, which group mainly data networks and lease lines, we have experienced very slow growth of about 1.2%, which in fact is the result of two very different trends. On the one hand, we recorded an 8.8% increase in services to corporate clients with a particularly strong growth of data-managed networks in the range of 14-15%. On the other hand, we experienced a decline of lease line services sold to other operators. This very strong decline of 26% is due to a certain number of factors. First, general price erosion. Second, shrinkage of the carrier market through consolidation and bankruptcy of a certain number of operators, as well as an overcapacity in long-distance backbone, which has driven down prices on long-distance lease lines.

With regards to international voice and data services, shown on slide 20, you see that revenue increased by 53.1% to €4.4 billion. Equant increased by 174%, though there is a perimeter impact due to the fact that in the first quarter of 2001 Equant was not consolidated in our accounts. John Allkins will comment on Equant later.

Fixed line telephony increased by 37.6%. There is also here a perimeter impact with TP SA, and Bertrand Le Guern will comment on TP SA a bit later on. Mobile services, excluding Orange, increased by 20.7% on a pro-forma basis. Here it is decreasing, whereas in fact on a pro-forma basis it is increasing by 20.7%. Fixed line telephony increased by 4.5% on a pro-forma basis.

I will now ask John Allkins to comment on the next slide, which is on Equant.

Thank you, Jean-Louis. Just to say, since Equant reports in US dollars, that the contributive revenue shown on this slide of €1.491 billion agrees exactly with the numbers reported today on the Equant conference call of $1.473 billion, because we need to convert to Euros and then deduct some inter-group revenue sold to France Telecom of about €150 million to €152 million.

The key revenue message for Equant is the 8% increase in the second quarter of our key direct sales revenue. Incidentally, these revenues also increased 2% sequentially over the first quarter of 2002. This was offset, as the slide mentions, by a reduction of 14% in the indirect network services sales revenue, because of the decline in the Sprint and Deutsche Telekom revenue streams.

As we indicated in our press release and on our conference call, we have seen significant improvements in EBITDA, which moved from a $10 million loss at the EBITDA level in the first half of 2001 to a $75 million gain, or profit in EBITDA terms, in the same period of 2002. This was achieved because of the strong synergies and cost control put in place following the integration. Our costs are actually down by $180 million in the first half year of 2002 compared to the first half year of 2001. We are predicting that these synergies, which are still a major task of the managers of the company, will increase and significantly exceed $400 million in the year 2003.

With that I will hand back to Bertrand to talk about TP SA.

Thank you very much. For the first time TP SA has been globally consolidated in France Telecom's results as of 1 April 2002. We are, of course, reporting those figures in the French GAAP[?]. In the first half of 2002 TP SA Group revenues grew by 3.7% in comparison to the first half of 2001. That leads to a contribution, as shown on slide 22 and presented in pro-forma and constant exchange rate, of €1.192 billion compared to €1.164 billion in the second quarter of 2001, which is equivalent to an increase in constant exchange rate of 2.4%. This performance has been achieved first of all due to the outstanding performance of Centertel in the second quarter of 2002. Mobile telephony operations sales increased by 62% in the second quarter alone compared to the second quarter of 2001, and 48% in the whole first half of 2002. We also managed to defend our position in the fixed telephony market despite the economic slowdown and growing competition.

Looking now at some operational figures it is clear that the first half of 2002 demonstrates the continuous growth of Centertel with the total number of subscribers growing to 3.6 million at the end of June 2002, representing a growth of 75% on a year-by-year basis as compared with a figure at the end of June 2001 of 1.527 million customers. That equals to a significant increase of market share to a level of 30.7% in comparison to 24.7% at the end of the first half of 2001.

At the same time, we see some stabilisation in the ARPU and the [MOU]. There is still some slight decrease, though it is definitely stabilising compared to figures for the first half of 2001.

Looking at TP SA I think it is important to underline that in the same period we have managed to increase the number of lines, specifically due to an increase of 208,000, or 78%, in the number of ISDN lines in the period.

Last but not least, an important element is the improvement in productivity. Compared to the end of June 2002 the productivity has now reached 205 lines per employee compared to 157 lines a year ago.

I now hand back over to Jean-Louis.

Thank you, Bertrand. In conclusion, for fixed telephony in France there has been stabilisation of the local market share, as well as confirmed growth for Wanadoo and Orange. International revenues represent 40% of the Group's total revenues, so we are on track for the full year target.

In terms of the outlook for the full year, we are confirming double-digit growth for both revenues and EBITDA. We think even that EBITDA and EBIT will grow faster than revenues for both the first half and the full year of 2002. We also expect to roughly achieve around €3.5 billion of operating free cash flow, which is the difference between EBITDA and capex, at the end of the first half of 2002. This is a significant growth of more than 50% compared to the first half of last year.

That was our presentation. I propose now that you raise your questions. Thank you very much.

Just to let you know that Bertrand Le Guern has to leave soon, so if you have questions on TPSA please ask it at the beginning of the Q+A session. To ask a question you must dial '*' '#'. Thank you.

I have three questions. The first is regarding your guidance for the full year. Does that include the full-year consolidation of TDF? You have announced the disposal today and when will the consolidation of TDF be in 02? The second question is regarding the trends for fixed-line and data in France. Do you think you will be able to stabilize the revenue in the second half? Thirdly, you mentioned it would be possible to get some support from the State. Could you elaborate a little bit more on that? Thanks.

On your question about TDF, we assume that TDF will be consolidated for the first three quarters of the year, assuming you are closing at the end of September. That is the basic assumption in our plan.

We have no reason to change the expectation we have of a slight decrease of the revenue of the segment as announced before. Things are happening exactly as we expected. For instance, in fixed telephony the market share is behaving exactly as we expected, so we maintain the guidance we already gave.

Regarding your third question, we have a shareholder which owns 56% of this Group. This support has been explicitly confirmed by the Minister of Finance recently in an interview. I have no specific comment to make on this support. He said clearly that if there is a need for support - but he does not think there is a need for support - our major holder will be there. I think it is too early to talk about more explicit support at this stage. It is very clear that the concept of a rights issue has been totally excluded by our major holder in this interview and our shareholder could discuss some other alternative with us. At this stage, we have no specific comment to make.

If there are questions about TPSA, Mr. Le Geurn will be leaving in ten minutes.

I have one quick question - hopefully you can answer it. With regard to your €15 billion bank credit facility, [Peter Semar] estimates that over half of that has been drawn with your payment to both Vodafone, Eon and other obligations. It appears that by year-end you will probably take down the remaining amount of that credit facility and will be near the covenant limits. Have you been in negotiations with the banks about securing a new credit facility with more lenient covenants? That is question one. Question two if you may, expand on the fact it appears from your bond indenture in March 2001 that the Government, as your major shareholder, would be able to support you in terms of a government-backed or guaranteed bond deal or provide a loan. Could you elaborate if you believe that would be in violation of EU competition laws, even if it is provided under market rates? Thank you.

First I would like to remind you that this conference call is dedicated to revenues, not to the balance sheet and financing. That is the first comment I would like to make and I would like to ask that the questions be more dedicated to first half 2002 revenues.

I accept to comment about what you said on the liquidity of the covenant. I do not know how you computed that, but it is the wrong computation. It is true that at the end of June, roughly half of the banking facility has been drawn, which means we have roughly €7.5 billion undrawn. For the second half of the year, we are in a positive free cash flow position for the Group and we expect to sell - we have announced a sale already of TDF for €1.6 billion. We expect to sell Casema, our Dutch cable operation, for €800 million and a satellite business for €600 million, so in total €3 billion which are either concluded or close to being concluded. You will have an additional €3 billion coming in the second half of the year. On top of that, you will have some positive free cash flow of the Group.

We will next start with a syndicated bank facility which will be close to €10 billion or €11 billion undrawn, not zero as you say. I do not know how you make your computation. We will start with a very strong liquidity position at the beginning of 2003.

I agree with you on that, but the problem is that in 2003 and 2004 your debt maturities will exceed the amount. That is how I got the use of the remaining part of the credit facility. The question remains: are you in negotiation with banks to renew your bank facility?

You asked three questions; one on liquidity, and you were assuming that we would be at zero at the end of the year. I answered that you were wrong and that at the end of the year we will be at plus-10 or plus-11. That is my first answer.

Your second question was on covenant, which is not a question about liquidity. You said we will have problems with covenant. I confirmed that there would be no problem with covenant and we will meet and reach our covenant at the end of 2002. It has even been confirmed by [Francis Mer] in his last press release. There is no problem with covenant at the end of 2002. This is a covenant of five times EBITDA, on an EBITDA which is stated on 12 months. We have to count 12 months of TPSA because the current consensus of the market about our EBITDA is somewhere in the range of €14.2 billion, if I understand. It includes only 9 months of [TPSA BDA], so you have to add to that the first quarter, which is not included in this figure.

It means we will have no difficulty to achieve a five-times net debt EBITDA at the end of 2002. About 2003-4-5-6-7 and 8 I think we have time for thinking about our refinancing. We will start the year 2003 with, as I told you, a strong liquidity position with undrawn banking facility in the range of €10 billion to €11 billion. Because we have other disposal of non-core assets in 2003 and because our positive free cash flow will increase again in 2003, we have no problem to refinance 2003.

Anyway, at the specific stage we will have to come back to the market by definition. Any company in the world has to come back to the market at a specific stage; you cannot anticipate what the verdict will be. We never refinance and we never go to the market for two, three, four or five years, because if it is a case you cannot find any group in the world which could survive. We assume that at a specific stage, maybe in the course of 2003, we will come back to the bond market - or in 2004. We have no reason for renegotiating nothing with banks because again we are reaching and meeting our covenant, we have a strong liquidity position and the Group is producing more and more free cash flow, as we announced for the first half of this year six months: €3.5 billion of operating free cash flow, compared to €2.3 billion last year. It is very clear that we are generating more and more of positive free cash flow. Other questions?

I have several questions. One is about pro forma growth. It went from 4.3% in the first quarter to almost nil in the second quarter. What is the reason for the drop in this pro forma growth? Second question is about fixed-line decrease in France. It went down for 70-something thousand lines, as far I have made the calculation. Which is the segment concerned with fixed-line reduction? Is it consumer, corporate or other? Could you give us the quarterly ARPU for France and UK please?

The pro forma is 2.6 growth. It is a mix of growth in the mobile business, partially offset by the decrease in the fixed-line telephony business. It is just the explanation of this 2.6% growth on the pro forma business and is the only comment I can make.

What was your second question?

[Jacque de Collat]: How do you explain the decline in fixed-line in France?

In revenues?

[Jacque de Collat]: No, you had a decrease in number of fixed lines from first quarter to second quarter.

It is a slight one.

[Jacque de Collat]: Is it consumer or corporate customers leaving your fixed-line?

I think it is mostly residential, but there is nothing very specific. For instance, you have some side effects of ADSL lines versus ISDN lines because the ISDN lines for small business is not suited to ADSL. Moves of that sort could explain in some cases some redistribution or evolution of the normal line. It is mostly on small business and residentials.

[Jacque de Collat]: I had a question about quarterly ARPU for both France and the UK. You published ARPU only on 12-month moving average.

I will take that one. In France, in euros we reported 12-month annual number €383 this morning. The quarterly number for the second quarter, when you annualize that, was €368 - which is pretty level with the quarter one number that we reported last time. In the UK, we reported a rolling 12-month of £252. If you take the second quarter and annualize that, it is $260.

[Jacque de Collat]: The last question, if I may: could you update on the situation with MobilCom, because I think the secure deal for the loans is the end of this month - in five days. Where is the current situation of the negotiation with all of the parties?

We are currently in negotiation with the vendors. We had an agreement in principle with the banks for transforming their 4.7 billion loan into a perpetual subordinated convertible instrument which would be convertible into France Telecom shares at the level of €47 strike price. We have an agreement in principle and this instrument will be recorded in our accounts as quasi-equity and will not impact our debt and our balance sheet and our debt ratios. We are now negotiating with the banks the MOU on the legal document we have to sign with them. I do not anticipate big difficulties for signing this document quickly now.

On the supplier side, negotiations with Ericsson, we are less advanced. We are discussing the same instruments with them, but we do not have an agreement in principle at this stage. The third step, assuming we complete the first two steps, would be to discuss with the Company and with shareholders about the structure of the capital of this company. It would be at the negotiations after we have completed the first two steps. Anyway, these three steps are conditional, so we could be successful in these three steps or we could fail. I cannot tell you at this stage that the future of this company is guaranteed; it will depend upon the successful negotiation of these three steps.

[Jacque de Collat]: Thank you. One technical question about accounting: when you will recall that your convertible share for the banks and the suppliers. What will be the asset at the [ultimate] side? Is this the license of MobilCom, as I understand it?

The asset is the loan to MobilCom. We are buying to the bank a loan to MobilCom. We are buying a bank loan to MobilCom and buying a supplier loan to MobilCom. That is what we are buying to the bank and to the supplier. The asset in front of that is this loan. It is the main lender to MobilCom.

[Jacque de Collat]: In fact this loan will be backed on the asset which is the license? Is that correct?

Yes, the assets and the potential cash flow of this company for the future. Other questions?

[Alistair Francis]: I have two questions please. The first one was just regarding domestic calls in the fixed network between Q2 and Q1. It seems that the number of minutes went down by about 2.4 billion. Of that, I estimate that about 0.6 is due to the loss of local calling market share. Could you let us know what is responsible for the rest of the slide in domestic calling minutes? Is it fixed-mobile substitution?

The second question was just regarding the capex number. It would seem from your free cash flow guidance that you are being fairly prudent in capex in the first half, especially on the fixed-line network. Yet at the same time, you have seen volumes on fixed-line grow by about 28%. Do you think it is sustainable to continue to be prudent on capex at the same time we are seeing volumes grow?

We cannot understand your question because there is a problem in your phone. Can you take another phone? We are not understanding what you are saying. There is a problem in your phone. Can you please call back with another phone?

[Alistair Francis]: Can you hear me better now?

Could you repeat your question please?

[Alistair Francis]: Yes, certainly. It was regarding the fixed business. I see that fixed-line minutes went down by 2.4 billion between Q2 and Q1 of year. Of that, I estimate about 0.6 is to do with the loss of local calling market share. I was wondering if you could explain what the rest was. Is this fixed-mobile substitution or a substitution for ADSL?

It is a mix of the two. Fixed-mobile substitution is probably too simple an explanation. It is the evolution of usages. As you know, you can substitute fixed voice by mobile voice but you can also substitute some usages of voice by other means of communication, such as email, chat and other things like that. There is an evolution of usage which explains part of it.

Of course, there is some effect of the ADSL deployment, which takes the heaviest customers of narrowband access to internet and which is explained with the increase of ADSL. It is a mix of the two.

Could you repeat your second question please?

[Alistair Francis]: The second question was regarding the free cash flow guidance which implied you were being relatively prudent on capex in the first half, yet at the same time we are seeing volumes in the fixed business grow by some 28% year-on-year. Does that imply that the fixed network is starting to run at relatively full capacity and that capex might need to increase at some stage in future?

Not at all. The increase in capacity, as shown by the traffic, was linked to the ADSL and broadband. We have plenty of capacity and do not expect to increase our capex in the fixed-line business in the second half or in the next year. We think we will stick to the current level of capex in the fixed-line business in France, which has been somewhere around 2.5 billion per year in past years.

[Alistair Francis]: You would expect capex in the fixed business this year to be around 2.5 billion as well?

I am not giving a specific forecast, but for the current year and for the following year we think we will remain in this range, which is around 2.5 per year.

I would have liked a quick update on the TPSA's current restructuring, but I believe Mr. Le Guern has left.

Mr. Le Guern has left.

Could you please provide me with a quick update on the current situation at FTML in Lebanon?

In Lebanon we have a difficult discussion with the Lebanese Government about BOT. They want to terminate the BOT and to launch a new auction for the license. We think that if the Lebanese Government is following this route, it will have to indemnify us, so we are entering into an arbitration process. That is the status of the situation, but it could change. In Lebanon, sometimes the status of a question could change. However, the current status is that if the Lebanese Government follows this route, we will enter into an arbitration process in order to obtain an indemnification.

Were STML numbers included in your last accounts?

It is not included in Orange.

I know that, but was it included in the others?

In terms of revenues, for the first half it was roughly €189 million.

[Vernon Danford]: Do you think you can tap the bond market this year? Maybe you have already tried in the last few weeks and maybe have no access? Also, there are a few small asset sales you are planning. What do you think you can get in some of the asset sales?

We had some problems with your phone, but if your question is about our intention to go the bond market, at this stage we have no specific intention to go to the bond market. We will see later, depending on market conditions, but we have no specific intention to go to the bond market at this stage.

[Vernon Danford]: Our impression is that this discussion of State support is only discussion and at the end of the day you will try to get to the bond market and bondholders have to pay.

I don't understand your question. What is your question?

[Vernon Danford]: The question is: these reports of State support are only reports and at the end of the day we assume you will try to come to the bond market and bondholders have to pay to get liquidity to France Telecom.

I do not understand what you mean - you have nothing to pay. If we issue bonds, as any company, the bondholder has the right to subscribe if they want. If they do not want, they do not subscribe. There is no obligation when you launch a bond issue to subscribe, so I do not understand the question. We have been issuing bonds in the last years and parts of these bonds are maturing in 2003 and will be repaid. Another part could be refinanced, as any other company. I do not think there is a problem. Next question please.

I have a couple of questions. First of all, on the local call revenues. You have outlined the effect of a loss of €150 million of revenues. Is that effect net of the wholesale revenues you would have gained from the traffic that would be carried over your networks? If it is, when you look at the revenues from carrier services, could you ask Marc to explain again how you lost the 247 million of revenues? I am not sure I got his full explanation on that section.

In the total figures for first half 2002, we estimate that the loss of revenues for the end-user traffic paid by customers at around €175 million revenues. This traffic gets to interconnections to other operators and, depending on weather, it is connected to the local switch level or at the transit switch level. It is difficult when we go to interconnection to know if this minute to this operator is the substitution of a local call or regular long-distance interconnection. We estimate the addition of revenue at the interconnection level at around €28 million to €30 million. When you add minus-€175 million and plus-€28 million or €30 million, you arrive at roughly minus-€150 million, which is the difference of the loss of revenue end-user customers and the gains of interconnection revenue.

Can you go through the 247 you showed on the slide? You talked through some reasons, but I did not catch them.

Which slide?

I am afraid our slides aren't numbered, but it is the slide titled 'Fixed-line revenue trends for H1 2002 and the services to carriers'.

This has nothing to do with the 150 local calls figure. I want to understand your question.

The 30 extra revenues you gained from the carriers for carrying their network presumably gets reflected in the Carrier Services line.

Let's be precise: the chart 16 shows an explanation by item. The figure of 150 is not reported in the lines of our reporting. In the lines of our reporting you should quote minus-175 revenues Calling and Services, and the extra 30 should be in the Carrier Services. We aggregated them to show the impact of the substitution.

I understand that, but could you explain the 247.

The 247 is something which is due to interconnection, where you have two major effects. You have the effects of the decline of interconnection splices, which is in the interconnection catalogue every year but there is something specific this year: the capacity interconnection, which is called 'free echo' in some countries; the flat rate interconnection. You should keep in mind that you can have flat rate interconnection systems at the interconnection level. We also had an effect, as explained on slide 17, which has the restructuring and the decrease of the number of competitors.

One question for Jean-Louis. On the guidance for the full year, you have talked about pro forma EBITDA and EBIT growing by double digits. What are the pro forma numbers you are referring to for 2001?

It is 2001 restated in the parameters of 2002. It is not only on pro forma; we will grow double digits even on an historical basis.

Out of last year's numbers, we take out Telecom Argentina and we add in TPSA?

Yes, absolutely. That is the main change.

Do you know what the EBITDA for 2001 would be under that basis?

No, I do not have that information in front of me.

Just to be as precise as I can, on slide 16 the minus-166 is in the line Carrier Services. The minus-81 is in the line Corporate Networks, but it's sold as [is line two] Carriers, and minus-150 is as 175 in the line Calling Services, and the plus-28 in the line Carrier Services. Just to re-affect those items.

On slide 14, the market share, you seem to be fairly confident that you are going to maintain 80% local market share by year-end and also the long-distance market share speaks for itself. Can you walk me through our rationale for this confidence?

Yes, I can explain that. The market share is driven by two effects. The first is pre-selection and the second is call-for-call. On pre-selection, the result is very simple to understand. When a customer is pre-selected in France, he is pre-selected for all of the traffic, so the market share is the same with pre-selected customers on local and long-distance.

On call-for-call, the customer makes a choice on the difference of prices, quality of service and so on. On local calls, as you probably know, most local calls are switched with one switch with France Telecom if you are calling your neighbor. The cost structure for France Telecom is very efficient because you have one switch. If we go to a competitor, you have three switches: the France Telecom local call switch, the competitor's switch and back to the France Telecom switch. The cost efficiency of our competitors is less structurally than France Telecom. This results in a price level of our competitors on the local marketplace which is not better than us, which explains that there is no price war in France - it would be foolish for them. They have not the same price edge not as easily as on long-distance.

There is a structural difference for customers because on local calls there is no competition from competitors, and on long-distance they have entered the market being cheaper than France telecom, even taking risk on quality of service, for instance, in some peak times. Their networks are designed in a way that it's not the same quality as France Telecom.

The second is as we were preparing to that, the usages are not the same. Long-distance calls are more prepared calls; you are calling someone who is far away. It is a call you decide and you can make a choice on price. On local calls, it is cheaper calls and repetitive calls. The bundle marketing is much more efficient for local calls. As our information systems and our network structure makes it more efficient for us to have bundles of local call minutes, which we call 'Heures Local' and it is very efficient - as I was saying before - because we have 1.8 million customers with that, we are able to offer local call bundles to our customers and to keep them on France Telecom traffic. This explains that we are able to forecast an 80% market share by the end of 2000 with this decline of the [Roston] market share.

On long-distance, most of the wins of the competitors is done and we are fighting on a more win-back way. On price, competitors have no interest in lowering their prices and France Telecom is keeping a slight edge in fighting on this border of market share. Is that explanation enough for you?

Yes, that is a very good explanation. Thank you.

Just another question on the capex and the operational cash flow number that you have considered in the pack. I want to determine what your definition is. Does your definition include a pro forma six-month contribution for TPSA? If that is the case, could you just clarify where we should put your capex? I think recently you have been saying the range is 8-8.2 consolidated. Is that a number you are happy with for the full year at the capex level?

No, it is not a pro forma figure. What we are mentioning is historic figures, which means this figure of operating cash flow of 3.5 billion only includes one quarter of TPSA. It includes just TPSA since April 1, 2002. It is not pro forma; it includes just one quarter of TPSA. About global guidance, we said that on a full-year basis our capex would be somewhere between 8 and 9 for the Group as a whole, including TPSA, but we think today that it will be closer to 8 than 9. There will be more capex in the second half than the first half, because there are some seasonal effects and there is the fact that in the second quarter you will have two quarters of TPSA capex instead of one quarter in the first quarter. However, you will also have two quarters of EBITDA for TPSA in the second half. We think it is something which happens every year. Normally there are more capex in the second half than in the first half.

[Ferrigo Swanney]: A couple of questions on revenues to start with. Did you see some win-back of customers on the local call segment in the second quarter? I was wondering whether you could explain the market share of long-distance between national and international in the second quarter. On your targets of revenue and EBITDA, the targets you had in the conference in March were for double-digit revenue growth and even faster growth in EBITDA and EBIT. Is this still the case? I had a few more questions.

I can answer this last question directly. Yes, we said in March that our target was double-digit growth for revenues and faster growth for EBITDA and EBIT, and I will confirm these targets for the full year. We confirm this target for both the first half and the full year of 2002. Perhaps Marc can answer your first question.

The dynamics of the marketplace is not the same for local calls and for long-distance, as I explained. On local calls, as we experience right now, it's a matter of pre-selection. If the customer is pre-selected, we lose the local calls. If the customer is not pre-selected, there is very little and it's going very slowly and call-for-call. As there is pre-selection, we win-back on the total of the traffic because pre-selection affects all of the traffic. It is difficult to say that we make some win-backs on local calls compared to win-backs on long-distance. The question is: do we do some win-backs? Yes, we do win-backs. The effect is the local market share goes slightly down, which explains that we are losing a little share of pre-selected customers. However, we can win-back on the call-for-call basis, which explains the long-distance curve.

We fight competitors with two major weapons. The first is specific tariff plans, especially on long-distance, trying to have the customers drop pre-selection. On local, if the customer is more interested in local calls, with our marketing of bundles of local call minutes.

Your question was also on the international versus domestic long-distance. It is difficult to have an average answer to your questions. The market for international is very major and in some countries we are gaining market share because we are more efficient and more competitive. In some areas and some countries, we are losing market share. It is a very dynamic marketplace. We have regions, such as South Asia for instance, where we have very aggressive competitors and in some cases we are losing market share on these specific countries. In some other countries we are gaining. The average market share on international is flat, the same as the domestic market. It is really major markets on long-distance domestic and international.

[Ferrigo Swanney]: What are those levels of market share at the end of Q2 or H1? Is that something you can disclose?

For which segment?

[Ferrigo Swanney]: For international and for national long-distance. Can you split the market share between the two?

I do not know if I have the figures. I do not know if it makes any sense, but we have roughly and on average slightly better in international than in domestic.

[Ferrigo Swanney]: But you can't give us any figures on that, can you?

Not at this level, no.

[Ferrigo Swanney]: I have a question on TDF. I wanted to know the impact on revenues in the fourth quarter that you might expect from the big consolidation of TDF. Same question on EBITDA please.

Hold on please, we have the figure. On the first half, TDF represented roughly €370 million. The last quarter would just be half of that, so roughly €180 million.

[Ferrigo Swanney]: And in terms of EBITDA?

We are not disclosing that.

[Ferrigo Swanney]: The last question I have is on MobilCom, if I may. If I could just get your thoughts on any consolidation potential; do you still think that is necessary on the back off Telefonica's decision announced this morning?

Oh yes, because we always said there is room for three or maybe four players, but not for five players in Germany. Even if Telefonica decides to abandon or to suspend its presence in this market, even five is too much. It is clear that in this market we think that ideally three players would be the right number, maybe four, but we are sure that five will not work.

[Ferrigo Swanney]: On TDF, when do you expect that payment to be made? In the fourth quarter?

No, we think that it is probably at the end of the third quarter. Closing is probably at the end of September or maybe early October.

[Ferrigo Swanney]: Will that be a straight cash inflow?

Jacque de [Collat]; Yes.

Mr. Fossier, could you speak a little bit to pricing specifically, in terms of the magnitude of the impact - particularly on Carrier Services - and on the corporate networks of pricing versus the market slowing down and volume changes?

On Corporate Services, Jacques Champeaux may answer. On interconnection, you have not two effects but three effects, if I may. You have the level of prices, which is interconnection catalogue. I do not have the exact figures on hand, but on the local switch level it was minus-6% for 2002 compared to 2001 and on the transit level it was a little more than that - I think it was around 10. At the [double-transit] level, which is something which is very small in terms of traffic, it was minus- more than 10. It was high but has no influence on the market.

The second is volume. You have the figures on volume on slide 5, so you see the volume effects. The third effect you shouldn't forget is a structure effect because of the basket effects. We are moving traffic at the minutes from the transit to the local switch. The competitors are not paying the same price when they interconnect at the transit level of the local call effect.

Just to give you some understanding of this market, we have started at the beginning of 2002 with at least one interconnected carrier, a telecom in the Cegetel Group which is right now interconnected to all our local exchanges. We have lost with this carrier all the transit interconnection, but the good news is that it cannot go further. When it is interconnected at the local calls, it is the last level where it can interconnect. This is the first structural effect. The second, as I already commented, is the flat-rate interconnection system, which makes a drop point to connect internet traffic. This is [one-shop] drop, because right now we estimate that the main part of the narrowband internet access traffic is interconnected through a flat-rate system, which was introduced in our interconnection catalogue - such as other countries - late in 2001 and mostly at the beginning of 2002. Most ISPs are interconnected with France Telecom on the flat-rate system. It is difficult because those three effects are combining.

I think two different situations. The first situation is I would say most of the services, like voices or data networks, have experienced the same type of trends as we have experienced in 2001 - perhaps a bit slower decline in prices for voice. There is a slight tendency to stabilize prices in voice. In data, there is still obviously an increase in prices per volume, but as you know the increase in volume is high. In fact, as you have seen, it has more than compensated because the inter-managed network still growing in the range of 40%.

There are two areas where we have seen price wars. One is in certain circumstances, some I would say 'desperate' carriers, such as WorldCom in the last month, have really cut prices to gain new customers, both in voice and in international data, for instance. The second case is obviously the long-distance capacity based on backbone networks, where obviously there is huge overcapacity, both internationally and also in certain main towns in France, where prices have decreased more strongly than in other services.

Can you give us a sense of how fast those prices are going down?

No, it depends, but obviously on the long-distance capacity it is a double-digit effect. Sometimes these double-digits may be very important.

[Francois La Civet]: I read in the French press that there have been some changes in the Executive Committee of France Telecom. I would like to know if this may have an impact on your strategy in fixed-line business in France.

I am leaving this business, but as you have seen in the papers I am in charge for some months of global mission of usages and impact of value creation for the Group, which clearly means that all the strategy all the marketing we have globally decided and achieved in the Executive Committee of France Telecom will be achieved. Other people, same team, same result, same ambition.

[Francois La Civet]: So we don't have to expect any big change in terms of commercial activity or maybe more cross-commercial activities between one and two in the fixed-line business?

Of course, France Telecom is a group and France Telecom will react as a Group strategically and try to make the more sense and value with our customers. As far as regulation, especially competition laws and all that sort of thing, we are already acting as a team - as you know - and we will act as a team. Other speakers at your conference, but same strategy, same efficiency.

[Jacques de Collat]: I have two additional questions. One is: could you comment why the percentage of revenue on data has declined in France versus the first quarter? Second question is about the scheme you described for the MobilCom offer. I am a bit surprised; if you have an agreement with shareholders, it means you will own all the shares and then you will have to consolidate MobilCom, which will imply that what you will have on the balance sheet is not the loan but the assets of MobilCom itself. Is this correct?

No, at this stage we did not take any decision about the way the shareholding structure will be negotiated with the company and with shareholders. If we take control of the company, yes you are right to say that the assets will be in the balance sheet - by definition.

[Jacques de Collat]: So you would have the license. Is that correct?

Yes, by definition when you acquire a company with a license, you have the license in your balance sheet. That's obvious. But again, we are in complex negotiations and we don't know exactly what will be the outcome of this negotiation because it is a three-step negotiation, as I explained earlier, and all of these three steps are interrelated and inter-conditional. We will see if we achieve these three steps.

[Jacques de Collat]: Is there a deadline? Will you communicate before the end of July on this subject?

No, I don't think so. We hope and expect to achieve this process maybe early September, but not before the end of July.

On your first question, the reason is not Q2 2002 compared to Q1 2002. It is the in fact the effect of Q2 2001, because at that time the leased lines operator was still growing. In fact, the basis where you compare Q2 2002 to Q2 2001, you compare on the basis on the leased lines line, which were higher because of this growth in operator, which has dropped in the second half of 2001. That is the reason.

[Jacques de Collat]: I'm sorry; I was unclear in my question. This was about Orange France as a percentage of revenue.

I think what we see is just a normal trend. Some quarters are slightly higher than others. We see the second quarter was lower than the 9.4% in the first quarter.

[Jacques de Collat]: Are there no special factors in that?

No. I think the first quarter was unusually high, for some particular reason. The second quarter was significantly higher than the end of last year, so the overall trend is still upwards.

Two quick questions. One: in terms of page 14, where we see you're pretty confident about the market share in the fixed-line business stabilizing, could you give us a little color on the outlook for domestic calling services? Do you expect it to continue to trend down in terms of the percentage decline quarter-over-quarter in revenues, given your outlook for more stabilization in the market share and considering that domestic calling services have been where we have seen the most fall-off in revenues under fixed-line telephony?

The second question would be on BDSL domestic market. Your target is 1.3 million; are you confident that you can get up to that level, given your run rates between 140,000-160,000 subscribers a quarter?

On the ADSL, you must take into account two factors. The first is that we have gained approval for our new tariffs from the regulator. This was published 10 days ago, so we will be able to offer better offers and better services to ISPs and to carriers. That will allow those ISPs to either lower prices or to have some extra cash to make promotions, advertisements and whatever they want. We expect these new wholesale tariff plans and retail tariff plans to have more efficiency on the marketplace. The second is: after some litigation with the competition law authority in France, we are again allowed to sell bundles, such as Wanadoo/ADSL bundles, in our commercial outlets. This will give new momentum, which will allow the tariff to grow at a higher pace and not have the same pace in Q2 as we had in Q1, as you can see on the figure.

On the fixed telephony revenues, I repeat what I said. We expect the market share for long-distance to be stable. We see no price competition on the marketplace and we expect local market share to slightly go down to our expectation of around 80% by the end of 2002.

One or two more questions and we will stop the conference.

[Isaac Bourneville]: Just one question on MobilCom. If in the event of you taking control of MobilCom in Germany, do you foresee France Telecom or Orange being a minority party in any future consolidation combination?

What makes sense in this market is consolidation and merging of small players to build a viable third or fourth player. If it makes sense, we prefer to have a minority position in a viable business than to have control of a non-viable business.

[Alice Jenkins]: My question is concerning the status of your negotiation with the bank of your Polish partner, concerning their right to put TPSA's shares to France Telecom.

We are in discussion with the banks and we have the agreement of the main banks. We are close to settling this issue and so we do not expect to have to repay this amount, which is in the range of 1.5 billion. In fact, your question is [relevant] because there was a trigger linked to the downgrade of our [A team], but we discussed that with the bank and the [Reid] manager accepted already, as have most of the other banks. We need a majority of two-thirds and we are now close to complete this settlement and to attain a waiver on that.

[Alice Jenkins]: My question is concerning the status of your negotiation with the bank of your Polish partner, concerning their right to put TPSA's shares to France Telecom.

We will probably exercise this option in the second half of the year. No specific date, but we will do that in the second half.

[Alice Jenkins]: The finance question would be: could you tell us what will be the EBITDA contribution of TPSA to France Telecom?

No, TPSA will disclose its own figures apparently for the first half, so we don't want to anticipate. It is a listed company as you know, so we cannot give the figures of EBITDA before they disclose their own figure - their minority shareholder interest also in TPSA. The contribution of EBITDA of TPSA will be very important, because it's a very profitable company with high EBITDA margins. This company, as you know, had a strong EBITDA margin and a strong EBITDA, so it will be a strong contribution to France Telecom in the coming years.

Thank you for your questions. I think we can now stop the conference. Thank you for your questions. We will meet again on 6 September for our conference on the first half results of the year. Thank you very much. Bye-bye.