Q&A with Jacek Kunicki, Orange Polska CFO

Our last year’s results have underscored resilience of our business to external headwinds and our ability to adapt to these challenges. High inflation in my view is one of the top risks for the telecom industry overall. Please note that the vast majority of our service revenues is derived from subscription contracts that usually have prices fixed for 24 months. As such, our ability to pass higher costs to customers is limited in the short term. Growth of our EBITDAaL last year resulted from the combination of strong performance of core business and ongoing transformation and adaptability of our cost base. As we have contained the increase of our indirect costs, we have preserved our high operating leverage, enabling increase of the direct margin to convert into EBITDAaL and net profit growth.

Our core business performed very well last year, pushing growth of the direct margin by more than 4%. We are simultaneously growing both the customer bases of our core telecom services, as well as the average revenues coming from the average user of these services. The latter has become point of special attention, taking into account high inflation. We have intensified our value strategy, that we have been consistently applying for the past few years. However, looking just at ARPO growth would be too short-term oriented strategy, so only a well-balanced combination of volume and value gives us a right mix to drive margins upwards in a sustainable way.

Our indirect costs increased more than 5% in 2023 mainly due to inflation. The majority of our rental contracts for telecommunications infrastructure, sales outlets and office space are indexed to the previous year’s inflation rate, which means that they surged by a double digit rate last year. Similarly, the costs of outsourced services, technical support and customer care have been subject to higher inflationary pressure. Growth in the minimum wage has been a major factor in some of these categories. A lot of this pressure has been mitigated by our numerous optimisation actions. We have achieved savings in property maintenance, network maintenance, procurement and optimisation of various business processes, which benefit from automation and digitisation. In contrast to 2022, when our energy-related costs increased by about 75%, this cost category did not significantly contribute to the evolution of our total costs in 2023 owing to our portfolio of contracts under which we receive energy from wind and solar farms at below-market prices.

We are pleased that inflation has come down a lot in the first months of 2024 but we will benefit from this only in 2025. As our rental contracts are indexed to prior year’s inflation, in 2024 we will still be affected by 11% CPI of 2023. So, the impact of inflation on our costs is expected to be broadly similar to 2023. The same applies to the impact of the minimum wage, which in 2024 has been increased again by 20%. This has two effects: it puts pressure on our own labour costs (we have increased minimum salaries in Orange Polska to adjust to market conditions), and it forces some of our suppliers to increase their prices. So, we will definitely continue to feel pressure on our costs, which requires from us to further transform our business and extract the maximum value from all our projects and assets.

Similarly to previous years, the key to the growth in 2024 will be performance of our core business, which brings the most in terms of margin. So, we need to persevere in execution of our commercial value strategy, preserving the right balance between volume and value growth in our core telecom services and bearing in mind that the competition continues to be intensive, especially in convergence and fixed broadband. At the start of 2024, it looks that achieving growth in the ICT area may be more challenging than in previous years. It undergoes a cyclical slowdown resulting from the broad IT market downturn and lower demand from the public sector. ICT is an important value driver for us, increasing our competitive position on the business market, and we are confident in its potential in the future. We anticipate a gradual rebound in this area starting from the second semester. Similarly, our energy resale business will have a more difficult year due to lower energy market prices and changes in regulations.

I am confident 2024 will be another year of growth for Orange Polska and we will deliver on the objectives of the .Grow strategy.

We were very happy to have been in the position to recommend another important increase of the dividend that will be paid in 2024 from 2023 profits. This is the second consecutive increase after we reinstated the dividend in 2022. The cumulative increase over these two years exceeded 90%. Please note that we also made this new level of PLN 0.48 per share a floor for dividend payable in 2025. So, our dividend next year will be at least on this level.

The higher dividend has been enabled by our strong financial results and a very solid balance sheet. The results of the past three years when we have been implementing our .Grow strategy demonstrate that we are performing exactly as we committed despite enormous external challenges. Our financial leverage at the end of 2023 stood at 1.1x (or 1.2x if we take into account full payment for 5G spectrum, which we made in the first days of January). Our last year’s dividend in millions of PLN represents practically the entire free cash flow that we generated (if we include full payment for spectrum that I just mentioned).

When thinking about dividends we are always looking at the long-term prospects for the operating profitability, cash generation, and also the longer-term prospects for leverage. As I mentioned, PLN 0.48 is a floor to be paid in 2025. At the same time, in 2024 we will work on a new mid-term strategy, which will define our goals in the new strategic perspective.