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
Results

Q&A with Maciej Nowohoński,
Orange Polska CFO

Q: Your 2018 financial results were better than expected. Adjusted EBITDA not only stabilised but grew for the first time in 12 years. What were the key drivers behind this performance?

It is the consequence of a well-implemented strategy. We have focused our commercial activities around our key competitive advantages, which are convergence and fibre. We have attractive proposals for all customers; however, value management is more important for us than chasing the highest possible customer volumes. Our pricing policy is driven by a ‘more for more’ approach. We are successfully developing new areas of business, including ICT, sale of devices without contracts, and resale of energy. We also benefitted from the national roaming contract with Play that we signed in 2017. As a result our revenue trend significantly improved, bringing us close to stabilisation. This means that we are able to increasingly offset the structural decline in our legacy services.

EBITDA growth was significantly supported by cost optimisations and record high gains on sale of real estate. The savings almost doubled as compared to 2017. Please note that these are net savings. Certain costs increased due to market factors, and we increased salaries – so gross savings were even higher. They were generated in all areas of operations including labour, customer care, IT, network, property and general expenses. It is worth mentioning that more than half of them came from areas other than permanent labour.

Q: You managed to cut your indirect costs by 10% and you reached the target two years ahead of schedule. What further prospects are there in this area?

The Orange.one strategy placed a new emphasis on efficiency, with its particular focus on value in all aspects of our operations. In implementing the strategy, we have introduced a comprehensive transformation programme aimed at simplifying our business processes and automating them where possible. Thanks to this programme we are able to find more and more optimization opportunities in all stages of our business model. Simple cost cutting at Orange Polska finished a few years ago.

Let me give you some typical examples of process simplifications and automations that we introduced last year. We were the first operator on the Polish market to introduce artificial intelligence: it is now used for 95% of customer interactions with call centres. Paperless electronic contracts are being introduced for customers in all distribution channels. Our omnichannel distribution network is now supported by a brand new supply management system. We are also finishing implementation of an integrated management system for our fibre investments.

In September 2017 we promised to cut indirect costs by 12-15% by 2020 versus 2016. We are in the middle of this period and we have already reached our target. The results achieved in 2018 were indeed better than expected but I can assure that more savings will come. We continue to have strong ambitions and our optimisation programme is running at full speed

Q: You generated record high proceeds and gains from real estate disposals in 2018. Can this be continued? How much more is left to sell?

Real estate disposals should be seen in the context of our business transformation. We have a large portfolio of real estate mainly because of our long history. In the past we needed many more locations for our employees and our infrastructure. We have gradually consolidated office locations and optimised space for infrastructure. This process is supported by technological progress and changes in our business model. As a result we are able to free up resources and sell unused real estate. This is a clear example of our discipline in capital reallocation, as we are moving capital away from real estate into our fibre network deployment programme which provides much better long term returns for the company.

In 2018 we generated almost PLN 250 million of cash from real estate disposals – a record high. However, the market value of our portfolio still available for sale exceeds PLN 1 billion. It will be gradually disposed of in the coming years

Q: You guide for growth of operating performance in 2019. What will be the sources of this growth? What are the key challenges?

Our guidance for 2019 is consistent with our 2020 turnaround ambitions. We plan to sustain growth of operating profitability and grow our revenues for the first time in many years. The sources of the growth will be unchanged. Commercial activity will continue to reflect cautious value management. This means that we mainly compete with quality of our offers and customer care, rather than on price. We strongly believe the Orange Love offer, which we just significantly strengthened, combined with our fibre broadband, creates a proposition for Polish consumers that our competitors cannot match. On mono services we will put more emphasis on improvement in ARPO trends. As I already mentioned we have high ambitions for further cost optimisations and real estate disposals; however last year’s achievements will be difficult to beat.

As for the challenges: the key to success, as usual, will be proper execution. We expect the market to remain competitive. We may be faced with certain regulatory headwinds, for example a cut in maximum rate of long distance calls within European Union. In our plans we are also taking into account the inflation of certain costs, like salaries and energy.

Q: Starting from 2019 you will introduce a new accounting standard IFRS16. What impact will this standard have on your business and financial reporting?

IFRS16 is the new accounting standard that we are obliged to adopt in 2019. The key objective of the new standard is to provide a single accounting method for all lease contracts for lessees. All the lease commitments will now be integrated on the balance sheet. In the P&L, expenses related to operating leases – so far booked as operating costs – will be booked below EBITDA under IFRS16.

We sign a lot of leasing contracts at Orange Polska, for example for rental of commercial and office space or lease of space for network infrastructure. As a result, the impact on our accounting will be substantial and EBITDA derived directly from financial statements under IFRS16 will be much higher.

However the standard does not change our business fundamentals and sources of value creation. In our view, expenses related to leasing contracts are part of operating activity and operating profitability. Therefore, under IFRS16 we decided to use a new alternative performance measure for reporting operating profitability. It is called EBITDAaL, which stands for EBITDA after leases. Please note that it reflects the key concern of IFRS16, so one accounting method for all leases, but integrates this impact within operating performance. It provides a better reflection of how the company is being managed internally. Also, EBITDAaL is very close to EBITDA as we reported it under IFRS15, so it allows for relevant comparison with the previous year.

Q: When do you think Orange Polska might return to dividend payments?

We are aware that dividends are important for investors, especially in the telecom sector, and it is our intention to return to dividend payments in the future. The key condition is successful turnaround and establishing a business model that will allow us to grow on a sustainable basis. Results for 2018 confirm that we are on track. The other very important factor for dividend prospects is the upcoming allocation of spectrum for 5G technology. It is still uncertain when this may happen and how much it may cost us. When we commented on our full-year 2018 results in February we stated we could envisage a dividend being paid in 2021 for the results of 2020. However, we cannot commit to that today. When we return to a dividend payment, our intention is that will be based on a transparent and sustainable dividend policy.