Integrated Report 2018

  • Introduction
    • Message from CEO
      •
    • About the report
      •
  • Company and our stakeholders
    • About our company
      •
    • Our stakeholders
      •
  • Business model and value creation
    • Business model and value creation
      •
    • Key resources
      •
    • Business model
      •
    • External environment
      •
    • Internal environment
      •
  • Strategy
    • Q&A with CEO
    • Our strategy
  • Results
    • Q&A with CFO
    • Outputs & outcomes
    • Financial review
  • Risk
    • Risk management
    • Risk exposure
  • Corporate governance
    • Our approach to corporate governance
    • Our governance structure
    • Governing bodies activities in 2018
  • Selected financial data
  • Appendix
    • GRI table
    • Defining the Reports content
    • Sustainable Development Goals
    • Methodology
    • Glossary
    • Independent Limited Assurance Statement
    • Contact information
Corporate governance

Assessment of Orange Polska Group’s Standing by the Supervisory Board

This section contains the Supervisory Board assessment of the Orange Polska Group’s performance in 2018 in accordance with the recommendation no. II.Z10.1 of the Best Practice for GPW Listed Companies 2016 introduced by the Warsaw Stock Exchange. The assessment is based on the 2018 financial results of the Group (the Company and its subsidiaries) as well as the information obtained by the Supervisory Board while conducting its statutory tasks.

The Supervisory Board, through the work of its committees and all its members (including five independent members), was actively engaged in the process of evaluation of the most important initiatives, having in mind the interest of all the Group’s stakeholders, including shareholders. In addition, it maintained oversight of the Group’s operational and financial goals through management reporting at its quarterly meetings, and was able, through the Audit Committee, to oversee the accuracy of financial reporting and the functioning of the internal control and risk management system.

Group’s Operational Review

The Group’s key goals in 2018 were to:
  • Follow the priorities set in Orange.one;
  • Execute commercial plans, which included capitalisation on the new offer portfolio that we introduced in 2017;
  • Increase monetisation of the fibre project;
  • Continue fibre network roll-out to cover more than 1 million new households connectable (including implementation of the Operational Programme “Digital Poland” – POPC);
  • Continue business transformation, including cost cutting initiatives to increase efficiency;
  • Implement further improvements in the customer experience management to continue to increase customer satisfaction and loyalty;
  • Consider balance sheet deleveraging initiatives;
  • Deliver stable restated EBITDA vs. 2017, that is around PLN 3.0 billion under IAS18 accounting standard (around PLN 2.75 billion under IFRS15 new accounting standard);
  • Maintain financial stability and monitor closely the level of debt ratios, that is net debt-to-restated EBITDA not to exceed 2.6 under IAS18 accounting standard (not to exceed 2.8 under IFRS15 new accounting standard).
2018 was a breakthrough year for Orange Polska in terms of financial results. After 12 successive years of decline, adjusted EBITDA was up 3%. This outperformed the stabilisation of this measure promised to the financial markets. In the Management Board’s opinion, which is shared by the Supervisory Board, it is a consequence of the well-executed Orange.one strategy. Last year was the first full year of its implementation.

The Management Board kept the Supervisory Board updated about various aspects related to the strategy. The Supervisory Board shares the Management Board’s opinion that the key conditions for success of the Group’s strategy include consistent implementation of convergence as the main formula for competing in the mass market, monetisation of fibre investments and steady focus on value generation in commercial activities.

As part of the review of investments in the fibre network, the Management Board presented also the information about progress in the network development in the Operational Programme “Digital Poland”. These investments are co-financed from the EU structural funds and are socially important, as they greatly contribute to the propagation of fast internet in non-urban areas and at schools. However, use of structural funds involves a risk of financing reduction or return in various cases, such as negative assessment of the formal dossier by control institutions or work delays beyond the settlement deadline.

2018 demonstrated that monetisation of this huge investment may be also effected through a wholesale offer. The agreement for the wholesale access of T-Mobile to the Orange Polska’s fibre network was a subject of analyses and discussions at the Supervisory Board’s meetings, and subsequently was given positive recommendation by the Supervisory Board. In the Supervisory Board’s opinion, the wholesale co-operation will maximise usage of Orange Polska’s infrastructure while avoiding fibre network overbuilding by other operators and accelerate convergence of telecom services in the Polish market based on fibre.

A major aspect of the Supervisory Board’s discussions of strategy was the situation in the telecom market both in regulatory and competition terms. Although the market remains highly competitive, the Management Board is of opinion that service prices in Poland (particularly in the mobile sector) have stopped falling. The observed market trends in conjunction with favourable macroeconomic outlook for Poland (resulting, inter alia, in disposable income growth) indicate that the situation in the telecom market should improve in the coming years.

Furthermore, the Supervisory Board discussed the end of co-operation with mBank in the provision of financial services under the Orange Finanse brand. The discontinuation of this co-operation stems from a change in Orange Polska’s business attitude to the provision of financial services to its customers. The new model will be more beneficial in terms of value generation for Orange Polska. Financial services remain a major pillar of the Company’s services supplementary to its telecommunications portfolio.

Group’s Financial Overview

The Management Board kept the Supervisory Board updated about the Company’s financial performance. The Audit Committee of the Supervisory Board supervised the accuracy of financial reporting on a current basis and submitted its opinions to the Supervisory Board prior to the publication of results for subsequent reporting periods. The Group met its financial goals for 2018. In terms of adjusted EBITDA, the guidance was even exceeded. Under comparable accounting standards, adjusted EBITDA was up 3% year-onyear, outperforming the intended stabilisation. Both revenue evolution and generated cash improved.
Revenues (under IAS18 accounting) totalled PLN 11,296 million in 2018. The year-on-year decline was contained to just 0.7% or PLN 85 million despite continued structural pressure on legacy business lines (traditional retail and wholesale fixed telephony). The Supervisory Board shares the Management Board’s opinion that convergence is the strategic engine of this improvement. Convergence revenues were up 30% in 2018, which was broadly similar pace as in 2017.

2018 adjusted EBITDA came in at PLN 3,104 million (under IAS18 accounting) and was PLN 93 million higher versus 2017. This adjusted EBITDA performance stopped 12 consecutive years of EBITDA decline. It was driven by very strong cost optimisations (indirect costs in 2018 were down 10% year-on-year) and record-high gains on disposal of assets.

Net income for 2018 stood at PLN 190 million (under IAS18 accounting) versus a net loss of PLN 60 million in 2017. The significant improvement is mainly a consequence of much higher reported EBITDA, which in 2017 was affected by provisions of PLN 204 million related to the Social Agreement.
Adjusted organic cash flow for 2018 came in at PLN 453 million and increased significantly versus PLN 111 million in 2017. The most significant factor behind the improvement was receipt of PLN 275 million from T-Mobile pursuant to the wholesale agreement.

In 2018, the Group did not pay out dividend, which was given positive recommendation by the Supervisory Board. This decision was determined by challenging business outlook, particularly the need to maximise cash allocation to strategic investment projects and potential payment of EC fine.

Conclusions and 2019 Recommendations

Orange Polska delivered its operating and financial goals for 2018 owing to the consistent implementation of its strategy, focus on value and comprehensive business transformation. The underlying objective is to build a company better structurally prepared to future competitive challenges and business opportunities, and able to generate sustainable growth. In 2019, Orange Polska will focus on the same strategic priorities in order to sustain the growth achieved in the preceding year.

In the Supervisory Board’s opinion, in 2019 the Group should focus, in particular, on the following key aspects:
  • Follow the priorities set in Orange.one;
  • Meet the forecasts and guidance for revenue and EBITDAaL growth published for the financial markets;
  • Execute commercial plans which reflect focus on value generation on both mass and business markets;
  • Accelerate monetisation of the fibre project;
  • Continue fibre network roll-out under the Operational Programme “Digital Poland” (POPC);
  • Continue business transformation, including cost-cutting initiatives to increase efficiency;
  • Implement further improvements in the customer experience management to continue to increase customer satisfaction and loyalty;
  • Prepare for 5G network investments;
  • Maintain financial stability and monitor closely the level of debt ratios, that is net debt-to-EBITDAaL should fall below 2.4 reported at the end of 2018.