Orange Polska SA

WSE:OPL

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and I would like to welcome you to the Orange Polska 2Q 2020 Results Call. [Operator Instructions] The format of the call will be a presentation by the management team followed by a question-and-answer session.

So without further ado, I would like to pass the line to Mr. Leszek Iwaszko, Head of Investor Relations at Orange Polska. Please go ahead, sir.

[Leszek Iwaszko, executive]

Good morning. Welcome, everyone, to our conference summarizing quarter 2 and H1 of 2020. Welcome those who are in the room, Welcome those who listen to us and watch us online. Speakers for today will be Jean-François Fallacher, CEO of Orange Polska; and Jacek Kunicki, CFO of Orange Polska.

Let me hand the floor to Jean-François to begin the presentation. Thank you.

[Jean-François Fallacher, executive]

Thank you very much, Leszek. Good morning, ladies and gentlemen, and welcome to the courageous ones that joined us physically today. Welcome to this conference. As usual, I will start with the business highlights. Jacek Kunicki, here present, will follow with the financial review, and then I will say a few words to close this presentation.

So let's start immediately with the Page 6 of this presentation with another view of where we stand after half of the year against our full year guide and expectations. So as you can read here, our revenues are up 1.7% in the first half. They were growing both in the first quarter and the second quarter. Our original guidance, if you remember, was the growth of revenues for the full year. However, when we presented the first expected impact on the pandemic on these results in the beginning of April, we noted that the growth of the revenues is this year unlikely, and we are still maintaining that view today. However, we do confirm the guidance for the growth of our EBITDA for the full year. You see that in these H1 results, we are posting an EBITDAaL that is up 8% year-on-year. And this performance is combining both our underlying turnaround and the significant impact of mitigating measures that we have launched in the second quarter.

Concerning the outlook of the second half, we are still cautious, but we believe that the performance that we are posting in this first half and the countermeasure that we have taken are making us more confident than before regarding the growth of this key parameter, financial parameter, for the full year. So we are maintaining also the full year outlook for economic CapEx. Although pandemic makes, as you know, the real estate market more difficult, and we are also having prepared some adjustments to offset the difficulties of the real estate market.

I would like also to highlight that at the end of the first half, we have achieved the #1 position in NPS. This is the Net Promoter Score, a measure of our customer satisfaction. This is meaning that we are now the most recommended operator on the Polish market. We advanced from #3 position end of 2018 to #2 position end of 2019 and now #1. This was clearly one of our strategic goal set 3 years ago, and this is the evidence that our daily focus on the need of our customers pays off. And I'm very proud now that customers are trusting us more.

Let me now go on to Page 7 on this presentation. I think during this COVID pandemic period, our performance in the second quarter proved that our operations are resilient. Relatively fast reopening of the economy that started at the end of April helped us to limit some of the negative effects that we encountered. Our distribution returned to normal operations early May when shopping malls were reopened here in Poland. And since then, we observed a gradual increase of the customer traffic. In June, it was still down 20% versus the level before the pandemic. However, it is improving in the month of July, again. We will review the commercial results a bit more in detail. So I will now just mention a few key trends.

Not surprisingly, the most resilient service was fixed broadband and fiber, in particular. Sales in mobiles dropped much more, but started quickly recover, especially in the consumer market. Recovery of the business market is a bit slower. Net customer additions in all postpaid services were helped by lower churn, especially during this lockdown. The service that suffered relatively the most was prepaid. We lost more than 100,000 customers due to much lower activations of new prepaid cards. This was a consequence of clearly the reduced small business activity and much lower sales to foreign residents, obviously, caused by the pandemic.

These were a few key impacts on our commercial results, and Jacek will comment on financial impact during his financial review. Clearly, it seems that Poland is less affected by the pandemic than other countries. Nonetheless, I say it again, we are cautious about the future as today's situation is helped by various government programs. And we know that many sectors are going through significant slowdown. This may, in particular, affect our business customers, especially in the ICT area. We are obviously very closely monitoring the receivables collection. And needless to say, our roaming revenues will continue to suffer during that summer period.

So now let's have a look on the mitigation measures that we have launched, as I was commenting in the last meeting in end of Q1. So I am now on Page 8 of the presentation. When we presented this Q1 result, we flagged that we were working to adapt to these unprecedented challenges caused by the pandemic. So here are the measures that we have launched. They required a big effort from our entire organization, and they have -- they are going to significantly help us to achieve our strong performance in Q2. Some of these measures were important enough that we reported them in separate announcements, so they won't be a surprise for you. You could read about the cancellation of the so-called Jubilee Awards and some amendments in the terms of the social agreement of the company. I would like use the opportunity to thanks our social partners because they have been engaging with us in dialogue and agreed to make compromises that are really serving the best interest of our company and its employees.

So on top of these measures, we've introduced rigorous cost freeze in many business areas that generated material savings, for example, in general expenses, property maintenance and marketing. We have also engaged our resources in renegotiating of certain rental contracts that we are having, and we will continue this cost freeze in the second half of the year. As I already mentioned, we also adjusted some of the CapEx, the investment products in the light of a tougher real estate market, and Jacek will say a bit more when he will present our CapEx outlook.

Let's go now on the Slide #9. I want to comment on the fact that the pandemic unfortunately also affected our 5G distribution process in Poland, 5G frequencies distribution process. As you remember, the auction was suspended by the regulator in April and then canceled by the government in May. At the moment, the timing of the new process is a bit unknown, and you know that there will be some, soon, a new head of the UKE, our regulatory office. Taking this into account, it seems to us not very likely that the process will conclude this year but rather next year, in 2021. So in such circumstances, we decided you have seen it to launch 5G on another spectrum. It was launched on July 1 on the 2.1 gigahertz frequency that we are actually also using currently for 4G. We are using a technology called DSS that allows dynamic allocation of these spectrum resources between these 2 technologies, and this is based on user demand. So this launch of 5G on July 1 makes, actually, 5G available for around 6 million citizens in Poland in some of the largest Polish cities. And in line with our value strategy, we positioned 5G to be available in the most expensive tariff plans, both for consumers and businesses. Obviously, the 5G that we will be able to offer in the future on the C-band will give customers even wider benefits, so that's why we are hoping for the new distribution process to be starting as quick as possible.

Let's please go to the next slide on Page 10, where I want to comment the fixed broadband performance in the second quarter. As already mentioned, it was very good for fixed broadband in the second quarter. As you can read, our total customer additions net were 22,000 Q2. This was the best results in the last 6 quarters for fixed broadband. All technologies contributed to that. So despite these crisis, the demand stayed very strong, which is not really surprising, given how important Internet access became for all our customers. However, we want to put a bit more attention on the lower chart on the left, which is the evolution of the ARPO, so the Average Revenue Per Offer, in the broadband-only customer base. You can see a real turnaround here made over the last 12 months, thanks to our last year's price increase and the growing share of fiber in the base. Fiber is contributing, as you can see, in a number of ways. Firstly, it has the highest share of TV services. Secondly, we have more and more customers in single-family houses who are actually paying a bit more to cover the higher construction cost of this type of households. And thirdly, we see growing demand for higher fiber speeds, which are also helping this ARPO growth.

In fiber, as you can read here, we had plus 44,000 customers net additions in this quarter 2, matching Q1, which was the second best-ever quarter in the history of Orange Polska for fiber. And June was the best month ever for us. As a results, our fiber penetration, as you can read here, stands now at 13.5% and continues to grow.

Let me now take a few minutes to comment on our fiber plans because they were, as you have seen, some media speculations about this recently. I can reiterate that we are actively, very actively working on a project that we call FiberCos in line with what we said in the beginning of the year because we see room in Poland for more fiber deployments and that we are looking for an optimal way to finance this further rollout, that involves potential teaming up with a partner, with a financial partner, to optimize our future CapEx. Let me underline that the final shape of this FiberCos is not yet fully determined. The project is still at an early stage. It is likely that we will include some part of the existing footprint, but it is too early to reveal exactly how much. We are also analyzing how much fiber rollout would be optimal in the future, I mean, new build and fiber rollout. These parameters are currently worked out, and we will start hopefully talking to investors very soon. This is all I can say today about this topic. I just want to confirm that this is a top priority for the company, and we expect to extract value from it. And our thinking is in value for long term.

I can also say that the ongoing management changes do not impact this. It is led by Maciej Nowohonski that you all know very well, our former CFO, which is now in charge of wholesale and kept the responsibility of this FiberCos project.

Let's now go to the next page. I'm in Page 11 of this presentation. This is the slide, the usual slide that you know very well, where we are presenting the source of value creation through our commercial activity and transformation. Now I want on this slide to focus more on convergence and mobile. If we look at the customer net additions in both categories, they are strong in Q2, actually better than in the first quarter. Obviously, the lower churn during the lockdown period is here a supportive factor, especially in mobile. And good trend in ARPO is continuing, even if it was distorted significantly by roaming in mobile. As you know, we lost a lot of roaming during this period.

If you look at the green box, you can look at the trend in mobile postpaid ARPO is deteriorating in Q2, but again, only due to the roaming effect. If we exclude that factor of the loss of roaming, we would see further improvements, driven obviously by our value strategy.

In the lower part of the slide, we are also presenting the effects of our efficiency transformation. You see that our employment is down by almost 10% year-on-year in the first half of this year. Around 1,100 employees left the company out of 1,250, which we have planned for the entire year, according to our social plan. The process of leaving of the remaining 150 people has been frozen as it was agreed with our trade union during the negotiation allowing us to reach these actions that I commented a few minutes before.

In the yellow box, you can see the savings in indirect costs. For Q2, they were 3x as high in Q1 with around half, thanks to the curtailment of the Jubilee Awards. They are also encompassing other savings generated with the framework of the mitigating measure that I presented a moment ago.

Now in the pink box, bottom right, you can see the strong performance in the first half of EBITDA. You can notice that trend in the direct margin has slightly deteriorated. This is related to only COVID increased provisioning that we took, and Jacek will comment on this in further detail. This is all for me now. I give the floor to Jacek.

[Jacek Kunicki, executive]

Thank you, Jean-François. Good morning, everyone. Let's start the financial review on Slide 13, where we present the highlights of the quarter. So our Q2 results were strong with both revenues and EBITDA posting a growth. The growth was driven by our value strategy, coupled with continued very strong cost savings. These helped to offset the first adverse impacts of the COVID crisis already visible in our results. Lower CapEx reflected a slowing down our investment spendings in anticipation of a potential shortfall in real estate sales. Finally, we generated particularly high level of cash this quarter. This stems from strong underlying performance and also from a significant shift of payments to the second half of the year.

Let's review the top line on Slide 14. So our Q2 revenues expanded by 2.5% versus the second quarter of 2019. The key underlying trends were unchanged for Q1. Revenues from core future-proof areas continued their very high pace of growth and they increased by over 8% year-over-year. There were 3 main reasons for this extraordinary dynamic. Firstly, core subscription services, so convergence, mobile-only and fixed only. Their combined revenues expanded by 2% to 3%. This was less than in Q1 only due to the fact that we had a 50% drop of roaming revenues, a direct impact of the COVID crisis. On the other hand, there is strong underlying growth accelerated, driven by better ARPO trends in mobile and in fixed broadband. This benefited from the continuous implementation of our value strategy.

Please note that we have a turnaround in broadband's only revenues as they grew this quarter for the very first time in many, many quarters, thanks to the improving ARPO. The second reason for the overall revenue dynamics was ICT, as these revenues were up by 46% year-over-year, almost by as much as in Q1. This combined the contribution of BlueSoft and an over 20% organic growth of the revenues, achieved thanks to a project pipeline developed still before the start of the pandemic.

Finally, similar results in Q1, mobile wholesale revenues benefited from higher voice traffic, driven by the pandemic. It's also worth mentioning that equipment revenues were down only 13%, as demand for devices recovered relatively quickly after the end of the lockdown. Looking forward, despite the solid H1 figures, we do not expect to achieve revenue growth for the full year. It is due to 3 main reasons: firstly, the B2B segment. Our H1 revenues benefited from exceptional growth of ICT, additionally fueled by the acquisition of BlueSoft in the middle of last year. Due to the crisis, we have a weaker sales pipeline for H2. In addition, we will have a much higher comparable base as BlueSoft was already included in our results in the second half of 2019. Furthermore, companies were shielded from the economic crisis in Q2 by the help of the government. As this will not be as much of a case in H2, they might start to optimize their big purchases, both in ICT and in telco.

Second reason. Secondly, this will be -- we will be affected by a further contraction of roaming revenues. This has already been visible in Q2, but this will especially be visible during the summer period. And lastly, we anticipate a smaller growth of wholesale revenues versus what we have seen in H1, as this was largely driven by the lockdown.

Let's switch to the EBITDAaL performance on Slide 15. Our Q2 EBITDAaL after lease grew by a solid 10% year-over-year. This included a drop of the direct margin, offset by a very strong savings in indirect costs. So first, our direct margin was PLN 56 million down year-over-year, and this was due to over PLN 40 million of additional provisions that we have booked, which were driven predominantly by the COVID crisis. These combined an additional allowance for prospective bad debts as well as other provisions for other future-risk areas. Lower direct margin was more than offset by very strong results in indirect costs. They fell by as much as 13% year-over-year. Substantial part of this was achieved thanks to the mitigating measures discussed earlier on, PLN 64 million from curtailment of employee benefits, but also savings in many, many other cost areas. These came on top of the ongoing cost-transformation program realized for the third year in a row.

Our H1 EBITDA is up by 8% year-on-year. The strong performance was much needed, ahead of the challenges that are expected in the second half of the year. It gives us more confidence that we had, after Q1 results, in our ability to deliver the EBITDA growth for the full year of 2020. However, we are aware of the potential risks in H2, including more bad debts, and we will monitor the impact of the crisis on our outlook on a continuous basis.

Let's now look at the bottom line discussed on Slide 16. So for Q2, we posted a PLN 52 million net profit, which was similar to the amount posted in the second quarter of last year. This combines a strong growth of EBITDA and also a number of cost elements that increased below the EBITDA. Firstly, continued investments resulted in higher depreciation. This was more visible than last year because 2019 benefited from the extension of certain useful asset lives, and this is not the case in 2020. Secondly, we sold less real estates due to the COVID-driven tougher property market. This translated into around PLN 40 million lower gains from disposals. Finally, on the positive side, our net financial costs were PLN 24 million down year-on-year due to less interest costs and the strengthening of the Polish zloty as it regains some of the values since the end of Q1.

Over to CapEx now on Page 17. Our economic CapEx in H1 exceeded PLN 800 million and was 14% below the H1 of last year. As a reminder, from this year on, we look at the CapEx taking into account both, the investment spending and also the inflows from the sale of assets. We call it economic CapEx or eCapex. The pandemic adversely affected the real estate market, as mentioned before. And in result, we anticipate less proceeds from the sale of these assets versus our original goals. In order to compensate that, we have slowed down some of our investments in areas, including network, fiber and IT. In addition, we've experienced some difficulties to execute the investment projects due to lockdowns of some of our customers' premises. As a result, we anticipate eCapex for 2020 in the range of PLN 1.7 billion, PLN 1.9 billion, so in line with the original projections.

Turning to cash flow generation. This is visible on Slide 18. Here, we generated over PLN 400 million of organic cash flow in Q2, significantly more than a year ago. The net cash from operating activities, before working capital, expanded by more than PLN 100 million or 20%. So this is very strong results. This was driven by strong growth of the EBITDA and by lower interest payments, reflecting different timing but also lower cost debts. It was coupled with PLN 86 million less cash outflow for CapEx. Finally, we've reported an exceptionally positive change in working capital. And here, please note that over PLN 100 million of this resulted from a shift of social security payments from H1 to H2, which was allowed under the anti-crisis legislation, so please have that in mind when you forecast our cash flow projections for the second semester.

Now finally, let's take a look at the leverage on slide -- on the next slide, Slide 19. Our net debt is lower by PLN 300 million since the end of the -- of last year, reflecting our positive cash generation. Our leverage is also slightly lower with net debt now at 2.1x the EBITDA. You will have noticed that the duration of our debt is below 2 years as we have significant loan facilities maturing in May and June of 2021. And however, here, please note that these are loans from the Orange Group, and we are already in discussions about their refinancing. So summarizing, we have a solid structure of the balance sheet and a safe financing position. Thank you for your attention. I hand the floor back to Jean-François for the conclusion.

[Jean-François Fallacher, executive]

Thank you, Jacek. Let me wrap up our presentation today. Our commercial and financial performance for Q2 and the entire H1, you have seen it proved that our fundamentals are strong. Our core business is resilient, and we have shown that we can adapt to unprecedented challenges. As I already mentioned in the beginning, however, we remain cautious concerning the second half. Jacek mentioned the reasons. You have them also enumerated on this slide. Nonetheless taking into account the strong performance that we are posting today on the first half and the mitigating measures that we have initiated, we have, I would say, more confidence than previously in our ability to reach our full year growth target. Obviously, we are continuing to monitor the situation on a constant basis.

Now as you know, I am leaving Orange Polska at the end of next month. I accepted the offer from the group to take the position of the CEO of our Orange Spain. I want to state here, in front of you, that I was -- I am very proud that I was part of the Orange Polska management team and part of this organization for the past 4.5 years. I think, together, we managed during this time to break a multiyear negative trends and proved that, in Poland, the growth is possible. Now I am very pleased that my successor will be Julien Ducarroz. I worked with Julien very closely in Orange Romania during 5 years. I'm convinced that he is the right person to continue this turnaround of our company and that -- is the right person to continue bringing it back to the road of growth and value creation. I will ensure a smooth transition of my responsibilities to him during this summer and hand him over on September 1.

Thank you very much for your attention. Once again, thank you for those of you who joined us physically in the middle of the summer, and we are ready now for your questions.

[Leszek Iwaszko, executive]

Thank you. We have questions from the floor. We start, as usually, please, Pawel.

[Pawel Puchalski, analyst]

Pawel Puchalski speaking, Santander. Can you hear me?

[Jean-François Fallacher, executive]

Yes, very well.

[Pawel Puchalski, analyst]

Well, so let's start. One of the first slides, you canceled out -- well, you said it earlier, but now officially, you are canceling your growth for top line. But this is not enough. Well, canceling growth is -- I would like to know whether it should be flat because there's one thing missing. It should be said, we are expecting flat revenues or we are expecting decline in revenues? You are constantly delivering, providing us with growth flat. And suddenly, it's nothing but canceling out growth. That would be my first question.

[Jacek Kunicki, executive]

So Pawel, I think what this reflects is that we have high uncertainty over the top line with a lower possibility to compensate that on the EBITDA side. And then what we've -- the main uncertainties on the top line, this is basically, first of all, roaming. Second of all, the level of revenues that we will be able to generate from ICT. This is much less of a recurring business than our standard telecommunication services. Continued, I would say, uncertainty over the level of sales of equipment, and that basically led us to decide not to guide for revenues for this year. We're not anticipating a tragedy. We're merely reflecting on the fact that this is less predictable than it was before and more driven by one-offs. You will have seen that already in Q1 and Q2. Revenues were driven up significantly by ICT. They were driven down significantly by loss of equipment revenues and also roaming. And they were again driven up by more wholesale revenues. So not wishing to be, I would say, in a position to revise or to comment this every forecast that we make. We've decided, well, not to guide for growth and not to provide a very specific guidance is what I'm saying. We're not forecasting some kind of a steep decrease. We are -- we know that we are -- core of our revenues are very resilient, especially Internet. This proved to be very resilient. And so those revenues that are driving our margins, they are performing very well so far. We expect them to continue to perform well. I think the uncertainty is rather in the lower-margin revenues, which might be much more volatile.

[Pawel Puchalski, analyst]

Okay. And so coming back, well, I've heard a lot of times repeated, uncertainty, no tragedy. Well, shall I read it as we expect decline, but we don't want to say? But because we are not forced to say anything, it's better to say nothing than to say decline?

[Jean-François Fallacher, executive]

Pawel, we can play on words and discuss. I think this is very clear. We just want to be cautious on what we are telling you about revenues in H2. That's all. I mean, as Jacek is rightfully saying, there is no drama. We do not expect a sharp decline, especially after what we see in the first months after COVID. However, again, in ICT, there are some question marks. In B2B, there are a few question marks. On devices sales, I mean, obviously, we've lost some revenues in H1, and we're still in the middle of this pandemic. So some people are talking about a potential, which we hope not, but the future lockdown. So we're just cautious. That's all.

[Pawel Puchalski, analyst]

Another question on fiber, in general. Firstly, well, I need to address FiberCos. It was a very hot topic recently. And you sell things today. And I want to make sure, are you looking for a partner for new projects? Because you said a moment ago that you are looking to reduce your future CapEx or you are taking into consideration an option to invite partner to your current, I don't know, PLN 3 billion worth of investments. So would you potentially invite partner or sell your current fiber network? Or we are just looking for a partner for future investments?

[Jean-François Fallacher, executive]

So it's -- actually, the project is something -- it's a mix between those 2. So what we are aiming to is to clearly creating a vehicle, which will, on one side, take what we call the new build for the future. So we are looking at the upcoming 5 years. So that will be the role of Julien Ducarroz, the new CEO, to come back to you with a new strategic plan probably in the beginning of next year with this plan. So it's about, indeed, the new build. But we are also looking to put in this vehicle a piece of the existing build to make this company more attractive to financial investors clearly. So it's too early to tell you exactly how much will be these new builds in terms of number of household passes and how much -- what share of the existing footprint we would like to put in there. That's precisely what we are fine-tuning right now and going to present to the investors actually very soon.

[Pawel Puchalski, analyst]

Okay. And the final question also on fiber. Well, for many, many quarters, you've been so proud of your fiber investments. You are today so proud of your high fiber additions. And suddenly -- well, I understand you are cutting CapEx because you do in uncertainty. But I noticed somewhere there that you are also cutting CapEx on your fiber investment, so…

[Jean-François Fallacher, executive]

We're not, not on fiber.

[Pawel Puchalski, analyst]

I found it somewhere I think, or maybe, it's my mistake. But I think it said somewhere that fiber is also cut. So is fiber…

[Jacek Kunicki, executive]

We were saying that some of the projects were delayed, not cut.

[Pawel Puchalski, analyst]

Well, the wording between delayed and cut. So we are not cutting, you are delaying fiber?

[Jacek Kunicki, executive]

No, no, just to be very clear, we are not cutting our fiber investment. We are not delaying our fiber investment. There was linked to, again, this lockdown that started mid-March, a bit of a slowdown. This is to that. That's all. Fiber is something we are preserving, I mean, especially after what we saw during these last months where it's been very resilient and there is even more demand than before.

[Pawel Puchalski, analyst]

Okay. And very last, I think. Well, your results are strong. I know there is uncertainty about second half, but again, results are strong. Free cash flow was strong. I know it's one-off driven, but still your net debt is down. Your net debt-to-EBITDA is 2.1. It looks like quite a healthy situation. And then you are saying you are cutting CapEx. Is it too early to cut CapEx? I know that your real estate in 2020 will not go as smoothly as they were expected by you. But you are cutting CapEx right after, well, 4 months of problems. It looks like either you've got long-term visibility and the outlook is not great, or maybe you've got your internal net debt-to-EBITDA targets, which might limit future dividend. Which of this might be correct?

[Jean-François Fallacher, executive]

Yes. So just to say again what Jacek has been saying. The reason why -- first of all, we are not cutting CapEx, we are delaying some of the projects that can be delayed, not fiber but other projects. So it means that instead of engaging them now, we will prefer to engage them probably next year. And the reason why we do that is because we are cautious. We want to respect our eCapex budget, basically. And we are worried that we will not sell as much as real estate as initially anticipated. That's the only reason. There is no long-term outlook reasoning in this. This is just being cautious, respecting our budget in terms of eCapEx, that's it. I mean, clearly, we believe Orange Polska is on the good path to turnaround. You have seen it. These results of the first half are confirming that. So if you look also at the country, Poland, compared to other European country and the macroeconomics of the country in these complicated times, I mean, this is quite a positive outlook. Actually, if we look further than this crisis because we all hope that COVID will be gone in -- we don't know exactly when, but in some time from now.

[Pawel Puchalski, analyst]

And that's why I'm surprised you are cutting your CapEx -- you are delaying your CapEx right now. Well, okay.

[Jacek Kunicki, executive]

These are very uncertain times right now. This is just a response to those uncertainties.

[Dominik Niszcz, analyst]

Dominik Niszcz from Trigon Brokerage. So just, if I may, if you could comment a bit more so that we could understand how flexible you are in this FiberCos project. So in Portugal, we had Altice extracting significant part of EBITDA at very high multiples, which could be understood that the infrastructure fund has lower weighted average cost of capital. So it kind of immediate value created for shareholders. So is this an option to extract a meaningful part of your EBITDA, like more than 10% into FiberCos and then sell it?

[Jean-François Fallacher, executive]

No, I mean this is not the way we are building this FiberCos. I mean the -- I would say, the strategic rationale behind this FiberCos is clearly, one, we believe there is really still room to deploy fiber on a profitable basis and creating value in Poland, further than the 4.6 million and the 5 million households that we are planning to build at the end of the year. So what we are really looking at is a way actually to share the necessary investments in a way also that would keep our room of maneuver, Orange Polska, for actually potential future 5G investments because let's not forget, even if I was explaining this auction has been delayed for the frequencies, we hope that this auction will take place the sooner as possible, and we will need to pay for spectrum, one; and second, deploy 5G networks, so we need CapEx for that. And as well, you all know, because this is what all our investors are requiring that at some point, we should return dividend. So this is the kind of equilibrium that we are having in mind, and this is the main strategic rationale of creating this FiberCos.

[Jacek Kunicki, executive]

No, I think this was clearly said. I think you're right about the lower cost of capital for the infrastructure funds. But while we may benefit from this, and this is one of the factors that need to be taken into account the idea of the project, it's not to 100% take benefit of the financial engineering. It has a much wider strategic rationale. And as Jean-François mentioned, it is about continuing to roll out and continuing to exploit the opportunity that we see, it creates really more long-term value. And I think it is important -- this long term is important in our thinking. We will be structuring this deal, this project to extract long-term benefits. It's not just for the short term. It's for the long-term benefits and value creation of Orange Polska.

[Dominik Niszcz, analyst]

Okay. So would you -- when do you think we could hear more inflow from your side on the project, like, end of this year or beginning?

[Jean-François Fallacher, executive]

Sorry, the future management will obviously keep you posted every quarter on the progress of this project, clearly.

[Dominik Niszcz, analyst]

Okay. And the second question, maybe if you could comment on the fiber in general because we had this very good quarter really in ARPO. So do you think this was kind of one-off COVID effect? Or do you see this as a new trend on the Polish market that this high-speed Internet is gaining?

[Jean-François Fallacher, executive]

I think it's both. It's quite obvious, I mean, probably most of you have been locked down with your families, in your apartment, or in your house with yourself working remote, probably your wife as well, the kids doing remote learning. So basically, more than ever, it is key and important to have a very good internet connection at home. So what we have seen is that fiber, but actually more generally, as you saw, fixed broadband was very resilient because people really, badly need it. So that is this one-off effect that you are describing. But it will stay because there is still the fear of a potential second lockdown, and there are still a lot of people still working from home. I mean, if we look at Orange Polska, we have still a lot of employees working remote. Not everybody came back full-time to their offices, as you can imagine. So this need is still there for time that we're not capable to say how many months it will last now, but I think it's really going to be deeply rooted in the mind of the consumers that the fixed Internet broadband at home is important. So this crisis has a positive side for us that is really reinforcing the need of -- and fiber is king in this problem, obviously. It's the king or the queen, whatever you prefer.

[Dominik Niszcz, analyst]

So in the retail business, do you think this pace of client additions could be maintained for the second half?

[Jean-François Fallacher, executive]

That, we will see.

[Dominik Niszcz, analyst]

Okay. And the final one, if you could address the mobile business, the mobile market. We saw Play adding extra promotion for mobile number portability clients. So could you comment on how is the situation here? And if you will see in the second half of the year still this ARPO effect from previous year's price hikes?

[Jean-François Fallacher, executive]

Yes. So yes, we believe we will see this effect from previous price hikes because, as you know, I mean, we've been doing it in such a way that it's not an immediate effect on all base but it's through a retention acquisition that these price hikes are taking effect. So the more time is going on, the more this effect is actually -- these effects are actually benefiting us. That's one.

Concerning mobile, it's quite interesting what happened. I mean, there was a complete freeze of the mobile network portability during this lockdown period. So because half of our retail network, not only ours, but our competitors was closed, people had something else in mind that the switching providers. So churn was almost 0 during this 1.5 months of lockdown. Now we are back to normal.

What we can see on the mobile network is that everybody is, first of all, it's quite a reasonable number of people that are parting between different operators, even if it's back to normal. So I will not comment what our competitors moves are on this, but we -- what we see happening on the market is still, I would say, very reasonable and value-driven moves from, I would say, the main key competitor.

[Leszek Iwaszko, executive]

Thank you very much. Let's now switch to our teleconference listeners. Operator, please?

[Operator]

[Operator Instructions] Our first question comes from Mr. Marcin Nowak from IPOPEMA.

[Marcin Nowak, analyst]

Just 2 questions from my side. I would like to clarify because it was said that it is considered the part of the existing fiber network may be moved to the FiberCo. Could you comment how large part of existing network and what would be the possible decision -- decision parameters for such a decision? Or what are the restrictions for the -- for not moving part of the network to the FiberCos?

[Jacek Kunicki, executive]

Thank you for the question. So as we mentioned, we are quite early on in the process. And to be honest, we are fine-tuning the answers to your question, as we speak. So I will not be able to elaborate on that extensively. What we can say is, we're not ruling out to put some of the existing network into this vehicle. Well, regarding the parameters, this would obviously be long-term consideration, of which potentially part of the network moving, which parts of the network could give us the good benefits. Obviously, fiber is critical for us. Fiber is a strategic asset. That's all we can say right now. It's -- we are considering to move part of the existing footprint, this part which will create the most value for us in the long term.

[Marcin Nowak, analyst]

Sure. And regarding the monetization model, do you plan for the FiberCos to work as a wholesale operator for all operators in Poland or only for Orange Polska purposes?

[Jacek Kunicki, executive]

No, I think realistically, if we're saying that we want to extract value, this would need to be value extracted through an open network, open-access network. This is probably the only model which enables you to extract reasonable value.

[Marcin Nowak, analyst]

Okay. And second item, I just thought that on the Orange France call, the CEO of Orange said that share of Huawei in Europe that will shrink. And that the decision regarding Huawei presence 5G in Poland and the [indiscernible] could be decided. Could you comment on your plans regarding possible decrease of -- or retention from use of Huawei in 5G network in Poland and maybe then in 4G and what would be the possible cost for it because I also remember that just this week you all said that the cost for Poland, in general, for mitigation from Huawei will be quite large. And what are your thoughts about?

[Jean-François Fallacher, executive]

So first of all, the question of Huawei, the risk concerning Huawei is, obviously, what you see happening in major geographies is the question of Huawei as a key supplier of 5G. So what we are clearly stated and I was recently having an interview in the Polish press and I reiterated the fact that obviously, you're limiting the number of suppliers in this field. Whatever the reason this would be for, it would limit the competition, and therefore, might have implication on the future prices of 5G equipment, and therefore, our capacity to roll out as fast as it could the 5G network. So that's, I believe, still valid.

Well, at this stage, I think we are analyzing different scenarios, but it's much too early to have any statement concerning this matter as regard to Poland. Because we are, as you know, first of all, waiting for the nomination of the new regulator. His name has been published by the press recently. So he must still be nominated. Then together with the government, they will add some, let's say, security considerations in the future of 5G frequency tender, which are, as we speak, in discussions. So at this stage, it's too early to have a very firm, let's say, a standpoint on this matter concerning Poland, and therefore, concerning Orange Poland.

On the other side, we also -- I'm also reiterating what I'm saying to the press is that we are a citizen of Poland, and we will obviously comply to any rules or regulation that would be decided by the Polish authorities. That's very clear.

[Operator]

[Operator Instructions]

[Leszek Iwaszko, executive]

Let me maybe now follow-up with the questions that I received online from Konrad Ksiezopolski from Haitong.

There are 4 questions. First question, if you or Poland force telecoms to switch from Huawei network equipment on already installed 3G or 4G, what would be the cost for Orange Polska? This is the first question. Maybe I'll go -- we'll go one by one.

[Jean-François Fallacher, executive]

Well, at this moment in time, there is no such questions or discussions in Poland. The impact of that not only on Orange Polska on the sector would, obviously, if such discussion will take place, be major. And that would have a major impact on, obviously, the capacity of all the operators in this country to deploy 5G. So again, this is not what is -- I think the potential risk is around 5G.

[Leszek Iwaszko, executive]

The second question is, again, on FiberCos. So just to clarify, OPL plans or the plan is not to cash out on fiber but to invite business partner to finance further fiber outlook, so thus OPL future FTTH CapEx will be lower. An idea to invite business partner to FiberCos means that you consider speeding up or rolling out more than you expected a year ago. This is…

[Jean-François Fallacher, executive]

So the question is not to speed up, but the question is rather to find the right equation, which I believe we can continue rolling out, indeed.

[Leszek Iwaszko, executive]

The third question is, do you expect any speed up in real estate sales in the next quarters? Current situation on real estate market apparently shows some revival.

[Jean-François Fallacher, executive]

So we do not, unfortunately, expect a speed up, but rather, as you say, revival. And we see this also happening, so we have restarted this -- we have -- sorry, restarted discussions. So we hope the market will basically recover and that we will be able to start selling again just at the back-to-school period.

[Leszek Iwaszko, executive]

The final question is, do you expect receivables impairment to maintain -- to be maintained at around PLN 50 million level in the coming quarters?

[Jacek Kunicki, executive]

Well, I think what we -- how we stand versus the accounts receivable. First of all, the payment pattern that we have observed in quarter 2 was nothing out of the ordinary. Our customers continue to pay on time and the aging of receivables did not deteriorate versus the historical patterns. So from the, I would say, lag indicators, we do not see anything bad happening to the quality of our bad debt -- to the quality of our accounts receivable. Having said that, what we did provide for was the prospective future risk. And this is something which all companies must assess. And we have made simulations as to what could be the future risk on our accounts receivable, taking into account the consensus for the macroeconomic impacts of the recovered. Hence, the provisions that we took, the over PLN 40 million, which I mentioned, this was not just bad debt allowance, this was bad debt allowance as well as some cost provisions for other areas or commitments that we might not meet or it looks like we will not meet due to the slowdown of activity linked with the crisis. This is one of the most volatile areas and one of the areas which carries the most uncertainty for the future. So obviously, we will continue to monitor every quarter, both the quality of the accounts receivable that we observed in presentment and also the prospects. So the prospective approach for risk, and we will reflect that in the provisions. So that's what we can say right now. We will need to observe more data, both our own data as well as the macroeconomic outlook, how that will change in time.

[Leszek Iwaszko, executive]

We have one more question from teleconference.

[Operator]

The next question comes from Ms. Dilya Ibragimova from Citi.

[Dilya Ibragimova, analyst]

Congratulations on a good set of results. Just a quick follow-up on FiberCos. And just to -- maybe if you could share your thoughts -- I know a lot of questions have been asked on your approach to what include -- I think you did mention earlier this year and today that you're now considering including some of the existing footprint into the FiberCos and in addition to the new rollout. And then could you maybe give a bit of color, what -- why you have reconsidered what to put -- or are you thinking of potentially changing or adding existing footprint into the FiberCos? Is it driven by the appetite demand from investors or are you thinking that it will make the package overall more interesting to an investor?

[Jean-François Fallacher, executive]

Thank you very much, first of all, for your congratulations. And then just clearly, I mean, the reason why we are considering to put a bit of the existing footprint is indeed what you were just quoting is to make the package more interesting for investors because we would like this vehicle to start actually operating with some, let's say, existing revenues and EBITDA in order to make it more attractive, not only for the investor but also for the potential financing banks. So that's the reasoning behind that, indeed.

[Dilya Ibragimova, analyst]

Yes. And then in -- just looking at -- if you could give a bit more color on what -- how are you thinking about how much of the existing footprint to add into the package? What would be, from your side, key considerations? Is it the location or whether or not data fiber has been taken up? Yes, if -- yes, any…

[Jean-François Fallacher, executive]

At this stage, they will be premature. This is precisely what we are discussing with our counsel at this moment and fine-tuning. So that's premature.

[Operator]

We have a follow-up question from Marcin Nowak from IPOPEMA.

[Marcin Nowak, analyst]

Yes. Sure. Just one more follow-up because a lot of what said about this fiber capacity in your plans, and I just I want to ask a question in regards. If it turns out that after the careful deliberation about the potential benefits from value creation from FiberCos, it turns out that the more value will be created if you leave the network on your own balance sheet, will you prefer -- will you decide just not to create a FiberCos and not to invite an investor to it? Or the promise of the return to the dividend at some point will be more -- will weigh more in the decision today?

[Jean-François Fallacher, executive]

No, I mean, if we -- to be very precise and very clear, if we are working very seriously and we, believe me, we engaged a lot of efforts and energy into creating this FiberCos is that we want to do it. So we do not want to continue rolling out on our balance sheet. I mean, yes, we would not speak about that. We would not actively do all this work, all these proprietary work. So now this -- we are beyond this point. I mean, we really want to pursue this direction.

[Jacek Kunicki, executive]

And obviously, we are convinced that creation of this will create value for us in the long term because this will mean that there is further rollout. There is further roll for a number of years, and it means that we have more opportunity to reap the benefits, both of the retail and wholesale sales, from this further rollout. So I think we are quite convinced today that there are significant future benefits from continuing this project and continuing rollout in such a way.

[Marcin Nowak, analyst]

Yes. Sure, sure. But you said that it seems that the most -- this nimble model for extracting value in the long term will be the wholesale operator. And the wholesale, you mean that you will simply invite all of your competitors who currently have not such large exposure on the fixed broadband market to be in this project. And I'm just wondering if this part of the equation is also considered in it.

[Jean-François Fallacher, executive]

Yes, this is absolutely considered. As Jacek was saying, clearly, this vehicle will be an open-access vehicle. Like some of the fiber in Poland is already today because the fiber we are deploying under POPC is an open-access regime. So some other operators which are having fiber in Poland are opening their fiber. So this is definitely something that we have more than taken in consideration in the, I would say, the models and the equation of this FiberCos, clearly. I remind that basically, T-Mobile is already having access to a big chunk of our fiber infrastructure.

And I remind that all other operators went into this convergent field so -- with different type of agreements. I mean, obviously, you will remember that our competitor, [Foreign Language] is the convergent operator and Play made a deal with a cable operator. So we are not fearing this. On the contrary, I mean, this is something we are quite confident with. We are not fearing competition. On the contrary, we believe that this is quite interesting to see that all our competitors are coming to the field. We have chosen to the battlefield we have chosen. So clearly, this is something we have in mind. And we have taken, obviously, in account, before we took this decision, to go in that FiberCos direction.

[Marcin Nowak, analyst]

Sure. Just one more thing. It seems that you are convinced that you will proceed with this project, but you still haven't talked with investors, possible investors, [indiscernible]. And what it depends on the financial financing parameters that are not attractive, not in all? What will make you come for the budget in time?

[Jacek Kunicki, executive]

We haven't gone through the -- speaking with the investors. So I think these are very good questions, and I'm sure we will be in a better position to answer those in a quarter time, but they are not that kind of questions that I can answer today. Clearly, what we are saying is that we believe that there is a value. There's a long-term value. This is a project which has an aim to create this long-term value. We're not a distressed company, so this is not about lowering the leverage. This is about creating long-term value for the company. And really, we are in early stage of this project. So we will inform you whenever we have meaningful progress in it and we are equipped with more information, more discussions so that we can share this information with you, but not yet today. This is quite early. We are discussing about the ideas. We are discussing about our goals. And well, you need to let us work on developing this project further.

[Leszek Iwaszko, executive]

And I think we have last question that was asked online from an investor. The question is about roaming. How does roaming impact? What is the impact of roaming on revenues and on profitability resulting from the pandemic?

[Jacek Kunicki, executive]

So I think we've lost about 50% of roaming revenues. The impact of this on quarter 2 was not yet hugely significant because this is not a quarter which is a peak season. So I would say, small tens of millions in terms of revenues and dozens of million in terms of the EBITDA. The main risk for the roaming, the main impacts that we do envisage, this is quarter 3, which is a holiday period. And we will need to see how many visitors we do have into Poland, which generates business roaming and then how many Polish will go abroad, so that we will have extra roaming revenues and cost from this. We do expect this sharp contraction year-on-year to stay -- to be in place in quarter 3. And hence, the impact in absolute terms that I would expect for Q3 would be more than we observed in Q2.

[Leszek Iwaszko, executive]

I think we have no further questions. So I think we can conclude today's presentation. Thank you very much for coming. Thank you very much for listening to us. If you have any follow-up questions, you know how to reach us. So again, thanks, and see you back in October. Thank you.