Orange SA (ORAN) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the France Telecom Orange's Q3 2011 results conference call. For your information, this conference is being recorded. The call will be hosted by Mr. Gervais Pellissier, Deputy CEO and CFO, with members of FT's Executive Committee of the Q&A session that will start after the presentation. Thank you, and let me hand over to Mr. Gervais Pellissier. Please go ahead.

Thank you. So good afternoon everybody and thank you for joining us today for this call on France Telecom Orange's 2011 third quarter results. As usual, I present our set of results for third quarter and we'll have the usual Q&A session with support of my colleagues from the Executive Committee who are available to answer to your questions.

We need to start with slide three. Just to overview briefly what we present. Highlights on the Group first, then a focus on main markets, and finally, just to remind you, the general outlook we have for 2011 before the Q&A session.

Page five. These are, in our view, the key headlines for this quarter. First noticeable thing is the confirmation of the commercial and the good commercial performance throughout the Group with 8.6% year on year increase of the customer base. And, I would say, a good commercial performance including Egypt. Even if Egypt has other issues, it has started to recover in terms of customer acquisition.

This good performance is mainly illustrated by the French performance, both in Fixed and Mobile, with a very strong performance in DSL, with a share of net adds above 35% for the first time since Q1 2009 and a stabilization of the retail mobile market share. And this is mainly due, as regards Mobile, to the segmented approach we have been developing between high value data, music, etc., and I will comment on that.

Spain has been confirming its operational outperformance with a revenue growth of 4.8% in Q3; plus 7.4% ex-regulation.

In Poland, revenue trend is also improving in Q3 where revenue now is down by 3.7%. It was down by 5% in Q2.

And, for Group, as anticipated, we experienced a slight slowdown in growth compared to H1. Our nine months of revenue is stable, plus 0.1%. Our last three months' revenue is slightly down at minus 0.5% ex-regulation.

On EBITDA, our efficient and disciplined commercial cost policy in Q3 has been able to help us to limit the margin erosion at minus 1.2 (sic -- see presentation) points year over year compared to the minus 1.5 points of erosion we had in H1. And we can confirm, by the way, that we should be in line with the indication we gave at the beginning of the year that margin erosion should be around 1 point, year over year for the full year.

Finally, we more than confirm our full year guidance. We now expect our operating cash flow to be slightly above EUR9b for 2011.

On page six, the main financial figures. To start with, revenue stable for the first nine months at plus 0.1%. As anticipated, we noticed a slowdown in Q3 and, by the way, we expect this to probably continue in Q4.

We managed to contain our year to date margin erosion to minus 1.4 points with an improvement in the third quarter, as I mentioned already.

CapEx stood at 11% of revenues for the first nine months, which is an increase of 7% year over year -- more than 7% year over year. And we confirm, also, our expectation that CapEx will reach 13% of revenue for the full year.

EBITDA less CapEx, operating cash flow is at a level at EUR700 -- sorry, at EUR88b, allowing us to expect a full year operating cash flow slightly above EUR9b.

EBITDA has been restated for several effects. You will find the detail described in slide seven -- in slide 27 sorry in the Appendix. The main restatement in this third quarter is the senior part-time plan for EUR19m and the (inaudible) free share plan, for EUR23m, which has been discounted under labor.

On slide seven we have tried to give you some elements of what could be -- what we see, in our view, for future growth. Maybe not bringing enough growth today, or not helping everywhere to offset some pressures we have on other sources of revenues, but we think that those elements are amongst the most important to help us carry growth in our Conquests 2011-2015 plan.

DSL market share is for us very important, and to come back above 30% and to be able to confirm today that we will be at 30% for the full year is very important, especially if you add to that the fact that ARPU has increased again for DSL.

In Spain we continue to outperform the market, and in the mobile market we have been number one in profitability in September. Our impressive results in Spain are mainly explained by the marketing segmentation we already presented in the past, especially the [MMOs], and how we try to adapt to each market segment and, I would say, to individualize as much as we can the -- and to adapt to the profile of consumption of customers between data, SMS, music, voice and the way they behave among those different services.

In Africa and the Middle East, our customer base has grown quite strongly and is now up by 3.4m in the third quarter, with strong results coming from Egypt, Mali and Cameroon.

For Orange Money, which is the payments tools for SMS of our Mobile, is now used by 2.7m customers at the end of the quarter with now the service launched in Cameroon and Botswana. This is a very important customer retention tool and adding value to our services also to preserve the ARPU positive.

Overall, our Group level customer base grew by 8.6% year over year, up to just over 221m customers.

Finally, we continue to develop both the volume and the value of our customer base with Smartphone penetration increasing. Two times more Smartphones at the end of September in Europe compared to the situation at the end of September 2010, and still a strong push in terms of data revenues, plus 14% year over year.

Page eight takes a few elements of what we have been doing so far in this quarter on the different priorities we presented for Conquests 2015.

Regarding portfolio management, the disposal of Orange Switzerland has been launched. We are reviewing the indicative offers received mid October, and the process is on track, probably, to be able to announce the binding agreement with the potential buyer before year end.

We have continued our pragmatic M&A strategy and recently closed the acquisition of 100% of CCT, the operator, which was held by ZTE in the Democratic Republic of Congo. And this is bringing us very close to our objective of doubling our emerging market revenues by 2015.

In terms of customers, and to continue to improve the quality of services offered, we have finalized the acquisition of 4G spectrum bands in both France and Spain and to target the digital SIM only market in France, we launched Sosh. That we can comment if you have questions.

The development of web distribution has been coupled with the reinforcement of our digital sub-network in France following the full control of CET, which was a partner owning about 200 shops on the French market.

Increasing our operational efficiency is a key success factor, and the recent launch of our JV with Deutsche Telecom for sourcing buy in, shows it. The JV has met the old savings objective of EUR1.3b for 2014, of which about EUR0.9b for France Telecom.

Furthermore, and as announced during our recent Investor Day, the Chrysalid performance programs were launched with the objective of realizing 2011 -- EUR2.5b of gross savings in 2015.

From a social point of view, I would like to highlight the association of our employees to FT capital with the performance-related EUR140m free share incentive plan. And this is based on the fact that the objective is that the Company has to achieve the cash flow objective that was presented on the Investor Day of [EUR27b] of operating cash flow between 2011 and 2013.

As regards our balance sheet and the debt management, we have maintained our very favorable liquidity position and debt profile. In 2011 we have successfully refinanced about EUR4b, of which EUR1.5b in euro and EUR2.5b in other currencies; a huge part in US dollars.

This demonstrates the ability of our Group to access debt capital markets at very attractive conditions, even in the current challenging environment.

Also concerning securitization programs worth EUR700m, maturing in 2012, of which EUR250m have already been renewed and extended with a five year maturity.

And, finally on this, we have no further bond redemption in 2011, and we have anticipated comfortable headroom in order to pay tax in front as soon as 2011 and to cover bond redemptions in 2012.

In terms of governance, you have seen that Olaf Swantee has been appointed CEO of Everything Everywhere and replaced in the Executive Committee of France Telecom Orange by Benoit Scheen, former CEO of Mobistar; Benoit himself being replaced by Jean Marc Harion as the Head of Mobistar, whereas the two shareholders of Mobinil, Orascom Telecom and ourselves, have decided to appoint Yves Gauthier as the new CEO in Mobinil, starting on November 15.

Finally, as decided by the Board of Directors yesterday evening, and as you know, I have been nominated as Chief Executive Officer Delegate of France Telecom Orange. And I will start in this role on November 1st, as retaining -- but also retaining my current role as Chief Financial Officer of the Company.

At the same time, Stephane Richard has appointed Delphine Ernotte, Pierre Louette and Bruno Mettling to join Jean-Philippe Vanot as Deputy Chief Executive Officer of the Group. They will also start in these roles on November 1st. This will strengthen the governance of the Group with our Executive Committee of 15 members.

Regarding revenue evolution on page nine, I think I will not comment further, but you see what has happened in third quarter compared to the first nine months of the year. We just noticed that we are -- we have a little more pressure in France; that we will comment later on. However, on the contrary, in Spain operations are still outperforming, even against the first six months of the year. And this is due to the very good performance in mobile, but also to the strong recovery in DSL, with the strong growth of the DSL revenue.

In Poland we observed a slower revenue decline in Q3 than what we had in the first half 2011 and this is thanks to the improving trend for fixed revenues, whereas the stabilization of ARPU for DSL and lower PSDN decline.

In other countries, slowdown in Q3 comes from slower than expected recovery in Egypt and lower equipment sales in European countries in spite of a good recovery in Romania.

In Orange Business Services, revenue trend is improved, largely due to the effect of some large service deals delivery of a customer in the US.

Slide 10 shows how we managed our EBITDA, being able to limit the erosion by better management of our commercial costs. Over the first nine months, revenue contribution, excluding regulatory impact and also VAT episode, has been positive by EUR127m (sic - see presentation) but negative if you include regulatory impact, termination rates cuts and lending charge decrease in some regions, plus the VAT. VAT is a cost for us for more than EUR100m in terms of revenue impact and EBITDA impact.

Interconnect costs were down by EUR230m over nine months with lower termination rates. This is a positive impact of termination rates when we send communication to our competitors. Compensating the usage and the increase of off-net traffic, keep in mind that, especially in the French market, a huge part of the bundle of our customers now include an equal view on off-net and on-net tariffs, allowing our customers to call whoever they want on the French network.

In the third quarter, commercial costs saw an increase, showing a noticeable control compared to what was achieved in the first half; only a EUR17m increase. And this is after a high level of investment over the first six months of the year and fourth quarter in a row of year on year increase.

In France, commercial costs actually dropped in the quarter without impacting the commercial performance.

On page 11, what has happened in terms of sales performance and in terms of commercial expense? As you know, we have stepped up the level of our commercial costs since the third quarter of 2010 through the second quarter of 2011. At our first half results, these results, these costs had increased for the fourth quarter in a row. And the first quarter of this year they were also amplified by the VAT episode, which has cost us about one-third of the commercial cost increase in the first quarter.

However, during summer, as you can see, Group commercial costs increase is now very much contained with a small increase of EUR17b -- EUR17m sorry, year over year.

In France, as I said, we spent less. Whereas Smartphones represents now 58% of contract gross adds in France while the percentage of our contract customer based under commitment is almost 80% compared to 73% two years ago. And in Spain, the trends are comparable.

As regards other costs and performance improvements for our Group, as part of Conquests 2015 plan we have already put in place some performance programs to improve operational efficiency throughout the Group. All those programs have been gathered around a Group project named Chrysalid, which is managed by Pierre Louette, our General Secretary.

The numbers you see here have been shown at the Investor Day, and the key figure is the EUR2.5b of gross savings expected in 2015 compared to the 2010 cost base, of which, at least 60% are to be achieved by 2013. For this year, our plan ramp ups should bring us to a level of between 15% and 20% of the 2015 target.

Examples of programs already implemented are listed on the right part of the slide and include, for example, the RAN-renewal and backhaul refresh program in Spain, the optimization of access network of our Orange Business Services, the reduction of field intervention in broadband in France.

In addition to this, we have also announced recently the operational start of our buy-in procurement JV with Deutsche Telecom. This is now being implemented in Group entities and with Group suppliers, with a progressive ramp up on the different geographies and in the different fields of purchase. Again, Pierre Louette is with us to comment on this if you have questions.

CapEx acceleration, this is also what we said that would happen this year. And this is my last slide on a Group level. CapEx are up 8% year on year; the equivalent of EUR262m additional spending. This corresponds to an 11% CapEx to sales ratio, increasing by 0.9 points over last year and this is in line with the indication we gave that we would spend 13% of our revenues for the full year.

Compared to last year, main increase comes from France, Spain and from the international carrier segment. In France, acceleration of FTTH where we have spent two times more than last year and we will spend two times more next year. This is also linked with the deployment of Livebox, to replace the Livebox base on an accelerated basis, and we spent, as you see, more than EUR400m of new equipment this year.

In Spain, CapEx increased related both to Livebox but also to the expansion of our DSL coverage. And in the international carriage segment, and across Africa Middle East, we have a higher level of investment in international submarine cable, the ACE cable and the LION2 cable around Africa. We have also allocated an important part of our CapEx for the acceleration of mobile broadband rollout in African countries with 3G launch in Kenya, Niger and Mali during the quarter.

Furthermore, we have spent EUR25m extra to accelerate the reconstruction in Ivory Coast after the civil war, [and did in spring].

I will not comment all the countries. I think you have the slide on the different geographies because I want to leave more time to have questions. But you have all the slides for the different Group segments, which details to you the performance, especially for France. What has happened on DSL, what has happened on the Mobile segment, including what we have been doing in marketing for the preparation of the arrival of the fourth entrant. Delphine and myself are there to answer to your questions on France.

But I will go directly to page 25 to confirm our full year guidance. So, even improved our guidance, we are confident enough today to say that we will achieve more than EUR9b of operating cash flow this year, slightly more, which help us to confirm the dividend but also to be very confident into achieving the right level of debt with a net debt to EBITDA ratio at the end of this year below two.

These are the main comments we can do on those Q3 results. We are now available for your questions.

Thank you. (Operator Instructions). If we do not have time to take your questions, then please contact our Investor Relations team after the call. (Operator Instructions). Our first question comes from Nicolas Cote-Colisson from HSBC.

Thank you. I've got two questions. The first one is in the past you mentioned that you would consider buying back shares with part of the proceeds from Switzerland, and I was wondering if it would be incremental to a EUR1.4 cash dividend?

And my second question is regarding France. In one of the slides you explain that the Q3 revenue for France was most impacted by the equity fund revenue, incoming traffic and also the impact from Open, but there is no mention of price cut impact. So should I read that price reduction has been offset by volumes, or that clients have been upgrading to bigger bundles?

So, I'll answer to the first question and Delphine will answer on the second question. We have said and it was said on the Investor Day, and I confirm it has been confirmed again in July, and at several occasions by Stephane Richard himself, we have said that once the sale of Orange Switzerland been done, we will propose to the Board to dedicate a part of the proceeds. And the order of magnitude that was given but which has not been fixed already by the Board was to dedicate 50% of the proceeds as a share buyback and this goes extra in 2012 to the dividend. It is not in lieu of the dividend.

Okay.

The next --.

For the French question on revenues, yes, you're right, there's some re-price effect limited to our Open offers, especially because the all discount is allocated to the Mobile side. So we have an effect on the Open offer. But, as you can see on slide 15, the annual ARPU is growing, and our strategy, which is to, in some way, compensate the decrease of voice by the increase of data, is well working. As you can see, data is increasing by 17%. SMS as well by 12%.

Okay, thank you.

The next question comes from Dimitri Kallianiotis from Citi.

Hello. Thank you for taking the questions. I've got three questions if I may. The first two are on France. The first one regarding the MVNOs. I just wanted to ask you MVNOs are coming down. Can you give us a view on how much impact you think you will have from having lost the MVNOs with Virgin next year?

My second question is regarding -- coming back to the re-pricing question on Mobile. How much more re-pricing do you think you need to do? And, especially in Q4, should we expect another worsening trend in terms of Mobile service revenues?

And my last question is on Egypt. Just regarding the potential for Vimpelcom to buy Mr. Sawiris' stake into Mobinil, would that be something you would be happy with or shall we expect you to exercise your option to buy Mr. Sawiris' stake in Mobinil, if that's the case? Thank you.

We'll start with the question on Egypt. It is very clear, vis-a-vis all involved parties, including the Egyptian authorities, that the partner we have in Mobinil is Mr. Sawiris or his family. There is no intent, neither from us nor from Mr. Sawiris and his family, and clearly, even less from the Egyptian authorities, to have Vimpelcom as a shareholder of Mobinil. And this is why there is this call which, by the way, is at a very attractive price. However, the Orascom Group and Mr. Sawiris have been undertaking the demerger of the Egyptian asset as well as other assets. This is a process which is underway. By the way, to my knowledge, there has been a General Shareholder Meeting last Sunday which voted this structure. There are still a few strategic steps to fulfill for the two Groups to grow this way, and we are working into this direction. But there is clearly no intent to have Vimpelcom as a partner in Egypt.

Regarding French MVNOs?

Yes, regarding the MVNOs, just two short remarks. On the first hand, what we are witnessing today is the fact that the MVNO market seems to go down a little bit in terms of market segmentation. The prepaid aspects are developing now and contracts are going a bit down, so it seems to show that MVNOs will be dedicated to downside or in the interests of market aspects.

Second remark, I want to stress the fact that we have a 60% market share, overall of the MVNO market today and we intend to keep that market share with the integration of the 3G roaming contract, with the free in the coming weeks and months. As of today, we haven't lost any client to SSR coming from Virgin, and we feel this might go on for a while now.

On the top line question on Mobile, I just wanted to begin to point out the fact that we've been re-pricing our offer for maybe three years, and despite those many re-prices we've managed to increase our revenue, our average revenue per customer. So, besides we have a very segmented approach, which is more and more segmented. That means that we are able to choose our battlefield, decide for which customers we are going to make some re-price or not, and, at the same way, de-average our commercial costs in order to really manage our margin.

Okay, thank you.

The next question comes from Jerry Dellis from Jefferies.

Yes, good afternoon. Thank you for taking my questions. A couple of points. Firstly, in French Mobile, should we assume that the minus 3.5% service revenue trend reported this quarter is a sustainable level for a while? Are there conditions under which it could deteriorate further, or could you turn back on the commercial investment tap in order to shore up that trend? Apologies if this point has already been mentioned.

The second question is just on data in France. It seems as though revenue growth here slowed quite sharply this quarter both on the messaging side and data, excluding messaging. I just wanted to understand please what's going on there? Thank you.

Mr. Dellis, could you repeat your second--?

Yes, certainly. The second question is I can calculate from the KPI sheet year on year growth in French messaging revenues and in data, excluding messaging. And it seems to be that SMS revenue growth slowed from 14% in Q2 to 5% in Q3, whilst data, excluding messaging, slowed from 24% to 18%. I just wanted to understand those trends please?

On the first question on revenues, we expect the trend to be at the same order of magnitude as we have seen in Q3, in Q4. On data revenue, there is a difference between SMS and data, of course, because in many, many offers we have SMS unlimited included, so we see a plateau effect. Even if SMS is still growing, we have still a plateau effect on SMS, whereas data is still growing very high.

Okay, thank you.

The next question comes from Antoine Pradayrol from Exane.

Yes, good afternoon. It's Antoine Pradayrol with Exane. Three quick questions please. The first one is a clarification on what you said for the Group revenue trend. I think in one of the slides you said that the H2 organic trend for the Group would be similar to what you see in Q3, so basically minus 0.5% excluding regulations. Is it right to understand that?

Second question on Sosh. Can you give us some indications on the success of Sosh in the first few weeks? Any numbers would be welcome obviously.

And third, on the churn in France. The contract churn has gone up to 16% in Q3, which is significantly up compared to last year, while I thought that you had said that the churn normalized after the beginning of the year, where the churn obviously was high because of the VAT episode. So do you think the churn can go back down, or should we expect the churn to remain around 16% or 17%? Thank you.

Revenue, again we are at the -- it's a little difficult to fully predict the situation, but what we see today, -- and this is more or less in line with the message we conveyed to you in July, we said there is a little more pressure in H2. But, today, where we don't see in Q4, I would say, more revenue pressure than we have observed in Q3, we think we'll be probably between 0% and the minus 0.5% before regulation we had in Q3. This, today, is the message, which help us to say that we expect revenue at least stable for the full year, ex-regulation. Again, this is ex-regulation. Keeping in mind that, even today, Egypt represents between 0.1% and 0.2% growth of the Group in total, and we have still an uncertainty on Q4 in Egypt on top of all the rest. Does that answer to your question Antoine?

Yes, very well. Thank you.

On Sosh figures, what I can tell you is that we are very pleased with our first figures. Sosh has been launched October 6th and so we got 10,000 customers in three weeks. So we are completely on track, and maybe a little better than we expected. And, beside, we have a good mix between acquisition and migration.

The churn in France is around 15%. That's what we call a normalized churn. Of course we are pleased with that churn, both on Mobile market and also Internet market. It's a result of many action plans, first on quality of service but also on very active retention plan, which seems to be very, very efficient. So we expect the churn to be at that level in Q4.

Okay, thank you.

Let's be clear, maybe to just to add a comment. In the current market in France, the churn battle is a real front end battle even before acquisitions. I think that that's a battle which has started now for the last 18 months. And I think what's key for us is to fight and to have this battle and to win it with the less ammunition possible, which are the commercial expense. This is really where the battlefield is today; being able to keep the customers and to keep them happy and to keep them committed. And you have seen the figures. We have been able to re-engage customers, including with the iPhone 4S, which is a very good tool, let's be clear, to re-engage customers. And it's important to do it at let's say not the lowest expense possible, but the most optimized level of expense.

Okay, thank you.

The next question comes from Matthew Bloxham from Deutsche Bank.

Yes, good afternoon. Just a couple of questions about 2012. Should we expect for you to try to improve the margin erosion again versus the 1% in 2011? And I think previously you have said that CapEx to sales will be somewhere around 14%. Is that still what you're thinking about for next year? Thanks.

A little difficult to answer to 2012 question. Maybe we are not ready for that. I think we are under -- we are clearly under preparation of 2012. There are still a lot of uncertainties. However, maybe as a first comment on that, we think, and we want to stick to what we presented on the Investor Day at the end of May, which means there will be some margin erosion because we know that it's very difficult to avoid it in 2012 because we have still pressure on revenues, we have still some pressure on costs, including regulation and we have still to adjust some of the efforts we have to do.

If you take, for instance, the Chrysalid plan, we don't expect the full impact of it in 2012. We said we expect to achieve 60% of it in 2013. If I take all what we do on content, we will have the benefits really in 2012. This is why we know there is still some margin erosion pressure. With that being the same order of magnitude, we expect that, but we don't know yet. This is -- we know that 2012 is a low point and that we will recover in 2013.

As regards CapEx, we have undertaken some plans for CapEx regarding FTTH in France, regarding 2G, 3G swaps in some geographies, preparation of LG. And this is why we said that, again, 2012 should be a peak year in terms of CapEx spending to sales, at 14%. We will not grow above that, but I'm not sure we'll go a way below that.

Okay, that's very clear. Thanks very much.

The next question comes from Hannes Wittig from JP Morgan.

Yes, hello. I've got two questions. The first one would be relating to your margin guidance for this year. I understand that the 1 percentage point margin decline for the year is an aspirational target given that you've been down about minus 1.3 percentage points year to date. When you say you'll reach a 1 percentage point decline, I therefore presume that that's a rounding, or are you confident that you can get close to the 1.0% margin erosion?

Secondly, on the margin in the quarter, how much of the -- how much EBITDA did you save or gain this quarter from the delayed iPhone 4GS, if that's something you could estimate?

Regarding your first question, if I said we target the minus 1%, it means we are confident to reach this target. Again, it is around it. It could be minus 0.9%. It could be minus 1.1%. We are not targeting exactly the absolute figure without anything behind the dot. That -- around -- means this level of valuation, but clearly, better than what we are today. We are today at minus 1.4%. We'll be clearly better than that because cost control will continue, especially the very segmented and dedicated management of commercial expense.

Regarding iPhone 4GS, we have sold 68,000 iPhone 4GS at the end of the period to now. We'll manage very carefully, again, our commercial expense; not to spend too much, but being able to get enough commitments of customers on the value propositions.

Excuse me, if I could just go back to the margin guidance point, thank you? The 1.4 percentage points year to date would of course require, therefore, a number well below 1 percentage points in the fourth quarter to get anywhere close to even the rounded numbers that you have been suggesting. So would you therefore suggest that we should assume the fourth quarter margin will decline by less than 1 percentage points and maybe by a lot less than 1 percentage points?

I think if you make the math correctly, this is the right assumption.

Okay, thank you.

The next question comes from Nick Belfast from Morgan Stanley.

Yes, thanks. Just a quick question on your associates. You've now got fairly significant operating losses to come from Congo, Iraq, Tunisia to offset the profits from your associate in Morocco. So, for those of us who look at earnings as opposed to just the EBITDA numbers, what kind of losses should we expect going forward maybe for 2012 from those businesses?

We don't provide guidance on the performance of associates so far. Regarding the companies you are mentioning, Congo will not be an associate. We will consolidate Congo because we own 100% of the shares, so we will guide including Congo next year.

Regarding Morocco, to my knowledge Morocco is profitable and is paying dividends, so I don't see any loss forecast for Morocco.

And Tunisia is marginal in terms of figures, including if we were to consolidate them.

And for Iraq?

And for Iraq, honestly I don't know. I will check. I don't have the figures of Iraq in mind.

Okay, thanks very much.

The next question comes from Jakob Bluestone from Credit Suisse.

Hi there. I've got two questions please. Firstly, in terms of the change in your cash flow guidance, could you maybe give us a little bit of color on what's driving it? Is it more EBITDA, less CapEx?

And then secondly, I had a question on the impact of SIM only on your revenues. You already offer your Mobile price plans in France on a SIM only basis even ahead of the launch of Sosh. Is some of the slowdown in personal French revenue that we saw this quarter, is some of that due to dilution from SIM only or is that something we should really be looking for to kick in in Q4? Thanks.

On cash flow, the main positive impact comes from EBITDA where we are more confident into achieving our EBITDA target. This is why, by the way, I also said that we should be eroding EBITDA by around 1 point. I think we say this with more confidence than we were saying it three months ago or nine months ago and I think this is the main change, whereas for CapEx we stay with 13% of revenues. Revenue could be slightly lower, but the impact is very small. So most of the positive impact on the cash flow will come from EBITDA.

On the SIM only question, what I can say is the SIM only is a very, very low part of our contract base. It's 0.4% of our contract base, so it's marginal. And besides, what I want to say, is that Sosh is dedicated to special customers, the digital natives and we know that we are not good enough on that type of customer, so we expect Sosh to drive new acquisition for us. So it will have a positive impact on revenues and EBITDA.

Thank you.

The next question comes from Will Draper from Espirito Santo.

Good afternoon. A couple of things. Firstly, on spectrum. You had previously indicated a range of about EUR2b through to 2012 for spectrum, but it looks as though recent auctions are running at above that level and I wondered if you needed to increase that number slightly?

And secondly on the portfolio, I wondered if you could just give us an update on Switzerland, where we are in that process and also give an indication of what might happen in Europe beyond Switzerland in terms of getting around to disposing of other of your assets? Thank you.

No, I don't think we cannot completely -- we don't know what will be the cost of the next auction in France. However, we still plan to spend around EUR2b for France and Spain in total. So we don't think we shall be above what we said.

Regarding your second question, is that any other things than Switzerland? This was your question?

Well firstly, an update on Switzerland, and secondly, what you have in mind to do beyond Switzerland.

Ah, beyond Switzerland. For Switzerland we said we expect a signing before year end and probably a closing at the end of first quarter 2012. We have no other disposals in mind in Europe, except the one which has already been announced, Austria and Portugal, but which are minority stakes. Not so easy to dispose, by the way, in the current period. Some process underway for Austria managed by the majority partner. No process on Portugal so far.

Okay, thank you.

The next question comes from Guy Peddy from Macquarie.

Hello team. Just a quick question please on your thought process for increasing your guidance for 2011. I'm wondering whether you considered investing your savings from Q3 into more commercial expenditure, a greater focus on contract adds in the domestic mobile market given that is clearly an area where things have deteriorated recently. So I'm just wanting to understand whether you did consider that strategy and what your strategy is going to be going forwards in that market. Thank you.

First, I think we have already considered into our guidance some possibility to invest a little more where we think there is this opportunity. This is already included in our forecast. If, by any chance, for instance there were some markets where we think there would be a need to do more, we'd think about it. But we have already included some margin of maneuver in this sense in the guidance we gave.

Okay, thank you.

Now one point we don't want to do, sorry to continue. One point we don't want to do, this is what some operators do and what we did in the past, for instance, in the UK four or five years ago, this is to spend a lot in acquisitions at high cost on low retention or low loyalty contracts. This is what has happened in the past. It's very easy to have the iPhone at EUR50 and to attract a lot of customers, but I'm not sure you keep them so much and so well at the end of the period.

Thank you again.

The next question comes from Jonathan Dann from Barclays.

Hi there. It's two separate questions. The first is can you explain how you think about the relative size of say Open customer base versus say Sosh in one year's time?

And then secondly, you've got some quite high minority dividend outflows and then you've also got some very high JV dividend inflows. It seems reasonably inefficient. Have you got any thoughts about tidying up minority positions and tidying up perhaps the position in the big JVs?

Regarding the JVs, to my knowledge there is only one big JV which generate dividends. Other JVs we have are sourcing JVs, operational JVs. These are not operations that would generate cash or dividends by themselves. They are just there to put in common processes, purchasing power, so they are not built to generate profit, or much profit within the JV, so I don't think they are an issue.

Regarding the UK, the UK we are in a long-term process in terms of value creation in the UK where, you're right, it might be considered as inefficient but I'm not sure that it is so inefficient because it is also risk-sharing. I don't think that neither Deutsche Telekom, and you can raise the question to them next week, or us, are ready to take the full risk on the UK market into building up the synergies into transforming the operation, and this is also risk sharing. You have to see it that way.

Once the synergies will be achieved, I think we will see with Deutsche Telekom what is the outlook on this partnership. But I think we are not in a phase where the JV by itself is value destructing compared to one partner taking over the other. At least this is our view on the France Telecom-Orange side.

Regarding other minorities, we are positively moving. Just to take the situation in Poland, Telekom Polska has undertaken a share buyback that will be accretive to us with our stake increasing to 52% of ownership of Telekom Polska. So we are doing it on a progressive basis without undertaking a takeover bid that would be detrimental in the current environment and I'm not sure they will be very perceived. So this is the way we have been proceeding so far. We'll see whether we can continue.

By the way, the Polish Stock Exchange system, or legal system for trading securities allows this progressive move. It's not true in all of the markets. But we know we can work on that, but it might be a progressive move.

Regarding Open Delphine?

Yes, regarding Open, so the question is very relevant because as you can see in the marketing slide, our segmented marketing policy is key for us. So Open is key for us because, as the leader, we have the biggest customer base both on Internet and Mobile, so a pushing convergence offer is key for us.

Open is a success, we're going to reach 1m customers by mid November and it's an offer which is still growing quarter after quarter and besides, we are going to enrich the Open portfolio. We've already launched Open for fiber in Paris and in all the other cities in October and we're going, of course, to go on with this Open portfolio offer.

On Sosh it's quite different. It's a new market. A SIM only market just to say, and we expect Sosh to represent between 10% and 15% of our gross adds in 2012.

Thank you very much.

The next question comes from Vincent Maulay from Oddo Securities.

Yes hello. Two quick questions. The first one is from the new TV experience expected in H2. So definitely we do not see any leak from the web, so do you still expect any such experience in H2?

And I need to come back quickly on your confidence on EBITDA in Q4, just to assess do you think it's fair to extrapolate the modest aggressiveness we've seen in terms of subsidy for the iPhone 4S in the French market, and to extrapolate it at least in November?

On new TV I can confirm you that we are going to launch a new TV experience by the end of the year. Besides, we've been very active since the beginning of the year replacing boxes by the new Livebox two Liveboxes, to increase customer satisfaction and reduce, of course, customer care costs. So we're working. Even if we've not launched yet a new TV experience we've been working a lot on the Internet and TV experience since the beginning of the year.

Regarding commercial expense for the Group and iPhone in France and in other geographies, I think there's now enough experience and background to, let's say, be more refined into our allocation strategy and this is why it is, in our view, embedded into the forecast we have and into the resulting guidance we have been giving so far.

Again, I said it in answering to another question, if by any reason there were more extraordinary push and if we think it's appropriate to fulfill the needs, we'll do it and then we'll say what we are doing. Okay?

Okay. Thank you.

The next question comes from Nick Lyall from UBS.

Hi, afternoon, it's Nick from UBS. Can I ask two questions please? Firstly on the margin guidance, just to confirm firstly it's post provision release. And secondly to ask, should we expect any release to accelerate in the fourth quarter?

And also just back on the iPhone point, you've mentioned a bit about Q4 not being material, but is it right the iPhone 4 was released in Q4 last year. Was that a material boost to commercial costs in Q3 2010 please? Thanks.

Regarding margin, it's true that margin -- first of all maybe for the sake of clarity and I know that most of you don't follow me completely on this, we give a guidance on operating cash flow. We don't give a guidance on margin. We give you an indication and insist on the difference of wording. The guidance is a commitment from the management. The indication is an indication to help you to understand how we built this commitment which means that we think that if we have to manage things slightly differently, including my answer to the previous question, this could change slightly the figures. However, if we give an indication, we try also to remain trustworthy into giving this indication.

The margin is post provision and includes the normal release for content. You know we had provided for content as well as senior part-time employees. But there is no change, to my knowledge, no change of pace into consummating those provisions compared to what was done in the first three quarters. We will check that in a while, but I don't see there is change. So we don't achieve an improved margin by using more of the provisions we have, if it was your question.

Yes great. And on the iPhone question for Q3 last year, was that a significant boost to the commercial costs which obviously makes the progression this quarter look a little bit better?

Well yes, of course the iPhone 4 was significant last year, but what I want to say is that the performance -- the reduction of commercial costs in Q4 this year is not due to the iPhone 4S postponed in October. It's mainly because we are much better in monitoring the de-averaging of the subsidies and, in fact, controlling the subsidies. That's why we are able to control in fact the commercial costs.

For the iPhone 4S, of course the demand is quite high and it's good news, but the impact is fully integrated in our marketing and financial plans.

Yes, sorry, and on the iPhone 4 last year as well, was that, when you hadn't de-averaged the SACs, was that something that was quite significant in Q3 2010 or is that part of the same case, relatively level?

(Inaudible) speaking. So as Delphine said, we benefit this quarter from positive effect coming from that point for sure. But as we said, we're trying really just to adjust and to work on our unit costs. So that's why, all in one we think it's not so very important for Q3.

Okay, thank you.

The next question comes from James Britton from Nomura.

Thanks very much. Just following on really on the same point, can you give us any detail on the average cost of the smartphones that you're delivering to the incremental smartphone customer in France? And how quickly this might or you're expecting this to fall over the next 12 months say?

We don't communicate this information. I think, I understand your question, but clearly, we are entering into a very sensitive area, so I will not communicate this information.

Okay, thank you.

The next question comes from Tarkan Cinar from WestLB. Please go ahead.

Yes hi. Thank you very much for taking my question. I think I have two questions. The first one is related to the growth potential in your Sosh brand. You said that you have since launch acquired 10,000 customers. How much of these 10,000 people are coming newly to France Telecom and how many of these people are former, for example, prepaid customers in your portfolio?

And the question is also valid for the postpaid. You have increased contract customer base by roughly 230,000 people. How much of them are coming completely new to France Telecom and how much of them are just switched off from prepaid contracts?

And the last question is related to the tax issue. I think you said that cash tax payments for France will amount to EUR400m by the end of this year, so can you give also a number for the rest of the Group? Thanks.

So, sorry, regarding tax, there is no change outside of France. We confirm a cash tax around EUR600m and in France it's an acceleration in terms of cash income tax payment compared to what was in place before in the sense that now, according to the French regime, you have to pay at least -- you have to pay in cash 40% of your profits -- on 40% of your profits. You can no longer use 100% of the tax loss carry forward to cover 100% of your profits. This is EUR400m this year, probably about EUR600m, between EUR500m and EUR600m next year, but it's more a timing difference. This will be saved over 2013 and 2014.

The next question comes from Andrew Lee. Please go ahead.

Thank you. A question on French Mobile and then a technical question. Just on French Mobile, we can see the proportion of your customer base that are on contracts has risen steadily over the last two years, but I wondered ahead of Iliad's entry, how successful have you been in increasing the average contract life remaining across your customer base. Maybe you could give some color on that?

And then just on the technical question, I just wondered how you account for handset subsidies. Do you take all the costs upfront in OpEx or do you spread the cost out over an average customer lifetime? Thank you.

Just on your first question, so of course we do not disclose that kind of information, but what we can say is that you can observe the churn rate. So, of course, if you divided the churn rate by 100, you can calculate easily what would be the customer evolving in our customer base. So that's why, of course, we put a lot of money, accounting money on the fact to retain most of the value customers for sure.

On your second question, we're using one-shot OpEx for second SACs. We do not put that in CapEx like some of the other operators.

Thank you and when you say one-shot OpEx, it's all of the cost is taken at that point of time? It's not spread over the lifetime of the customer or--?

Yes you're right. Yes, you're right.

The next question comes from Nicolas Cote-Colisson from HSBC.

Thank you. Just a follow up question. You gave us a number of 0.4% of the contract base being SIM only. What is the proportion on the gross adds? And also, if you could share with us the churn rate of the Open offers and compare it with the ADSL classic churn rate.

We expect the gross adds, SIM only gross adds to be around, between 10% and 15% next year. It's too soon to disclose such figures nowadays. And on Open, of course, we expect the churn of Open to be much lower than the average ADSL churn but we don't disclose those figures.

I see and the 10% to 15% you mentioned earlier, it was for Sosh. So do I assume that you don't have many plans for SIM only offers outside Sosh offers?

All our Origami offers are available on a SIM only basis. So we have, on one side, SIM only offers on all our portfolio and on the other side Sosh which is especially dedicated for digital natives with web-only subscription and web customer care.

And the two together make 10% to 15% for next year.

Yes. Yes that's true.

Okay, thank you.

The next question comes from Stephane Beyazian from Raymond James.

Thank you. My question has been asked already.

The next question comes from Justin Funnell from Credit Suisse.

Thanks. Just some follow up questions. Firstly, on the comment about incoming volumes. You mentioned in the release that some of the weakness in Mobile service revenue in France was to do with a slowdown or a decline in inbound volumes. You mentioned voice but you point out specifically SMS. Is this the same thing that people moving to flat rate plans are affecting that or is it more volume driven? And if it's volume driven, what's causing SMS volume growth to change? Are you starting to see some cannibalization of SMS from over the top services such as What's Up for example?

Secondly, I just wondered if you had some thoughts at this early stage on the recent proposal from the European Union to potentially lower copper wholesale prices to encourage fiber investment. We saw some comments from TI resisting this proposal.

Thirdly, Vodafone has been putting prices up in the UK market, the UK Mobile market. Is this a trend that you see something that you would potentially follow with price increases as well please?

On the income revenues in France, in fact all operators have bundled unlimited SMS in their -- SMS and voice in their offers. So even if the usage is continuing to grow, we start seeing a slowdown in the revenue growth. It's a sort of plateau effect.

As to your question about cannibalization, no we don't think there's cannibalization sorry. The growth is still there and quite strong in SMS and besides we already take into account the fact that users are transforming through our marketing segmentation in our Origami offers and also in our marketing strategy.

Yes, just a short answer on the FTTH aspects. We have been witnesses, of course, of Ms. Kroes's declarations recently, so we feel this is not a major threat for us for several reasons. The first reason is that our plan in developing fiber has been pretty well accepted by French authorities, either central or territorial. So we're rolling out this plan according to what we had programmed.

The second aspect is that the unbundling prices are already relatively low today, so we feel that this thing that she considers as a possible threat is not really a threat to us.

The third aspect is that we have really played alongside the rules and have been established recently by the law and the regulator and we were able to get one of our major competitors free to actually sign a contract with us to use our fiber in the coming years. So we feel that we have put in place an organization that is pretty much resilient to any threats from the European Commission.

We did not understand completely your third question.

Yes, Vodafone has basically put prices up in UK Mobile slightly. They've tweaked up monthly fees and also bundled call charges have gone up a bit. The amount of data in the bundles has gone down a bit. They seem to be trying to lead the market upwards. Are you prepared to follow?

It will be a little difficult to answer to this question today. We have not discussed that with the JV so I'm not able to answer to the question today. But that's probably a question we will work, but we will review that mid November with our colleagues from Everything Everywhere.

Okay, thank you.

The last question comes from Allan Nichols from Morningstar.

Hi, thanks for taking my question. Just a follow up on you currently state about what your length of contracts were, but with the drop in handset sales, does that imply any problems with new contracts as Iliad comes closer together?

And also in Egypt you mentioned that you've seen a rebound in subscriber growth. Can you give us any specifics on what that has been? Thank you.

Regarding Egypt, we are quite happy with the sales recovery with the gain of new customers. However the situation, political situation remains confused and, let's say, I would say the competition situation and also the role of the regulator remains also quite difficult. I don't think we are happy with that, but I'm not sure that we can conclude that we are clearly on the recovery mode and this is one of the reasons for which we have also decided to appoint a new CEO. And I think we will leave some weeks to the new CEO to see what the situation, like Olaf Swantee did in Everything Everywhere. He was appointed at the end of July. He has proposed new measures end of September. It is at least eight weeks for a new CEO to take care of the situation and to propose things. So on Egypt, I think it's a little premature to draw conclusions, even if we consider that's quite okay.

Regarding France handset sales Delphine?

The market is still very dynamic in Q3, even if it's a little, little lower than in Q2. It's 5% growth in Q3. So we've seen people expecting the iPhone 4S of course, but we do not observe a freeze due to an expectation of free offers.

And what we can add on that, we re-measure that at the end of the year. I think if we add all the sales of iPhone 4S on the French market since it has been launched until the end of year, you will see that there is a huge market segment which is preferring to get an iPhone 4S now than to wait for Iliad arrival next year.

Thank you.

Thank you for your attendance this afternoon and we hope to speak with you again. By the way, we changed the date of our release of our results to avoid a conflict with our colleagues at Deutsche Telekom. So they were kind enough to leave us with the right date last year. This year we do the reverse. So we will communicate on the full year results on February 22, 2012.

Have a good month of November and December and maybe we'll probably see you with the Investor Relations team.

By the way I would like to welcome Patrice Lambert-de Diesbach who is replacing Xavier as Investor Relations, and I would like also to think Claire Roblet who has been acting in the job since Xavier preferred to take care of Iliad, fight against Iliad in France. So these are the new members of the team. But you see that Xavier with Delphine, Pierre and Michael, is still very near from us to help you understand what we do in our business. Thank you very much for your attendance this afternoon.

Thank you. That will conclude today's conference call. Thanks for your participation ladies and gentlemen. You may now disconnect.