The Company’s financial performance improved significantly in 2017. What were the key drivers behind that?
In 2017 we managed to contain adjusted EBITDA decline to less than 5% compared to around 10% in each of the two previous years. I would point to three main drivers of that improvement.
Firstly, we shifted our commercial strategy towards a value focus. Significant reduction of handset subsidies and optimisation of our distribution channel mix allowed us to reduce commercial expenses by 10% year-on-year. An important factor that allowed for that change was the Orange Love convergent offer, which enabled more efficient customer acquisition.
Secondly, we saw considerable improvement in the fixed broadband business. Almost 11% growth in the customer base (as a result of our investments in connectivity and convergence strategy) translated into the kind of revenue growth that we haven’t seen in this area for a long time. Thanks to operating leverage, revenue grew faster than costs and contributed to the better EBITDA trend.
And thirdly, we continued to optimise our fixed costs, a process which has been ongoing for many years. In 2017 we reduced these costs by around PLN 200 million compared to the previous year, if we exclude a one-off booked in 2016. Please note that traditional wireline telephony is in structural decline and continued to put a drag on our results.
Please note that traditional wireline telephony is in structural decline and continued to put a drag on our results.
What were the main challenges from your perspective in 2017?
I would highlight two factors here.
The first one was related to the changes in roaming regulations within the European Union that came into force in June and affected the entire telecom industry in Poland. Customers have very quickly got used to free roaming. Data consumption in EU roaming in the peak holiday season increased more than twenty times versus the previous year. Unfortunately the higher revenues from incoming traffic were not sufficient to compensate, as the volume of foreigners coming to Poland from other EU countries is much lower than the number of Polish people travelling abroad for business and leisure purposes. As such, this regulatory change had a significant negative impact on our financial results in 2017.
I would also like to mention here some challenges related to our investment process in the rollout of the fibre network. This is a big undertaking that involves huge effort and co- -operation with dozens of co-operating companies. In the second half of the year we experienced bottlenecks related to the capacity of our subcontractors. This was due to significant demand for construction services not only in Poland but also neighbouring countries. Nonetheless we managed to handle this situation well and it did not affect our overall level of capital expenditures.
The EBITDA trend improved; however, it did not translate into better cash generation. Why?
Indeed, cash generation deteriorated more than EBITDA. This was primarily related to much higher working capital requirements than in 2016. A lot of it is related to different timing of benefits from certain developments.
A good example of this is our supply chain financing programme. In 2016 we invited some of our suppliers to enter into reverse factoring arrangements, which allowed us to release a significant amount of working capital and contributed to good cash generation that year. In 2017 we continued this programme and even slightly extended it; however in year-on-year terms the negative change in working capital from that reason was almost PLN 100 million. In 2018, we expect a considerably lower increase in working capital requirement.
What should contribute to the expected EBITDA stabilisation in 2018?
Our ambition is for the year 2018 to be the first without a drop in adjusted EBITDA for Orange Polska in more than a decade. In my view, our visibly better performance last year positions us well to achieve this ambition.
We expect further benefits from our convergence strategy and the monetisation of fibre. Convergence is our unique feature: a source of competitive advantage and at the same time a good customer loyalty tool. We see further potential in convergence which we will explore in 2018. By rolling out our fibre network we are rapidly closing a technology gap with the cable companies. This year we plan to extend our network by another 1 million households. The benefits of this massive investment will be more and more visible in our financial performance. In 2017 we signed a national roaming contract with Play which will be a new source of revenues and profits for us this year. The agreement enables us to better monetise our network investments by guaranteeing a minimum income. These positives should increasingly offset the structural decline in legacy services.
We plan to continue our value-driven commercial strategy but please note that commercial cost savings greatly contributed to better performance in 2017 and this effect cannot be repeated this year. Accelerated optimisation of indirect costs is a necessary condition to stabilise EBITDA. This will be facilitated, among other measures, by the new social agreement that we announced in December.
Why will the new accounting standard, IFRS 15, have a negative impact on the results in 2018?
IFRS 15 is the new accounting standard that we are obliged to adopt in 2018. It concerns recognition of revenues and sales commissions. It impacts only the recognition of revenues when we sell a service with a device (usually a handset) that is subsidised – that is to say, sold below the cost at which we purchased it. For such bundled products, revenues are recognised differently in time: more upfront and less throughout the contract period.
The impact of implementation of IFRS 15 on the financial results versus IAS 18 (accounting standard until 2017) depends mainly on the trend in the subsidy policy. If this trend is stable, the effect is neutral. If level of subsidies is increasing, the impact is positive. Orange Polska significantly reduced handset subsidies in 2017 as a result of the focus on value generation. This significantly contributed to the improvement in our financial results last year. However, because subsidies are now falling, EBITDA under IFRS 15 is lower. We expect that while we maintain our current commercial policy, this impact will be much lower going forward and even disappear.
I admit, the topic is not easy and may raise concerns among our shareholders. Let me stress that this is only an accounting change, without any impact on underlying business trends or, obviously, on cash generation. Moreover, to assure continuity of analysis of past business trends and in order to allow the financial community to track the execution of our long term plans we will also report our financial results for 2018 under the old accounting standard.
When do you think Orange Polska may 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 for this to happen is successful turnaround that will allow us to grow our EBITDA and cash generation on a sustainable basis. As I stated in September when we announced the new strategy, if the turnaround materialises, from today’s perspective we could envisage dividend to be paid in 2020 for the results of 2019. However we cannot commit to that today. We will also have to consider potential future investment needs, particularly with respect to 5G technology.