Deutsche Telekom Ag S/Adr

Good afternoon and welcome to Deutsche Telekom's full year 2022 conference call. As you can see, with me today are our CEO, Tim Hüttges, and our CFO, Christian Illig. Tim will first go through his highlights and also provide a short review of our Capital Markets Day targets and how we track against them. This will be followed by Christian, who will talk about the segments in somewhat more greater detail. After this, we have time for the Q&A, which will be conducted through our WebEx. Before I hand over to Tim, please pay attention to our usual disclaimer, which you can find in the presentation. And please also note that the conference will be recorded and uploaded to the Internet. And now it's my pleasure to hand over to Tim.

Thank you, Hannes, and welcome, everybody, to our fourth quarter and full year 2022 results call. As you have seen, record numbers which we can provide on both sides of the Atlantic and as well another growth guidance for 2023. We will also do a halfway review on how we are tracking with regards to the four-year targets which we have laid out at the Capital Markets Day in May 2021. And we will put that in context of our longer-term results. These are challenging times, no doubt about it. Economies are on the brink of recession and inflation is rampant. And as you can see Deutsche Telekom keeps delivering and therefore there are three main themes for me coming out of the review today. First, growth. Possible on both sides of the Atlantic. Second, consistency. And third, reliability. T-Mobile had another strong quarter, wrapping up another great year. A lot of growth and consistent growth. Their 2023 guidance means that they will fully deliver what they promised in 2021, and that's reliability. And in Europe, we also had another strong quarter, another great year. Here, too, a lot of growth. and a highly consistent delivery, just as we promised in 2021. Actually, in most areas, we are ahead of track what we have promised. And that's what we want to keep delivering to you, reliability, consistent, and growth. On both sides of the Atlantic, I'm very happy and grateful that this has been rewarded by A strong share price in 2022 and more recently over 100 billion market capitalization finally. But of course, we won't stop and we don't want to stop here. On this page, you can see some of the highlights of 2022 and of our performance since the capital markets day. Let me start with our key financials on page five before moving on to the organic view on page six. You can see strong growth in revenues, in EBITDA, in free cash flow, and in earnings. For the full year, we delivered 40.2 billion adjusted EBITDA, of which 14.6 was generated ex-US. You can see 11.5 billion free cash flow. Wow, it's a big number. of which 3.9 billion were coming from ex-US, and we see an earnings per share of €1.83, which is a record high as well. All of these are better than we expected at the beginning of the year 2022. On the next page, we show our organic growth in 2022. All segments grew. All segments. Including TIS systems. Despite some one-timers in the last quarters are what we talk about later. When it comes to our most important operational KPIs, organic service revenues grew by 3.7%. Outside of the US by 1.8%. Organic core EBTR grew by 6.8%, XUS by 8.4%, sorry, 4.8%, and this shows that we are ahead of most telcos in our sector. Germany has now delivered 25 consecutive quarters, which is, by the way, six years of organic EBITDA growth, and Europe The segment has delivered now 20 quarters, which is five years, year over year, in a row, consistent organic growth. Going to page seven and looking at the free cash flow. We show the year-on-year bridge. Our 30% growth in free cash flow was driven by higher free cash flow from operations, the biggest piece, Higher year-on-year capex was mitigated by lower lease payments, mainly reflecting T-Mobile's prepayments in the prior year. And our adjusted net income grew by 55% year-on-year, well ahead of the initial expectations. This strong growth is mainly explained by 3 billion higher EBITDA, partially offset by higher tax and minorities. also benefited from various non-recurring items, mainly in the financial results. More about this later. Going to a chart I'm very happy about, which is the net debt situation. One of the areas where we still need progress towards our 2021 capital markets targets is the area of leverage. And you know that we have given ourselves a strict target, which is to have a leverage in the vicinity of 2.75 times by the end of next year. We ended this year with 3.07. Incremental lease liabilities, mainly resulting from the Crown Castle lease extension, were offset by strong free cash flow and EBITDA growth. Remember, at the end of Q3, we stood at 3.34 times. Surely the dollar has helped since then, but I'm still happy to see our leverage coming down by 0.3 times in the fourth quarter. Equally, and this is how almost everyone else reports it, our financial leverage came down significantly, sequentially and year on year. At the end of 2022, we now stand at just under 2.6 times. This is almost within the comfort zone we used before the IFRS 16 introduction, and it now compares rather favorably to our European and US American peers. Next up is our tower transaction, which we completed at the beginning of the month. This will take our ex-lease leverage down by a further 0.2 times. So we are not quite there yet, but it's great to see our leverage inflecting. Finally, on the debt topic, let me mention that our pension deficit declined by $2 billion in 2022, mainly due to higher interest rates. And it has declined by over 3.5 billion since 2020. This is reducing our rating debt as well. On page 9, we compare our 22 guidance with our 22 performance. Without going too much into the detail here, I think it's fair to say that we over-delivered on all our financial promises On a like-for-like basis, we grew and we were reliable. Let me dive a bit deeper into our earnings per share performance. We initially guided for more than €1.25. And then we raised it to more than €1.50. That was at our nine-month stage. We outperformed our initial guidance by almost 60 cents, but to be fair and transparent, about half of that performance was coming from non-recurring items and mostly non-cash factors. Yes, we have those even in adjusted earnings per shares. The non-recurring factor in 2022 reflect a year of unusual interest rate volatility and significantly M&A activities. First, interest rate volatility resulted in a positive valuation effect related to our civil service health insurance fund. Second, a stronger dollar and a stronger T-Mobile share price resulted in positive valuation effects related to our forward and our fixed price options. And third, T-Mobile Netherlands still contributed in Q1 2022. And fourth, post-deal group development tower benefited from held-for-sale accounting. Let me be very clear. We will be consistent in our treatment of any non-recurring items. There may be years, like the last one, where these non-recurrings were positive. There can also be years where they are negative. Either way, we will be fully transparent. Now, let's move to our guidance for 23. We follow the same mechanic as every year. We take the midpoint of the T-Mobile guidance and add our ex-US guidance. For the overall group guidance, we use the average exchange rate of the prior year, in this case, €1.05. And in the case of EBITDA, we adjust for the US GAAP to IFRS translation, in this case, $0.8 to €2. $0.85 billion for 2023. So it's $0.8 to $0.85 billion for 2023. This gets us to the following guidance. Adjusted EBITDA of around 40.8 billion, and core EBITDA of around 40.5 billion, of which 13.9 coming ex-US. Free cash flow of at least 16 billion, up over 40% year on year, of this around 3.5 billion ex-US. and adjusted EPS of at least 1.6 euro per share. In Dependix, we compare our guidance to the consensus. We think our initial 2023 guidance is like for like, broadly in line with market expectations. Please note that our ex-US Free cash flow guidance bakes in 150 million one-off tax payment related to our group development tower transaction. Moving on to our short 21 Capital Markets Day review. The foundation of growth remains our network leadership. We now passed 13.5 million homes passed in FTTH, up 3 million year-on-year. We passed 5.4 million in German homes with FTTH already. Our Ultra Capacity 5G network reaches 265 US POPs way ahead of our competition and we will reach 300 million POPs by the end of this year. In Germany, we now cover 95% of the population with 5G. In the European segment, we stand at 47%, up 6 percentage point in the quarter. By the way, even if some newspapers write it wrongly, in Germany, we entirely fulfill and over-fulfill the built-out obligations which we have with regards to the spectrum options. I'm particularly proud of the next slide. It shows our consistent customer growth and we had a strong fourth quarter. We keep the foot on the pedal year after year. Our mobile customer growth accelerated in 22 on both sides of the Atlantic. Our growth in broadband and TV was a bit slower. And this was mainly due to the temporary impact of the new German telecom law in the first three quarters of the year. So you haven't seen them anymore in the fourth quarter. Last October we hosted our sustainability day with the full management and we outlined our ambitions, our clear commitment and how we will actually walk the talk. And you can find all the materials on our investor relations website. Let me focus today on a couple of highlights. In our ex-US operations, we managed to reduce our energy consumptions by more than 10% in Germany. TMUS became the first US telco to announce a science-based 2040 climate neutral target. And we provided extensive support for crisis victims. Our customer satisfaction improved and our employee satisfaction remained at the high level. Our commitment here too is we won't stop. Next up, let's look at our capital markets cost reduction target. Here we are not where we want to be. This is not for lack of effort. You can see this is an average 3% reduction in our ex-US headcount in the last two years. The main reason are inflationary headwinds, especially from energy costs in our European segment. Into systems we are growing mainly in digital services, which is more people intensive, and this resides in higher than planned indirect costs. Let's now look at how our key financials have developed in the last five years. including the first two years of the capital markets guidance. Again, the theme is consistent growth. Group service revenues grew by 3.6%. EBITDA adjusted for handset leases grew by 7.3%. Entry cash flow grew over $5 billion since 2020. Of course, there was the year of the one with the Sprint merger. All this growth compares very well to our capital market guidance targets. And our guidance means this will not stop for 2023. The next page shows our ex-US financials. Again, very consistent growth, well on track for our capital markets guidance. Service revenues up by 1.9% in the last two years. EBITDA up by 4.8% on average. and free cash flow up by 0.6 billion over the same period. One way to think about our performance is to compare our actual performance with where we would have been at the midpoint of our guidance. Taking the example of adjusted EBITDA RL, organic 2020 EBITDA was 13.3 billion, At the midpoint of our 2.3, capital market guidance would have grown to $14 billion in 2022, but we delivered $14.6 billion EBITDA in 2022. Of this, 0.1 was from health for sale accounting, so we delivered over half a billion EBITDA, more run rate outperformance over the two years than what we have guided. And that is XUS alone. On page 18, we review our progress against our capital allocation target. We call it portfolio management. The theme here is reliability. On the left, you can see the main decisions we have taken. On the right, you can see some of the key outcomes. Two years into the merger, we reached 49 in the U.S. Currently, yesterday, we were at 49.6%. We are still outside of our stated leverage comfort zone, but as mentioned, we are now seeing the inflection. And even while we were still executing the merger, we twice raised the dividend to 70 cents. On the next page, we summarize the financial review on the previous pages. The second column shows our target as stated at the capital markets day. The next column shows where we stand after two years. Note here that all numbers are comparable given changes in the composition of the group. For instance, our ex-US free cash flow target of 4 billion for 2024 would translate into around 3.5 billion. The difference is due to the disposal of T-Mobile Netherland and RGD Towers. The traffic lights on the right show how we assess our prospects to reach our stated capital markets targets. And I'm happy to say that we see ourselves mostly on track. In many places, we are ahead of it. And with this optimistic outlook in difficult environments, I'd like to hand over to Christian to give you a deep dive about the quarter.

Thank you. Thanks, Tim. And let me deep dive on Q4. And let me start with T-Mobile U.S. Q4, another set of excellent financial results, 7% post-bred service revenue growth and 16% U.S. gap core EBITDA growth. With that strong finish in 2022, T-Mobile was able to comfortably outperform its initial guidance for 2022. And let me remind you, there are a few translation items, as you know, between T-Mobile's US GAAP EBITDA performance and our IFRS EBITDA performance. We covered those in the most recent webinar, but for those who won't be able to participate, we have on page 41 an explanation for those translation items. The first thing which we have to consider is obviously handset revenues, which are not part of the core EBITDA definition. And handset revenues have declined from 21 into the end of 22 by $1.9 billion. So we basically left the year with the remaining $1.4 billion of handset revenues in 22. For 23, we expect a further decline to roughly $300 million. So these will be still relevant headwind in 23, but much less so in the years after 23, meaning starting from 24. The second one is obviously the bridge between U.S. GAAP and IFRS, which is driven by the energy purchase agreements, which we're seeing in the U.S., and which obviously have to be evaluated every quarter and stock-based compensation elements. And we have seen some changes between 21 and 22. In 21, those accounting effects were almost neutral and the bridge was very small. In 22, they have actually become a headwind. In Q4 only, we had a gap between U.S. GAAP into IFRS of close to 300 million. And the year before, that was only 30 million. So that will obviously dilute the EBITDA whenever we're translating from US GAAP into IFRS. But as you know, those effects will effectively wash out whenever it comes to EPS and free cash flow. Let's move over to the commercial performance, and you've all seen the numbers. Very strong set of numbers for Q4, 930,000 phone net ads, Postpaid churn was the lowest in a fourth quarter ever, 314,000 new postpaid accounts, or a total of 1.4 million in the year 2022. APA was up 2% year-on-year, and obviously a very, very strong performance on the high-speed Internet category, which grew by more than 500K in the fourth quarter, or almost 2 million annually. over the course of the full year. And so, therefore, we're absolutely confident that we're full on track with our 7 to 8 million guidance for 2025. Let's move over to Germany on page 23. So Tim said it already, and you're getting used to it, but it's not normal, 25 consecutive quarters of EBITDA growth. Organic revenue was only at 1.1%. That was because we had lower handset revenues. But service revenue actually accelerated sequentially, and the organic EBITDA again grew by 3%. Next page. As I said, service revenues in Germany grew by 1.7%. Mobile service revenues grew by an astonishing 3.5%. But let me flag a couple of issues. Despite the fact that the loss of LeBara revenues is completely included in those numbers, which account for roughly $20 million and a quarter, We had a couple of positive one-offs, and we also had a tailwind which accounts for roughly 1% growth just coming from the roaming and visitor revenues. So what we're seeing in the German business is actually that we are ranging at the upper end of our 1% to 2% CMV guidance. The organic fixed revenues were up 1%, which is pretty consistent with the recent quarters. On commercial performance, look, we're happy to report out that we had a very good broadband quarter in Q4. And you can also see that our prediction, which we have given to you at the beginning of the year, that the TKG effect will essentially fade out over the course of the year is actually happening in the broadband space. We also had a good quarter for TV net ads of 51, and we're also seeing that the TKG effect is fading out on this one. Sorry. And we're making progress with our upselling efforts. Now more than 40% of our broadband customers are on speeds which are at least 100 megabits per second. And if you take a look at the vectoring platform, actually we have now 1.8 million retail and wholesale customers on our super vectoring platform, sorry, which is an increase of 46%. As I mentioned last time, during the last two quarters, we proactively moved roughly a million customers from ADSL to VDSL, and that was a forced migration in order to increase the customer experience. So this is now the last time that we're going to do this, and it's also the last time that we're going to report out on those numbers because we basically have now every customer on our Fiverr platform, and therefore there's no reason to basically show the numbers in the upcoming quarters. Next page, 26. Organic retail fixed revenues grew at 1.7%, and they were obviously supported by a strong broadband quarter, which, again, consistently shows a 5% growth rate. Wholesale revenues are always a little bit volatile, as you know, and we expect also a little weaker quarter in Q1. But all up, we expect stable to slightly growing wholesale revenues in the year 23. So... That brings me to page 27, mobile. You see a strong quarter again in Q4 on mobile net ads, 225K net ads, roughly 100K on the first brand, another 80K on Conxtra, and the rest goes into the B2B space. So we're really happy with our next magenta proposition, and it really yields a good market response. So fiber build-out, what you can see on the page 28, we are on track. Obviously, we're currently facing some headwinds when it comes to cost inflation, especially in the construction area. And we're seeing some delays by connecting homes. That obviously is something which is currently at a sweet spot of our analysis and obviously remediation actions. But we're absolutely confident that we're going to pass at minimum 10 million households by the year 24 and therefore are completely in line with what we predicted in the capital markets day. And you know that our target is now for this year well above 2.5 million homes passed in 2023. But that does include Glasfaser plus our joint venture, which we established in the year 2022. So Tim has mentioned the consistency of growth in the whole company. I think what you also see that holds absolutely true for our large operation here in Germany. Again, 25 quarters of consecutive EBITDA growth. And you see that the EBITDA growth has actually accelerated and that we have an average of 3.4% since 2022 when it comes to organic EBITDA growth in Germany. Let me move over to the European segment. Again, another consistent, strong performing quarter from our European colleagues. Despite meaningful headwinds, the segment was able to deliver a 20th consecutive quarter of organic EBITDA growth, which was close to a percent. But bear in mind, they have to fight two, I would say, artificial headwinds. At least one is for me artificial, which is the Hungarian revenue tax. And also they have to fight higher energy costs. If you would exclude this, the underlying growth momentum on EBITDA is 3.5%. Our customer growth, as you can see in the next page here, is very consistent across all different categories, being it mobile net ads, broadband, FMC, and TV net ads. And despite the fact that we have increased prices, we don't see a significant slowdown in the volume momentum in the European segment. So if we review now where we are with regard to the capital markets day, we can say despite that we're facing headwinds right now, we're tracking really well. We have now 8.1 million households passed when it comes to fiber. Our target is 10 by the end of 24. The average organic EBITDA growth was roughly 4%. over the course of the two years since 2020. That compares really well with the 1.5 to 2.5 guidance. And 7 out of 10 net goals are leaders when it comes to customer satisfaction. Next chart brings us to GD and Towers. And as you know, we have closed the deal with Brockfields and Digital Bridge on the 1st of February. But if we take a look at the Operational performance over the course of 2022, we see that we have net added 800 sites in Germany, which comes from 1,200 new mills and 400 decommissions, a very strong momentum when it comes to recurring revenues with a 5.7% growth rate, and organic EBITDA grew by 8.1%. So if organic EBITDA grew by 8.1%, okay, if we're taking a look at the At the system solution, which brings us to the next page, you see that order entry and revenue performed well year over year with 2% and 6% growth. But as part of the strategic alignment, which we've done in November, we also had a deliberate decision to do some de-risking on large projects, on large legacy projects, which obviously brought EBITDA down in the given quarter. But even if you include that quarter and combine it with the first three quarters, T-Systems is growing. T-Systems will also grow in 2023 and has – reiterated its guidance of an average 5% EBITDA growth over the course of one year. So from this perspective, we're really positive and comfortably tracking our CMD targets. And I think that leads me to the end of the review of the Q4 performance, and I hand it over to Tim.