Orange SA (ORAN) 2004 Q2 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to France Telecom's First Half '04 Results Conference Call. [Operator Instructions].

At this point, before we begin I would like to note that the following discussion will contain forward-looking statements and that our actual results may differ from those discussed here. Additional information concerning the risk factors that could affect the financial results of France Telecom is contained in the Document de Reference submitted to the AMF on March 9 '04 and in the filing of Form 20-F with SEC on April 16 '04.

Thank you. Let me give the floor to Michel Combes.

Good afternoon, Michel Combes speaking. Before starting this conference call, let me point out that for the first time France Telecom is presenting full H1 audited results 1 month only after the end of the semester. The full consolidated figures and appendix will be available on Friday the 30th as well as the management report.

But let's turn to the real purpose of the call and comment on our H1 '04 figures, on slide 3. Those figures are in line with expectations, both for revenue and EBITDA. Revenues are up 4.2% pro forma, at the upper range of our full-year target range of 3% to 5%. Our 38.3% EBITDA margin is also fully in line with analysts' consensus and is consistent with our over €18 billion EBITDA target for '04.

These good figures are the results of 2 major operational trends. First, a sustained double-digit growth for Orange and for broadband revenues. Second, a good resilience, especially on Access for Fixed Line service in France.

All in all, those strong results allow the growth to maintain its '04 and '05 guidance. I will come back on this later.

Let's have a look on slide 4, which recaps the key P&L figure for H1. Revenues increased by 1.4% to reach €23.18 billion, up 4.2% on a pro forma basis. EBITDA margin before commercial expenses improved by 3 points compared to H1 '03.

As in Q1, part of the operational gains have been reinvested in commercial expenses. Nevertheless, and despite those commercial efforts, EBITDA margin improved by more than 1 point year-on-year on a pro forma basis.

At €5.27 billion, operating income posted a double-digit growth, ahead of expectations. Current income from integrated companies increased by 47.6%, highlighting thereby FT operational leverage.

Finally, reported net income is down 56%. However, the comparison is impacted by exceptional items, such as the positive tax impact in H1 '03 and exceptional goodwill amortization in '03 and '04. Indeed, these 2 items represented a net profit of €2.2 billion out of the €2.5 billion net profit in H1 '03.

On the other hand, H1 '04 €1.1 billion net profit is negatively impacted by €0.5 billion exceptional goodwill.

Let me turn to cash generation and debt, on slide 5. CapEx stands at 8.9% of sales in H1 '04, but we foresee no change in our guidance and maintain between 10% and 12% CapEx to sales ratio objective for the full year.

Free cash flow before debt, disposals and excluding Orange and Wanadoo minority shareholders buyouts, which is the real organic cash generation, is up almost 69% to €3.4 billion compared to €2 billion in H1 '03.

Net debt is reported at €47.9 billion end of June '04, up 8.6%. This figure includes almost €3.6 billion linked to the application of new accounting standards regarding securitization for €1.4 billion and the [consequent] impact for €2.2 billion. The latter would have been in any way taken as debt when exercised. Without this change in accounting method, net debt would have been stable.

Organic free cash flow generation being offset mainly by the buyout of Orange and Wanadoo minorities and dividend payments.

Overall, FT maintained its objective of a net debt to EBITDA ratio in French GAAP between 1.5 and 2.

I will not comment the following 2 slides at this stage, except to point out on slide 6 the resilience of Fixed Line in France and the double-digit growth in revenues for Orange. And on slide 7 the fact that barring Equant, all segments boasted an increase in operating income and EBITDA minus CapEx on a pro forma basis, and that overall Group EBITDA minus CapEx is up 9.6% pro forma.

Slide 8 now, with a summary of the Group EBITDA margins on a consolidated basis. In Q2 '04, EBITDA margin before and after commercial costs has improved both year-on-year and sequentially as the TOP program continues to yield operational improvements for the Group. We therefore believe to be on track for our 40% EBITDA margin target in '05.

Let's look at operational segments' performance in more detail now and go directly to slide 10 with key messages concerning Orange.

In H1 '04, Orange posted an 11.5% increase in its subscriber base, with now almost 51 million customers around the world. Continuous improvements in EBITDA margin before acquisition and retention costs has allowed the Group to increase its commercial expenses without impacting profitability.

Rest of the world performance has been strong once again, with 24.4% revenue increase and almost 43% EBITDA improvement. All in all, Orange confirms its guidance of an acceleration in revenue growth year-on-year.

Let me comment more precisely on the main drivers of this performance.

As far as consumer base is concerned, on slide 11, all sub-segments have registered an increase [inaudible] with a regular growth in metro markets and a strong pick up for rest of the world, with double-digit growth in each country. I will come back later specifically on the UK market.

As shown on slide 12, positive ARPU trends are confirmed in France and in the UK, with an increase of both voice and data revenue per user. As far as revenues are concerned, with an 11.2% increase in H1, Orange segment's achievements were above market expectations.

Slide 14 now, with pre-SACs and SRCs margins increasing for the Group and for each geographic area, France up 3.2 points [UK up 1.6] points, rest of the world up 6.9 points, reflecting the success of the implementation of the TOP program.

As shown by the next slide, revenue growth commitment has been reflected during the period by the growth in commercial expenses. The Group forecast on SRCs was confirmed everywhere in order to retain high-value customers. Churn pick up in the UK reflects the high level of competition in this market. In France, thanks to the success of loyalty programs, overall churn decreased by 1.8 points and by 2.9 points for contract customers.

Now let's focus on Orange UK. As everybody knows, it has been a very challenging market, and John will be with us for the Q&A later on. Net add figures for Q1 and Q2 for Orange UK have been somewhat disappointing. However, contract net adds are more satisfactory and reflect Orange's commitment to retain value leadership.

Nevertheless, you can see on the next slide, 17, that Orange focus on high-value customers can be seen on the following indicators. Contract churn remains stable and the lowest in the market. Contract ARPU is at a premium to all other players, and as far as profitability is concerned, Orange UK continues to improve EBITDA per customer ratio.

So even if the situation is a logical consequence of a value-oriented strategy, Orange UK management has taken further steps to improve its competitive position.

In order to regain momentum on this market, Orange UK is implementing a Group-wide segmentation strategy, which allows the launch of Orange Premier, a specific plan for very high-value clients. Orange UK is also improving its exposure to corporate clients, enhancing its distribution channel performance, both indirect and direct, and launching 3G datacard products.

Note that higher EBITDA margin pre-SAC and SRCs allows for stronger commercial spend while protecting margins. The UK market is tough but Orange UK has enough room of maneuver to be able to adapt in any case.

We can turn to profitability now, as slide 19 analyzes EBITDA and operating income trends for Orange sub-segments. France posted a double-digit increase in both EBITDA and EBIT, with EBITDA margin up 2.3 points year-on-year. Rest of the world saw, as usual, the largest improvement in profitability with EBITDA up 42.9% and operating income up 111.9%.

I would like to comment more specifically on UK operating income, directly impacted for the first time by the beginning of amortization of UMTS license network.

Without this impact, UK EBIT would have decreased by 1.7% instead of 21.1%. The impact of 3G licenses and network amortization in H1 '04 is €120 million. UMTS license amortization was €9 million in France in H1 '04.

Slide 20 now, with an overall 13.4% growth in profitability and EBITDA margin increasing by 0.7 points year-on-year. CapEx are up 3.8%, in line with full-year guidance despite the rollout of EDGE and UMTS networks.

To finish on Orange, 2 slides for the H1 key initiatives. I will not comment them precisely, but let me point out on this one the success of Orange Signature Phones, which have proven according to our internal usage statistics to be a key driver of ARPU and usage.

And on the next slide, 22, the successful rollout of Orange broadband networks, 3G and EDGE, with an expected commercial launch before the end of '04.

This will be all for Orange today before Q&A with Sanjiv, Didier and John. Let's talk about Wanadoo.

As you can see, slide 23. The key message for our Internet subsidiary remains the success of broadband. With a 80% increase year-on-year for Wanadoo in Europe, more than a third of Wanadoo's European subscriber base is now broadband. For example, in the UK Wanadoo has doubled its broadband subscriber base over 6 months. Also, Wanadoo Netherland has more than 400,000 broadband subscribers.

I will not spend much time on Directories, as you can refer to the presentation made by PagesJaunes last week. Let me just emphasize on the success of Internet services with online directory's revenues up 20.9% and an increase of 15% in the number of Internet advertisers.

At the end of June, Wanadoo had 9.3 million customers, of which almost 50% outside France. The [pot] of broadband customers increased regularly in France or outside France, reflecting the strong demand for this product.

Slide 25 demonstrates the continuing double-digit growth revenue in this segment. Internet business is still on the rise, with a 15.9% growth. Directories performed well, with a 4.5% rate growth.

As shown on slide 26, increase in profitability shows a relative slowdown as a result of adverse market conditions on Access in France and growth in commercial costs. EBITDA margin remains stable nevertheless, and the model keeps on delivering more cash at the same time, if we consider EBITDA minus CapEx metrics.

As for Orange, I will not comment slide 27. Let me nevertheless give you our feeling on Wanadoo's current market position in France. We are well aware that Q2 was disappointing, as our net adds market share decreased to 34% compared with 39% in Q1. In a highly competitive market, Wanadoo lost a bit of momentum in terms of pricing and commercial visibility.

As you know, due to legal aspects during the buyout offer, Wanadoo advertising campaigns have been restricted. We have always said that the merger was an opportunity for Wanadoo to react to competition and to better serve our clients [through home] and this is the reason why we have chosen to accelerate the agenda by launching a cash squeeze-out rather than a merger.

We have also strongly reacted on the commercial side and launched competitive new offers to be available in Q3 and innovative services in July with Wanadoo Live-Box. Our target is to substantially increase our share of [contest]. I cannot provide any precise figures yet, but let me tell you that we saw the first positive impact of Wanadoo new offers as early as in June and that the positive trends have been confirmed in July.

We'll come back with Olivier later on, probably during the Q&A.

Let's switch to the Fixed Line business. Slide 28 gives you a quick picture of the [messages] in the Fixed Line business. ADSL remains the major growth driver, with a 48.5% growth year-on-year.

On the consumer segment, the main points were the resilience of Access revenues and lower traffic. Business services have been impacted by price pressure and technology migration. Carrier services posted a double-digit growth, thanks to broadband market development in France and the increase of international traffic.

But despite the slight decline in revenue, Fixed Line segment improved its profitability.

On slide 29, we present the 2 major ADSL market KPIs, namely revenues and number of lines, reflecting precisely market trends. As far as revenues are concerned, they keep on growing quarter after quarter on a regular basis. The customer base registered the same trend and we still expect between 5.5 and 6 million ADSL lines at the end of the year, of which around 4.5 million excluding unbundling.

To comment slide 30. First the stabilization of the number of lines. Minus 0.8% year-on-year and a slight erosion of traffic market share. Second, the regular increase in the number of customers with contract offers, allowing us to secure almost two-thirds of our revenue every month.

Slide 31 now, with an highlight on consumer services. Subscription decreased by 1.6%, reflecting the impact of Liste Rouge free access, implemented in Q3 '03. These base effects will be [inaudible] partially in Q3 '04 and totally in Q4 '04.

The Q2 to Q1 trend difference is linked to phasing effects in the accounting of some services and is not at all reflecting a change in operational trends.

Calling services decreased by 9.8% because of the [very slowing] market trend, fixed-to-mobile price cuts and market share loss, the latter explaining 60% of the decrease.

To counteract this trend, we launched unlimited offers to stimulate usage and successful contract offers to preserve our market share. Let me comment those offers on next slide.

When we announced those new offers in June, we were pretty sure it was the right way, not only to react to competitive pressure but also to answer to new customer needs. Apparently we made the right choice. One month after launch we have 300,000 customers for the unlimited offers and Le Plan, with 60% of the subscribers choosing the real 24/24 and all numbers unlimited plan for €33.

Even more interesting, the success appears to have a rapid and significant impact on the loyalty of our customers, as our weekly market shares on the retail segments have improved in July. However, we need a longer time window to assess the full impact of these new offers.

I will not comment slide 33, and switch directly to business services on slide 34.

Fixed Line sub-segment experiences a 9.7% decrease, mainly because of fixed-to-mobile tariff cuts, price pressure and market slowdown. Business networks is stable, thanks to the increase in broadband, new services, and a wider [Internet access width need], offset by the transformation of product mix from lease line to DSL products.

Slide 35 presents major initiatives to develop business services. They are consistent with what we announced during the last investor day and show the willingness to go for more added value services wherever it is possible. I shall not go further in further details, but Barbara will be there for the Q&A.

Slide 36 gives you a flavor of carrier services sub-segment, which experiences a 14.5% general growth. The main growth driver in domestic interconnection is the positive volume effect, partially offset by price cuts, in particular fixed-to-mobile. As far as other carrier services are concerned, the pick up is directly linked to the great success of broadband and international.

Slide 37 recaps the whole segment revenue figures and shows an improving trend in Fixed Line, Distribution and Networks, with a 1% decrease in revenue on a pro forma basis.

We have on slide 38 a quick [draw] of Fixed Line, Distribution and Network trends, where the improvement of the semester is confirmed. Note that this favorable trend has been achieved without increase in subscription fee, which would have been around 0.5% positive impact, and despite the adverse effect on Liste Rouge for '04/'03 comparison, around 0.5% also year-on-year negative impact.

Slide 39 gives a flavor of Fixed Line business's ability to enhance its profitability on a pro forma basis, thanks to TOP program. EBITDA margin improved by 2 points, from 34% to 36%. OpEx decreases by 3.8%, thanks to sourcing and labor cut impacts, despite increasing commercial costs. Headcount was reduced by more than 7,000 people. CapEx grew by 3.4%, with an increasing weight of IT.

Slide 40 provides a focus on TOP positive effects on labor and non-labor costs. Labor costs decreased by 4% and non-labor costs by 3.7%. OpEx are now under control and give us confidence to deliver our commitments.

Let's go now to Equant, on slide 41. The decrease in pro forma revenues is due, as you know, to an adverse competitive and economic environment, while Equant is continuing to develop its business in skilled-based and outsourcing to counterbalance.

I will not comment slide 42, taken from the presentation Equant gave last week, and go directly to slide 43.

To repeat what has already been said by Daniel Caclin, the ongoing OpEx reduction reflected, for example, in the significant reduction in termination costs and in lower personnel costs, will allow Equant to improve its results in H2.

On slide 44, let's comment now on TP. Our Polish subsidiary experienced an increase in both fixed line and mobile subscribers. Revenues increased by 1.6% on a pro forma basis, with a drop of 5.7% for fixed and plus 29% for mobile.

Slide 45 presents TP key operating figures. EBITDA margin remains to a high level of around 45% on a semester basis. TP experienced a cost reduction program. It has been implemented in particular on the fixed line labor costs, which decreased by 13.1% in H1 '04. TP will release its H1 consolidated results on July 30.

Slide 46 presents TP key initiatives. I shall not go into more detail, and turn very quickly to other international operations on slide 47.

This segment experiences a 7.5% growth on a pro forma basis. In actual figures the 20.8% decline in revenues comes from the asset disposal of CTE in Salvador, Menatel in Egypt and Casema in Netherland.

As you can see on slide 48, the segment experiences a general growth in profitability and in cash generation, if we consider EBITDA minus CapEx.

As a conclusion on this part, and beyond the figures, I would like to stress that we are addressing operational issues coming from H1.

For Orange UK, a stronger focus on corporate clients, distribution optimization and 3G datacard will allow to regain momentum.

For Wanadoo, we have new broadband products to be launched in Q3, which will announce our share of net adds as we have already seen in late Q2, early Q3. This will be done through a new integrated structure.

For fixed voice in France, our unlimited offer appears to be a success, with the potential for improving ARPU and market share. We will be back to you on this when appropriate to provide with a deeper analysis on this impact.

For the business market and also for Equant, the implementation of the strategy, oriented service, continues. It is a long haul project but like the recent business everywhere initiative, you can see that it is taking shape.

All in all, FT is regaining the initiative and this supports our confidence in the future.

Now let's see the TOP program update.

One of the main TOP program efficiency indicators, EBITDA minus CapEx, improved by plus 9.6% pro forma year-on-year. This is mainly due to contained CapEx, reflecting sourcing impacts and the TOP program, and an increased EBITDA, plus 6.9% pro forma, despite higher commercial expenses and thanks to labor cost decrease.

Slide 52 confirms our ability to balance growth and profitability. As you can see, H1 '04 EBITDA improvement over H1 '03 is mainly due to revenue gain for €940 million, and to a lesser extent a decrease in labor costs for €162 million. Those positive impacts are partially offset by commercial expenses take up of €513 million.

H1 '04 operating trends are consistent with Q1 '04 and will allow us to reach full-year targets.

Slide 53 gives you a view on CapEx trends, with total Group CapEx contained thanks to sourcing impacts and saving effect, as mobile CapEx are expected to grow in H2 with 3G rollouts. On the other side, ADSL CapEx will continue to benefit from price decline and optimization linked to better equipment utilization rates.

Despite a lower rate in H1, like in '03, we maintain our full-year target of CapEx to sales ratio between 10% and 12%.

I will rapidly comment OpEx on slide 54. They are contained with a 1 point decrease in OpEx to sales ratio year-on-year on a pro forma basis. This has been achieved with a reduction of our labor costs, minus 3.5%, linked to headcount reduction and despite higher commercial expenses to deliver growth.

For full-year '04, we expect a similar evolution of labor costs, detailed on next slide, where you can see that the 3.5% reduction year-on-year on a pro forma basis is mainly achieved thanks to volume impact with headcounts reduced by 5.7% on a pro forma basis. This is partially offset by a positive cost effect of plus 1.8%. This is fully in line with previously announced targets.

Slide 56 draws a picture of Group's headcount trends. Year-on-year the Group experienced a minus 5.7% pro forma decrease in headcount, in line with guidance.

To finish with operational costs, a quick comment on non-labor costs, contained on the TOP program but inflated by commercial expenses.

Last but not least, operating capital trends with KPIs are under control. Please note that due to phasing effects, operating capital change in H1 is negative but it should be slightly positive for full-year '04.

As a conclusion, let me say that TOP is fully on track and delivering continuous results for FT. This remains the key focus of the Company. Following '03 improvement per business, TOP program in '04 is driven by [inaudible].

Jean-Paul Cottet, who is in charge of TOP, will be there also to answer questions.

Let me now present our consolidated results, starting on slide 60 with an overview of main items between revenues and operating income.

After a long operational presentation, the only item I would like to comment is the line "Amortization of actuarial adjustments in Early Retirement Program", which will account for zero as from now, as all the remaining amount has been impacted on equity funds following new accounting standards. You will notice that even with this change in methodology, the improvement of operating income would have been above expectations.

Slide 61 describes the items between operating income and current income from integrated companies. The main item for H1 '04 is a sharp 21.6% decrease in interest expenses, mainly due to de-leveraging. The annual average compound rate of FT's net debt stands at 6.77% at end of June, against 7% a year before.

Current income from integrated companies increased by 47.6% in a year, reflecting France Telecom's strong improvement in organic profitability.

Slide 62 takes up from current income from integrated companies to net income Group share. I would like to flag the exceptional amount of extraordinary tax profits taken in H1 '03, for €3.3 billion.

One point maybe, on goodwill amortization, impacted by the integration of Orange minorities, and on exceptional goodwill amortization with the impact of Equant goodwill depreciation. Also, minority interests are lower after Orange minority buyout.

Slide 63 shows the way to go from EBITDA to net cash provided by operating activities. Once again, very few comments except on restructuring costs and others to tell you that restructuring costs account for almost €200 million. The remaining €300 million being the sum of various small impacts, including litigation for [€60] million.

All in all, net cash provided by operating activities reached almost €6 billion, €1.5 billion more than a year ago.

Slide 64 details all the cash elements impacting net debt. Starting from net cash provided by operating activities, which have just analyzed. In order to understand the dynamics of net cash provided by investing activities, I have to comment on the impact of investment in short-term marketable securities.

In French accounting standards, investment in short-term securities is considered as investment in line B. As you know, it is just cash put in another short-term vehicle. That is why on line E we offset what has been accounted as investment with the same amount. Therefore, the relevant figure for you to compare is net cash provided by investing activities excluding, that is plus, impact of investment in short-term securities.

Free cash flow before disposals, only €90 million in H1, and buyout of Orange and Wanadoo minorities €2.3 billion, reached €3.4 billion compared to €2 billion in H1 '03. This is a strong achievement and the result of a balanced growth and margin strategy.

As far as debt reduction is concerned, you have to keep in mind 2 main points.

First, organic free cash flow of €3.4 billion - that is before acquisition of minorities - is used in €2.3 billion of minorities acquisition, the €0.7 billion of dividend payments, and other exchange rate-related items.

Second, reported net debt rise by €3.8 billion, almost only because of the application of new accounting standards on securization and [consequentative] for a total of €3.6 billion.

By the way, concerning Kulczyk, we just announced during the call that we have entered a new agreement with Kulczyk Holding that I would like to comment to you. We just announced it now because it was signed late than half an hour ago. France Telecom and Kulczyk Holding have announced that they have reached an agreement to bring forward the exercise of the Tele Invest I and Tele Invest II put options, in accordance with their investment agreements.

This agreement will allow the transfer to France Telecom of the ownership of the 13.57% stakes held by Tele Invest I and Tele Invest II in TPSA. The consolidation of these shares and their related debt of approximately €2.2 billion are already taken into account within France Telecom's results as at June 30 '04, applying the new accounting standards that came into force on January 1 '04.

By bringing forward this put option, France Telecom will be able to refinance its existing commitments at more attractive conditions.

Let me comment shortly, slide 65, on cash impact of M&A. What we see with this chart is that since H1 '03 cash impact of main acquisitions and disposals has been nearly neutral, with a positive impact of around €3 billion in year '03 and an estimated negative impact of €2.9 billion for '04. The acquisitions made were mainly linked to Group restructuring, for minority buyouts, and mostly paid thanks to disposals without impacting organic cash generation and thereby negatively impacting debt reduction program targets.

As a conclusion, the only thing I would like to say is that due to a strong H1 result, we have no reason to change our full-year guidance. For H2, despite higher CapEx as we maintain also our 10% to 12% CapEx to sales ratio objective, we think we will be able to generate around the same amount of free cash flow, in line with our debt net to EBITDA ratio in between 1.5 and 2 by the end of '05.

Thank you for your attention. We are now ready with all of my colleagues to answer your questions.

Hello?

Hello?

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Yes.

[Inaudible] from Oddo Securities. So I have questions on Fixed and Orange. As regards the Fixed business, I would like to know whether you could comment the decision today by your French Economy Minister on the ADSL wholesale offer?

I would like to know also if you'd tell us something in terms of clarification on the new Wanadoo offers, because if I look correctly at the slide 27 there seems to be a change in price of the 2 Megabyte offer compared to what you said at the investor day.

And the second question, also on Wanadoo, on Orange, I'm sorry, is related to the impact of a semester of decreasing [cost]. Could you quantify the impact of this tariff decrease on your half 2 revenue growth?

We're going to answer with Olivier and Didier. Just one comment on your first question. First concerning the reference to slide 27. That's true that for the 2 megabit we give on this slide the existing price, where for the 1 megabit and the 512 we give the prices which were presented by Olivier as targets for September. So that's why you have a mix of existing price and target prices.

Nevertheless, we remain on track with what Olivier announced at the investor day, to launch new services. I always remind you with the fact that new services is not only a matter of price, but it's a matter of content of services, bit rates, and all what you can sell to your customers. But I guess that Olivier will be keen to comment.

Okay. On the decision taken by the Ministry of Industry just this morning, we're very satisfied by this decision because it goes in the right sense to lower the tariff of the wholesaler for the customer and so to a more dynamic, especially on the higher [the bit]. We think that we could have been further and we do believe that, we've got a 6-month review of the tariff rather than an annual basis of the tariff. Because as you can see, with these figures of the growth for the ADSL, the ADSL market is totally booming in France and when you multiply just by 2 the customer bases, you've got very strong reductions of the cost bases in the cost of the equipment, the cost of the [inaudible] and when you just react on a yearly basis, you just need the evolution of the major economics.

So a good point for this Ministry, but today we think that ART could have gone further in the decrease of the wholesale tariffs. Mainly on the [connect].

But again, Jean-Francoise, to come back on slide 27. I guess even more important is all the range of new products, new services, new tariffs, that Olivier already announced that he will launch in September as a result of the new broadband strategy and which is really paving the way for us to increase our market share capture.

And maybe, just to follow up on this one. Could you say what kind of market share you expect for half 2 considering the level where you were in Q2?

What we have said is that at the end of Q2 we are around 48% in terms of market share in France and so the target is to remain more or less flat in the second semester. So in between 45% and 50%, which assumes that we'll be able to have, capture market share in between 40% and 50%. And from what we have seen the beginning of July, with what has already been launched in July and with all the new products that Olivier and his team are preparing, we are confident that, let's say, that's the target reachable for the Group. In France.

By the way, you know that on an international basis we have had also very, very big successes in Netherland, in the UK and also now in Spain, with the rollout of our unbundling policy.

For your second question, Didier.

Good afternoon. Didier Quillot speaking. As you know, we have decreased estimates and [inaudible] but it's very [honest] to have a first result on that subject. What I can say is that we have, on the 2 [inaudible] we have seen a small increase of usage, which was our forecast. And on year-end, not guidance but on the year-end forecast, as we said already I guess, we are anticipating that the price decreasing will be compensated by acceleration of usage, all of it being natural or no more than a few million less revenue for Orange France. On a yearly basis.

Okay, next question.

Good afternoon. This is Jerry Cutter from SG. I would have 2 questions, if I may. First, could you give us some indication on the management structure of France Telecom going forward, notably with the departure of Mr. Dangeard, he is going to be replaced or are his functions going to be divided among his team staff?

And secondly, going back on the French mobile market, MVNOs are actually on the market currently, can you give us your assessment of what changes we should expect in the market - accelerated penetration or break up between a postpaid and prepaid, more in line with the rest of Europe - and trend in prices? Thank you.

So, first on your first question concerning management structure. First of all I would like to remind you with the fact that France Telecom is obviously managed or leaded by our Chairman and CEO, Thierry Breton, and that the top line and all what has been achieved has been achieved by a team under the leadership of Thierry. First point.

Second, as you stated, there has been some announcement by which Frank might join Thomson, which is not yet done. Later the General Assembly decide on that point. And let's say that's what we can say on the management, and you can be sure that the whole team remain focused on the implementation of the strategy, which has been established by Thierry Breton and which is now underway.

For your second question?

Okay, for the second question on the MVNO on the French market, I will try to make it short because it's a long subject. We have signed an agreement with Carphone Warehouse a few weeks ago. This agreement is a commercial agreement on a written minus base, in order to address the region of France which are less penetrated. They have started July with Brittany. I think they will implement those types of offer in other regions of France which are low penetrated. We are very active with this agreement. It's a written minus contract. They own the base, they own the SIM card, but they don't own any piece of the network.

I do believe that this type of MVNO based on a commercial agreement in France will allow French market to develop, I will say, the 3 to 4 remaining points of penetration, especially prepaid and low-end customers. And as far as I am concerned, this type of agreement is serving the market, serving our commercial interests and we are happy with it.

They have, [inaudible] one pre-announced quite low prices for prepaid contracts, prepaid customers. Do you think that this is something that the other operators will have to follow through?

I don't know. You should ask what [inaudible]. As Orange is concerned, we get new revenue, it's going to be network revenue - one more time, on a written minus base. So this is for us a win-win business. For my competitors, I don't know what they will do in Brittany and in this region.

And you won't release your own price schedule?

No. I will not follow. Keep in mind also that we are talking about not a big piece of the market. The [inaudible] themselves said that their target within 2 or 3 years was somewhere between 200K to 300K customers.

But that will be in Brittany only or wherever they are?

This is 2 or 3 regions, the total of that being somewhere between 300K.

Thank you.

Okay. Next question please.

Yes. Good afternoon. It's Francois Travailler from Descartes Securities. I've got 3 questions. The first one is related to Equant. Recently the market cap has been divided by 2 and I would like to know what's your strategic position in Equant going forward. Do you believe the solution could be to merge with another entity or to swallow Equant into France Telecom? That's the first question.

Secondly, I would like to come on broadband, because it seems like according to different informations your market share in Paris or Marseilles is very low in net adds. Something in the range of 10% to 15%. So that Group figure, what could happen in the other areas? Could you come back on what's your specific measure in order to recapture market shares, especially where you have the most various levels of competition? That's the second one.

And the third one is just a point of clarification on your guidance, and especially the ratio net debt to EBITDA. Could you clarify what is your decision of net debt, what you include in that? Especially after the restatement you made, and if you really reconfirm on the 1.5 to 2.

Okay. So let's start by the third question, concerning net debt to EBITDA. So we reiterate our guidance, in between 1.5 and 2 net debt to EBITDA ratio by the end of '05, including the change in the accounting policy as far as the Kulczyk is concerned and as far as the securitization is concerned.

As you know, Kulczyk, it doesn't change anything, as the plan was in any case that the put would be exercised before the end of '05. So we have always said that this off balance sheet commitment was part of our commitment. For the securitization that's a different story. It was obviously an off balance sheet commitment which was disclosed, but it was not part of the net debt in our calculation.

So what I say today is that our guidance is a ratio in between 1.5 and 2 for net debt to EBITDA, including this securitization. Which means that we have slightly improved this guidance in French GAAP, as it is disclosed today. So that's for the guidance.

Then your first question, I guess that was about how we'll certainly add, I would say that's before raising any questions around the ones that you have mentioned. I guess that the main focus of the management - and this has been explained at different occasions - is to develop, to transform the Company towards a strategy more oriented towards value-added services. It will take some time to make this transformation and that's what we have to move forward and probably to factor in, in the next coming months. And in the same time, to still improve our cost structure.

So I don't know where Barbara wants to add on the specific measures which have been launched within Equant.

No, this is exactly the key measures. Our priority [inaudible] it will push forward and prepare our strategy to migrate towards a service company. We have started, as explained by Daniel Caclin during the last finance conference, we have made a number of wins, around 50, during the first part to [prove] the strategy. We need also to focus on cost reduction. A lot of programs have already been launched within Equant. We need to strengthen them. It will be [inaudible]. So for the time being, our policy is obviously to maintain and increase our market share also in Europe. It's very important. And push our policies around the world. So for the time being, it's really increasing the speed of [referring] the strategy that is absolutely [good] for Equant.

Will it remain a standalone entity?

For the time being.

As far as the first question is concerned, I guess Olivier should refer you to slide 27, this does describe the initiatives which have been taken.

Exactly. Of course, the competition is harder in the dense area because of the unbundling. Just because we've got more actors in dense areas than you have in non-dense areas. For instance, [Jarre] doesn't invest in non-dense areas. [They will be] select to the figures and you've got special offers that are just [investing] in dense areas.

But basically, our reactions were first to launch the Voice over IP products, as you know, and this was [now given] today. And [plus] launch the [inaudible] plan and with [inaudible]. We've only got offers in consistency with our [PSEN] tariff in the mid-August, as relays of customers use the Voice over IP. We've been launching the new Live-Box, a domestic gateway WiFi-enabled and with a lot of innovation, also consistent with our key offers. And after [inaudible] of our tariff that will [procure] in September, we'll launch during this autumn the new bundle that will really make the home strategy alive, especially with a bundle joining TV and Internet products.

And when will it be launched, in October?

Yes, in autumn, in autumn. So October/November.

So you will see the result of our new organization, which allows us really to be there to launch new products, and with a really clear operational focus, both at Wanadoo and at Equant, in order to transform our business models and to improve our margins.

Thank you.

Okay, next question.

Hello, excuse me. It's [Carlton Marchlon], Exane BNP Paribas. I've got 3 questions, please. First of all, on your [numbers] of non-commercial external costs. It seems that from Q1 to Q2 '04 they increased by around €100 million, and if we look at comparison year-on-year it's also visible that we had an increase in Q2 versus a reduction in Q1. Could you comment on this? Is there anything exceptional there or is that just that it's a seasonal effect that we didn't have last year? That's my first question.

The second question is, just more visibility on this [efficiency] increase in France, which is still dependent on government decision.

And thirdly, if you could give us some more comment on the headcount evolution in France. So at FT SA we can see that between end of '03 and the end of June, we had a reduction of 2,000. It seems not fully in line with the 60% of what we expect in 2004. Maybe you can give us some more color on that.

Okay, so I will try to answer the previous questions. I guess for the first one, it's mainly a [business action] '03 but my colleagues are checking, but it's mainly a big effect that we had in '03 that therefore will give the explanation.

Second, concerning the subscription fee in France. So as you know, and as you probably remember, we have always said that we have the lowest subscription fee compared to the other European countries. And so we had had 1 year ago, for an increase of this subscription fee, which was approved by the ART, but which was not set up by the French government. Obviously it's not a decision which is in our hands. What we can just say is that we still remain with the lowest subscription fee.

As you know, we have always said that having or not this increase will not impact our revenue guidance for the Group on a pro forma basis in between 3% and 5%. That's exactly what you see. And second, we have also always said that far as an inflection point is concerned, obviously that was taken into consideration in our ability to reach the inflection point.

If you look at our fixed results on page 1, you'll see that we have 2 effects. One which is Liste Rouge, which accounts for around 0.5% and which will be offset at the next semester because Liste Rouge became free in July of '03. And the second effect is that we didn't experience any subscription fee increase. If we had had this increase, it would have accounted for 0.5%.

So all in all, we are nearly on our, we are exactly on our guidance, which was to say inflection point based on the time that we would get this subscription fee. Nevertheless, in any case, that's not a decision which is in the hands of France Telecom. So the management is more focused upon our ability to promote new services, new offers, new packages to our customers. That's what we have did, for example, with the unlimited offers. That's what we have did with the [Pro] offer, for which we have added to the subscription some additional services. And then we will see what decision will be taken by our environment.

Your third question was related to the evolution of the headcount. So what we see is if we compare, you have on slide 56 the evolution of the headcount in France, both for FT SA and for our French subsidiaries. What we can say in any case is that we have announced for '04 a decrease of our headcount by 14,500 and we keep this. We are on line with this target for the whole year, and what has been reported on slide 56 is coherent with our target.

Okay?

Hi. It's Damien Maltarp from Cazenove. I've got 2 questions. The first question on Orange, I guess it's got 2 parts. Firstly, in terms of [market share], that's focusing on more on the business customers and on Premier customers. Does this mean that we should expect to see a continued loss of prepaid customers? And if anything, does that mean we could expect to see the overall size of the customer base decline for the remainder of the year? That's the first part.

And the second part is on usage in Orange UK. It looks flat, not only on a blended basis but also for the contract and prepaid customers as well. I was wondering if you could just comment on what you're seeing there and what you expect the trend to be for the remainder of the year.

And the second question, just on Wanadoo. Just looking at the margins over the last 3 halves. First half of last year you had 9% margin, went up to 17% in the second half, back down at 9%. Could you comment on whether this, to what extent this is a seasonal element and to what extent we can expect margins to recover in the second half of the year, given your commentary about as being focusing on commercial expenses?

Thanks.

Okay, so for the first question, maybe Sanjiv and John?

Let me have John address specifically the ARPU trends in the UK, as well as business customers in the UK. Then I'll give you an overall Orange view of the business markets. [I'll pass on to John].

Okay, yes. So if I talk about what you mentioned, the business customers and the Premier customers. Those are clearly 2 segments that are very valuable segments that we are addressing and focusing on. We will also focus, though, on other high-value segments going forward. So those could be youth, playful, whatever you want to call them. It does mean, though, that there will be by implication less focus on acquiring new customers who are, if you like, lower value, lower ARPU customers. So I think the overall base could go down going forward on prepaid.

One thing I would say is that a lot of the new contract customers that you see across the whole market are fuelled by people coming out of prepay and moving up to contract. So there are a number of different influences at work here. But I think the point we're making is we will concentrate on segments that give us that value, both in terms of customer numbers and revenues.

The second point is about usage, and really, yes, usage has been flat. And the reason for that is we have concentrated over the last couple of years on actually managing the yield from customers. So we have gone for 200-minute bundles, which basically give us a good access fee per month, and we have not been chasing out of bundle usage up until now.

I think the way the market is moving, though, and the way we want to go forward to stimulate growth and stimulate usage, we will start to see a trend towards bigger bundles, which you're already seeing in the promotional offers that are out there in the market. So I think going forward we will be looking more to stimulate usage than we have done over the past year or 2.

So I think those are the 2 questions, Sanjiv?

Just a couple of points. We are seeing growth in our data revenue, consistently over the last 6 quarters. That has been our focus. And not just in the UK, but overall in all of Orange - UK, France as well as rest of the world we have seen very solid growth and we took you through the numbers. And in business markets our growth this year, year to date, has been double-digit revenue and subscriber growth across our footprint, and which is faster than market, which is growing in 7% to 8%. So we feel very good about that growth as well.

Okay. Your question concerning Wanadoo and the margins, which were flat in fact if we compare first semester '04 compared to first semester '03, the 9.3%. So I am not quite sure to have captured your question, and this margin remains quite flat because obviously we have been able to deliver [full top] improvement in our operational margin, EBITDA pre-commercial spending. And we have increased our commercial spending, in order to fuel the growth, as you have seen with the number of broadband customers. So at the end of the day that gives us the same margin for H1 '03 and H1 '04.

Sorry, just to clarify my question. It's just that in the second half of 2003 you obviously saw quite a big pick up in the margin. I'm just trying to get a handle on whether that's purely seasonal elements and therefore going into the second half of this year, whether we should expect to see a similar increase in the margin relative to H1 or whether a greater focus on commercial expenses means that we won't see much of an uplift.

Well, I guess that there is in fact a seasonality effect, maybe Thierry wants just to comment on that. Thierry Lemaitre.

Yes, hello. The seasonal picture, just consider regarding Wanadoo is not from any access business. The course of the business, of access plus your tariff, among the direct [inaudible] you've got the seasonal effect, which means that in fact that H2 EBITDA margin is much higher than for the first half. So if you compare H2 2003 on H1 2004, of course you've got to compensate this [structure]. And with the [inaudible] then on the second half you should recover a higher EBITDA margin in this year too. So you cannot really very compare H2 on H1, because H1 versus H1 it is absolutely stable, which is fair to compare this figure.

So it'd be fair to assume a similar uplift in the current year as we saw last year?

Yes. It's likely to happen, yes. Same seasonality.

Okay, thanks.

Next question?

Hello. James Britton from Lehman Brothers. First question on Orange, and about the level of the commercial expenses you've reported for the first half. So 17% of revenues. Is it right that this is unlikely to increase further, given that pretty much all handsets are now free on contract plans in the UK? And does Orange now have to offer more attractive tariffs to send its market share more proactively from here?

And I suppose a related question on brand. Orange anecdotally has lost out a little bit on brand over the last 12 to 18 months to operator, other operators, catching up. Are there any plans to address this and try and reassert the Orange brand and, I suppose, change marketing strategy?

And then a second question on plans to introduce broadband services in Belgium. Can you just update us on timing and how that might take place?

Sanjiv?

James, this is Sanjiv Ahuja. Let me take the second and the third one and then I'll pass the first one back to John.

Your question was Orange brand. In all the territories that we operate in, whether it's the UK, France and other Orange territories, Orange brand health through all analytical measures continues to get better and better. We do analysis on a daily basis, weekly basis, monthly basis, quarterly basis, and we feel very good about the brand health, whether it's brand for the UK or Netherlands or any of the other markets that we operate under the Orange brand. So we feel very good about it.

However, you're right that like all brands you have to continuously work on it and continuously shine it up and refine and focus our messages, and you will see us because we are putting a very concerted effort to take the brand to the next level. And you will see us emphasizing it over the next few weeks to few months, and as we go into next year. And you will also see us developing more synergies with the rest of the France Telecom offers, as we go on in the future.

Now on Belgium business, we are looking at a broadband strategy and we announced, we actually talked about it on the investor day, which starts rolling out broadband offers later this year through EDGE, evolving into 3G over time.

And now I'm going to pass on to John to pick up the first question.

Okay. So with regard to the level of commercial expenses, which is obviously customer investment we're talking about here. It was 17% in the first half and that was up considerably from a year ago. What I would say is 2 things happened. A year ago we were actually trying to reduce subsidies in the market, but clearly other operators didn't see it that way. So there has been a jump year-on-year there.

In terms of what we're actually spending now and what the competitive situation is, you talked about handsets and yes, handsets are subsidized pretty much down to zero in the UK. Certainly on pay monthly. That's likely to continue. We have to put our investment competitively behind both retention and acquisition, and in fact when you look at the numbers there you can actually see that there's a marginally bigger increase in retention spend than there is in acquisition spend.

And that's important because back to the strategy about balancing growth with producing cash and so on, we have to make sure that we're competitive in retention and in acquisition, but we don't go and do stupid things. Which is why we then start to develop our own direct channels where we can now retain most of our customers, two-thirds of our customers are now retained through our direct channels and around 40-odd percent are acquired through direct channels, and that will going forward get more. So the cost effectiveness of our own channels is clearly better than paying third parties.

Having said that, clearly the market continues to be very competitive and we have to do whatever we need to do to keep the low level of churn that we've got. So the real success has actually been in managing the churn and the acquisition to keep the margins as high as we can.

James, one point. We are seeing resiliency in the market and ARPU trends for not just obviously data revenues growing but even on the voice side. The cost, the price per minute may be dropping but there's enough sensitivity [inaudible] that there is a core resiliency in the ARPU and we see that continuing as we go on.

Okay, next question.

Yes, hi. It's Steve Malcolm from Arete Research in London. Sorry to labor the point in Orange UK, but 3 further questions if I can. Firstly, on that SRC point. Is it a shortening of replacement cycle that you're seeing or are the costs that you are, the money you're spending to keep your customers is going up?

Secondly, it's just on 3G OpEx in the first half. Did you see any marked impact of extra costs of running your 3G network, or should we expect that to come through in the second half as the network goes fully live? That's excluding UMTS license payments.

And third, just on Orange Premier. Could you just give us a bit more color on this? You've talked about bundles but are there initiatives you're putting in place to try and be more competitive in that segment of the market? Thanks a lot.

Okay, John?

Okay. So the replacement cycle on retention, I think yes, we are seeing that customers, they know there are more deals out there in the market. The handset manufacturers are obviously launching the latest, newest products which they want to sell and so that does have a tendency to shorten that cycle. And it's, again, it's something you have to manage. It can be the same customers, of course, going round and round every year, whereas there are other customers who have a much longer cycle.

So it's managing that, and tailoring your SRCs towards customer lifetime value, and that's clearly something we're all working on and becoming more expert at it as time goes on.

With regard to 3G OpEx, again yes, technical costs, a lot of technical costs are driven by the number of sites that you have and the amount of equipment you have out there and so on. So there is an increase there. However, we have to work to offset that by finding other ways of saving technical costs. So it's certainly our aim that whilst technical costs have historically gone up, linked to a number of sites and investments we'll make, whether it's 2G or 3G, we work in other areas to manage that and to bring it to increases which are more manageable.

Our overall OpEx has dropped, as Michel shared with the numbers, and that has enabled us to deploy a good part of those savings into our SACs and SRCs. And those OpEx obviously includes, they do include 3G-related OpEx, both in the UK and France.

The third point you asked about was Orange Premier, which if you like is one of our first segmented offers and it happens to be aimed at what we term up-market aces. The whole idea there is to package together the right handsets, the right level of customer service, the right care, insurance, guaranteed replacement of handsets and those sorts of things, to customers who are clearly slightly less price sensitive than other parts of the market. So there's an added value there, and early indications are that you get almost double the ARPU from those sorts of customers.

So clearly that fits in with our approach to segmentation and you will see over the next few months us starting to launch many more segmented offers to the target segments that we have, where we believe we can drive more value out of the market. And clearly for a youth segment it'll be much more towards the right handsets there, the right sort of levels and bundles of picture messaging and the sorts of services, entertainment and so on, that very youthful customers will want.

Thanks very much.

Okay, next question.

It's Justin Cadwalder at CSFB. Coming back once more, I'm afraid, to Orange in the UK. You said at the Orange Group level that you've been able to increase commercial expenses without impacting EBITDA but it's precisely the opposite of that that is happening in the UK. The EBITDA margins are down year-on-year and your absolute EBITDA number is down year-on-year. In addition you say that the Orange brand metrics have never been stronger in all markets, but it does look like a genuine reduction in customer numbers. Because it doesn't appear to be just low-end churn of customers, otherwise your ARPU would be going up and sequentially compared to Q1 it's no more than flat.

How much do you feel you are losing desirable customers from Orange in the UK, desirable prepay customers from Orange in the UK? And how much do you feel you need to protect that customer base? And therefore what is the impact going to be on margins in the second half of the year? Could we actually see margins down sequentially from the just under 32% that you saw in H1?

Shall I take that?

Yes.

Okay. So where shall we start? The EBITDA margin, yes, clearly it is down year-on-year but if you like, if you look at the strategies that both ourselves and Vodaphone have been following, it has been to protect our margins and protect the absolute level of cash and profits that we're making whilst remaining competitive in the marketplace. So, and as I explained, in the first half of last year our margins were especially high because we'd taken or were endeavoring to reduce the level of subsidies in the marketplace, but that was clearly against the general trend in the end. So we are balancing off margin and customer investment and so on.

Then when you look at genuine customer numbers, I think you've got to remember that overall customer numbers in terms of contract customers they are up, and that is clearly the most important area. Then you ask are we losing valuable prepaid customers. Clearly there are quite a number of movements and the whole growth of contract has to come to no small measure from the prepaid base. So we have to manage that and indeed our internal statistics show us that over 40% of our new contracts are coming from our previous prepaid customers.

So yes, of course we will lose some prepaid customers, will go off to 3 or wherever, where it is very, very cheap minutes for them. Having said that, we are keeping and moving a lot of them up to contract ourselves and we will have to continue to do that and do it even better than we are at the moment.

Let me just add one thing, a couple of things to those things. As you look at the Orange business and as we have talked about it for many months now, our objective is to look at it in the global context. And whether it's the brand health or customer base or customer acquisition or customer retention, our intent is to be competitive in all geographies and grow across the board, but obviously when I put on my hat I look at all of our Orange results and how are we doing overall as a Group, across all the countries we operate in.

So our strategy is, as John stated, we will stay competitive in the UK but we will do it with reason and we will be competitive whether it comes on headline offers, on tariffs, whether it comes on acquisition or on retention, but we will, our intent is to retain and do it with a fair level of profitability. Our intent is not to engage in price wars in most of the territories we operate in. Our objective is to provide value. That is the strategy we've been following in the UK very effectively. And when you look at our profitability per customer, that is, and the trends are absolutely right across the board, not just the UK.

And we have the lowest churn in the UK of contract customers of all the networks. So I think our investment is paying off in the way we target it best.

Just to emphasize what has just been said by John and Sanjiv, if we look at Orange segment as a whole, we have been able to achieve first the growth of 11.2% and have in mind that now Orange is presenting the biggest operating profit of the Group in terms of absolute contribution. Which means that it's a mix of different assets and we have had a great success with Orange as a whole, being now, it is the main contributor of the Group in terms of operating margin.

Can I just ask an unrelated follow-up question on CapEx? I think at the start of your presentation you talked about CapEx in H1 having been just over €2 billion, from slide 5. But then when we come down to the cash flow calculation, I think there's a reference to CapEx in H1 of €2.6 billion, I think that's on slide 64. What am I missing about the difference between the 2 of those?

[Inaudible] the difference is coming from fixed assets accounts payable so this amount of €2.5 billion is net of working capital requirement on the fixed assets payable.

Right, thank you.

It's Damien Goodham from Morgan Stanley. 3 questions for John again. Hopefully some of them positive, because obviously Orange UK is having a tough time, but just to clarify. You've managed in the past for high yields and in the slides you say that's enabled you to meet your revenue and profitability targets. You are now flagging a fairly major inflection point in terms of voice yields, is that right, that you're going to cease managing for high yields and therefore we should expect those voice yields to drop materially going forward?

No, I wouldn't say they'll drop going forward because I think the whole trick is to A, hang on to the high yield customers that we've got and B, to develop customers cleverly through high usage even though at lower pence a minute to get an overall higher ARPU out of them. So I think, I think Sanjiv said it earlier, that although pence per minute is dropping we are not seeing overall ARPUs drop. Now, that's not to say there clearly won't be strain on that, as the price deflation in the market, but I don't think it's something that we would, we've given up on.

We actually feel very good that we have new offers that are being announced and some are yet to be announced that will actually help us grow the voice usage very nicely. The specific one [inaudible].

And then don't forget you then add data usage and so on, and at some point data usage and voice usage, the 2 come together.

You said that you had 2 additional questions. Maybe on other topics of the Group?

I'm sorry, but I'm going to have to go back to that because pence per minute, I mean pence per minute by yield. You are flagging a decline in that coming.

No. What I'm saying is there is clearly at a headline level as people bring out new offers, there is more value than a bundle.

Okay, great. Just on a couple more positive topics. You clearly feel that you have an advantage in segmenting the customer base with these targeted offers and you have invested a lot in CRM recently. What is it that you think your CRM systems give you in terms of competitive advantage? Is there anything that you can just say that we, Orange, are able to do through our data mining that our competitors, we think, are not able to do?

From my point of view I think we have to do it better. Everybody knows the theory, you actually have to put it into practice and operationalize it better and do it in a deeper and more thorough way.

The first operator-- Our geography's first operator that is doing a needs-based segmentation and the needs-based segmentation tells you the elasticity the customer has in terms of which needs you serve, how you serve them and how do you acquire, retain and grow the customers that you target. And that is helping us as we talk about Orange Premier, it is based on the needs of the Premier customers, not based on the ARPU. And we believe we are unique. It has been tried and proven in consumer services markets all across the world successfully and we are now applying it in the telecommunications sector and we are already seeing very good results. We are doing it in France with success. We have started it in the UK and we expect even more success there.

Okay. And finally, since you're not involved in this roaming lawsuit I'd be very interested in your perspective on the whole roaming issue. Do you think that the prices that have got Vodaphone and MMO2 into trouble are really water under the bridge, a historic issue, or are those very high prices still present in the market? And do you think the UK is unique or simply the start of an overall process of these wholesale roaming rates coming down significantly?

Look, this is, again, that's a question you should really ask, part of the question you should ask MMO2 and Vodaphone. They are the ones that Mario Monte has really addressed this to. We feel our prices have been fair, continue to be fair and we intend to keep them fair as we go on in the future.

Okay. As we are running a little bit out of time I would like to ask you to focus on one question for the ones which remain. I guess we could have 10 people to come. So please focus on one question for each. So next one.

Hi. It's Paul Marsch from Morgan Stanley. That's a real shame because I have 2 questions but let me prioritize. It's a question for Sanjiv really. It sounds like Orange as a whole, you're confident of managing, of the ability to manage to a margin target. And you've mentioned this idea of achieving a fair level of profitability within the customer strategy that you've talked about. I suppose where I'm struggling is what is it that you think is a fair level of profitability for Orange Group and for Orange UK, and I suppose in terms of EBITDA margin?

Okay. Well, let me answer both of these. I think I want you to focus on, when you say fair margin and fair level of profitability, this is while achieving 11% plus revenue growth. So it is a double-digit revenue growth, accelerating revenue growth from last year, accelerating revenue growth half-over-half, accelerating revenue growth year-over-year. Still a record across all of our footprint. Whether it's France, international or the UK. So I feel very good about the revenue growth, and we are doing it while improving our margins. Not just in absolute numbers but also profitability, EBITDA percentage points.

I think the margin percentage we have today, as we have talked about it, we see - I'm not going to give you any news items. I feel very good with the kind of margins we're getting today and we intend to retain them and improve them if we see opportunities for improvement. But I feel very good with overall results.

Talking about UK specifically, and as I've stated in the past, our intent is to be competitive, stay competitive, as we go on in the future. But it is the overall Group, Orange Group, profitability I look at, overall Orange Group revenue growth I look at. And with the results we're just announcing I think they're absolutely solid.

Paul, just to remind you, we don't give guidance in terms of EBITDA margin for the different units, but just to remind you also that the EBITDA evolution of the France Telecom Group that you know, 32% in '02, 37.5% in '03. We are at 38.3% and so we are currently on track towards our target or goal, which is to reach the 40% at the end of '05. So that's another answer to the question that you raised, which is to give you the way that we are following for the Group as a whole. Don't forget that we are an integrated Group.

Okay, thank you.

Jacques Declonan calling, CDC IXIS Securities. I have also 2 questions but 1 to ask, I guess. The net equity excluding minority is €9 billion currently, if I'm right. Second thing, could you explain the increasing depreciation, which is going up about 20% compared to the first quarter on the second quarter? Thank you.

The increase of the depreciation is mainly due to the depreciation on the license. Okay? And due to the assets on 3G in UK, on March 1 2004.

And your first question was?

What about the net equity excluding minorities? Because after what you did on the pension accounting, I believe that net equity excluding minorities are €9 billion, am I correct?

We come back on this question in 2 minutes. So let's take the other one and we'll come back on this. Okay?

It's Nick Larsen from Morgan Stanley. Just going to ask, the other carrier section was actually the strongest growth in the Fixed business.

Sorry?

The other carrier business seemed to be the strongest revenue growth contribution in Fixed Line. They got €90 million year-on-year. I just wanted to ask what the contribution from one-off connection fees was this second quarter and also in last second quarter, just so I can get a gauge of what the benefit is from connection fees for ULL, bit-stream DSL and other charges.

Okay. So maybe Jean-Philippe might just highlight what is in the growth, this carrier services growth. It's not only about ADSL, there are different sorts, and then answer to your question which is one-off which is paid when we connect new ADSL lines.

It's very simple. When we connect new ADSL lines, the one-off for option 3 is €50 per line. A bit more than €50 per line, and for ULL it's a bit more than €70 per line.

Okay. I just would like to come back on the previous questions because the net equity is €15 billion. I am not quite sure to have catch your previous question.

The [inaudible] is due to only the capital, okay? It's not the [inaudible].

Okay. So if the person who has raised the previous question can come back on line, we'll try to make sure that you have a precise answer. Let's move to the following question.

[Thornton Schroek] from BNP. Just a very quick question. How will the finance function for [inaudible] will you organize and what will be your implications following the possible departure of Frank Dangeard?

Well, again, I thought that I had answered to this question. I might add 2 things. As you can imagine, Frank has worked with Thierry Breton for 10 or 15 years. So you can imagine that even if he was appointed as Chairman and CEO of Thomson he will remain around as a specific adviser to Thierry Breton and to France Telecom, at least for a financial evolution.

Second, as you know, we have strengthened the financial team with the arrival of Stephane Pallez.

And third, probably I am going to disappoint you a little bit, but I think that I will still be around in the next coming months to present the results.

Thank you very much. You don't disappoint me.

Next question.

[Bonshaleron Belcove] of [Inaudible] Equities. What will be the cash impact of the Kulczyk put? First question. Is the growth of the international operator services segment sustainable?

So what we have said as far as the Kulczyk put is concerned, as a result of the agreement France Telecom will incur costs allowed and [€40] million after tax. Which will be obviously offset by the economies which will be generated by the fact that France Telecom will be able to refinance its existing commitments at more attractive conditions. So at the end of the day it's a net gain for France Telecom to have this put exercised right now.

Next question?

Hi. It's Paul Marsch again at Morgan Stanley.

Paul, I said 1 question each [inaudible].

Clearly nobody else has any questions to ask. So I think last year your EBITDA in the second half of the year was €330 million higher than it was in the first half of the year. It sounds like you're confident that you can at least match that level of increase into the second half, about €330 million. Should I be expecting to see labor costs in the second half below labor costs in the first half? Commercial expenses in the second half below commercial expenses in the first half? And other external purchase costs down in the second half, whereas they were up in the first half?

Paul, I am not going to discuss today, even if we are quite fast within the financial department at France Telecom, the results of the second semester of the year. So we will wait probably until next January. What I can tell is that in any case the commitment-- February. No, what I can say is that the commitment that we have taken is an EBITDA higher than €18 billion. So you're right, there is some seasonality in our EBITDA figure, as we had in '03. So that's the commitment and that will be made. Obviously, decreasing labor costs and I think we'll still have some pressure on commercial costs. But the commitment is to be over €18 billion.

And I don't know if one of your team had a chance to delve into the question that was asked earlier about those other external purchases, which seemed to be up in Q2 where they were down in Q1. I suppose there's a question there about the second half. Should we be expecting a reversion to a decline in other external purchases year-over-year in the second half?

You know external purchases, within that there are different elements. There are elements which are related to growth, which are external buyings of network resources and all that stuff. And all our non-operational purchases which are decreasing quarter after quarter. So I am not quite sure to know what you are referring to. [Inaudible].

I think other external charges, I think you are referring to other external charges, including some taxes like tax for [this summer] in France and it should be in the same range in the second half because we have made an accrual at the end of June related to the tax we are supposed to pay for the whole year. But the main part at this time is due to tax provision.

That's why Q2 is higher than Q2, due to this accrual which has been made at the end of June.

Okay, thank you.

Hi. Jacques Declonan from CDC Securities again. On the equity, I want to be sure. You had put all the actual losses of the pensions on the equity directly, so net equity excluding minorities is €9 billion. Am I correct?

No. Net equity, shareholders' equity, is €15.328 billion and minority interests are €4.188 billion.

Okay.

Okay?

Okay. I made a mistake, thank you.

Thank you. Next question?

Hi. Terry Sinclair from Citigroup Smith Barney. If we just look at the Fixed Line revenue performance, the volumes in the second quarter clearly increased the rate of loss. I think in the first quarter the rate of loss in the consumer sector was 7.5%, in the second quarter it's been 10%. What would be the [dominating] factor of this coming in totally in May? What's your level of confidence that you will test this through the method you're taking in the second half rather than next year?

What I just would like to remind you with, if we go to slide 21 and maybe Olivier will be keen to add something. But at least just to remind you with the slide that the main impact on our calling services trend is due to fixed-to-mobile tariff cuts and the evolution of our market share. The overall market slowdown, which has been seen in the semester, at the end of the semester, has a slight negative impact on our revenue.

What we have said with Olivier earlier on in this call is that based on that first, there's market share erosion and second, market slowdown. We have decided to launch those new offers, those new unlimited offers, in order really to offset this evolution of the market. And what I was sharing with you earlier on during the call is that the first indication that we have on the beginning of July makes us quite confident that in any case we came with products on the market which really answer to our customer needs. So when you develop this type of unlimited offers, obviously it boosts the traffic and it seems that it allows us to recapture some market shares and a bit to increase the loyalty of our existing customers. So that's what I can say.

But would you go so far as to assume that there'll be a point at which your fixed line revenues can grow within the next 12 months?

Well, what we have always said is that we have a target, our target for '04 was to reach somewhere the inflection point based on the different assumptions that we made including the subscription fee. Second, what we can see is that the first half of the year has improved compared to, back to last year. Third, what we have tried to highlight with Olivier is all the majors which have been launched and all the new products which have been launched, both on broadband and voice telephony in order to improve the situation.

So we think that there is no fatality, I don't know how you say that, fatalism, for a decline of the Fixed business and that what we are working on with all the teams of [roam] in order to boost this business. And again, the first informations that we have on ADSL market, share market capture beginning of July and for voice telephony make us quite confident. And as you can imagine, there is still a lot to come in the next coming months in terms of new services, as it was described by Olivier.

And one final follow up. On your annex, it's clear that about 21% of minutes in the first half of the year were fixed-to-mobile. Presumably the share of revenues for consumer fixed is roughly 30% to 35%. Would that be fair?

I am not quite sure to have captured your point. You said 21% were fixed-to-mobile, but I didn't capture your second point.

Would it be fair to assume that the share of consumer revenues in Fixed Line is about 30% to 35% fixed-to-mobile?

We don't give, sorry, this figure.

Okay. Thanks very much.

You're welcome.

Hi. It's John Pierce speaking from Dresdner Kleinwort Wasserstein. I'm glad to say I've got a question which isn't about Orange UK, after all the other ones. What I wanted just to get an update on, in the past you've talked a lot about uses of surplus cash going forward. In other words, cash over and above that which is needed to meet the de-leveraging promises through to the end of '05. Could you confirm that the top priority for the use of that cash remains further reduction of debt?

Absolutely. So it was confirmed by Frank Dangeard at the investor day a few months ago, and a few weeks ago. So I can reiterate that. Obviously de-leveraging remains the first priority for the Group and we have these targets that we have reiterated today, including the securitization, which is net debt to EBITDA ratio in between 1.5 and 2. And then on top of that, we have stated that if the excess cash might be used first to continue our dividend policy if it is approved by the General Assembly. Second, to fuel the organic growth. And third, to buy back some minority shareholding positions, as we have done with Equant, sorry, with Orange and with Wanadoo in the past few weeks.

My colleagues are concerned so there is not, it's not a statement from [inaudible]. So we have already answered to Equant the focus is on the management operations of the Company and there is no question concerning the shares of Equant at that stage. So I am really saying Orange and Wanadoo.

Okay, thank you.

Mark Cardwell, Bernstein.

Hello?

Hi, it's Morris Patrick here from Bear Stearns. Just got a quick question on your Orange Premier service. I guess the question really is, I'm struggling to see the attractiveness of the Orange Premier service. Give me a free phone every 9 months, [inaudible] and very expensive voice calls compared to some of your peers. How are you targeting Premier customers and how will you judge your success and progress on that going forward? Thank you.

John?

Yes. We target them mainly through Orange retail and through basically direct marketing and through existing customers. And I think that's just an example of where the needs of the customers, customers we believe will be prepared to pay for that extra bit of safety, comfort, whatever.

Okay, thank you very much.

Next question?

It's Michael Armitage at [inaudible]. I've got one question and one observation, so I can just slip round the rules slightly. The question's a very simple one. Can you clarify - and forgive my ignorance but why exceptional goodwill amortization is down roughly 50% in the first half compared to last year? That's the question.

The observation is having listened now to almost 2 hours of this presentation I've heard almost nothing on the fact that the telecoms world is suddenly flooding with extremely attractive handsets and terminal devices. You actually slipped over that point in the presentation. I'm just wondering, given that we're hearing from other operators what a tremendous impact on ARPU we're getting from multi-function devices, why you're not emphasizing this in your own presentation.

I think we did mention it in Signature phones.

Absolutely. So we did it on one of the slides, on the Signature phone. That's for your comment. For your question, so as far as the exceptional goodwill amortization is concerned, on the first half of '04 we just had Equant for €519 million. On the first half of '03 it was made of several items. €287 million for Orange, which was accounted for our Thailand operation. €611 million for Wanadoo. Then we did on Wanadoo UK, [Uni2] in Spain and Wanadoo additions. And €143 million for Mauritius Telecom, which brings to the €1.041 billion which was posted first half of '03.

Next question, please?

Thanks. Paul Norris from Lehman. Couple of questions, or related questions, on the European strategy. Could you update us, please, on your unbundling plans in the UK, Spain and the Netherlands? In terms of how many exchanges and timescales. And then on the Netherlands, I'm not quite clear. Are you [inaudible] a wholesale DSL provider?

And then in France, the same [inaudible] topic. Are you [inaudible] that the regulator will increase shared access and full unbundling pricing at the year-end review?

Okay. So 2 questions. In fact our broadband policy in Europe and how we see the unbundling pricing in France - Olivier.

Okay, fine. Well, as you know, we've been re-blending free service to Wanadoo UK right now. I can tell you that it's really one of the major success. We were able to keep our customers with the Wanadoo brand. We were able to get some [inaudible] share some weeks above BT and all the above leaders. I think we're [trying] right now to get approximately half a million customers in broadband and DSL at the end of the year. So it's a very high ambition, but I think really we're quite successful in Wanadoo DSL products in the UK. The awareness of the Wanadoo is already very high in the UK, so it's really very successful.

In Netherland right now we've got a partnership with Bbned to provide the full DSL services. And we've got also very strong improvements of our market share right now. So some weeks we are above KPN. In Spain we've been unbundling over 100 [MBS] in Spain and so we are going to be really ready to go for unbundling and to have our real commercial launch at the autumn and we'll be fully ready for Christmas in Spain to launch our broadband strategy in Spain. And in France, we think that there is room to increase the price of the full unbundling. Like the subscription fees, the ART recognize that we've got really very low prices when we're compared with the European bases, with the European average. So we think there is room to increase mechanically the subscription fees and the unbundling fees.

Okay.

Okay, thanks. Could I just follow up? So, just to be clear, it sounds like Spain is the only country where you're yourself opening up the central offices and installing your own [D-plans]. And in the UK and the Netherlands you're going the wholesale route?

No. We have started by unbundling in Spain and we have clearly stated that if it makes sense from an economical point of view that's a route that might be followed in the other countries.

I just remember you that in Spain we're in a very particular position because we're in the process of merging Uni2 and Wanadoo Spain. And with Uni2 we have already a network and so [comparative] there to, with a network, which is not the case in the UK and Netherland.

Okay. Next question. As it's already 2 hours and I know that there is still 5 questions to come. So 1 question each.

Yes, hello. It's James Ratzer from New Street Research. A very quick question, please. Just regarding your reclassification of the net debt, in particular the €1.4 billion securitization. Can you just confirm to us that there's absolutely no change at all on the P&L with any cost classifications as a result of that?

No change on the P&L, no change on the debt guidance.

Can you say, given you've made this change then to the accounting, which you've hinted at in your 20-F, are there going to be any other changes that we should be aware of as we go into the second half?

As far as the French GAAP are concerned, we just applied the rules and so based on the rules as [they exist] today there is no change to contemplate for the second half in French GAAP.

Thank you.

You're welcome.

Hello. It's James Golob from Goldman Sachs. Can I just ask on Kulczyk? I can't understand what the [€40] million cost after tax is, because if I relate that to the €2.2 billion, that implies an interest cost of a bit less than 2%. And do you have any desire or interest in raising your stake to more than 50% in TP SA?

So 2 questions. The [€40] million was, I was comparing the [€40] million, which is paid, less than [€40] million, which would be paid up front. To what we pay today, in terms of financial expenses for this put. In fact, just to give you a flavor, telling that it's financing those shares with a spread of 175 basis points, where France Telecom is able to finance itself with spreads of about 20 basis points. So that the difference in those spreads on the duration of the put, which clearly exceed by far the [€40] million without taking into account dividends and whatsoever. So that's why I am saying that it will be net positive for France Telecom.

On your second question, at that stage we are happy with the 47.5% that we own. And as you know, with this 47.5% stake within TP, we clearly manage the company. We have the management control on the company, which is what we need.

Thank you.

Yes, good afternoon. It's Guy Petty from Deutsche Bank here. Just a couple of the quick things. One on the Signature phones. You've mentioned in the text about having some positive ARPU and usage stimulation. Can you just give us some data points?

And secondly on 3G, I don't know, I'm not really fussed whether it's in France or the UK, but you've mentioned you've incurred some OpEx. Can you just tell us quickly how much of revenues you've incurred in 3G OpEx please? Thank you.

Didier Quillot for France.

So regarding France, we will launch 3G by end of year, as we said the release is going to be a few [extra effects], as you can imagine, based on the H2. And regarding revenue for UMTS, obviously as we will launch Q4, end of Q4, there will be very little revenues so I don't think that comparing UMTS OpEx on UMTS really for this year, that would mean anything.

So same for UK I guess?

Same for the UK.

Okay. Next question.

Yes, hi. It's Mark Cardwell, Bernstein. I want to go back to the MVNO conversation we had a couple of hours ago and ask the following question, if I can. When you say 300,000 or 400,000 subscribers from Carphone Warehouse, surely at a market level that's not enough subscribers to get the regulator very interested in what's going on with MVNOs. My question is this - what do you think it will take in terms of overall market share belonging to MVNOs, not just yours but all the MVNOs, in order for the regulator to feel like there's enough competition in the MVNOs or a relevant part of the market? And do you think the regulator is going to drive for that over the next couple of years?

Okay. It's Didier Quillot. It's a very difficult question. I do believe that, as I said before, Carphone Warehouse will take somewhere around 300K. As it was said by not only [inaudible] but also Mr. Devedijian the French Minister of Telecom. The target is to have 3 to 4 million by the end of the year. So if you simply multiply by 3 200K we are at 1 million plus. I do believe at 1 million plus everybody as soon we are on a MVNO basis is not destroying value. I do believe that [you show] that the French regulator but somewhere between 1 to 1.5 million subscribers made by MVNO within 1 or 2 years in France is something that will make everybody happy.

So that's only a very small percentage of the market, a few percentage points?

This is my belief, yes.

Thank you.

Okay. Next question, please.

Oh, hello, it's Jonathan Dan from Bear Stearns. I was just hoping we could go back to the Wanadoo question. Could you disclose the Access EBITDA for France and UK, Spain, Holland?

No. We don't disclose the Access EBITDA figure for the different countries, we just disclose it for the Access segment as a whole.

Okay. And what was it for the-- I think historically you broke out France.

No, no, no, no. I guess that is not, we provide exactly the same level of information that's the one which was disclosed previously. So I'm going to, I guess I am asking Thierry for the [supplement] Access. The EBITDA margin is minus 0.3% for the first half of this year, compared to minus 3.2% for the first half of '03.

And are you able to comment on whether, say, the UK is still at breakeven or whether Spain is still breakeven? I think that was at least the commentary you gave before.

There was some comments on our recovery story in the UK, maybe Olivier, you want just to say while you're on this track.

We just say that last year we reached breakeven and that was done for Wanadoo UK and Wanadoo Spain. Right now, you know it's another story because we're merging Wanadoo Spain and Uni2. So we don't give any figures any more.

Okay. Can I ask 1 very quick question? At the analysts' day you gave you declined to comment on like-for-like usage of Signature devices. You've had another 6 weeks of usage. Could you comment on what like-for-like usage you're seeing?

Okay, Didier?

Regarding what we have, as of today we have around 12 Signature devices, where the increasing of ARPU is around the 25% to plus 25% to 30% on ARPU, simply due to the Signature devices.

And also, just to pick up on a question that was asked earlier, we today, as Didier said, we had around 1.5 million Signature devices and we are on a path to have 3 million Signature connected devices by the end of the year. The number, 12 devices, we expect that that will exceed 18 to 20 by the end of this year as well.

Can I ask a clarification? So that 25% to 30% uplift, that is "I'm an existing customer paying X ARPU"?

No. This comparison, this is comparison between 1 customer which has a Signature device and another customer which has not a Signature device.

So your comparison is between, say, my wife who has a Siemens and myself who has a Blackberry?

Yes. And also, at the investor day what we did not state was we've seen ARPU growth for the same customers that moved from a non-Signature device to a Signature device. The answer is yes, we have 6 more weeks of data and we have seen a consistent growth.

But we have not [inaudible] the Siemens of your wife anyway.

Okay, thanks.

So long as it's on Orange.

Last question.

Thanks. It's Adam Worthington from Morgan Stanley. I just had a quick question on Equant. I was wondering whether you would be able to state whether you believe there was any benefit from actually buying in minorities from an operational perspective. And also, Equant have some significant tax assets, which are geographically diverse. Are you able to take advantage of these with your 54% ownership currently, if Equant can't utilize all of those assets? Or asking it another way, if you were to increase your stake are you able to fully take advantage of these tax assets?

Again, I think I have already clearly stated with Barbara earlier on during this call. That's really not the question at that stage. At that stage the management is focused on 2 priorities, which is first to transform the company in order to increase the value added part of the services which are provided by Equant, and second to manage the cost reduction of the company. So as we have stated, it's clearly under way. It's a long process. We would be keen this process to go faster and that's what we are focused on at that stage.

Okay. So I want to thank you all. It was quite a long session today but it was the first time we were making it for Orange, Wanadoo, France Telecom at the same stage. So you've seen what is the real integrated Group with the whole ExComm team answering to all of your questions.

Thank you. Bye-bye.