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.