Orange SA (ORAN) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to France Telecom half-year 2008 results conference call. The call will be hosted by Gervais Pellissier, Group CFO, with members of FT's Executive Committee and countries' managers for the Q&A session that will start after Gervais Pellissier's presentation.

The IH 2008 presentation contains a cautionary statement. Two items have to be underlined. Also, France Telecom believes these statements are based on reasonable assumptions. These forward-looking statements are subject to numerous risks and uncertainties. There can be no assurance that anticipated events will occur or that the objectives set out will actually be achieved. More detailed information on the potential risks that could affect France Telecom's financial results can be found in the registration document filed with the French authority, de Marches Financiers, and in the Form 20-F filed with the US Securities and Exchange Commission.

Thank you, and let me hand over to Gervais Pellissier now. Please go ahead, sir.

Thank you very much. So good afternoon, ladies and gentlemen. Thank you for joining us this afternoon. As you have seen, because I guess you are already on your computer very early this morning to watch our presentation and to check what was in our press release, so you see that our second quarter is very good, and that added to the first quarter it makes a very strong first half.

So to go on slide 4, we will start with slide 4, we see key achievements, first one in terms of revenues, with 3.9% revenue growth on a comparable basis. This is a strong first half. The third -- the second, sorry, after the second half 2007, and the fourth quarter with growth above 3.5%.

It comes, this growth -- and we will come back on that because I guess you may have questions -- comes from two sources, on one hand the permanent achievements of the emerging countries, which we made strong double-digit growth in most, globally speaking. But as a change compared to a year ago, the performance of Western Europe countries, especially France, UK, Poland, but also Switzerland and Belgium, were on these territories of major markets in Western Europe, revenue growth is 3% on this semester.

The difference between the historical valuation and the pro forma valuation is explained for about half -- it's about half by the ForEx impact for 1.3%, and 1.1% by the perimeter effect, and with the perimeter effect, you have mainly the sale of Orange Netherlands that was performed at the end of June 2007.

Regarding the profitability, our gross operating margin has increased by 5% to reach -- to be very near from EUR10 billion in this semester, and the gross operating margin rate has increased by 0.3 points year on year. Again, we'll come back on that. A huge part of the profitability improvement is coming from the revenue achievement, but not a small part is also coming from the increased cost control we have had, especially on our labor expense and some G&A expenses.

Regarding CapEx, CapEx we said, as we show, is stable at 11.9% to revenue compared to 11.8% a year ago. And at the end of the game, our organic cash flow has increased by a little less than EUR400 million to reach EUR3.6 billion at the end of the first half. And this gives us a lot of confidence in our ability to achieve the full-year guidance.

A few operational indicators, especially in terms of customer base, but as a whole is seen on France Telecom as a whole. Just to mention that, globally speaking, the customer base has continued to increase, a 6% increase year over year for the total customer base, which is now slightly above 170 million customers, out of which 116 million are under the Orange France.

Regarding mobile business, we have now more than 115 million customers, which is an 11% increase over June 2007, and more than 20 million, exactly 21 million, mobile broadband customers, which is more or less two times what we had a year ago.

Regarding the DSL business, we remain the number one player in Europe, with now more than 12 million customers, which is a 19% growth over June 2007. And (inaudible) it's about the same for the same period. And out of those customers, about 60% have now Livebox, which is our home gateway, and about half of those customers are now using Voice over IP for their telephone line.

Regarding the enterprise business, in many [decade are we give] in terms of our performance regarding this activity this year. The increase of the convergence, we have now 20% more users of the Business Everywhere product for the enterprise division.

On page 6, just a snapshot on the profile of the revenue growth. You see that both quarters have been much stronger than what we had a year ago or two years ago. And we consider, when we look at the performance, when we look at the figures, we remember that at the beginning of the year, we said we were expecting growth for the Group in line with the market trend, and we evaluated the market trend between 2% and 3% growth for the period '08-'10. You see that with 3.9%, we are above this expected figure, at least for the first semester of 2008.

On the situation by geographies and by segments, as it is affected, on the page 7, you see that improvement has been achieved more or less everywhere compared to a year ago, and that in the second quarter, most of the geographies have improved and the segments have improved their performance over first quarter. If I just take the streaming segment, personal growth, home growth and [rest of world] growth are higher in the second quarter than what it was in the first quarter.

Regarding the situation of -- between the different geographies, especially if you try to distinguish between emerging markets and major countries, growth in first half 2007 was coming mainly from the emerging countries. We had a 1.9% growth, out of which 1.8% was coming from the emerging markets, whereas mature markets in enterprise were more or less giving a zero result at the end.

First half 2008, let's say a little less half of our growth is coming from the mature markets -- France, UK, Spain, Switzerland, Belgium and the fixed business in Poland, which brings 2.1% out of the 3.9% growth we have achieved, whereas enterprise division, back to positive, contributing 0.3% of this growth. And the emerging markets, slightly below what they were a year ago, with lower growth as a whole, but as expected. If you remember, emerging markets were growing more than 20% in [2006], around 15%. It was very well expecting to (technical difficulty) double-digit growth, which is (technical difficulty) '08.

Regarding the profitability, again, the comment is that here, a piece of the gross emerging margin in absolute terms has been coming mainly from the mobile division and from the enterprise division. However, the residential business, or home division, we have been able to restore and increase their profitability rates, with 0.4 point improvement of their global profitability, whereas for the enterprise division, you remember it was something a lot of you were asking about. When will you achieve stabilization of the margin and even improvement of the margin? So this has come, and there has been very good work done in the division, to continue to [report] at the highest level of profitability in the enterprise division compared to our peers.

Regarding the cost structure, as it appears on page 10, so as I said, the profitability improvement comes firstly on the revenue performance. But it is also linked with the fact that in spite of the increase of the revenues, we have been able to control our costs, especially on two major lines -- one, the labor costs, where labor costs in percentage point to revenues have been reduced by 0.7 points, [to which 6.7%] of the revenues, and also on the interconnection line, where there has been a real control. You remember that something which becomes key in our business is the traffic we buy from other operators, as also regulated fees, which are the termination rates, are on the free market, and which we use to provide [off-net] offers to our customers. And this is (technical difficulty) which we have worked a lot, and this has remained under control.

General expense has been reducing, both on the operational terms, but also because we had less need to provide for reserves and risks at the end of H1 '08 compared to H1 '07. And at the end of the semester, the only area in which expenses have increased are the commercial expenses, [like I say], fees and commissions, where the increase is linked with the increased competition on mobile markets, but also with the higher share of mobile business within the global group picture.

Regarding labor costs, we are on track with our '06-'08 manpower leadership plan in France. If you remember, it is a plan where we said we would reduce our manpower by a net of 16,000 over three years. And when we [see the] performance at the end of June '08, we are clearly in line with what we want to achieve.

On page 12, how -- these are the final, the pure financial slides. To go from the gross operating margin to the operating income is that we have a slight increase of the operating income in spite of the bigger increase of the gross operating margin. But there are a few items of difference.

The biggest one is the fact that we have not recorded in '08 any big proceeds linked with the sales of assets, whereas in '07 we had still the proceeds from the disposal of TDF and Eutelsat, which grossed a little more than EUR400 million in operating income.

There is less depreciation because we don't have extraordinary depreciation in '08. We had in '07 the accelerated depreciation of the Euskaltel customer base and of some 3G cost structures in France, whereas there is some increase of the restructuring cost with the fact that we have launched two manpower reduction plans, Spain and the UK, and we have been providing those plans for, and also some small adjustment on the [okray diamond] in France, just to adjust the interest rate.

Regarding the net income, and I guess most of you are familiar with the complexity of our net income, but we have tried to use exactly the same presentation, and the same split between comparable terms and global terms, and what we did a year ago when presenting the June '07 results. When you look at our net income on comparable terms, there is an improvement, an increase of 4.4%, to reach a little more than EUR2.5 billion net income, Group share, on comparable terms for the Group.

What is the difference with the published? Because when you look at the published figures, there is, on the contrary, a devaluation of 19%. Three major moves. One is the fact that in '08, there is no gain on asset disposals, the difference of about EUR400 million compared to a year ago. And second [and more to move], and one can comment later on in more details, is the fact that in '08, we have no big exceptional items on the deferred tax assets, whereas in '07 we are still accounting for huge asset creation, because we had still a layer of tax loss carryforwards taken into the balance sheet that we're not taking into the balance sheet at the end of '06.

The organic cash flow has increased by 12% of the whole Group consolidated and by more than 16% for the cash flow belonging to the France Telecom [inside] shareholders to reach EUR3.6 billion consolidated and a little more than EUR3.4 billion for the cash flow part of the Group. Main improvements come from the gross operating margin on one hand, from the reduction of the interest expenses, but also from some improvement at the working capital level, especially linked with the improvement of the inventories.

Regarding our investment policy and what we have been investing in for the first half, so same percentage point to revenues, 11.9% compared to 11.8% a year ago. So this is, and in absolute terms, it is an increase of EUR150 million, more or less, which is just, euro for euro, the difference is coming from the fact that we have repurchased some technical buildings in France, where we thought it would be better to keep them for the long term.

The other maybe important point is that there is, globally speaking, less expenses for the mobile network, where we are now at less than 10% at the end of June in terms of CapEx spending, and some increased spending in the fixed network, mainly for [various] platforms, but also for the first step of the [Exetile] fallout in France, (technical difficulty) a little more than [EUR70] million.

Regarding the balance sheet and the debt situation of the [optical mesa] at the end of the semester, net debt is at EUR38 billion compared to EUR42 billion a year ago, and with the net debt to gross operating margin ratio of 1.97 compared to 1.99 at the end of '07 and 2.25 at the end of June 2007.

We have been continuing to refinance the Company, and the situation, if you'll remember, we presented the same slide at the end of '07, and we still had at the beginning of the year about EUR7 billion to refinance as a whole. Most of this has been refinanced in first half, and there is just a remaining portion of less -- of about EUR600 million to refinance in '08. The financing has been done in good conditions, especially for the bond issues. Globally speaking, money has been raised at a cost which is below our current cost of debt. And we have also taken the position to buy back some [TDIRAs], which has two positive impacts -- on the financial costs, but also on the potential dilution of the equities.

We will come back on the performance by country. And to be brief on that, because you may raise questions, on France first, a strong performance in the second half -- in the second quarter, sorry, but with also an important point, is that it is a semester where even on the retail market -- excuse me, on the personal business, we have an increase in the revenue which is linked with increase of voice. For the first time, there is a small increase of the voice revenue linked with the traffic, which was not the case in the previous semesters. And we probably have the best growth in terms of revenues on the French mobile market. This has helped to keep strong margin, in spite of the pressure on commercial expense.

Regarding some of the operational indicators, our global market share has remained at 46.4%, with still some deterioration of the retail market share, but in line with our policy to favor MVNOs. Now the MVNO business within France Telecom is about 3% of the total market, total mobile market in France, and more or less around -- a little more than 6% of our own business.

The customer base has still continued to grow in terms of more [payments lee] customers, which now represent 60.5% of the total customer base. And the ARPU has been greatly stabilized, mainly thanks to the improvement of the nonvoice ARPU, especially for the additional services, [benetek sales], content, et cetera, which are helping support the ARPU stabilization.

In terms of fixed and Internet business, revenues have increased by 1.2% year over year, with the compensation of the naturalization of the PSTN decrease by a stronger Internet revenue piece. And globally speaking, what we have observed on the French market is that we're still losing a huge number of PSTN lines. We can cover much more of those customers with our Internet offers than we did a year ago.

Again, on the fixed and Internet business, thanks to this commercial activity, but also thanks to the strong cost improvement programs which have been put in place, the margin has improved by 1 point -- excuse me. The margin has increased by 1% and has remained stable.

In terms of performance indicators, as I said, the loss of retail line has been lower in first half '07 than what it was in second half -- in the first half '08 and as it was in the second half '07 or first half '07. We are now at 727,000 lines lost. Regarding the total number of copper lines in France, they continue to increase by 2% year over year. And in terms of market share of the DSL market, we are, at the end of first half '08, back at 49.5% after two strong quarters of acquisitions, above 51% for the second quarter and slightly below 50% for the first quarter.

You'll remember that now, for the last month, we have [intimated] a lot about our content strategy in France, which, I just would like to remind you, is not to produce content, but to distribute content. The main steps for the future is the first soccer match for the French Premier League on -- not next Saturday, but the Saturday after, on August 9, and at the -- probably between October and November, the launch of cinema series channels to complement our programs. And we had launched, maybe you remember that, it was three weeks, a little more than three weeks ago, we have launched our triple-play offer with satellite broadcast for the TV part of the triple play. It has been launched on July 3.

So [priorities of France agree] to keep the control on costs if the market were to slow down more than what we are currently anticipating, to continue to improve the quality of service, because this is the best way to maintain some price premium and to reduce the churn. And I would say on the specific markets of mobile and broadband, regarding mobile, there is clearly the routine media usage strategy that's to be put through with the iPhone, with the [strategy] of the models, the MVNO strategy. And on the home business, we maintain the DSL market share and to launch complementary offers in terms of music and TV, which are very important also, the measures that we launched in terms of the contents of Musique Max offer, which is a working [box], which is a convergence [for] between fixed, let's say, Internet, fixed Internet and mobile, which was launched a few weeks ago.

Regarding the UK, a very strong mobile performance the first half, with not far from 10% revenue growth, linked and to be seen as a result from the value strategy, which has been driven and applied in the UK for the last three semesters and which is now paying off, both in terms of revenue growth, but also in terms of profitability, because we're starting to recover from margin in a country where you know how difficult it is to compete.

When we look at some of the [regulatory] indicators on the UK market, again, the fact to push to more payments lee customers has continued. Now 37% of the customer base is payments lee customers. And when you look at the acquisition for the last quarters, we have positive net adds in the contract part of the business, whereas we still continue to be careful not to acquire not very profitable prepaid customers.

The ARPU has increased in the UK, thanks to the increase of the data ARPU, but also because there is an increase of the voice ARPU, which is the good news, and linked with the more unlimited offers, which are gaining some ARPU increase. There is a point in the UK that we have continued to push to have much more controlled distribution and [dereg] distribution. Now, 44% of our sales are coming from direct sales, where it was 36% a year ago.

As regards the home business in the UK, the situation remains, globally speaking, difficult, but I assume you see that for all the players, including the incumbent. The revenue evolution remains negative, but globally speaking, we have decided and it was said at the beginning of the year, we have decided to concentrate on our ULL investments and [we to] a push on customer acquisition and customer retention, mainly on the ULL side, not targeting too much other parts of the business. And it is underway with also a lot of efforts to improve the quality of service, because we think that in the long term, what will make the difference between the different broadband players will be the quality of service.

Priorities in the UK are to remain in the same direction with the improvement of the customer experience. You know that we have pointed at the end of last year a new CEO in the UK, so mainly our [effort] to improving customer experience, improving quality of networks, both on the mobile business and on the fixed, and to work a lot on the brand. I guess for those who are residing in the UK, you have seen the relaunch of the Orange brand, but on a new, much more modern business than what it was before.

Regarding Spain, Spain is a good result, with 2.3% growth in mobile, which, as far as we understand, after our competitors [are intermeshing] their results, is the best result among the three major players, and it has helped to improve the gross operating margin in Spain.

What is the reason for this performance compared to others? This is based on what we have improved in terms of operations. Again, the same strategy, which is a value-driven strategy, where we are trying to attract and to (technical difficulty) higher ARPU customers and payments lee customers, the same strategy as in the UK. The customer base mix is now made of 56% of payments lee customers, whereas there were only 53% payments lee customers a year ago. And the ARPU is also, like in France, quasi-stabilized, with some increase of the ARPU, whereas there is still some pressure on the voice ARPU. Also in Spain, another important point is that we have started for a year our MVNO strategy, and now the MVNO base is a little more than 400,000 customers.

Regarding Home Spain, it was also a good semester, because for the first time since we have launched the DSL business in Spain, the revenue growth coming from DSL is bigger than the decline from narrowband and other traditional revenues. In the second quarter, it is especially noticeable in the second quarter, with 8% growth of the revenue in the second quarter of the year, whereas the conquest of customers remains very strong. We have 14% increase of our customer base, and 35% increase of our customer base in the unbundled areas.

Where we are continuing to suffer globally in Spain, this is -- we are continuing to suffer from the global regulatory framework, even if there has been some improvements, and competitive framework with the incumbent has been in terms of unbundling conditions, whereas you know that on the French market, we are obliged to provide disconnection and reconnection to our competitors in less than seven days, and we generally do it in less than five days. On the Spanish market, (technical difficulty) more than three weeks, you get disconnection/reconnection from the incumbent, one of its competitors.

Priorities in Spain are to continue to improve, even, especially, in terms of distribution. We will reopen 300 stores in the next three years and to continue to optimize the cost structure as well in the countries where there is a voluntary departure plan.

Poland has been publishing their results yesterday, so I will not comment them, but you saw that they are good. And so I will just focus on page 38, on the other countries. Just to comment the mobile business and other countries, we saw strong performance in H1, both Western Europe, Eastern Europe, Middle East/Africa. It was an 8% growth, and the improvement of the gross operating margin of 4% compared to a year ago.

Regarding the operational performance, just to mention that now the customer base outside of the mature countries represents 43% of the Group customer base, and that, outside of Western Europe, customer base growth is still above 20% on average, if I just take the exception of Slovakia.

Regarding revenue growth, we are also, outside of Europe, at more than double-digit growth and, generally speaking, more than 20% on average. Regarding the residential business outside of the big countries, again, revenue grows by 2%, globally speaking, and an increase of the customer base by 65%. In the emerging markets, we have now more than 156,000 broadband customers in Middle East and Africa, globally speaking.

In the emerging markets, we have been continuing to focus on new operations. For the last month, we have been launching or starting new businesses, with Guinea, Guinea-Bissau, Niger and Telkom Kenya, where we have now taken control of operations.

On the enterprise division, it is on page 43, so as I said, performance in terms of revenue has been very good, with about 3% revenue growth for the first half and some acceleration in the second quarter compared to the first quarter. And this is resulting from the combination of better performance and better resilience of the legacy businesses, especially for businesses that were especially in France, and some solid growth in advanced business networks, but also a very good growth for services, the growth above market of plus 16%. This revenue performance has been the main driver of the margin improvement, where the work on the cost structure has been starting to pay off because of this recovery in revenues. So, the plan is for enterprise to continue in this direction.

To comment in a few words now our 2008 outlook, so as we said in the press release this morning, we are careful because we know that the global economic environment is not as good as one could expect, especially in most of the countries where we are operating. However, when we look at the trends of all revenues, our feeling is that they will remain above the average market growth we have been describing at the beginning of the year. We said at the beginning of the year that for the period '08-'10, we are expecting market growth between 2% and 3% a year, and we think that we will be at the higher end of this range.

If you look at the situation in the different countries, in France, we expect good [revenues of our] activities, even if the global market will have probably a lower growth than what it had in the first half, and in both segments, fixed and mobile.

In the UK, again, we think that our performance, which was very high compared to the market, will be closer to the market performance. In Poland, there has been an improvement of the guidance. Now we expect to have flat revenue in '08 compared to the initial expectation, which was a decrease of 1%.

In Spain, we expect to have higher revenue in second half than what we had in first half, but there are clearly some pressures linked with the global economic condition, and we remain careful on the level of improvement we expect over first half. Regarding the emerging markets, we don't see major changes in the trends, at least for the second half.

This leads us to keep, clearly, our guidance on the gross operating margin, where we are clearly confident that it will be stabilized compared to 2007, even if a few items are putting some pressure on the costs in the second half. There is the impact of the so-called Chatel law, with [reoutlined] regulations for the retail and enterprise activities in France, which cost us a few hundred millions.

There is the fact that we think that because of the relative improved performance of some big players in terms of customer acquisitions, first off, we think there will be more commercial activity (technical difficulty). We have considered that we should assemble a plan to be able to face this increased competition.

There is also a third attempt, where you remember [there's always] that one of the big players in the US made a warning because of that (technical difficulty) of selling the iPhone. [They announced] that there is no revenue share, but we have to subsidize the terminal. It's also to account for the sale of the cost of the acquisition. But, however, in order to mitigate all this, we are continuing to put pressure on our costs. And this is a way to guarantee that we will achieve our objectives, as they are described on page 48, so strategy of the profitability, stability of the CapEx ratio, and a cash flow above EUR7.8 billion.

Last point, which was the decision of the Board of yesterday. This is to distribute an ordinary interim dividend of EUR0.60 per share, which will be paid on September 11. This is a decision which is, let's say, the result of the confidence of the Board to the performance of France Telecom for the second half of the year. But it is also a decision which has been taken to better balance the return of cash within the year and not to have just 100% of the dividend paid in one installment.

The Board has kept its words on the potential return to shareholders, keeping the (technical difficulty) to above 45% of the organic cash flow if (technical difficulty) [lose it], and to take the decision of the ordinary dividend amounts in February '09, based on the '08 results, knowing that this is confirmed to be above the EUR1.30 paid in '08. And last, but not least, the Board may consider some additional remuneration also in February '09.

Thank you for your attention. With my colleagues from the (technical difficulty), we are at your pleasure to answer questions.

(Operator Instructions). Terence Sinclair, Citi.

I've got two questions. First of all, while I appreciate that the margins are generally improving, I wonder if you could just tell us where there are significant promotions at the moment which may not continue into the second half of the year? If we look across France, the fixed to mobile, the UK, Spain, are there any (technical difficulty) that we should be aware of? Because removal may encourage growth to slow.

The second thing is, I wonder if you could talk about the exposure of labor costs through wage inflation, given the inflationary pressures generally?

We start to answer to your second question. I think on labor costs, for the second half of the year, we don't see risks that we have not taken into account into our plans. Now, for the next year, that is another question. So we can't answer for '08. I think for beyond '08, we don't know if there is, globally speaking, some inflationary pressure in Western Europe. But how this will be felt country by country, it depends on (technical difficulty.

Regarding your first question, if I turn myself to my colleagues, I don't think there are extraordinary promotions, at least not on the French market. Louis-Pierre, [I don't know] if you are in line.

I'm here. This is Olaf for the UK. No, we don't see significant promotions being stopped in the second half.

Very good, thank you.

Did that answer your question?

Yes, than, you. Can I just extend it to MVNOs? Given that one of the things that has improved your position in Spain is the strategy of [incurring the] MVNOs onto the network, should we assume that there are further deals that can be struck in the next two quarters, or [will be there] in terms of MVNO coverage?

Globally speaking for a second, we like the MVNOs. So if we can have good deals with very good partners in Spain, we will continue.

All right, thank you very much.

Frederic Bouland, Morgan Stanley.

Just a few questions, please. First of all, on payouts, I'm just wondering which criteria the Board will use to assess increased payouts in February next year. Is it fair to assume that without significant M&A, out of the EUR4 billion headroom you will have to your (inaudible) net debt target, EUR1 billion or EUR2 billion can be paid out on an exceptional basis?

Secondly, if you could share your thoughts on the M&A in the medium term, do you plan to focus back on your primary EMEA footprint focus?

And maybe lastly, if you could comment on the broadband performance in the UK and Spain, which remains very poor. So you commented on your UK focus on unbundling, but in Spain you are also seeing very poor additions. So if you could comment on your strategy to fix this. Thanks a lot.

Regarding the dividend, I think it is a little premature to comment what the Board will decide. I don't know myself how the Board will go. I can just repeat what was said in February, which is to say the Board has clearly considered and asked us to express that if the situation of the Company [lose it], as there will be a strong view to see whether or not we can pay some additional remuneration, under which format we don't know yet, whether it's an extraordinary dividend or something else. But it will clearly be reviewed and commented upon based on the second-half performance and [online] perspectives.

Regarding the link between that and big acquisitions, I think there is absolutely no link between the two, because if there is some additional remuneration, it could be a big amount, but very far from one could be the total size of a big acquisition like the one we were trying to achieve a few weeks ago.

Regarding the M&A strategy itself, we have not defocused from EMEA. You have seen that we are launching four new operations in Africa during this first half, and we are continuing to work on potential small or medium-sized acquisitions here, Africa, Middle East, Asian footprints. And we hope we will be able to propose to our Board and our shareholders new projects in the next months, but for medium-size or small-size opportunities, as we did in the past. So there is no defocus on that.

On the other end, as I said to one of the journalists this morning, we have no big projects in our pockets today. So we are not preparing a big deal for the next weeks or for coming back from vacation.

Regarding the broadband in the UK, Olaf, maybe you can answer.

Yes, I can give a few points. So for broadband in the UK, I think it is very important to reiterate there our focus on the customer experience. As I have mentioned in previous calls, we had a very difficult situation last year, both in terms of the actual experience, like the stability of the lines, which was last year at 75%, as well as customer services, so our responsiveness to customers who had problems. We have focused on that and we have made improvements in those areas.

Today, if you just take the stability of our lines, we now have more than 94% of our lines which are stable. If customers phone into the call center, we ensure that more than 90% of those customers get a response within 20 seconds. Last year, this was in the range of 50% to 70%. And our ratios for call resolution and problem resolution in general are improved significantly versus last year.

In addition to that, we have built out our LLU footprint. And as Gervais has explained, we have focused squarely on trying to improve the number of -- the volume of customers on that footprint. And we now have 40% of our customers on LLU.

Moving forward, we will continue to work on the customer experience. There's still a tremendous amount of work to be done. We continue to work on improving the network economics, so on making sure that we optimize the back end, that we continue to differentiate our pricing in [IP stream], and thirdly, we want to make sure that an increasing amount of leverage is coming from the mobile side. Hence our initiatives to increase the number of customers that are converged.

Today, we have a significant portion of those customers that are converged, but we want to make sure that in the second half we continue to build the number of clients that buy both a broadband contract as well as a mobile contract. So those are, let's say, the three key focus areas for us continuing in the second half.

Just a few words on Spain. Regarding the Spanish situation, we have a very strong commercial engine, with strong gross adds. Unfortunately, we are facing high churn, mainly linked with what I described earlier, which is the conditions to provisions of customers, which are linked with the full conditions offered in regulatory terms on the Spanish market, and some internal issues that we are currently solving. But globally speaking, the commercial performance is very strong.

Okay, thanks a lot.

James Britton, Lehman Brothers.

Firstly, you made a reference to the fact that iPhone customer investments are going to drag margins in the second half. To what extent can we look at America and use that as a guide in France? And how will you defend market share against the iPhone in markets like the UK and Spain?

And secondly, on M&A, there was clear emphasis in the presentation that you are seeing better growth from mature markets. Is there any sense that you are, I suppose, you are looking at mature markets more and more, which are obviously priced for very low growth, rather than emerging markets, which are priced for high growth? And what needed to happen for FT to reopen the file on TeliaSonera?

Maybe, Olaf, you can answer on the commercial investment for those countries. We don't sell the iPhone. How you see it?

So maybe the key point here is, if I focus first on the UK, when we look at our numbers, it is clear that in the UK, but also in Spain, we are showing very strong resilience in our commercial performance against the players that have iPhone. We're monitoring on a week-after-week basis our market share positions in net adds, and we're showing that, in the high-end segment, where the product is playing, we're still doing extremely well.

And the way we respond is quite simple, is we are working with strong, other high-end devices in the market, and there are a lot of other high-end devices in the market from Samsung, LG, Sonny Ericsson, for example. In the UK, we have announced four high-end 3G phones with strong tariffs, focused of course on data usage and multimedia. And the combination of tariffs, the high-end devices and strong marketing behind it keeps our position in those segments of the market where the iPhone plays. And that is in particular for the UK and for Spain.

Regarding your second question, I think when you look at the results which have been published by the different players, I think most of those who have a balanced footprint between the mature markets and emerging markets have a better performance in those unsecure periods, and those were concentrated on one market or one segment.

And I think that to keep the balanced portfolio for the future is very important. So to continue to expand in emerging markets is key, but also to look for opportunities in mature markets is also something we will continue to look at for the future. I just remind you that last year, we spent some money on mature markets, especially in Spain, when we acquired Ya.com.

Just as a follow-up, is the AT&T precedent relevant for Orange France when looking at the iPhone customer investments?

No, not at all. You mean in terms of warning for the iPhone costs?

What would be the impact on margins in the second half, do you think?

There is an impact on margin, but not big enough, in our view. There is an impact on margin in the second half because instead of accounting for a split of the revenue for the future, we are accounting one-shot subsidy at the time we sign the contract with the customer, and then we'll keep 100% of the revenues for us for the future, whereas in the previous [NSPL], there was no such fee and a share of the revenue with Apple. So it's more a question of timing difference in the accounting of the profit or the income and cost than any change in the global long-term profitability profile. I think nobody would have signed with Apple if profitability, there was a new model, would be lower than what it was initially.

And then, for us, the impact is small, to be materialized or to be identified on an individual basis, which was not the case for AT&T, whereas the share of sale of iPhone within the order onset is very big, and they had to show it because it was really impacting their guidance on the year. For us, it is not changing our guidance of profitability.

And finally, just any comment on when you might relook at TeliaSonera or what would need to happen for that to come back on to the agenda?

We are no longer looking at TeliaSonera. The file has been closed on June 30, and on our side there is clearly no willingness to open a new file. When I said we have no big projects in preparation, it includes TeliaSonera.

Thank you.

James Sawtell, Goldman Sachs.

I was going to ask one question about the dividend, but I guess -- I think you've been as clear as you possibly can at this stage. So my only other question was wanting to revisit Spanish mobile again.

Can you give us any color, firstly, maybe just on the rate of acceleration of the MVNO subscriber base on your network through the first half of the year and into the second quarter, and give any sense of how the MVNOs in the market that you are supporting are changing market practice and market behavior, and whether that incrementally is something that you might have to respond to, or any of the other players have to respond to?

Maybe I will ask to Jean-Marc Vignolles, who is the CEO of Spain, to answer. Jean-Marc, you are on line?

Yes. So as you has seen in the presentation, there has been a significant increase of our MVNO customer base, which is now above 400,000, which is reflecting, basically, the success of the recent MVNO launches on our network, launched from KPN and its brand, Simyo, that launched two of the other players, like [Met Mobile and GSTel], and also the sustained -- the performance of the first MVNO launched on our network, which was [Sun How].

Our view is that the partners we have selected are performing well, that basically their share in terms of customer base on the MVNO market is close to half of this market, including Euskaltel as an MVNO. They have had no more disruptive impact on the market as other players or the network operator a year ago. Simply, in an environment of economic downturn, a slowdown has been commented. It is clear that low-cost offers have an effectiveness, which accounts for their relative success.

And to some extent, you are happy that their low-cost offers sitting on your network means that you don't have to launch your own version of a low-cost offer to match. Does that make sense?

I think at the moment, we are complementary on our growth on the market, and that through distinct and differentiated distribution channels, we are touching a different customer base. And as was mentioned, our priority has been to strengthen our value strategy over the past 12 months, and we see this well-reflected in our figures.

Thank you very much.

Antoine Pradayrol, Exane.

Three questions, please. The first one is on the cost base in the fixed line in France. Based on my calculation, costs are up 1.5% in France in H1 compared to last year. Can you just explain a little bit why, and whether this will continue into H2, where I think revenue growth will be slower, so maybe there could be some impact on the margin in H2? So that is my first question. Maybe you can answer this first one first.

[We did that cash completely]. What are you referring to is a 1.5%?

I just calculated the --

This is the absolute --

Yes, the OpEx seems to be going up slightly, slightly faster than revenues, actually, in fixed line in France.

Yes, but I think we clearly commented, this is, I think the increase is related to the increase of business. It is not an increase of the fixed (technical difficulty).

We have no special increase on the fixed-cost base. It's [due] our normal maintenance, so I don't see why this number should change. And we are just increasing the number of lines, but then there are revenues which are coming, then, from that, either retail revenues or wholesale revenues. There is no reason why they should significantly change over time.

Okay. So OpEx continues to go up slightly in H2, even though the revenues in fixed line in France will not grow in H2, because there is no impact anymore from the line rental increase? Is it right, or am I missing something?

I'm not sure we will make an OpEx number based on fixed line, just on fixed line, because how can you distinguish this --

No, I mean on Home France, on the whole Home France.

Oh, for the overall France?

Fixed line in France, yes.

Home France, I mean, we are on a good track, because we have a lot of figures which showed us, for example, that the number of calls we get from our installed base is decreasing currently in our call centers, and we have significant plans going on to improve the effectiveness of the people in the field, so they do a better job the first time they go. And we try also to avoid as far as we can to have these people go, because it is one of our main cost drivers. But overall, we are pretty confident that we will continue to keep our OpEx under control.

Some of you are looking at the improvement we did last year. It's true that we had a strong improvement last year, but last year was a year of recovery of the margin compared to all the difficulties we had in 2006, especially in the development of new technologies like Voice over IP and all the services platforms we had. We did not expect and we did not plan for such a big improvement. On the years to come, we are planning on stabilization. What we are planning for Group as a whole also applies on the French business.

Maybe just to finish on that, what I don't exactly understand is that revenues were up 1% in Home France in H1, roughly, and the EBITDA margin was, GOM rate was flat. If I look at H2, revenue growth will slow down. So how can you be so sure that the margin can be flat in a less favorable revenue environment in H2?

I think you're right, you can never be sure of that. Now, we are working on some of the costs, valuable costs, with some effect. So we don't say it will come without doing nothing, if this is your question, that just by spontaneous generation that the costs will go down. There is strong work to be done, but we are confident we will be able to keep the margins at their levels.

Okay, that's good. The second question is much simpler. It's when you talked about restructuring in Spain and the UK, can you give us some figures in terms of the headcount reductions that you're targeting?

For Spain, this is a voluntary plan, turning around 200 people. And for the UK, it is about 450.

And that is in six months or in one year, or -- ?

[Rest of] the year.

Okay. And the last question, maybe -- I don't know if can answer that, but just to try and understand better the decision on an interim dividend that you have announced today, I think when -- I understood that management would propose to the Board an extraordinary cash return yesterday, at the Board meeting yesterday. But what you have decided today, what you have announced today is not an extraordinary cash return; it is just an interim dividend. So can we know whether you as a management team, did you propose an extraordinary cash return yesterday, and what was the decision of the Board?

We never comment the debates of the Board in one sense or the other.

Okay, thank you.

Frederic Doussard, Oddo Securities.

So, let's say, three or four questions. First, regarding Spain, can you tell us if there is a change in EBITDA margin in Q2 versus Q1?

And second question is, obviously, so in Q1 2007, the EBITDA margin in Spain was impacted badly by that one shot by Euskaltel. If we extract this negative one-shot impact, there is a significant decline in EBITDA margin in Spain. How we do we explain that? And do you think you could improve that in H2? Actually, that is my first question just regarding Spain. After, I have other questions.

On the margin in Spain, there has been, you're right, some impact in H1 '07, but there are also some items which we are not commenting, because we think that it's more the cleaning of the account. We have changed the team in Spain with a new CEO. So Jean-Marc was appointed last summer. And we have appointed a new CFO at the beginning of the year. And we have had some, let's say, cleaning of the accounts to make.

I don't comment in too detail, but let's say the operational performance is globally better than what we have. On top of that, you have the regulatory impact on the business, which is also impacting the margins. Don't forget that Spain, we are no longer benefiting from asymmetric termination rates profile, which is exactly the contrary from what is applied in France. And if this is not taken into account, the margin would have gone up to 24%.

Okay. And then on margin, I have a question. You mentioned an increased competition in the mobile market. Are you really sure of that, and how will that materialize, mainly? Do you think it is mainly due to the arrival of new high-end onsets?

Olaf can comment on the view on the mobile market.

I think, if you're talking about the iPhone, the iPhone is only the visible part of the iceberg, because the competition is far beyond the iPhone in France. It is few tens of thousands of phones that we're selling per month compared to 100,000 on the rest of the models. So you cannot say the competition is coming from the high end.

Just as a matter of fact, our competitors, both SFR and [Wig], have continued to have a very strong pressure in the market, and you can see this just by looking at the time where they're launching their new campaign or their new offers, which is in advance compared to the previous year, first point. And second point, usually at the beginning of the year, there is a bit of slowdown in that aggressiveness in the market. And this slowdown was not as big this year as it was in the years before. So I think it is just a normal situation which gets tougher. It has nothing to do especially with the iPhones or the high-end part of the market.

Okay. And then my last two France questions. First, regarding the enterprise business, are you confident that the trend will continue, and for how long? And when do you think the migration towards full IP will come in France?

Thinking about the trends, first I think we cannot say how long, of course, the enterprise market will be softened or impacted at a given point by the overall economic context, so this is something that is really difficult to anticipate in this case.

What we can say is if we look at the GOM rate, which we expect is a slight drop in H2 compared to H1 for different reasons, the first one being Chatel law that has been described by Gervais before. There is a base effect because the H2 last year was very good. And also, we have enjoyed in H1 some positive one-off effects that were due to the reversion of some provisions we have taken in some -- we had taken in some countries due to some risks we were forecasting. And as they did not happen, we have reversed the provision. Overall, I would say we see again -- so if I exclude this effect of kind of stability, both on revenues and GOM, taking into account this [allowance].

Okay. And you don't --

Voice over IP, quite difficult. I think there, we increase every day at a strong pace the number of Voice over IP sites. What we can say also is the fact that we come back to growth on data certainly sooner than some of our competitors in some different markets. And here I'm not speaking of France, but the other incumbents, due to the fact that we started the migration toward DSL and IP VPN sooner than the other, I would say, telcos, meaning that we have had a stronger decrease before them. And certainly, we are back to growth before them also.

So on Voice over IP, quite difficult to predict. There is an evaluation. The market is still, you know, growing every quarter. And there is also a positive impact on access because people want to secure their infrastructure. So (technical difficulty) overall, we don't see a huge change in trends.

Okay. And I'm sorry for asking so many questions, but the very last one regards the trends in turnover growth for Home France. Do you think it is totally impossible that you will sustain the pro forma growth in H2 at the similar level as H1?

This year is that we don't have the subscription increase, which is for about EUR100 million worse, the subscription fees, so which is one of the key reasons. For us, the effect of the certain number of rights we are carrying on the content, and so it's going to be difficult to sustain the same level.

Okay, thank you.

These are the two last questions, if you don't want our friends from Spain to be waiting for you.

Nicolas Cote-Colisson.

On OpEx breakdown, I can see a slight increase in ITN network costs. Can you explain what are these subcontracting costs you are mentioning? How much are they, and how long will it last?

You mean in the ITN expense? Maybe Jean-Philippe can comment.

Okay. So different point to explain, the evolution of ITN OpEx. First, in some countries, mainly Western European countries such as Belgium, Switzerland, we decided to outsource some activities we were doing internally before. So there is, let's say, a transfer from labor to nonlabor. It explains an important part of the increase, that first step.

The second point is that in France, for sure we have some increase in some DSL activities, mainly field intervention or installation at home, with extra review. But, let's say, as it's pure service activities, even if, let's say, the GOM is increasing, the ratio of GOM is not increasing.

Can I just follow up on another question about your real estate operation accounted in your CapEx in France? What are these estate operations?

It is within the framework of our active management of real estate. We were in a situation where (inaudible) of some of our buildings. The landlord decided to organize a process for a sale. And we have the right to match the first offer. And this means that, building by building, we analyzed the situation, taking into account the financials first, and including in that the fact that we were not, building by building, [invitation] to consider the length of the duration [on that], particularly for technical buildings.

And as a result of that, that was for, if my memory is correct, 22 buildings. We are deciding that the best solution, given particularly the usage we have of this technical building, was to match the first offer and to buy, then. To be clear, it is not a starting point of a new activity. It is just very active management of our real estate.

Good to know. Okay, thank you.

Jerry Dellis, JPMorgan.

Three questions, please. Firstly, on MVNOs in France, you said that now accounts for 6% of your revenue base. I wondered if you could comment on the competition council ruling yesterday, which argues that contract terms should be made less restrictive for the MVNOs. It would also be helpful if you could comment on what the margin on your MVNO revenues is currently.

Secondly, on the enterprise side, there was a EUR35 million positive exceptional. It would be useful to know what that was, whether it was related to provision reversals, what is going on there. And also, if you could quantify the impact of the Chatel law going into the second half.

And then finally, just to come back on the issue of Home France margins into the second half, obviously the margin was flat H1 on H1. But the line rental increase offered a 130 basis point tailwind. So should we not expect the margin to fall quite heavily going into the second year, or is it that you are holding something back? Or are there some cost initiatives that you could give us some clarity on? Thank you.

On the MVNO, Louis-Pierre, maybe.

On the MVNO, I think the statement which came out yesterday was an overall statement, and from that perspective we are probably ahead from our competitors. We have been most active in that field. And today, 60% of the MVNOs' revenues are with Orange, which is far above our normal market share.

Our MVNOs are strong. Some of them, we are now above or will be shortly above 1 million subscribers. We continuously discuss with them to make sure they get enough room for maneuver in order they can find a good way to grow. We of course will read carefully what the statement was and continue to improve the conditions which we are using to work with them. But we don't see this as a disruption in what we have been doing so far.

On the enterprise market, so first, speaking of the Chatel law, we evaluate today, but this is an evaluation, of course. The impact of Chatel law for the enterprise market, this is not including impacts on Home France business of something like EUR20 million on GOM and 0.5 point of GOM margin overall.

Speaking of the exceptional items, on GOM, as I said before, it is a mix of different subjects and reverse provisions that have been taken out, some of them coming from Russia, some of them coming from cost recovery in some countries. So it's a sum of different items that overall represent 0.9 points on GOM.

If I understood correctly, your question was what could be the outlook for the margin on home in the second part of the year. It is clear that we will have to take into account this number of facts which were not present in the first part, like the Loi Chatel we just mentioned, like the soccer rights, plus a few other things, which are basically just eking some margin out, which we tried to recover through OpEx reduction plans. But it is a race between the two. And so far, it is hard, when you talk about something which is largely in excess of EUR100 million, to catch it up within six months.

Could I just come back on one point? Is it possible just to get an idea of the margin-on-margin on MVNO revenues, please?

No, we don't communicate that. You understand that, especially with what you mentioned in terms of debates, it is clearly information that we don't want to make public.

Fair enough, thank you.

Thank you very much to all the participants, and hoping to see you face to face in the course of September, October, and good vacations.

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