Orange SA (ORAN) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to France Telecom 2011 first quarter (sic) results conference call. The call will be hosted by Stephane Richard, Chairman and Chief Executive Officer and Gervais Pellissier, Deputy CEO and CFO with members of FT's Executive Committee for the Q&A session that will start after the presentation. Thank you and let me hand over to Stephane Richard. Please go ahead.

Good afternoon everyone. We are happy to tell you this afternoon about our first half 2011 results. Let me give you a few highlights on those results.

We think that those results show a very good resilience of our activities and business model across the board. We have been living through a, let's say, challenging environment in most markets where we operate. But despite this environment we have been able to achieve all our targets, especially in our domestic market, France, but also in Europe and in the rest of the world.

Our revenues have been strongly pushed by the data traffic which has increased by more than 25% in this first half. Data revenues represent more than 15% of our personal services revenue today. The phenomenon is very spectacular all over the world, of course, especially in mature markets.

We have also been able to show our capacity and commitment to keep our commercial positions and commercial basis. We have as a whole a customer basis growing by nearly 7% this first half 2011. And we have been able to keep a strong commercial momentum in the different countries and to protect our market shares and in the same time also defend value and EBITDA.

As I had announced during the Investor Day, we have finalized our strategic review, or at least the first step of this strategic review regarding our European footprint. And we have made strong and clear decisions after this portfolio review. We will of course give you more details about that.

For the next month and until the end of this year, we will keep on being very pragmatic and serious. We see our markets as remaining challenging for the next months, but we also see opportunities. I've already mentioned the data engine. It's still very lively. But even in the most challenging market, which is the French market, as you will see we have triggered a lot of initiatives and answers that should make us in a good position once again to defend our positions.

In financial terms, we are on track to achieve our EUR9b operating cash flow guidance full year 2011.

Page six, a few main figures of this first half. This -- revenue slightly positive after regulation. There's 0.3% growth excluding regulation. This is globally like is what we expected.

I want to stress the substantial impact of the VAT rise in France. But also still the way of regulation hit. You can see that accounts for more than EUR370m in the first half.

In terms of EBITDA, we have been able to maintain the erosion around 1.5 points which is still coherent with the full year target of being around 1 point of erosion, because as you know we are usually have a slightly better EBITDA margin on the second half than on the first half. This figure enables us to confirm the full year guidance in terms of EBITDA.

Let's also stress the fact that -- can you hear me?

Okay, sorry for this interruption. Maybe some technical problems. But it was just here in our headquarters. Of course I hope that everyone is able to hear what I'm saying, not to listen to.

I was just saying that in terms of EBITDA we have contained the erosion of this EBITDA margin at 1.5 points for this first half. And I just wanted to emphasize that if we consider -- exclude non-recurring impacts such as the VAT increase or the situation of Ivory Coast and Egypt, the EBITDA margin erosion would be under 1 point, which is I think a very good performance.

We are also on track in terms of CapEx, with around 10% of increase in CapEx. As you know we, in our five year plan, this adapt to conquer strategy, we have decided to invest more in this year and next year in order to accelerate the rollout of next generation network. And you can see from those figures that we are also on track with this roadmap.

And in terms of operating cash flow we are, I think, at a level a little over EUR5b, which is definitely also coherent with our full year guidance.

On page seven a few figures about -- page seven and eight, a few figures about our commercial performance on this first half. I want to stress the French results. As you know, the French market is quite challenging since the different players are preparing to the -- for the fourth entrant's arrival at the end of this year or early beginning of next year. So we have faced a very fierce competition in the market in France. And we have been able to keep a very satisfactory mobile market share around 41% excluding MVNO, which is a good result.

In terms of broadband, we have a Conquest market share, a little over 20%, which is not too bad, also compared to what we have done last year for the same period of time. And also, if you take into account the competition that has been very tough also in this market in France, especially with our competitors launching new generation of products.

Very good results in Spain both on mobile and broadband with really a very spectacular momentum in this country, which in fact is accelerating and we are month after month the net winner in terms of portability against all the competition, but of course the fourth player.

We have been able also in this country to buy the spectrum which is necessary to roll out 4G or LTE equipment and to bring high speed services for mobile at a competitive price under in fact what we have estimated.

In Poland we have been resilient and solid in mobile, first with a market share around 30% which is also stable. It's once again in this country a very tough competition between the four players. We have been driven by a strong growth of data revenue, almost 30% as you can see. And we have signed last week a network sharing agreement, with the creation of a JV with Deutsche Telecom that is going to bring about substantial synergies and in the same time an improvement of the quality of our coverage.

Page eight, rest of world. Nice results in the rest of Europe and very nice results also in the -- in fact, only market in the American zone where we are which is the Dominican Republic.

And as far as Africa and the Middle East is concerned, the results are still good with a growth which is around 7% if we exclude Ivory Coast and Egypt, which means that growth engine of those countries in this area of the world is working well.

Maybe just a few words about Ivory Coast and Egypt. In Ivory Coast as you know, this country has been going through a major political crisis and definitely we have suffered a lot from the troubles that happened in this country. There's huge damages in our network and infrastructure. We are currently rebuilding our network and the commercial activity is significantly improving in the past weeks. And we are very confident in our capacity to regain the market shares that we lost in past months. But of course the results of this first half have been impacted by the situation of Ivory Coast.

In Egypt, we have had less damages in the assets. But in this country as you know, the political situation is still unstable and the economic situation is fairly depressed. So they are under what we expect from such a large and growing economy and market. But we are at the same time very confident about our capacity to recover. We have already the first good signs of this recovery and we will also manage the political environment of our business in Egypt.

I will personally go to this country in a few weeks in order to all the stakeholders and to convey very clearly the message that Egypt is 100% member of the Group and a critical country for the Group.

In the B2B division we are still in a slight recession in terms of revenue, but the trend is definitely positive. I think that the B2B results for this first half is one of the good -- I won't say surprises but one of the good achievements of those months, with the continuous improvements both in terms of revenue and position in terms of [B2B].

On page nine, a few quick remarks and comments about the portfolio evolutions. First, I would like to stress that we have done a lot of major changes in our content policy with first, the end of the soccer, if I may say so, the venture. We didn't bid on the new auction to buy soccer rights so this is going to be around EUR200m savings every year in future.

We have also been able to come to an agreement with Canal Plus in order to create a co-enterprise for the rest of the paid TV channels, Orange Cinema Series, Canal Plus taking a third of the capital, also going to bring us their skills in terms of buying programs and distribution platform.

At the same time we are thinking of the future and we have taken a 49% stake in Dailymotion which is the number one in the world of video services on the Internet. And this is going to enable us to prepare I think differentiated and interesting offers combining access and video content on the networks, between Orange and Dailymotion. We are currently working on channel bundles that we will launch later in the year.

We want to refocus on core businesses and that's why we have disposed one of the non-strategic assets of TP S.A., our Polish subsidiary. I'm talking about Emitel and this sale has been well achieved with a net gain of nearly EUR200m in our accounts.

We are still on track to reach our target of doubling our revenues coming from Africa and the Middle East by the acquisition of 44% in Korek Telecom, one of the major mobile operator in Iraq in a JV with the Gulf company Agility. It has been closed very recently.

And in terms of portfolio management we have decided to launch a sale process of Orange Switzerland which is the mass consumer market activities. So we will stay as the B2B operator and provider in this country for our big customers but we have decided to sell the consumer business. We are going to launch this process in the next days. It is expected to be completed maybe by the end of this year or beginning of next year. And this puts an end to our strategic review work in Europe.

We are currently undergoing the same work on our African and Middle East portfolio and also on our B2B division.

Of course there's still the situation of our non-minority -- sorry, of our minority stakes in Portugal and Austria, where as I've already mentioned we don't want to stay in the long term a minority partner in such operations. This is not really our object. But we will see with the majority shareholders of those businesses, the conditions and time schedule under which we can contemplate an exit.

A few comments now to end my introduction about the way we are in fact implementing our Conquest 2015 strategic plan. I think we have made significant progresses in all the big priorities of this plan.

First, employee satisfaction with two steps regarding the improvement of the social situation in France and also a new organization, more customer centric in France and a strong focus on quality and quality of service in this country but also everywhere else in the world in fact.

Employee shareholding development also with a free share plan that has been voted by the Board yesterday and which is an incentive plan that is going to concern more than 80% of our work force.

Regarding our customers, we are currently accelerating the rollout of new fiber networks in dense areas in France. But we have also signed a very important agreement with Iliad Free in order to co-invest in less dense areas in France, which will provide more competitive conditions for this investment and also bring an answer to -- for areas and for populations that are living in, not in the big cities.

We are also preparing new offers, both in the broadband market but also of course in the mobile market, in order to be aggressive and competitive before [Free's] arrival in the market. That is actually the case for a new sub-brand and offer that we want to launch beginning of September, under the name Sosh for social networks. This will be a 100% digital low cost kind offer that will focus heavy users of data exchanges. It will be a very flexible and attractive offer and we think that it will be a very competitive alternative to what exists today in the market and what we can reasonably expect, just to launch in a few months time.

In terms of our shareholders, we of course confirm the EUR1.4 dividend for 2011 and 2012. As I told during the Investor Day, we are doing everything to keep our operational performance at a level that guarantees the perspective of a stable dividend in the coming years.

And regarding the disposal of Orange Switzerland as I mentioned also during the Investor Day, you will see later on the use of cash which is generated by this disposal. But clearly we will return a significant part of this cash to our shareholders, we'll see under which kind of conditions.

In terms of governance and Executive Committee, we have renewed our Board recently. And we have today one-third of our Directors being women which is one of the highest rates for the big French companies and we are quite proud of that.

And in terms of Executive Committee, as you know Olaf Swantee who was in charge of European operations has been appointed CEO of Everything Everywhere recently and he's going to take over the job beginning of September. He will be replaced by Benoit Scheen who is today the CEO of Mobistar in Belgium. Benoit is himself a Belgian national. He has a very strong track record, both in the Telecom business and also IT sector and he will clearly provide us with the strong track record, skills, experience. He's also a young high professional and we are very happy to welcome him around the Executive Committee.

A final word to say that we are very vigilant about our balance sheet situation and especially the management of our debt. We've been able to of course keep the debt to EBITDA ratio under 2. We still benefit from a very favorable liquidity position and we have a very proactive management of our debt. We are, I think, one of the very few telcos with a very high rating. But Gervais will give you more details about that.

And I am now going to give the floor to Gervais and of course we will be able later on to answer your questions.

Thank you Stephane. So maybe to go through some of the slides. I guess most of you have already had a look what we have been producing this morning. So I may just comment some of the sales rather than to give again a global picture.

Regarding the revenue situation on page 21 (sic), just to mention that when we look at the different segments of the Group, France confirms its resilience. Spain is the fastly growing sector. Polish mobile operation remains solid and globally speaking Poland is in a better situation than it was a year ago. Rest of Europe is also good with maybe the exception of Romania where the situation remains -- still remains difficult.

And as regards to international markets, I think Stephane commented that if we separate the specific situation of -- or if we look separately on this situation, the situation of Egypt and Ivory Coast we have still around 7% growth, which is in line with what we have been achieving so far.

And as regards to the Enterprise division, again a better profile this year than it was in 2010.

Regarding to the contribution of revenues of the different regions on page 23 (sic), this is -- let's look at it. Two main comments. One is that the growth in Spain is offsetting France and Poland. And the other point is that in other countries we have in fact growth. This growth or half offset by the specific situation of Egypt and Ivory Coast.

As regards the profitability of our Group on page 25 (sic) and the profitability by operation, maybe two comments. One, EBITDA decline is not a given everywhere. We have seen regions where we are able to stabilize EBITDA rates, or even slightly increase; Spain, Poland and Enterprise. So this is also something you can achieve based on a system of cost cutting and the results of the efforts done in those regions. Even if at least for Spain one should underline that Orange Spain has been improving for the last two years and we are very happy with that but it came from a very low level.

As regards France, some one-off has impacted the performance of this first half. It was commented again by Stephane. The big one is the VAT rate change on telecom package. This has had a strong impact that we value at about EUR70m.

And as regards to -- as regards other countries, Egypt and Ivory Coast have an impact of EUR80m. This is around EUR100m.

If you try to look at our profitability based on the cost structure coming from the cost structure of the Company on page 27 (sic), and slide 15, sorry slide 15. On my book it's page 27. But it's the slide 15, sorry. On slide 15, also two comments.

One is that EBITDA for commercial costs is stable. We have, in spite of the revenue pressure, we have been able to align our cost structure. And I would say in spite of the revenue pressure but also in spite of the labor costs, a slight labor cost increase, which means that our performance program which are now under the responsibility of Pierre Louette has been executed so far, to keep our profitability this level and to margin of maneuver at the commercial cost level.

As regards commercial costs, there has been a need to increase bonds in Spain, and this is reflected on slide 15 to push the revenues.

And in France mainly to keep the market share especially as much as we could and to keep the value of the customer base especially with the VAT as it happened in the first quarter.

To close the P&L picture, net income. So net income is below what it was in 2010 with one big exceptional, which was the capital gain on the contribution of Orange UK for Everything Everywhere last year, EUR1.1b.

The rest of the decline is linked with the EBITDA erosion and with the accelerated depreciation of some of our 2G networks with swap from 2G to 3G as we have been implementing in France and Poland to improve our network in terms of capacity, in terms of coverage. But in terms of quality of service, but also in terms of cost structure for the future.

I take this is opportunity to update you on the tax. We have the highest tax in terms of P&L. When we'll be at the cash flow page you will see that we have no increase, no increase of cash tax. What has increased in terms of income tax is our some one-offs for around EUR100m that we had, which were positive in 2010. And we have been updating our tax provision in France for about EUR100m. The difference of EUR200m is explained 2011/2010 those events.

Another point which is important is that today we will probably pay a significantly lower amount of tax in 2012 than we would have initially thought. We have been saying, including until April 31st that you pay around EUR700m tax in France. And today we could be between zero and EUR300m tax.

Our investments. CapEx ratio is at 11% with some ramp up in the second quarter. And this is consistent with the seasonal ramp up we have year after year. The main increase in terms of CapEx spending comes from France and Poland with three priorities; network, FTTH in France, 3G HSPA in Poland and also some 3G swaps in France and in the other regions.

Higher investment in terms of IT. 10% more than what we did in 2010. And higher investment on -- sorry, for network it's mobile rollout as I mentioned and submarine cables.

Second priority is IT with 10% increase France, Poland and Belgium and also, as a success of the open offer and recovery of our DSL share of Conquest plus an accelerated deployment in terms of [introduction] of the Livebox, we have, also have increased the spending into customer premises equipment; 48% more than what we did a year ago.

Cash flow, so operating cash flow under -- with the EBITDA evolution and with some increase in CapEx. Other cash flow items improved. Lower interest spending. Not much, or more or less stable, income tax cash out. Work on the working capital. And if you look at the total organic cash flow per Group, we are at EUR3.5b this year compared to EUR2.7b a year ago. However, one should remember that in 2010 we had an exceptional one-off which was French taxe professionalle paid for EUR964m as well as a little more spending in terms of spectrum.

As regards the debt, again rating maintained, liquidity slightly increased. And we raised EUR1.25b of bonds in the first half 2011, with nine year average maturity and at a cost largely below our current cost of debt.

We -- today we no longer have any debt to reimburse, bond debt to reimburse in 2011, which means that the operations in terms of financing we will be conducting in the second half of the year will be dedicated to accelerate and improve the debt redemption profile for 2012.

I shall not comment all the segments. Maybe just France. Poland has been published separately. Everything Everywhere has also been published separately. I will not comment at least those two ones.

As regards France, again we are quite happy with the situation in second quarter especially in terms of market share but also in terms of commercial expense spending. And the domestic activities have been quite resilient especially in Q2, as it is reflected on slide 21.

If you look at the operational KPIs, for mobile stabilized market share in terms of retail market share in the second quarter compared to first quarter. So we lost the market share in the first quarter with the VAT and with the strong push of some of our competitors. This has been stabilized.

Our market share in terms of network has also recovered to come back at the level of year end, which means that this also enables where our partners have been able also to improve the global market share for France Telecom Orange.

We have also ARPU, which continues to increase excluding regulation and excluding its impact, it is nearly 3% increase mainly pushed by data usage and data coverage in terms of data penetration story and data usage. And when we look at the mobile margin you see that after the VAT impact, we have been able to better manage our SAC/SRCs in order to preserve the margin.

Regarding the fixed business, the market share in terms of DSL which is quite stable compared to Q1, with 22% market share of Conquest is again a satisfactory result for us because we have low churn -- at least lower churn than last year. And we are coming back more or less to our historical churn rate which means that the strong performance of our competitors is mainly on new customers and also on churning the others than churning us. Whereas, for PSTN we have a lower level of line losses in Q2, is also a satisfactory point.

As regards ARPU, ARPU has been eroding mainly taking into account the re-pricing we have been implementing last year in May 2010 to recover our competiveness versus our competitors.

Spain with 4% revenue growth, 6% before regulation and a stable EBITDA margin rate with revenue evolution as it appears on page 24, really improving quarter after quarter, especially as regards mobile revenues.

Regarding the operational KPIs for Spain, 8% customer base growth and quite good if you compare the revenue customers which is plus 6% before regulation, 8% customers today, there is not too much price dilution in customer growth. It's not so bad compared to what happens in other countries. ARPU also increasing compared to regulation. And also, an accelerated data and smartphone penetration in Spain where we continue to be number one in terms of iPhone sales.

As regards DSL, just to mention, that we are also recovering with 9% customer base growth and revenue growth.

Poland has been published, but results were considered satisfactory when they were published.

And to conclude with the consumer footprint for the other geographies, the figures -- main figures have been commented by Stephane. Just to mention that EBITDA has been eroded by 3.2 points but more or less half of it linked with the events of Ivory Coast and Egypt.

Customer base is continuing to increase and it is a 22% increase, most of it being organic growth. 4m added just with the acquisition of a 40% stake into Meditel.

For Orange Business Services, again a better revenue profile that we had a year ago. And we are also very satisfied with the stability even slight recovery of the EBITDA rate, plus 0.6 points compared to what we had a year ago.

As regards the operational KPI of this business, we have more or less a stable situation for IP VPN accesses compared to what we had a year ago. And we are continuing to grow our revenues in emerging markets. An objective to reach [EUR1m] in 2015 and we continue to grow our revenues in voice over IP by 25%.

Everything Everywhere has been published. But again this first half is satisfactory.

And maybe to conclude this presentation, we confirm our guidance for 2011 as it has been presented on our Investor Day on May 31 -- EUR9b operating cash flow. Our dividend confirmed and debt objective also confirmed, by the way, achieved at the end of June.

We are now ready with Stephane and some member of the management team to answer your questions.

(Operator Instructions). We will now take our first question from Nicolas Cote-Colisson of HSBC. Please go ahead.

Thank you. I've got two questions. First one is on French fiber and co-investment. I can see the point, in terms of regulation and cash out. But co-investment also means that you are sharing your secure advantage with your competitors. So I would like to know a bit more about your view on this and how do you think your higher market shares in less dense areas may evolve in that context?

And my second question is on your portfolio management. You mentioned that you are currently looking at your emerging market portfolio. Does it mean that you are now done with Europe or should we expect more in Belgium and also Spain? And actually, in Belgium, have you started recruiting Benoit's replacement?

Yes, Pierre Louette for the first question and Gervais and I will respond to the second one.

So just a few words on the fiber issue. Maybe we have to take one step back to -- in order to answer your question precisely. If you remember well, we decided that we were going to launch an effort of fiber over all the country, which was announced and published in February -- early February. We announced that we were going to bring the fiber to 3,600 cities in France, with a coverage of 10m households by 2015 and 15m in 2020. So this was an announcement which was very important for us. And we confirmed at that time that we were going to spend around EUR2b until 2015, in order to deploy the fiber network in the country.

What has been announced now with Free is the consequence of two things. The first thing is the -- we published actually the global unbundling offer in fiber, which was discussed and accepted by ARCEP. It was published. And the day after it was published, it was chosen and accepted by Free, which decided as a company to admit this offer, to buy into this offer as well, and to co-invest with us in the non-dense areas, which is really important for the whole fiber issue in France and very important for us also, because it means that we're going to put fiber in those non-dense areas, according to our plan. But we will generate revenues instantly at the time we're going to deploy the fiber.

So it's pretty important for us, in terms of revenues, in terms of business plan. It's also the confirmation that the prices that we have established actually are acceptable and actually have been accepted by the new entrant in this fiber field. So I think that's a good news for fiber in the country. Very good for France Telecom, especially.

As far as the second question is concerned, as I mentioned earlier, we have completed our review of our European assets. This being said, as I mentioned, we still have two minority stakes, as you know, in Sonaecom in Portugal and at Orange Austria. We are not willing to stay in such positions in the long-term. But in those two cases, we have to discuss and to see where the majority shareholders of those companies, the timing and the conditions under which we will exit from those companies.

You mentioned Belgium and Spain. In those two countries, we are definitely not willing to exit from the market because we think that we are quite successful and that we still have some value creation potential in the future. We have no plan, in the short-term to make any strategic move in those two markets because we think that there is no real and realistic opportunities for us in the very short-term. But we will of course pay attention to what is going on and what's happening in those markets. But definitely what we want to do is to capitalize, to accelerate, to focus on the improvements of our ongoing operations in those two countries.

As I mentioned, in Spain we are very successful but we still have a lot of work to do because I do think that we have a lot of progress to achieve again in the mobile market, also in broadband and combining both. So a lot of things to do and of projects and no plan to -- for any kind of strategic move, either of course to these posts or even to buy such or such asset. Of course, if there is some consolidation in those markets, for instance, if one of the players in the mobile market is potentially to be sold in Spain, it's something that we will of course consider.

As far as the CEO position is concerned in Belgium, what I can say is that we will submit to the Mobistar Board a candidate to take over the CEO position, coming from the Group.

Okay. Many thanks.

Next question comes from Antoine Pradayrol of Exane. Please go ahead.

Good afternoon everyone. First question on your revenue trends. The H1 revenue trend, excluding regulations of plus 0.3%, listening to you, I didn't have the impression that you really expected improvement in this revenue trend ex-regulation in H2. Can you tell us whether you are still confident in the revenue target of a slight growth, ex-regulation for the full year? Are you more or less optimistic than a few months ago on that? That's the main question.

The second question obviously is less important, but it's just important for us for modeling purposes. I see that EBITDA was positive in ICSS in H1. Even the adjusted EBITDA was still positive. Why was it positive? And is it a sustainable figure and remain positive for the coming quarters and years. Thank you in advance.

Thank you Antoine. Regarding revenue, we still expect a slight positive growth before regulation for the full year probably with not exactly the same profile between first half and second half. That's what we had anticipated in our forecast end of last year. Probably first half is better or slightly stronger than what second half will be. And this is mainly linked with the macroeconomic situation. It's not linked with our own market share or our perspective. This is because we are cautious, like most of the consumer goods players. The fact that it seems that in Western Europe especially, the second half will not be as strong as one could have initially anticipated. But we continue to confirm a slight positive revenue growth before regulation.

Regarding EBITDA for corporate and international carrier because ICSS is a gathering of what is not exactly in the operations, the expected level for full year EBITDA is around zero-plus. And we expect a negative EBITDA in second half because we have a few non-operational items to take into consideration, which are generally carried at corporate levels.

Okay. Thank you very much.

Our next question comes from Nick Belfast of Morgan Stanley. Please go ahead.

Yes, thanks very much. I just wanted to clarify on tax. I think you said that you'll pay less tax in France in 2012 than you originally thought, and about 0 to 300 I think you said, rather than 700. What's the driver of that and what is the outlook for 2013 and onwards? Thanks very much.

We cannot have -- it can be only good news. So for 2013 today, we think we'll be a normal taxpayer, paying the normal level of tax. So for 2013, I cannot give good news.

Regarding 2012, this is because we are still working on our tax loss carry forwards what we have in the Group. Some are usable. Some are not usable. But we try to rearrange that. And we have been working on that. And this is why we think that we will be in the situation to pay a little less tax in France. But when I say a little less, quite less in 2012. This is also linked with the fact that we have now a better picture on the 2011 social reserve for France. And this means that we can have a much more precise calculation of what will be the nominative income tax for France in 2011.

Thanks very much. If I could, just one other question. In terms of linguistics, the reversal of provision that's talked about in ICSS, is that a reversal as in a write-back of the provision that was taken or is it the utilization of the provision?

This is a utilization of the provision. It is not a write-back. It is a utilization. We have, and I think Stephane commented that -- we have taken -- we have confirmed two major decisions regarding TV. One is that fact that we have not been a candidate to soccer rights, which means that in fact all what has been reserved for continuing sports rights spending until 2012 has been reserved and is now consumed month after month until mid-2012.

And regarding Orange Cinema Series, the JV which is under construction with Canal Plus is also partly covered. The cost of this JV is partly covered by our reserves and which are consumed year after year.

What has been taken into account in this first half is the consumption of EUR40m in ICSS and of EUR90m in the French operation.

Thanks very much.

The next question comes from Jonathan Dann of Barclays. Please go ahead.

Hi there. Two questions. Could you confirm each time you make a disposal for more than EUR1b, will the decision on a buyback be treated in isolation or will you take into account any potential acquisitions you'll make? So I guess if Switzerland is successful, will you then return 50% of the proceeds?

And then my second question. Could you just elaborate briefly on the idea behind the social brand? How will you distribute it? How does it fit with the existing brands? That type of--

Okay. Regarding the first question, I want to be very clear. We will return to shareholders a significant part of the proceeds coming from the sale of Orange Switzerland. And this is without any kind of interference from other projects that could arise in the meantime.

Then regarding the new brands, maybe I will ask Delphine, who is with us and who is in charge of French operations, to give you maybe a little more information because, as you know, we are just announcing and a little bit teasing the market with this new offer. Delphine.

Our new brand, called Sosh, the distribution will be web only as well as the customer relation, which is -- will be mainly on our new website, Sosh website. And so it will be separate from the common Orange offers and Orange customer care. But if Sosh customers has a trouble with mobile or a SIM card, he could use the customer care in our Orange Shop. The difference is that customer care in our Orange Shops is free for Orange customers and won't be free for Sosh customers. So that's what I can tell you today. But of course, we'll give more details of this new offer at the end of the vacation.

Thank you very much.

The next question comes from Nick Lyall of UBS. Please go ahead.

Hi. It's Nick Lyall from UBS. Could I ask firstly on the French business? It looked like relatively weak broadband adds in a slow market this quarter and also slightly weak retail personal France adds as well despite the new pricing on broadband. So are you still confident that you don't need to raise commercial spending aggressively in the third and fourth quarters?

And then secondly, also could I ask, with MVNOs still very strong, could you tell us the existing position on Virgin Mobile please? Would you consider, if it has left for SFR, that you could re-bid for that business or maybe even consider trying to buy in Virgin Mobile over time if you're set to lose it from your network? Thank you.

Okay. Maybe first Delphine on the performance in the broadband market. And then maybe a few words from Pierre Louette on the contract and relationship with Virgin which is -- just to mention it -- it is not a change of Virgin in terms of partner for MVNOs. They have decided to have a dual source but it absolutely doesn't mean that the traffic is going to be transferred to SFR. But I will let Pierre maybe give you more information about that. Delphine.

Yes. So on the broadband market, we don't find our results and our market weak at all, but we are very resilient. Just I want to remind you that our competitors have launched new boxes. And we have had, at the beginning of the year, the VAT with all our customers no longer engaged in our offers. So we find that our results, in term of market share, is a very good result, and especially our churn is quite low, which means that we do control our base, which is key for our business and key for our revenues, of course.

Okay. So regarding the MVNO position on the French market today, just a few reflections to share with you. The first thing is that actually anything that shows traction on the MVNO side is good for us. You have to remember that we have around 70% of the market share in the MVNO. So whenever they develop their business, it's pretty good and interesting for us, in terms of wholesale. So we're not losing when they develop, usually.

The second thing is the MVNOs have shown, and it's an interesting sign also, that they were able to build some market share gradually. Virgin is in the area of 2m customers now, which is also an interesting sign of the way you can develop yourself on the market by using the specific commercial offers. And this is exactly in the direction of what our new brand is going to do, probably. It shows some way, how we can use commercial segmentation and how we can use client driven offers to grow our businesses. And that's it basically.

And could you just -- what will be the differences between what you offer to Virgin and what SFR offers? Do they offer more flexibility or are you offering exactly the same thing, because it seems a slightly strange thing to do if that's the case?

You have to bear in mind also that whenever an actor like MVNO grows, he will probably go to a double sourcing system because a larger MVNO needs to actually try to play between two different providers. So it's a sort of a structural evolution that we've been witnessing in several markets.

Actually, Virgin today is not the most important double sourcer of our own clients. I'm not going to enter into all the details. But we have another client that is actually more double-sourced than Virgin is. So we are used to that. And it's a stimulation for us also to be preparing better offers, giving our MVNOs better weapons to fight on the market. It's structural. I don't think they're offering much more than we do. And all those situations are very volatile. They can change and go back to previous situations before you know it.

That's great. Thank you.

-- comes from Stephane Beyazian of Raymond James. Please go ahead.

Yes. Good afternoon. Thank you. Two questions, if I may. The first one is one of your competitors, SFR in France, recently cut its prices and readjusted its strategy. I was just wondering whether you have any view on those price changes, whether you feel they are quite aggressive or not. And at the same time, they also have been reviewing let's say their level of subsidies for new customers.

My question is do you think, in the current environment of price cuts, there is however room, let's say, overall for operators to be reducing subsidies in order to offset impacts on the top line by -- sorry to impact on margins of the price cutting-backs by potentially lowering the subsidies in the French market or not?

My second question is regarding the dividends you received from the UK, EUR264m. Is it just possible to assume elements of the calculations basis to get to the EUR264m of dividend? And what is the phasing of the dividends from the UK joint venture, going forward?

Delphine maybe, then Gervais.

So on SFR new offers, remember we've launched last year, at the end of last year, the new offering of Origami portfolio, which was called [Origami Still] and which was and which is still very successful. And in some way, SFR did the same with its new carrier offers. So the market's new offer is very well, saying, we are cutting prices, but in fact they just readjusted their portfolio to our own portfolio.

There is no external release of the figures of the cash flow figures of Everything Everywhere. But just to say that we stick to the policy which has been agreed with DT, that Everything Everywhere we distribute 90% of its dividends to its shareholders and see where that has been calculated. And today, our expectation is that for the full year, we're [realizing] the same order of magnitude that what was paid half last year.

Thank you. And regarding the subsidies in the French broadband market.

Could you repeat your question?

Oh, sorry. My question was do you see any room for reducing the level of subsidies in the French market.

We definitely see room to reduce subsidies, because it's the kind of trade-off between the level of the monthly fees and the level of subsidies. That's why in Q2, we've already increased -- reduced the level of our subsidies to prepare, in fact, these new market rules that we expect to be the rule in H2 and also onwards.

Thank you.

The next question comes from Dimitri Kallianiotis of Citi. Please go ahead.

Good afternoon. Thank you. I've got a couple of questions, just going back on the French broadband market. And the first question, regarding your business plan for fiber, just trying to understand why you are spending so much money in fiber because if you are allowing the other partners to co-invest, you probably won't be able to gain market share. And at the moment everybody seems to be pricing fiber at the same price as copper. So one or two things. Do you expect to really gain a lot of market share or do you expect to be able to charge a lot more for fiber than for copper?

My second question, again on the broadband market. Do you feel more pressure to launch a new box because your market share is still quite a long way below the 30% market share of net adds in DSL?

And my last question, just finishing on the broadband market, you -- on one of the slides, you said that you expect an upturn in terms of broadband ARPU in France. And I was just wondering why because the new offers you've launched, some of them, like the Livebox then is priced quite low. So why exactly do you expect the ARPU to go up? Thank you very much.

So on the first part of the question regarding fiber, first of all you have again to remember that even though I know that some of you will not remember those items, but we are building a fiber network for the future. At the end of the very last day, in many years, we will inherit from the network we will have constructed. So when you will distinguish the copper network, at least we will be owners of a new network. We're a Company that builds networks, runs networks, so we need to build new networks. So that's one thing.

You have -- the second thing is you have to judge the payback on fiber in the long run again. It's obviously not something that's going to happen in the next weeks or next months. It's going to take awhile before you find out.

And the third element also is that we have actually started commercializing fiber offers at almost the same level of price as the ADSL. But it's probably going to change in the future. We are waiting for new offers, new contents, new elements, new ways to raise those prices. And also, we are also waiting for the public to buy into those offers and to find out what the added value of fiber is and we'll probably be able to raise those prices. Exactly what happened in the US over the last month, I would say, should happen in the French market over the next years.

Our new broadband offers. So of course -- yes, we have two offers. At the low end, which is like [Boxan] and a high end, which is like [Boxar]. And in fact, we have a very, very good mix between those two offers, a very good mix, in fact higher than our expectations.

On the boxes, we are working on a new TV experience in H2 and on a new box next year.

Thank you.

The next question comes from James Britton of Nomura. Please go ahead.

Good afternoon. First question is on headcount costs. The headcount bill seemed to go up by 5% on a proforma basis in the second quarter. Can you just answer why this is such a significant step up from the Q1 level? And is this level likely to continue for the rest of the year?

And then secondly -- I apologize, I joined the call a little bit late, but did you clarify that you're sticking with your organic free cash target of EUR8b? Can you just clarify that for me, please? Thank you.

I'm not sure where you take your 5% from where, because for us, on the total half, the increase is 3% for Group, regarding labor costs. This is why I'm a little puzzled with the -- where the 5% comes from on Q2.

You know that some of our labor costs are used for internal works, either on networks or on IT. And they are capitalized and transformed into CapEx afterwards. So this is why, if you take the OpEx proportion of labor costs, it's 3% increase.

However, at the same time, and this was one of the decisions made last year, in terms of manpower management and people management, this was to re-internalize some of the subcontracting we had. And when we look at the global workforce, subcontracting plus internal workforce, we are more or less stable at corp level, between 2010 and 2011. That is the first one.

The second point is that we are also accounting for the labor costs. Some of the costs of the people who will go to the senior part-time plan, which means that we measure our global labor cost, which includes people who will leave the Company in a couple of years. So this is part of the transition we have to face.

Okay, just to clarify. I'm reading it off page 22 of the press release. It seems to highlight that the second quarter labor expenses, on a comparable basis, increased by 5%. So they contributed 1.2% of the margin decline.

This is not exactly the -- can we check, maybe separate the figures, because I think that's part of the -- we knew that we will have an item. Maybe on second quarter there is an impact of some one-offs, especially the fact that the participation in (inaudible). We had (inaudible) Exceptionale which was accounted for, which is exceptional premiums that was distributed on top of the normal labor costs, which has been accounted for in Q2. This is probably profit-sharing plans, the exceptional amount of profit sharing plan which has been distributed in Q2. Probably this is the impact, but we'll check.

Regarding the cash targets, first of all, on May 31st, we came with a new KPI which is the operating cash flow. And as regards our target, we set a target which is EUR9b operating cash flow. We confirm that today.

We had and we have been living with an organic cash flow target for the previous years and the target is EUR8b. What I said in May 31st is that we will continue to work to work on the working capital, financial costs and other items to continue to improve the global cash flow, the free cash flow of the Company and to get as close as possible from these figures. But we said, and I said that on May 31st, and I confirm that today, that with the pressure we have had in the first quarter regarding some elements on EBITDA, Egypt, Ivory Coast, VAT, that it's more reasonable to remain cautious and that we expect -- we hope to reach the strongest cash flow possible. But we have to take into account those one-offs for the EUR8b.

Can I just add a comment on the cost management referring to your question on labor costs? I just want to remind you that the EBITDA margin, excluding SAC/SRC which means really the operational gross margin, is exactly stable in '11 compared to 2010. And in 2010 it was a little above the 2009 ratio, around 50% of the revenue, which shows to me the performance that we have achieved in managing all our costs, including of course labor costs.

Thank you.

The next question comes from Will Draper of Espirito Santo. Please go ahead.

Hello. Good afternoon. I just had one question relating to the UK, the appointment of Olaf Swantee to go into the UK. Particularly I wonder what you think the challenges are for that JV? What, if anything you think that Olaf is likely to prioritize and to see the need to tackle first and whether you think the guidance that was given at the time of the formation of the JV still applies in terms of the medium-term targets that you set out? Thank you.

I think if we have said nothing, which means that we confirm the synergy of the JV, which is GBP3.5b in terms of present value of synergies. And this is confirmed. And this is Olaf's objective to achieve that in the next year. We had -- and with Tom Alexander we -- and again, I would like to thank the work done by Tom for those two years. But one should not forget that this JV was decided in September '09. In fact, that Tom has been executing the job of merging the two operations for the last two years. And this was the agreement we had with him that he would help us to build one Company, Everything Everywhere, a job that he has done.

Now we have thought that the priorities for the next couple of years were more operational mainly in terms of implementing the synergies for network sharing for back office restructuring. And I think between Olaf, Tom and the two shareholders, there has been an agreement, especially because Tom wanted also to get more time for his personal life. This is what he has been stating and what he has been doing. Don't forget that Tom is also a man with a lot of other hobbies than just working. And we thought that for this phase, Olaf would be probably more adapted to have to the drive of the -- on the operation.

Okay, thank you.

Our next --

We want to leave space for our colleagues of Telefonica. Will start in two minutes.

Our next question comes from Hannes Wittig of JP Morgan. Please go ahead.

Okay. Hello there. I'll leave it to one question. Just in terms of the fiber scheme that you have agreed with Iliad, the question I would have is if you were able to have another agreement with another operator that was similar, then would you be able to lower your guidance of EUR2b for the CapEx that you anticipate in 2015? And will you account for the contribution from Iliad as revenues or will they be used to lower your capital expenditure?

Yes, we are trying to elaborate new agreements with other players on the ground. The first reason is that we would like to try to avoid investing in the same areas all the time, which obviously isn't in the interest of any party. But I want to confirm that our EUR2b spending program or projects includes some assumption already of co-investment. It was a figure which included our expected co-investment process that would take into our investment programs companies like Free and maybe later on. SFR or others.

Okay. But if you were -- let's say if you were able to make an agreement with a company that has a bigger market share than Free, then would you not -- would you be able to change your assumptions there or would it not matter for your EUR2b? Logically, it would seem it does matter.

Remember that we are discussing with Free. We are talking about investment in the non-dense areas. So this is a very different ballgame from the investment in the dense cities areas.

If you mention or hint at a possible agreement with another player, this other player would probably be more interested also in investing in dense areas, so that's a different thing. It cannot be compared with the Free agreement. And at the end of the day, I think it would remain to that figure because this figure already embarked, if you want, some co-investment that we expected from other players, so I would stick to that figure.

Okay, thank you.

On that, if Pierre allows me, I would say that this amount is what is necessary for us to keep a strong leadership in the fixed high speed services because we definitely want to be and stay with a substantial market share in this market. And so we need to invest this kind of amount, which has been, I think, very carefully calculated, in order to keep a very substantial leadership in the next generation services into fiber.

So thank you very much for having participated. Okay. Thank you for your attention. Have a good afternoon. Thanks.

That will conclude today's conference call. If you have any further questions, please contact our Investor Relations team. Thank you for your participation, ladies and gentlemen. You may now disconnect.