Orange SA (ORAN) 2003 Q2 法說會逐字稿

Good day everyone and welcome to this Equant Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Ashley Rayfield. Please go ahead, sir.

Thank you. Good morning and good afternoon, ladies and gentlemen. Thank you for joining us today for our investor conference call to review the results for the first half of 2003, which we announced last evening. The news release is available over most of the wires and on the Equant website.

The agenda for today’s call is straightforward. Jacques Kerrest, Equant's Chief Financial Officer, will briefly comment on the results and then he will be happy to take your questions.

I would like to remind you that our speakers’ comments today may contain remarks that constitute projections, beliefs or similar forward looking statements. You are cautioned that these statements are only predictions and that actual results may differ materially from the results anticipated or projected in any such forward looking statements. Additional detailed information concerning the important risk factors that could cause actual results to differ materially from the information the speakers will give you today is readily available in Equant's filings with the Securities and Exchange Commission in the U.S. and the Commission of the Bourse in France. All forward-looking statements are based on information available to Equant as of today, and Equant assumes no obligation to update such statements.

Now I will turn the call over to our Chief Financial Officer, Jacques Kerrest.

Thanks, Ashley. Good morning and good afternoon, ladies and gentlemen and, again, thank you for joining us on the call. We announced the headline items for the half-year on July 28 and gave a good rundown on the competitive environment and the economic conditions under which the business is operating at this time. So, it is not my intention today to go over old ground. What I want to do is concentrate on what is driving our very much improved operating income before depreciation, amortization and non-recurring charges, as well as a much reduced net loss.

By way of a reminder, as you will have seen from the release, there were some positive signs in our revenue numbers. Network Services direct revenue was up by 9% compared with the first half of 2002. Integration Services also recorded growth, which together more than offset the expected decline in SITA revenues and the lower revenues in our indirect channels. Overall though, our revenues were stable, as we told you they would be.

Against that background, we have managed to improve our growth margin from 28.8% in the first half of 2002 to 32.7% in the first half of 2003, an increase of 400 basis points. That we have been able to do this speaks to the success of the Network Integration that the company has undertaken over the past two years. This has allowed us to cut direct costs dramatically. We have highlighted in the release two of the main areas where we have cut direct costs, which were circuit costs, down $37m, and facility costs with $17m. These reductions come about as a direct result of the company’s good cost management.

In absolute terms, our gross profit is up nearly $60m, reflecting essentially a reduction in the net direct cost base of 5%.

Turning to SG&A, you will see that our expenses were reduced by almost over 7% first half 2003 compared to first half 2002, which has meant a reduction in our expenses of over $25m, with more reduction to come in the future. Reduced staff and facility costs are the main drivers of the lower SG&A expenses. As a reminder, what is clear from the numbers is the success of the integration strategy which started by integrating the sales force, then the network before finally turning to G&A.

And those reductions in our costs are following straight through to our improved operating performance, with total costs before depreciation down by 5.6% or $78m, effectively explaining the improvements in the operating income before deprecation, amortization and non-recurring charges. Below that level, the depreciation charge has shown an increase of $23m, which resulted from our aligning the useful life of certain Global One assets with those of the company. The absolute amount of depreciation is a function of the high levels of investment that we have made in the past, and as our capital expenditures have reduced over the past 18 months or so, we expect depreciation to begin to come down.

The release also sets out the restructuring and integration position, and I would only add that from 1 July there is no further support from France Telecom. In the second half, by the way of a reminder, we expect restructuring and integration costs to be small.

Our cash position remains strong. Our operating profits before deprecation, amortization and non-recurring charges, at $159m was in excess of capital expenditure, which helped with cash generation, but we continued to optimize the capital invested and used in the business.

Capital expenditure was down 14% from the level in the first half of 2002. In the first half of this year, about 65% of our capital expenditure was driven by customer requirements.

Turning to working capital, we have brought down receivables. That is about $100m since the year-end 2002. Third-party days outstanding as of June 30 2003 were around 60 days.

In conclusion, we are doing well in a difficult environment. We are continuing to win new business. The benefits of our integration strategy are coming through, allowing us to get our cost base down. We have improved our cash position at the same time.

On that note, I will hand you back to Ashley to explain the Q&A process.

Thank you, Jacques. Now we will entertain any questions that you may have. Operator, can you please explain the process for investors to ask questions.

Today’s question and answer session will be conducted electronically. If you would like to ask a question, please press the * key followed by the digit 1 on your touchtone telephone. We will proceed in the order that you signaled. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, to ask a question please press * 1 at this time. We will pause for a moment to give everyone an opportunity to signal.

Thanks operator. While the operator gets the queue in order, let me remind you, if I may, that this call will be relayed through Monday, September 22, 2003. The call-in number for the replay is 1 719 457 0820. The access code is 682000. If you did not receive an email of the news release and you want to be included on our distribution list, please send anyone at Equant Investor Relations an email with your contact information, or call me in London on 44 20 8321 4581 or Isabelle Guobert in Paris on 33 1 46 46 9953. Operator, we are ready for the first question please.

Thank you. We will take our first question from Steve Randall with Bear Sterns.

Good morning and good afternoon. I just wanted to talk about cash flow for a minute. Could you talk about the cash reimbursements from France Telecom. Is it correct that you did not get any cash reimbursements this period? I noticed that you said in the press release that you are due $123m in recoveries from the restructuring activity for the first half. That is the first question.

The second question, could you give us some updated color on where you see SITA revenue? Do you still see that coming down 10%-15%? Then, perhaps you could give us some color on 2004 as well. Thanks.

Thank you, Steve. Good afternoon or good morning. The answer to the first question about the restructuring and integration costs, we have indicated, as you have pointed out, in the press release that we expect the recovery of around $120m to $123m from France Telecom. We are in the process of settling this number. That is where we stand today. We have not received that amount of money yet.

If you want to talk about SITA revenue, we keep our guidance to what we said before. We expect revenues to decrease 10%-15%, as you said. This does not change.

Okay. Just a quick follow up, did you not receive any cash from France Telecom in the first half for those restructuring activities?

Yes, we did receive cash after the end of the first quarter. But we have not received a final settlement.

About how much was that for the total period for the first half?

I don’t have the number in front of me, but I believe it is around, I think it was a small number in the first quarter, maybe $10-$20m.

Okay, thank you.

We will take our next question from Pierre Machalon with Equilant.

Good afternoon, Sulter Mitchell speaking. First question is, are you in a position to confirm yourselves or defend or [indecipherable] compared to 2002? That is my first question.

My second question is on the working capital. I just wanted to check that you have an increase of your connect working capital in the first half? How would you expect that to be for the full year?

Lastly, on SG&A you reported that you expect further improvements or further cuts, does it mean that compared to first half we will have an absolute occurrence in H2 a reduction, or is that some seasonality impact to be taken into account there? Thank you.

Thank you very much. First question, if I heard it correctly, you were asking if our guidance is the same, in terms of revenue for 2003 for the full year compared to 2002. We are not changing guidance. We expect to be relatively flat with last year.

In terms of working capital, yes, we have seen an improvement. We expect a smaller improvement in the second half, but nothing dramatic. Just a small improvement from the first half.

In terms of SG&A for the second half, compared to the first half, obviously we had a good improvement in the first half. Some of this will flow through in the second half also, but you will not see as big an improvement as you have seen in the first half in the second half of this year.

When you say improvement, is that H1 versus H1 and then H2 versus H2?

It is H2 compared to H2.

Okay, so not as big H2 versus H2 as was H1 versus H1?

That’s right. I mean sequentially there will be an improvement, but not as big.

Alright, so sequentially it is H2 versus H1?

Yes, but you will see a bigger improvement in H2 compared to H2 last year.

Okay, thank you.

Next question.

We will take our next question from Adam Woodington from Morgan Stanley. Please go ahead.

I have two questions, if that is alright. The first one is, could you give some detail as how Equant fits into FT Top Program. Also, in your first couple of months there, any opportunities that you foresee to drive the business model forwards? For example, cost restructuring, new market to generate growth, etc.

Then, secondly, I think that the Radianz joint venture losses have increased marginally, whereas I actually believe that consensus was actually expecting a number closer to $20m for the full year. And you guys came in with $15m for the half. I was wondering whether you could give us some clarity with regards to your expectations there.

Okay, regarding the FT Top Program, as you know, we are part of this Program, and we are contributing to the overall improvement in the FT program. I think we can go offline and discuss that if you want, but I am not sure we need to go into all the details. But, as you know, we are part of the FT Group and, therefore, we contribute to the improvement of the overall Group.

In terms of the Radianz losses that you see in the P&L, I think that this number was expected. I think that we had given guidance before about this. I do no think that there was anything special. I am not quite sure exactly what you wanted to know about it.

I am sorry. I will try it another way. [Are we to be] taking this run-rate going forward, or should it be declining? I was just wondering-- Also, what measures are you putting in place to actually hinder these losses or reduce the losses going forward?

I think for the second half you can expect maybe a small increase in the loss. We have not, and have not presented here, a budget for 2004 yet. And we shall review this in four, five or six weeks, and we will be in a better position to tell you when we report the full year, in early February next year, what we expect from the Radianz through our P&L.

If I could just have a follow-up question. I was wondering whether you had set a date yet on when you expect to communicate the new management strategy, etc, to the investment community.

Well, as you know, we will be reporting the third quarter around October 29, and Daniel Caclin the new CEO will be at that analyst conference call, and will certainly give a good view of what he wants to do. He will also certainly describe the management team that he has put together around him. I think that will be first time he will communicate with the marketplace.

Thank you.

We will take our next question from Mr. Patel Rafan from Odo Securities. Please go ahead.

Thank you and good afternoon. Can you give us a sense of what you see in the market right now in terms of demand and competition? Has anything changed since July?

As you know, Patel, we really don’t want to comment between quarters. I think what we said on July 28 still stands. Things really have not changed in the marketplace since that date. So, we will give a better update and an update really at the end of October when we report Q3, but there really is no change in general in the market.

Thank you.

You are welcome. Next question.

There are no additional questions. Mr. Rayfield, we will turn the call over to you, sir, for closing comments.

Thank you very much, indeed. This will conclude the conference call for today. I would like to thank you all for joining us. The investor relations team will be available after the call to answer any additional questions that you might have. You may either call me, Ashley, or Isabelle Goubert. Thank you very much indeed.

This does conclude the Equant results conference call we do thank you for your participation. You may disconnect at this time.