Deutsche Telekom Ag S/Adr

Good afternoon and welcome to Deutsche Telekom's conference call. At our customer's request, this conference will be recorded and uploaded to the Internet. May I now hand you over to Mr. Hannes Wittig.

Good afternoon, everyone, and welcome to our first quarter 2021 conference call. With me today is our CFO, Christian Illig. He will first go through a few highlights and we'll talk about the quarter's financials. And after this, we have time for Q&A. Before I hand over to Christian, please pay attention to our usual disclaimer, which you'll find in the presentation. With that, I hand over to Christian.

Thanks, Hannes, and also welcome from my side. Today I wanted to share some highlights of our strong Q1 results. We look at our first quarter as a strong step towards our full-year ambitions ahead of our Capital Markets Day next week, where we're going to lay out our midterm ambitions. Ahead of our Capital Markets Day, we decided to keep this meeting a bit shorter and you will have the opportunity to listen to Tim and all the other board members at a much greater detail. So let me dive into the highlights of this quarter. You saw T-Mobile's excellent results last week. They delivered strong customer and EBITDA growth, and they raised their full year's guidance. Today, it's the time for our ex-US business and obviously for the group guidance to be raised as well. This follows a very strong quarter in the first three months of this year, also on the European part of the business, but we're getting into more detail later on. T-Mobile continues to make great progress with its merger integration, and their 5G leadership is becoming more and more evident as you take a look to the ongoing network tests. Already 20% of Sprint customers and 50% of the total traffic has been migrated to the T-Mobile network and obviously creates a much better customer experience than it used to be. Also, the churn levels remain low. At its March analyst day, T-Mobile outlined a strong and long-term plan and its financial targets. And it's also planning to basically return up to 60 billion U.S. dollars to shareholders over the course of 23 to 25. And this should happen via buybacks. We're taking a look at the European part of the business. We had an excellent quarter. Despite the ongoing corona headwinds, we delivered a 4.6 organic EBITDA growth. We see a strong momentum on customer acquisition. We made strong progress on 5G and fiber. And the German regulator approved our 10-year fiber wholesale agreements, but we'll get into more detail later on as well. Despite corona, we managed to grow service revenues in the U.S., but also in the European operations. And let me remind you, as you may recall from my AGM, we also sharpened our climate targets. And we want to reach climate neutrality for our scope one and two emissions by 2025, which is five years earlier than the old plan. And for scope three, we want to achieve... climate neutrality by 2040, which is 10 years earlier than the original plan. And we have the opportunity to dive into more detail on this one also at our Capital Markets Day. So let's move to page number four, take a look at the adjusted EBITDA. All segments, as you can see, contributed to our strong and consistent EBITDA growth. The European segment has grown on an organic basis. now for 13 quarters in a row, and in Germany, it's already 18 quarters in a row. The overall organic EBITDA growth was up more than 8% year over year. Next page on networks. This is the basis for a good customer and financial results. In Germany, we are already covering 80% of the population with 5G, and we raised our target by the end of the year to 90%. In the U.S., we are approaching nationwide coverage with our extended range 5G network, and we already reached about 100 million pops by the end of the first quarter with 2.5 gigahertz, and our target for the pop coverage by the end of the year is 200 million. Our fiber deployments in Germany and in Europe are on track. In Germany, we passed around 140,000 homes this quarter. We announced various deployments, including the plan to pass 1 million homes in Berlin over the next six years. Let's move on to page number six. Importantly, what you can see is our customer results remain strong, and this is despite the pandemic. 1.2 million new postpaid customers in the U.S., 300,000 30,000 contract customers on the mobile side here in Europe, 160,000 new broadband customers, of which 93 are coming from Germany, and 80,000 new TV customers. This is stronger than our performance in the last year. And remember, the last year in 2020, in Q1, there wasn't a pandemic happening so far. So today... On page number seven, we raise our guidance for 21, both in the U.S. and ex-U.S., both on EBITDA and on free cash flow. Obviously, we reflect in our overall numbers the upgrade of T-Mobile, which has been communicated last week. On top of that, we will raise the EBITDA IL target in the European operations from $14.3 billion to $14.4 billion, which is an increase of $100 million. And we're doing the same on the free cash flow. We're raising the target from $3.5 billion to $3.6 billion, which is also an increase of $100 million coming from the European operations. So all up, we're increasing the EBITDA guidance by $200 million for the end of the year and also for the free cash flow. So it's an equivalent contribution from the U.S. and the European operations. Let's get into the financial results, which are shown on page number nine. Obviously, these financial results are massively impacted by the consolidation of the Sprint merger as of April 2020. But also on an organic basis, you see that we have grown revenues by 7.1% year over year, and that service revenue came in with a growth rate of 2.4% year over year. As I said earlier on, organic EBITDA growth was up. 8.3%, and on our portfolio ex-DUS, it was up by a strong 4.6%. The adjusted EPS was down by 7%, which is roughly $100 million, and that can solely be explained by a drag which we're facing from the fixed price option from SoftBank because the share price has come down by $10 relative to Q4. and that obviously had a negative impact on its valuation of the fixed price option. Free cash flow has doubled year over year, but be aware that we have basically unwinded $700 million of factoring in Germany in the first quarter of last year, and obviously that is obviously impacting these numbers here. Net debt, including leases, is up to $129.5 billion. and that very much reflects two effects, the C-band auction, some additional lease liabilities in the U.S., and some headwind from a stronger U.S. dollar relative to the previous quarter. Let's move over to page number 10. On page number 10, you see that we're consistently growing on both sides of the Atlantic, the EBITDA up quarter over quarter over quarter. Last quarter, it was 10.1% in the U.S. and 4.6%. on the European operations. Let's move over to Germany and its results in the first quarter. In Germany, our revenues grew almost by 2%, and we have an accounting change here coming from the IT services industry. If we would have factored that one in, the growth would have been 3%. We grew our EBITDA by 3.4%, and I think what I would highlight is we've seen an accelerating growth EBITDA growth in the German business. The accounting question I just alluded to obviously is impacted by IT services, which are not coming as a high margin, so it wouldn't impact the EBITDA. Page number 12 on the service revenues. Obviously, you see that the service revenues are very much driven by the strong fixed line results. Overall, we grew service revenues by 1.7%, and the main driver was, as I said earlier on, the retail fixed service performance. Mobile services were on a reported basis down by 0.8%. If you factor in the COVID effects, meaning lower roaming and visitor revenues, then our revenues would have been up 1.2%. And if we would further adjust for the ongoing empty hour cuts, it would even be 1.5%. Move over to the next page, page number 13, positive mobile KPIs. You see that our mobile customer growth is steadily growing, and that has also been supported by the low churn which we're having in the German business. Page number 14, fixed commercials. Our fixed commercials are really strong. We added another 93,000 broadband customers, which is 10,000 more than last year, and we assume that this is going to be around a market share in the first quarter of 50%. The line losses remain at a low 29,000. The TV net ads were lower than in the previous quarter. We had a deliberate discussion on this one, and it's basically attributed to the shop closes, which we're still facing here in Germany. and the demand for our fiber connections remains strong. Page 15, our strong broadband customer growth obviously drives our broadband revenue growth, which was 6.5% in the first quarter. Organic retail fixed revenue growth was 4.1% year over year. We also saw a better performance in other fixed retail revenues to 0.4% growth This is partly impacted by IT business, some delays which we face in the fourth quarter, and some exceptional public sector business wins. These tailwinds obviously mitigated ongoing corona headwinds. Moving over to wholesale, that revenue number declined by negative 2.4%, and there are two factors impacting that results. First, the shift to IFRS 16 in 2019. allowed us to basically go for a shortened amortization period of one-time fees. This effect is now rolling over. And secondly, since the beginning of the year, we're no longer allowed to charge extra traffic-related fees under the old contingent model. Therefore, there's going to be a negative impact as well. From the next quarter onwards, our new 10-year commitment model comes into force, which has been approved by by the B&S on April the 1st. So let me deep dive a little bit into this one. As we said, and we also said it in the previous call in the last quarter, we're really happy to strike deals with our wholesale partners on a long-term basis. These drive our fixed broadband revenue fees and to some extent also secure volumes. And since the fact that they're long-term, meaning 10 years with a three-year term, extension period that gives us good visibility in the development of our wholesale business. Overall, what you can see is that a large percentage of the excess revenues can be secured with these long-term contracts. Importantly is to mention that all these contracts actually provide a consistent and a creative more-for-more monetization framework on the FTTH side. and we have the opportunity not longer have any kind of ex-enterprise regulation, and it allows us to basically charge a premium for smaller local areas, which gives us a good monetization opportunity going forward. The FTC bitstream fees, which we proposed and negotiated with the BNSR, they're coming in a little lower, and let me explain what's going to happen. So when it comes to the effectively built terrorists, I can tell you that for 50 megabits per second and 100 megabits per second, we're seeing a negative impact in the years 21 and 22 because of price declines. In 23, we will basically reach the 2020 price levels again. And then we have an increase until 25, which gives us an extra revenue. And that increase is about 10% higher than what we're seeing right now. And from 25 onwards, we're going to see on these two traffic price bands a stable development until 2030. On 250 megabits, we actively see a decrease over the whole period of time. But let me remind you, super vectoring, we're happy with the customer results. only reflects about 3% of our bitstream access traffic, which we're seeing it right now. So from this perspective, be aware that we're going to see some drags in the years 21 and 22, a break even in 23, and then obviously a price increase onwards. Let me move over to the U.S. and the usual two slides which we're having on the U.S., Starting with page number 17, organic EBITDA was up about 10% on an IFRS basis year over year. On page 18, you see that we added another 1.2 million postpaid subs, of which almost 800,000 were phone subs. And this puts T-Mobile U.S. again when it comes to customer acquisition on the top spot in the U.S. market. T-Mobile also outlines plans for the ultra-capacity coverage, as I mentioned early on, that is a pop coverage of 200 million pops by the end of the year 2021 and 250 pops by the end of 2022, and 90% of the U.S. population in the year end of 2023. As previously mentioned, at the end of March, the 2.5 gigahertz coverage was around... 140 million POPs. At the analyst day of T-Mobile, T-Mobile also announced the higher synergy target, which is 7.5 billion, and already they have, as I said earlier on, migrated 50% of the sprint traffic already onto its network. So what you're seeing is the synergy captures coming in higher and better than originally anticipated, and it will yield to higher synergy results overall at the end of the process. So let's move over to page number 19 and take a look at the European segment. The organic revenues returned to a slight growth despite the headwinds of the pandemic. We've seen a very strong EBITDA contribution of 4.1% year over year, and that was driven by both net margin growth as well as reduced indirect cost. Page number 20, you see it's not coming at the expense of customer growth. We have all up very strong results in the European segment with 150,000 mobile customers, almost 60,000 broadband customers, strong momentum on the FMC penetration, and also a stronger TV business. Page number 21, on T-Systems, look, you see that we cannot – compensate the legacy business decline in T-Systems right now with our growth segments, which is predominantly public cloud and digital solutions. So we see a slight decline here. On the other hand, we're cautiously optimistic that we're going to see a stable outlook for the EBITDA. And we've seen some encouraging wins also in the first quarter when it comes to new deals. So you hear me being a little bit more optimistic than I was in the previous quarters, but I would say seeing is believing. So next one is page 22, group development. Our strong revenue and EBITDA growth continued. Headline growth benefited, obviously, from the inclusion of the Austrian Towers and GD Towers. That said, organic financials were also strong with revenues 5% up and EBITDA even 9.7% up. Let's move over on the next page, 23, to T-Mobile Netherlands. Also, the Netherlands continued to perform well. The broadband and the mobile net ads were negatively impacted by the shop closures. Still, you see a growth of 11,000 broadband net ads and 12,000 mobile net ads. Organic revenues were up by 0.6%. And if you include the COVID impact, meaning roaming a visitor effect, it would have been 2.1%. GD Towers on page number 24. You see that we added organically about 1,200 sites over the past 12 months. The recurring revenue grew at 3%, EBITDA at 7% year over year, so another strong performance. And I would say I'll leave it as this on the overview on the segments and moving over to some financials. So page number 25 on the free cash flow. Free cash flow has doubled year over year. Again, as I said, be aware that we have basically unwinded $700 million of factoring in the last first quarter of 2020. The net debt increased to almost 130 billion. That reflects a combined impact of the C-band auction, which accounted for 8 billion euros, another 1 billion euros from additional leases from the U.S., and we had a negative impact from the currency, which was almost 4 billion euros, which was coming from a higher or a stronger dollar. Our adjusted EPS, again, was slightly below 7%, and that is very much driven by the SoftBank auction. So from a leverage ratio, let me just dive on this one. You see that our leverage ratio has increased, including leases, to 2.98. And if we exclude the leases, it's 2.6. I think we're going to give you... much more detail what we expect midterm, especially when it comes to EBITDA and free cash flow growth. That will be a key driver for the deleveraging. And I think what we should bear in mind is we're going to see peak leverage ratios in the years 2021 and from 2022 onwards, they should decrease. So with that, I would leave it with my short presentation and open it up for questions.