Financial Review

Revenues totalled PLN 11,928 million in 2021, up PLN 420 million or 3.6% year-on-year. Revenue growth considerably accelerated over 2020, when it was 0.9% year-on-year.

Our core telecom services, consisting of convergence, mobile-only and fixed broadband-only services, remain the key growth engine. Combined revenues of these three categories were up 6.7% year-on-year (versus a 2.9% increase in 2020), improving in each category. The main growth driver was convergence with revenue growth of 15%, fuelled by steadily growing customer base and ARPO improvement. Improving ARPO was a consequence of price increases and a growing share of fibre customers, who generate the highest revenue. Mobile-only revenues achieved growth for the first time as a category in this reporting layout and were up 3.1%. This resulted mainly from a growing postpaid customer base and an increase in ARPO. The customer base is expanding, despite partial migration from mobile-only to convergent services, owing to B2B customers as well as Nju and Flex brands. Post-paid ARPO increased by more than 1%, following its earlier decline, under the positive influence of our value strategy and partial recovery of roaming revenues following a slump amid the COVID-19 pandemic.

Revenues from IT and integration services maintained their very strong growth rate (up 19% year-on-year), benefitting from both organic growth and the consolidation of Craftware acquired at the end of 2020.

In the second half of the year, revenue evolution was negatively impacted by regulatory cuts in both fixed and mobile termination rates (FTR and MTR). A decrease of approximately 60% and 30% in FTR and MTR respectively led to revenue erosion of approximately PLN 170 million, which contributed to a 10% decrease in all-year wholesale revenue.

Revenue evolution in 2021 was also influenced by the following factors:

• An almost 34% increase in other revenues owing to a higher volume of energy resale versus 2020;
• A further structural decline in fixed voice telephony legacy revenues (by 15% year-on-year);
• An 8% increase in equipment sales, as demand for smartphones partially recovered.

* Wholesale excluding non-fibre fixed wholesale and interconnect
** Legacy: narrowband only, non-fibre fixed wholesale and interconect revenues

EBITDA after Leases (EBITDAaL) for 2021 came in at PLN 2,963 million and was up PLN 166 million or 5.9% year-onyear. This is the fourth consecutive year in which we are reporting growth of our operating profitability. Operating margin (ratio of EBITDAaL to revenues) increased to 24.8% from 24.3% in 2020. EBITDAaL growth accelerated from 2020, when it was 2.9%, and, what is equally important, its structure changed. Last year, EBITDAaL growth was generated by improving direct margin – that is, revenue growth fuelled mainly by the successful implementation of our value strategy in core telecommunication services (especially convergence) and the ICT sector. In previous years, the turnaround after years of decline was driven by cost savings. This change, aligned with the goals of our new strategy, makes our growth structure healthier and based on solid foundations.

Cost evolution can be attributed mainly to the following factors:

• A decrease of 10% in interconnect expenses, resulting mainly from cuts in both fixed and mobile termination rates and reflecting a decrease in wholesale revenue;
• An increase of 8% in commercial expenses, driven by growth in smartphone and ICT equipment sales;
• An increase of 17% in other external purchases, resulting mainly from higher costs of energy for resale (related to higher revenues in this segment) and higher costs of ICT services (partially due to the acquisition of Craftware at the end of 2020);
• A decrease of over 50% in costs of impairment of trade receivables and contract assets, mainly because provisions for bad debts due to the impact of the pandemic were recorded in 2020.

Net income for 2021 at PLN 1,672 million was significantly boosted by PLN 1,400 million (net of tax) gain on the sale of a 50% stake in Światłowód Inwestycje. Excluding this one-off development, net income was PLN 272 million, significantly higher than PLN 46 million recorded in 2020. This improvement resulted from the growth of EBITDAaL, lower depreciation (which benefitted from extension of useful lives of certain assets) and lower financial costs (which were elevated in 2020 by foreign exchange losses mainly on euro-denominated long-term leasing liabilities). The bottom line was also impacted by PLN 136 million provision related to the new social plan

The Group’s economic capital expenditures in 2021 amounted to PLN 1,737 million and were lower by PLN 64 million year-on-year. (Starting from 2020, this measure includes accrued proceeds from asset disposals.) These included mainly the following:

• Investments in our fibre network, which included rollout of the fibre access network, mainly to cover the rollout agreement with Światłowód Inwestycje (these assets were subsequently sold to the latter), further commercialisation of the constructed network (including customer premises equipment and service delivery), and fibre rollout to dedicated business customers;
• Investments to enhance the range of LTE services and the mobile network connectivity, expand the capacity and range of GSM/UMTS services, and adapt the mobile access network to the 4G technology requirements, particularly in the areas not covered by the mobile access network consolidation project (i.e. strategic or underinvested regions);
• Expansion of the mobile transport and core network in order to handle the growing volume of data transmission and ensure the service quality expected by customers;
• Implementation of transformation programmes;
• Investment projects related to the portfolio development, sales and customer service processes as well as the modernisation and enhancement of the IT technical infrastructure; and
• Excluding sale of fibre network assets to Światłowód Inwestycje, proceeds from sale of assets were slightly lower year-on-year and reflected the ongoing, difficult, pandemic-related situation of the office real estate market.

Organic cash flow for 2021 was PLN 867 million, a growth of 35% (or PLN 225 million) year-on-year. There were three key factors contributing to this performance:

• Firstly, more than PLN 200 million better cash generation from operating activities before working capital reflected higher EBITDAaL;
• Secondly, cash proceeds from sale of assets at PLN 196 million were much higher year-on-year owing to improved disposal of real estate (from a very low, pandemic-related level in 2020) and sale of network assets to Światłowód Inwestycje (sale of fibre network assets that Orange Polska had started to build before the signing of the transaction);
• These two strong positives were partly offset, however, by PLN 111 million lower year-on-year working capital release mainly as higher receivables balance reflected better equipment sale on instalments.

* Cash capex reduced by PLN 82 mn of cash proceeds from sale of fibre network assets to FiberCo (excluded from cash proceeds from sale of assets)

Our net financial debt in 2021 decreased by around PLN 1,473 million to PLN 4,076 million mainly owing to solid cash generation and the FiberCo transaction. Our leverage ratio stood at 1.4x at the end of 2021, having strongly decreased over the previous 12 months. It reflects improving business fundamentals and balance sheet optimisation initiatives. Our debt is denominated in PLN only, so is insensitive against currency movements. As of December 31, 2021, the Group’s proportion between fixed/floating rate debt (after hedging) was 91/9% as compared to 99/1% on December 31, 2020. Owing to such a high level of hedging, changes in interest rates in the market will have limited impact on our debt cost until mid 2024.

Considering the success of the concluded Orange.one strategy as well as the new strategic plan, .Grow, which assumes stable growth of the Company’s financial results, the Management Board is convinced that Orange Polska is on the right track to resume sustainable shareholder remuneration. The PLN 0.25 per-share dividend was proposed by the Management to be paid in 2022 (from 2021 profits) and has already been approved by the General Meeting. We see the PLN 0.25 per-share dividend as a sustainable floor for the future. Further changes to dividends will be conducted on a yearly basis taking into account projections of underlying financial results and longterm financial leverage (net debt/EBITDAaL) forecast versus 1.7x to 2.2x leverage corridor.