EuroBusiness Media (EBM): Orange, France’s largest telecoms operator and one of the leaders in Europe, has just published its results for fiscal year 2016. Stéphane Richard, welcome. You are the CEO of Orange. 2016 turned out to be a historic year, with a return to growth of both revenue and adjusted EBITDA. You are even a year ahead of your roadmap if I understand correctly?
Stéphane Richard: Yes, it is right to say that 2016 was a landmark year because it was the first year we harvest the fruits of our strategy, which is a strategy based on differentiation and quality of service. If you look at the aggregated figures, our revenue did increase 0.6% to €40.9b and, what is interesting and important, our EBITDA also increased—twice as fast—by 1.3% to €12.7b. So, 2016 was a success, putting us a year ahead of our roadmap in terms of the company’s revenue growth and profitability.
So, how did we do that? In short, by banking on Capex and, clearly, on fixed and mobile very-high-broadband rollout. Which is what we have been doing around the world, in Europe, and also in Africa and the Middle East. Let me give you a few examples. First on fiber. Orange is currently Europe’s leading operator for fiber rollout, with 20 million connectable homes and 3.3 million customers at end-2016. That’s a year-on-year increase of 75%. Orange is also one of the leaders for 4G with 28 million customers, an increase of 58% in a year.
That is where we focused our Capex. I would also like to mention the revamp of our retail distribution network. We have 157 smart stores (a new concept store, launched in late 2016) supporting our differentiation strategy based on the quality of our infrastructure. We have nearly 17% capex to sales ratio. Another differentiator is the customer experience, an area where we are also focusing heavily. Therefore, we are pleased to see that the decisions we made several years ago are starting to deliver real results. And the impact is clear across all of our financial results and, this is even more important, in our commercial performance.
EBM: Could you take a minute to break down your growth by region?
Stéphane Richard: Yes. What you have to remember, of course, is that competition in our industry is still fierce. So it would be inaccurate to say, whether in Europe or Africa, that the 2016 business environment was any less difficult than in previous years. Now, if you take a look at the major regions we serve, we can start with France. France is our domestic market and our main market. France had an extremely tough year in terms of just how fierce the competition was. I would just like to point out that in 2016, all our competitors were running promotions nearly eleven out of the twelve months of the year. Orange did so to a much lesser extent, but in terms of sales, it was a bumpy year. However, despite the competition, we performed relatively well. Our revenue was practically the same as the previous year, down just 1%. Most importantly, we strengthened our positions, once again through our Capex strategy, investing in the growth drivers of the market. Take fixed very-high-broadband with fiber—we accelerated the pace of investment in fiber rollout. 4G, but also convergence, which is our priority in all our countries in Europe and which is delivering very strong results in France as well. Today, almost 60% of our fixed customer base are on convergent offers. So, in France, despite the very tough market I mentioned, our results were very good, very encouraging. Our performance shows that leveraging network and service quality as differentiators is working. It is working. I could mention share of conquest on the fixed market, which was nearly 50%, a number we have not seen for many, many years.
Next is Spain. We are very satisfied with Spain. The Spanish market has seen some consolidation. A fixed and mobile consolidation and for us, the acquisition of Jazztel, which was a huge success from an industrial and a human point of view. We were able to complete the Jazztel integration in record time and the synergies that came out of that deal go far beyond what we had announced to the market. Which is not always the case, I would like to emphasize. This result in incredible growth in Spain, at +6%. I don’t think there are many countries in Western Europe where telecommunications operators can report growth that high. The acquisition also created momentum for the Orange and Jazztel brands, once again, backed by substantial investment. Our fiber rollout is massive in Spain. Since the summer of 2016 we are rolling out more fiber than Telefonica, Spain’s incumbent operator. That also shows how focused we are on fiber. For 4G we made the decision a few years ago to stay a step ahead on 4G and that is also continuing to pay off. So we are really very pleased with what the company has accomplished in Spain. And I would like to point out how essential our people in Spain have been.
Another country where we are happy with our performance is Belgium. Belgium had some tough years, when the market was starting to look a bit convergence-driven at a time when we were not. Last year we made the leap to convergence with a new fixed/cable plan made possible by the new cable regulation. And the convergent plan has started off well. At end-2016 we had just over 30,000 subscribers. Overall, Belgium is doing much better on the mobile market, where, once again, we had already made our decision to bank on 4G. Our 4G coverage in Belgium is 100%. Here again we are picking up momentum in convergence-based plans through our fixed offers. So Belgium, which will once again be paying out dividends, is one of our successes for 2016.
Now, if we look at areas where things were a bit tougher—albeit not to the point of raising any concerns—, where we are facing some challenges, we are talking about Africa and the Middle East. Overall, both regions saw continued growth of just over 2%. But not quite as much growth as in previous years. And there are two specific situations behind this figure. First, Egypt, where business was not bad at all, but where the macroeconomic situation, with a massive currency devaluation, obviously had an impact on our results. And the Democratic Republic of the Congo, the DRC, like a lot of other countries in Africa, took drastic customer identification measures, which reduced the customer base there massively, by several million. So that, of course, also had an impact.
I would like to highlight something more positive, which is how well Orange Money did in Africa, with 29 million customers at end-2016. Africa is the continent where mobile banking, mobile payment, is emerging as a crucial aspect of economic development. And telecommunications operators are carving out a huge role in these countries’ development and economies.
I will end with Poland. Poland has traditionally been a complex market. We are the historical operator, and yet we are not very strong on the fixed market. This forced us to implement an investment program in fiber—with FTTH—to put us in a position to support a convergence strategy. So, in Poland we are currently investing in fiber just like in France and Spain, only we started later. Which means that the payoff will come a bit later, too. But fiber is off to a good start. We also turned things around a bit on the mobile market. However, overall, the Polish market is still in recession for us, so we are focusing more on cutting costs there. And we will have to wait just a little longer for the very substantial investments we are making there to start paying off. This is why we announced that there would not be a dividend payout in Poland. Our short-term priority is really to focus the majority of our resources on Capex.
I would like to wrap up by focusing a bit more on the improvements we are making to management. Because when you talk about sales performance, you are talking investment. And we are running a very tight ship in terms of how we are managing our spending, our operating expenditures. Maybe we will come back to that later. I just would not want anyone to think that we are not managing our resources as well as we should be, whether it is controlling Opex or making the best use of our human resources. These things are all still major priorities for us.
EBM: Let’s address that point now. Where are you with your Explore 2020 operational efficiency plan? Can you update us?
Stéphane Richard: As you know, a few years ago we implemented a program called Chrysalid to put the company on the path to increased performance and efficiency, which, for us, is a must, given what our markets look like. The Chrysalid program was completed and delivered the results we were expecting: more than €3b in savings. Our new strategic plan, Explore 2020, is aiming for an additional €3b in savings by 2018. As of end-2016 we are well on our way with €1.7b in savings, or 57% of the plan’s overall target. So, I am very confident that we will not only reach but exceed our Explore 2020 savings target. We achieved €760m in savings in 2016. The plan’s pillars are pertinent and, most importantly, I and our entire management team are keeping a close eye on how we are managing the business in our countries.
EBM: Your successes in terms of sales are the results you expected from your major Capex efforts. Does that mean that you will continue along the same lines in 2017?
Stéphane Richard: Yes, let’s address Capex. In 2016 our Capex went up 3%, which equates to nearly €7b for the Group. That is a Capex-to-sales ratio of 17%. These are record numbers. And we will need to continue to invest for several more years. First of all, because our Capex funds major programs like fiber in France, which are multi-year programs. 60% of Capex goes to network infrastructure. And if you look at France as a case in point, we will exceed €1b in Capex for fiber. And it is clear to everyone that investing in fiber is crucial to taking back market share. So our Capex strategy remains unchanged. We are probably talking about another two years, so 2017–2018, of high Capex. Beyond that point, because these projects are cyclical and before 5G hits the market, the pressure to invest will ease up. But we are gearing up for at least two more Capex-intensive years and things should level off after that point.
EBM: But is your balance sheet strong enough to support that kind of Capex? And what about your dividend policy following your proposal to increase the dividend payout by €0.05 for 2017?
Stéphane Richard: First of all, I would like to point out that Orange has the strongest balance sheet of all of the major European operators. At end-2016 our net debt was €24.4 billion. Our net-debt-to-EBITDA ratio was 1.93x, lower than the medium-term target of 2x that we had set. Therefore, Orange’s balance sheet is very strong, very healthy. This positions us not only to finance our Capex projects, but also to consider redistributing the value we have created. And I will come back to that.
What makes our balance sheet so strong? First of all, as I mentioned, we manage our operations very carefully. And our EBITDA is going up. Plus, over the past few years, we have succeeded at managing our portfolio very selectively. We have seized opportunities. One thing in particular I would mention is our sale of EE in the UK, which happened a few months before Brexit, but also before British Telecom’s got into trouble. This disposal positioned us to reduce our debt substantially at end-2016. So, I feel that the disposal was good for the company and that it is perfectly reasonable for all of our shareholders to benefit from it, both through the dividend payout and through Orange’s capacity to pursue the major Capex projects that are so crucial to our strategy.
Back to dividends. Our shareholders have been contributing, I would say substantially, in the form of lower dividends over the past few years. A few years ago, the dividend was at €1.40. We gradually lowered it to better address the challenges we were facing. The dividend is currently at €0.60, and that has been confirmed for 2016. I would like to put a dividend increase of €0.05 to a vote at the Annual General Meeting. That is an increase of just under 10%, which is not insignificant. I feel that now is the right time to do it. Why? First of all, because it sends a message to our shareholders that they, along with our employees, have supported our efforts to get the company on the right track, the track to strong, investment-driven growth. And we are starting to see the payoff. We are a year ahead of our plan. It is perfectly reasonable for our shareholders to benefit from the results. I also feel that the distribution of value created among the stakeholders that helped create that value and, especially, the balance between our shareholders and employees, is a key point. We need both, both keep us moving forward. Which is why, in addition to compensating our employees through free shares, for example, I feel it is necessary and fair that our shareholders also benefit in the form of a dividend increase. So, I plan to put it to a vote at the next Annual General Meeting.
EBM: What is your guidance for 2017 now that you are a year ahead of your strategic plan?
Stéphane Richard: For 2017, our hope is clearly to maintain this positive momentum. First of all by pushing our EBITDA even higher than what we posted for 2016. That will give us two consecutive years of EBITDA growth. It is vital to get the company on track to profitability growth in the medium term. And that is what we are going to do in 2017. In any case, that is our objective. Other than that, we would like to keep doing what has been working well for Orange so far, a very strong balance sheet. This translates as a net-debt-to-EBITDA ratio of around 2x, and we will be keeping a close eye on that. And in terms of business development, we will pursue a very selective portfolio management, portfolio rotation, policy. This is critical if we hope to maintain the strong balance sheet I mentioned earlier.
EBM: I saved two questions on slightly touchier topics, Canal+ and Vivendi and consolidation in France, for the end of our interview. What can you tell us?
Stéphane Richard: Content. You know, in a way content is the telecommunications industry’s unseen character. There have been times when we have seen a lot of media/telecommunications convergence, and other times when the trend has been more toward disengagement. At Orange, we are trying to see beyond these cycles and to learn what we can from our own experiences. There have been times when we have invested heavily in content. We need to be realistic, pragmatic, and address this topic country by country. What is relevant in Poland or Spain might not be in France, or vice-versa.
So, what does all of that mean? Well, first of all, that Orange is a major player. We spend a lot on content. We spent more than €500 million, €550 million on content in 2016. That makes us a major player. And we have some great assets. We have a channel, OCS, that has the exclusive distribution rights to HBO content in France. OCS has 2.5 million subscribers, which makes it a pretty big channel. We are active in the film industry, as well. So we are not building this thing from the ground up.
And where are we headed now? We would like to keep a close eye on where the industry is going and on our competitors’ strategies, of course. In the final analysis, the idea is simple. We want to bring our customers the best content available. We want to make sure that our customers, regardless of the market, get major content like sports, football in Europe, and even movies and series. Our strategy does have a defensive aspect in that growing our fixed very-high-broadband and, especially, fiber business won’t work unless we have a “secure” supply of content. This is vital.
Then there’s the more offensive aspect. The world is changing, and people are using digital technology and consuming content in new ways. If you take today’s teenagers, they are not sitting on their parents’ couches watching TV. That’s a thing of the past. They are watching TV on their computers, tablets, and smartphones to an increasing extent. We have to adapt to this new landscape and figure out how we, as the operators that control the terminal—or rather the use of the terminal and, specifically, the connectivity that makes the terminal useful—can stay ahead of new consumer habits, deliver innovation, and, finally, support the momentum we have created on the access market through content. That is our way of thinking.
What about Canal+? Of course, Canal+ is a major player in France and the pay TV market leader. There are areas where it is natural for Canal+ and Orange to work together. Orange is the fixed market leader and Canal+ is the pay TV market leader. Obviously, Orange is a major distributor of Canal+. There are also places we could work together outside of France. I am thinking of Africa in particular, and perhaps Poland. We could also work together on innovations like short-format and smartphone-format series—that is one idea we are interested in. So, Orange and Canal+ have a lot of common ground and joint projects. Will this necessarily lead to a capitalistic move? No. What matters to us is strengthening our industrial and commercial partnerships with Canal+ in France. But there are other potential alliances in Spain and possibly in other countries as well.
That’s all for content.
As for consolidation in France, where do things stand today? The first thing I would like to be very clear about is that there are currently no deals on the table. At this time, we have no plans of this kind. The factors that got operators talking to each other on several occasions to see whether or not consolidation was a possibility remain unchanged. This means Capex efficiency and achieving critical mass and convergence for the operators on the market today. Personally, I am still not convinced that the French market is necessarily big enough to support four operators over the long term. Just look at our neighbors. Germany has three operators; Spain now has three; Italy has three. In the United States, which is on a completely different scale, there could soon be just three operators left. So, I don’t see how anyone can say for sure that the French market will be one of the only markets of its size to work well with four operators. Those factors are still there and everyone is aware of them.
We are always talking to the other operators. First of all, because we have joint projects. We are working together on fiber optic network infrastructure, for example. Some of us have network-sharing alliances. And at this point nobody can say that in the future we won’t sit back down at the table to negotiate a deal. What I can tell you is that, for the time being, there are no operation in process, there is no deal in process. Even though the conditions for consolidation have not changed.
As far as Orange is concerned, and that is what matters here, of the four operators we are the least dependent on consolidation to survive and, I would say, to thrive. Which doesn’t mean that consolidation wouldn’t have its benefits for us, of course. This puts us into a comfortable position. And in a position where we can afford to maintain a sharp demand and focus on value creation. In other words, we would only enter into a deal that would clearly and massively create value for Orange and our shareholders.
EBM: Stéphane Richard, CEO of Orange, thank you.
Stéphane Richard: Thank you.
