Q&A with CFO

Q: You delivered on your financial commitments in 2020. How difficult was it in a year defined by the pandemic?

It was not trivial but we managed to achieve it through a combination of resilience of our business and significant support from extraordinary mitigating measures on the costs side.

A business like ours derives the majority of its revenues and profits from subscription services. In addition, lockdowns, with the shift to online working and schooling, accelerated demand for fast and reliable connectivity, which has become more essential than ever to the needs of consumers and businesses. This allowed us to rely on a relatively stable and predictable revenue streams and put us in a more comfortable position versus some other industries.

However, the closure of borders and restrictions regarding people’s mobility significantly affected our roaming and pre-paid area. There was a slowdown in the IT/IS market and a slump in the real estate market, on which we are trying to actively sell some of our properties as part of our asset-base transformation. We also had to create additional risk provisions. To at least partially mitigate this negative impact and protect our business goals, throughout the year we launched a number of measures impacting operating costs and capex. The most important one was curtailment of the jubilee awards scheme, which resulted in significant provision reversal. We also renegotiated some elements of our social plan and implemented a rigorous cost freeze in all non-essential business areas. In capex we have slowed down certain projects in IT and fibre rollout preparation.

Owing to the relative resilience of our core business and additional compensating measures, we reported 2.9% year-on-year growth of EBITDAaL in 2020, which was in line with our guidance provided at the beginning of the year.

Q: With the Orange.one strategy you have achieved a financial turnaround. What were the key drivers of that?

We have delivered on all of the financial recovery promises that we presented during our strategy announcement in 2017. In some cases we even exceeded the initial expectations.

It has been achieved through a combination of a progressive commercial turnaround coupled with great efforts in cost optimisation. For commercial turnaround, two factors were crucial. Firstly, we successfully implemented our convergence strategy, which was mainly possible due to dynamic growth of our fibre footprint. Secondly, in all our commercial activities we paid particular attention to value, which included ‘more for more’ pricing. Simultaneously we significantly increased our efficiency. Since 2017 we have optimised our indirect costs by almost PLN 600 million or 15%. This was done despite inflationary pressures in areas such as labour and electricity costs, so the effort to achieve these savings was even greater.

To sum-up, this turnaround has put us in a much better position than we were in 2017 with growing revenues and operating profitability as well as a much safer balance sheet.

Q: Does it mean that Orange Polska is now growing on a sustainable basis?

Orange.one was a breakthrough: it proved that constant declines were not a fatality and that we can grow. However, to grow on a more sustainable basis we need another step forward. Our growth in the past three years resulted from significant effort in the area of cost optimisation. The direct margin generated by our business, which indicates profitability of our revenues, continued to decline although the pace of deterioration has diminished. This was despite increasing revenues. The chief reason behind that is a constant drag from our legacy services, which are in structural decline. So in order to increase the direct margin we first need to offset this decline. Improvement of financial results from cost savings alone cannot be perceived as sustainable. We will certainly continue our transformation, however by definition savings have limits. In order to grow sustainably growth needs to be driven by revenues, through growth of the direct margin. I think this will be our key financial ambition for the next strategic period. This is also our plan for 2021.

Talking about our growth ambitions I would like to also mention that our decision regarding capital allocation will be made with an attention to improve our return on capital employed ratio (ROCE).

Q: You have done a tremendous job in cost savings in the past couple of years. What is the scope for more savings going forward?

Yes, as I already mentioned, within the framework of the Orange.one strategy we have introduced a comprehensive transformation program to simplify, and where possible to automate and digitise, our business processes. This gave us very significant efficiency increase. I am sure that this transformation will continue in the new strategy but its scale is likely to be naturally lower.

Directions in which we see a lot of further potential include automation and digital. Our digitisation initiatives will span into many areas, including distribution channels, product offerings and customer care. We want to accelerate the share of online sales and customer take-up to our fully digital offers. In customer care we already made good progress with artificial intelligence in the form of ‘chat bot’ Max, but we have ideas of how to develop more digital tools and also push higher usage of our My Orange application in the customer retention process. We will invest more in machine learning and AI solutions in support functions and network maintenance. That among others should allow us to further optimise energy consumption. The pandemic makes us to rethink our working model: for example, I believe we will need much less office space in future.

For Orange Polska, the era of simple cost cutting is long behind us. An increase in efficiency results from the continuing search for new simplification initiatives – a process which has become a part of our Company’s DNA. This is driven by high competition in the marketplace, an environment of inflationary costs and the still-significant burden of our legacy. Inflationary pressure is especially visible in labour and energy costs. The latter may even accelerate along with the rollout of 5G network.

Q: An important element of the new OPL strategy will be the FiberCo project that you recently signed. If fibre is so profitable why share its future benefits with a partner?

FiberCo allows us to realise a few goals at the same time. First and foremost it will build the fibre footprint for an additional 1.7 million households that Orange Polska will use on a wholesale basis. This is the key benefit for us. Secondly, because Światłowód Inwestycje will be a co-controlled entity, its capex and debt will not appear on the Orange Polska balance sheet. This is very important for us in front of the capex cycle related to rollout of 5G technology. Finally, by selling a 50% stake in FiberCo we are able to monetise part of our past investments and additionally strengthen our balance sheet. So such a set-up allows us to combine further expansion of the fibre footprint and at the same time have capacity to invest in 5G, which will include both purchase of the spectrum licence and subsequent network rollout. This would have been much more difficult without the FiberCo transaction.

Q: Do you think that with the new strategy Orange Polska can return to shareholder remuneration?

Meeting investors on many occasions I am aware how important it is for our shareholders that we return to dividends. This is also my wish and I am confident that this moment is approaching. As a result of the Orange.one strategy we are in much better shape as compared to 2017 when we suspended dividend payments. A few weeks ago the management has proposed returning to dividends in 2022. We decided not to recommend our shareholders dividend payment in 2021 taking into account uncertainty around the terms of the forthcoming 5G auction and the final provisions of the cybersecurity regulations. However we have committed to propose PLN 0.25 per share dividend payment in 2022 from 2021 profits provided that our net debt/EBITDAaL ratio will not exceed 2.1x including result of the 5G spectrum auction.

I am sure that during the upcoming presentation of the new strategy we will discuss our approach to shareholder remuneration in greater detail.

Jacek Kunicki
Orange Polska CFO