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.
Yes. Thank you. Good afternoon, everyone, and welcome to our Q1 2020 conference call. With me today are our CEO, Tim Hoetkels and our CFO, Christian Eelich. Tim will first go through his highlights of this quarter, followed by Christian, who will talk about the quarter's financials and provide a few deep dives.
After this, we have time for Q and A, a bit less than usual if you allow because we have some urgent appointments afterwards. Before I hand over to Tim, please pay attention to our usual disclaimer, which you'll find in the presentation. And now it's my pleasure to hand over to Tim.
Yes. Thank you, Anders, and welcome, everybody, from my side. I want to talk about our strong Q1 results. And in addition, I want to give you an update on how COVID-nineteen has impacted our business and why we remain confident to achieve our stated full year 2020 targets. This will be followed by Christian with a deeper dive into our Q1 results plus some additional financial disclosures.
Let me start with my highlights. We closed the U. S. Merger on April 1 from the Home Office. So we gained all remaining approvals.
We were able to raise €19,000,000,000 shortly after closing despite peak market turmoil and on better terms than expected in our initial merger case. In brackets, I was a little bit nervous in the meanwhile, but to turn to beyond, much more positive. We confirmed the target synergies and are now working on the rapid implementation, which is going well. In Germany, meanwhile, we revealed our plans to cover over half of the country with 5 gs, and this already in 2020. The strong commercial and financial momentum we achieved in 2019 continued in the Q1 of 2020 On both sides of the Atlantic, all segments are growing from a profitability basis.
Our EBITDA grew double digit in the Q1. Yes, you heard it rightly. Our EBITDA grew double digit. And this despite, let's say, the impact of the global COVID-nineteen crisis. It seems to be that our operations are very resilient.
We were able to move swiftly with decisive and generous crisis support for our customers. Our networks and service operations held up flawlessly across all geographies and technologies. We remained in our stated leverage comfort zone, and we confirmed our dividend. So based on our Q1 performance and based on what we are seeing so far, we see ourselves on track for our stated 2020 guidance. Before we go through the details, let's look at a quick summary of our Q1 financial performance on Page 4.
Let's keep that simple. All segments grew this quarter again. Page 5, we show some of our key investments outside of the U. S. In Germany, we cover over 35,000,000 lines with fiber, of which 1,700,000 with gigabit connectivity.
In the EU, we now pass 3,400,000 with full fiber, bringing the total footprint, including Germany, to just over 5,000,000. This is up 1,000,000 compared to 1 year ago. We now have 250,000 customers on SuperVectrum as demand starts to accelerate. And in Germany, we reduced our IT time to market to 5 months, less than onethree of what it was in 2017. And the app penetration, our European segment has reached 57%.
Our networks stand out and keep winning all awards. By the way, it's the most successful first quarter we ever see in Deutsche Telekom. We won the recent Connect test for the overall best mobile networks, both in Germany, in Europe and as a multi country operator for entire Europe. We won all German mobile network test. We won all German fixed line test.
We won all service test, and we won the test for the best German IPTV platform with almost full marks. And we were named 1 of the Germany's top 3 customer oriented companies alongside with Amazon and Miele. Our customer service metrics that we showed you mid February keep improving. Moving on to Slide 6. Early May, all German operators met with Bundesnett's agenteer to declare their 4 gs coverage.
From what we learned, I can tell you we are not just far ahead of Telefonica Deutschland, we are also far ahead of Vodafone. But network leadership is not just about 4 gs. It will increasingly be about 5 gs. A couple of weeks ago, and I mentioned that already, we revealed a big plan for 5 gs in Germany, and let me give you the details. Upon launch, we will refarm some of our 3 gs spectrum.
And as soon as our newly acquired 3 gs spectrum becomes available, we will have 2x15 megahertz of 2.1 gigahertz spectrum on 5 gs. 2.1 is excellent for 5 gs because this spectrum range combines speed with good propagation. We will switch on 5 gs in 2.1 gigahertz and at least half of Germany already this year. On top of this, we will have the top 20 cities covered with 3.6 gigahertz. Going forward, we will leverage other spectrum ranges such as 700 megahertz frequencies.
So we have a mix of low band, mid band, high band, which is, compared to my competition, significantly better, and we will roll out faster than anybody else. So comparing the commitments of Vodafone with ours, we will have 4 times more coverage already by the end of the year with regard to 5 gs. I'm very excited about this acceleration plan, which we laid out during the corona crisis, and it shows that we are maintaining our clear German mobile market leadership. On Page 7, we talk about the customer growth, and it remains strong. We are very grateful for the trust, especially in these difficult times.
The incumbents are the winners, and we see it again. In our European footprint, we added 1,400,000 converged customers. In Germany, almost 15,000,000 homes are served by our fiber products, and we saw strong and steady mobile customer growth on both sides of the Atlantic. There was a time where people were criticizing our vectoring and super vectoring rollout. We are now able to serve more than 80% of German households.
And we are the guard horse for the digitization in Germany and especially for all the business customers. So all the traffic load in the COVID crisis is managed on our network, and we not had a single outage in our networks during the crisis so far. Let me now, on Page 8, talk about the way we have approached the corona virus. Those who knew me know that I'm reluctant with praise, but I'm really, really proud how our company, our people have responded to the crisis. Early on, well ahead of others, we announced many offers to help those affected by the lockdown, not just in Germany, but let me focus here on Germany and give a few examples.
Immediately after the shutdown here, we gave 10 gig extra mobile data for free. Millions of customers signed up for this via our app, residential customers and business customers. To help stranded families, we gave 6 months of Disney plus for free. So far, we have more than 500,000 takers on this new proposition, exclusive at Deutsche Telekom. We support a German business with multiple free offers, and usage went up by many multiples.
Here, we are talking about Teams and mainly WebEx from Cisco. We gave WebEx to schools for free, and we had 40,000 takers. That enables 1,000,000 pupils since the beginning of the crisis. And on request of the German government, we teamed up with SAP to develop a COVID-nineteen tracing app, so it shows the trust even the government has in us. So on, it's a really long list of things.
And I can tell you we have proven that we are taking societal responsibility, and we won't stop for the upcoming months. On Page 9, we show the impact COVID-nineteen crisis on our operations. And again, we use Germany as an example. We kept the networks up and running. There were no disruptions, 0.
As we speak, each minute, we enable around 70,000 WebEx or similar conferences on our fixed line infrastructure. Within 1 week, we enabled 16,000 service staff to work from home. Our field service had enough protective equipment and remained fully operational. Currently, we have 180,000 people at Deutsche Telekom working remote. All our service KPI were stable and some even better than before the crisis.
Complaints, for instance, are down by 1 quarter. Our employee health ratio improves on a like for like basis. This is stunning. Take an example. In Germany, we have 6,000 people in the field operations, and we had a better health ratio than before COVID.
And the same is true with the idle time and the handling of our service people who are working from home. The productivity increased by 8% points. When it comes to distribution, as our shops were closed, we saw somewhat lower gross adds, but we also saw significantly lower churn than usual, I should say, even lower. In any case, our digital channels and our inbound call centers picked up much of the slack. So in some overall, commercial performance was not hugely affected.
As we speak, most of our shops are open to customers and are operating again. Commercial activity is slowly beginning to normalize. Looking forward, it will be interesting for us to leverage the lessons learned during the crisis for our efficiency, for the digital customer experience, for our networks. On Page 10, the good news is that based on our strong first quarter and what we have seen so far, we feel able to reiterate our guidance as stated. And by the way, we reiterate our guidance.
Most of the telcos are not giving a clear commitment with regard to the guidance for this year. Clearly, COVID-nineteen brings some short term and some long term headwinds throughout the business, especially on revenues. And Christian, he will show you the sensitivities of these parameters later on. But positively, at the EBITA level, there are a lot of mitigating actions we took and we can take going forward. And our stated 2020 guidance had been prudent as well.
The bottom line is our group outlook will change when we fully incorporate Sprint. T Mobile last week guided for the 2nd quarter and said that they will provide full year guidance with their 2nd quarter results. And then we will reflect this in the group outlook. That said, our stated guidance is unchanged. We continue to expect €13,900,000,000 ex U.
S. EBITDA. This is, of course, not affected by the U. S. Merger.
Without the merger, we would still expect free cash flow to grow from €7,000,000,000 to €8,000,000,000 this year, as stated. And again, we confirm our $0.60 2019 dividend ahead of our virtual AGM in June. I think this is another very, very strong environment in these difficult COVID times. Let me now hand over to Christian for a number of further deep dives. Christian, over to you.
Thanks, Tim, and welcome from my side. Let me start with the key financials on Page 12. So reported revenues grew this quarter by 2.3%. Organically, that would have been 1.1% and that compares to 2.8% growth in 2019. On our adjusted EBITDA after lease growth, as Tim stated, we grew double digit with 10 point 2%.
On an organic basis, that would have been 9%, and that compares to a 4.2% in the previous year. If we're just taking a look at our ex U. S. Business, EBITDA grew by 3.8%. That compares to a 4.7% in 2019.
That flips on an organic basis. Here, our growth in 'twenty is 4.2%. That compares to a 3.7% in 2019. So I can say, as you take a look at the Q1 figures, we're tracking comfortably ahead of the Capital Markets Day guidance
of 2% to 3% CAGR.
The headline free cash flow, as Tim stated earlier, was down by 17% this quarter, And this is coming from a working capital drag. Or more precisely, we have taken a conscious decision to reduce our factoring exposure in our T Mobile ex U. S. Footprint by €700,000,000 Adjusted earnings per share were up 8% this quarter, very similar to the run rate in 2019. And net debt, depending on which definition you take, grew either by 7.7%, this is the IFRS 16 definition or in the old definition, 8.6%.
Let me before I'm going into the performance review of the segment performance, give you an overview to what extent we are impacted by the COVID-nineteen crisis and what are the areas to what are we exposed. And let me clear the visual first. So what you see in the left hand column in the middle is basically the maximum exposure which we would have if everything which we planned would be taken away. Obviously, this will not happen. On the right hand column, you see the impact which we have observed so far.
So let me start with the retail roaming revenues. So on retail roaming, we roughly plan €315,000,000 in revenues this year outside the U. S. And we had a fairly decent Q1, so we didn't see a lot of impacts there other than the last 2 weeks. But by throughout the months of April, we could see that the Retail Roam in revenues actually decreased by 80%, which, and this is something which speaks to the quality of the forecasting team, was anticipated by the team in that given month to a large extent.
If you go into the handset revenues, that's obviously a large number. In the ex U. S. Footprint, we're basically selling handsets worth €3,500,000,000 As we have closed the shops, we have seen that those sales rates came down by 20%. And as we have reopened the shops again, we now have to take a look how this develops over time.
ICT revenue, this is the total number which we're having here. What we're seeing right now is that especially in the large project business, we're seeing quite a bit of project delays. This is also due to the fact that we have a lockdown and people cannot basically communicate in the same manner as they've done it before. You're not allowed to enter customer premises. But bear in mind that 80% of the T Systems revenue is contractually committed for the year 2020, and therefore, we only have to work on the other 20%.
There is an adverse or let me put it differently positive effect, which is coming from fixed call revenues. And this is out of bundle revenues, which we're talking about. Due to the fact that we have so many people in home office, we could see revenues in these categories. And you can see the impact, we planned roughly €600,000,000 in the European footprint. And in the months March April, these revenues were up 33% or onethree relative to what we planned for beforehand for the crisis.
Obviously, we have to take a look how this evolves over time, but this is I would say, this is a corona benefit, which we also have to acknowledge here. And on bad debt, you can see that our numbers historically have been quite low. In Germany, we're just planning with 0.6 percent of revenues and the rest of the footprint, it's 1.4%. In total, that's around €300,000,000 So far, we have seen limited impact, but that is obviously an impact which will kick in later and is highly dependent on how large how long the crisis will endure because the longer it will, obviously, that impact will increase. But so far, we don't see anything.
As Tim said earlier on, so bottom line, we are negatively affected by the corona crisis, but we have mitigation measures in place that we are still confident to basically keep the guidance at the €13,900,000,000 EBITDA for our operations outside the U. S. Let's move to the next chart, which is EBITDA growth. And you can see basically the EBITDA growth on an organic basis in our footprint next U. S.
And you see the growth rate in the U. S. I think both numbers speak for themselves. So I think it's a very nice development, and we're really happy with it. On the next chart, Page number 15, I'm moving over to the free cash flow.
And as I said, the free cash flow was comparatively to the previous year down by 17%. And that is because we have taken that conscious decision to reduce in this in this in that current quarter compared to the last year. What you also can see on the more long term perspective that we have started with that reduction of factoring already in 2018 and that is a continuous program. So everything is baked in into the €8,000,000,000 free cash flow guidance, which we have given you on both sides of the Atlantic. But let me also take the opportunity to provide you a little bit deeper dive into the ex U.
S. Free cash flow. At the Capital Markets Day in 2018, we quantified the ex U. S. Free cash flow at €3,300,000,000 and that was in '17.
And we guided an increase to around $4,000,000,000 in the year 2021. And I would say it is fair to say this is not reflected in the current consensus right now. Now when you look at our consolidated free cash flow number from 2019 of €7,000,000,000 and you take the T Mobile U. S. Free cash flow out of the equation, then you would get us to a 3% a 3,000,000,000 free cash flow ex U.
S. Performance in the year 'nineteen. So and now we're taking a look how this basically plays out in 'twenty. In 'twenty, we're basically planning to have CHF3.3 billion of free cash flow, but that includes, again, an acceleration of reducing our factoring exposure by €700,000,000 So in that respect, I would say, we're on a very good track on reaching that €4,000,000,000 by 2021. And obviously, if we're going for that €4,000,000,000 run rate, as 2 20 indicates, we will not stop in 'twenty one and provide you with a better figure if possible.
Let's move over to leverage. And we have changed their perspective on leverage or we have added an additional perspective on leverage just for the sake of the argument that some competitors basically provide a pre IFRS 16 perspective. So you see now both perspective from our side. If you take a look at our leverage ratio in the classic IFRS 16, so including leases perspective, I would say Q over Q, there isn't been a lot of change. It remains basically at 2.64%, which is still at the upper end of the quarter, 2.25% to 2.75%.
If you take leases out and adjust the EBITDA by the leasing impact, then we would be in the old world where our ratio was 2 to 2.5, and then the leverage ratio would be 2.36. So and finally, aside the leverage perspective, let me repeat again that we're super happy that we refinanced the U. S. Merger bridge in April, that we immediately got the €8,000,000,000 intercompany loan back here, which helps us to basically cover our maturities outside the U. S.
Until the end of 2021. Let me now go into the operational performance of the businesses. So let's start with Germany as usually. So EBITDA again, was growing by 2.7%. And you see this is very much in line, a notch higher than the growth rates which we have seen in the previous four quarters.
But we're really happy with the EBITDA growth performance in Germany. The total service revenue growth again accelerated to 1.4%, and that was basically supported by 3 things. 1 is higher broadband net adds second 1 is strong performance in mobile and third one is a reduction of line losses relative to the previous year, so that supports that growth. If we move into the next page, you see our mobile service revenue growing by 1.7% this quarter, and that was including whatever kind of roaming effect you would include in the Q1 number, and that is obviously including all the regulatory impacts. Without regulation, that growth would have been 2.4%.
Fixed revenues improved to a growth rate of 1.2%, and that compares to a basically flattish development in 2019. And it was very much driven by wholesale performance, but also by a very strong broadband and NetApp performance, which we have seen in Germany.
If we
go on to the next chart, you can see our commercial performance in mobile. Again, our net ads, own branded net adds are pretty much at the same rate as they have been a year before. It's 141 1,000 net adds, which we're seeing. Magento 1 is now covering 80% of mobile contracts. Our churn has sequentially come down to 0.8% in the Q1, and we see a healthy growth in mobile data usage of 61%, which obviously will support our More for More strategy.
And just to give you an additional information, we have now 3,300,000 customers on StreamOn, which is an increase of 8% since the start of the year. Moving over to the fixed performance, and let me start with the broadband net adds. So the broadband net adds in Q1 were 83,000. This is the best performance since 8 quarters and that actually gives us a net add share in that given quarter of more than 40%. And you know this is our aspiration, we want to have a 40% net IP migration, and you can see that also on the line losses where I'm getting into, but also customers relying on the incumbent throughout the crisis, and that obviously helps in our performance.
If we're taking a look at our line losses, our line losses came down to negative 113,000 and that compares to 211,000 the previous year. So as we said to you earlier, once we have finalized the ATM migration, you will see a significant lower line loss number, and we expect exactly that behavior will stay there for the remainder of the year. We added roughly 390,000 new fiber connections, of which more than 250,000 were coming from the retail part. The slowdown in wholesale, I think, is due to 2 effects. 1 is we have a slower geographic expansion, but we also can see that Vodafone is obviously moving customers from our network onto their network if there is an overlap.
And we're happy with the TV net add growth. As you can see, in Germany, it was a +60,000. So going to the financial figures, you can see that the fixed revenues grew by 0.5%. We're happy with the broadband growth. Revenue growth is at 4.3%.
Also, wholesale was supporting and is in line with our midterm guidance. So overall, we're really happy with the development of the fixed line business. But bear in mind, I told you there's one, I would say, COVID induced impact, which is out of bundle revenues, which obviously supports that result as well. Moving over to the U. S.
And I think the U. S. Have given their results already to you, so probably most of you are totally aware of this. A stunning EBITDA growth of 14.5 percent that was obviously supported by a very strong service revenue growth of 5 0.9% and has been adjusted for merger cost and corona related special factors. These were €117,000,000 euros But even if you exclude those two impacts, EBITDA would have been ahead of consensus.
What we can see in the U. S. Is obviously that the net adds number has come down significantly. This is due to the closure of their shops. The revenues, and that's on the next page, remain generally stable and also in the U.
S, a very, very strong network performance. On spectrum, we acquired about 700 megahertz nationwide millimeter wave spectrum, which gets us to a total of now well above 1,000 megahertz of millimeter spectrum. So now we have a very nice position, which is low band, mid band and millimeter wave, and we're super happy with that position. And of course, we closed the Sprint merger as of April 1. Now the team is really working full steam ahead, and I think the U.
S. Team has given you a positive outlook on the merger synergies. And at the end of the day, you can see the immediate impact of the merger right now because T Mobile has basically added roaming capabilities to the Sprint customers and they're supporting those customers now on their network. We have actually signed a 3 year spectrum lease agreement with Columbia Capital, and we started to light up 2.5 gigahertz spectrum on the T Mobile network in many markets, including New York. So and what helps, obviously, is that 80% of the Sprint customers do have a headset, which can be supported by the T Mobile network.
So we're really confident and optimistic on the development of the U. S. So let's move over to the preliminary performance and I keep this short because Braxton has would have €71,000,000,000 in revenues, roughly 24,000,000,000 would have €71,000,000,000 in revenues, roughly €24,000,000,000 in adjusted EBITDA and €81,000,000,000 in net debt, of which €20,000,000,000 is coming from operating leases. But please, it's important that you treat those figures as indicative, and we will give you more precise numbers at the end once we have closed Q2 and communicated those results. Moving over to Europe.
Results in Europe, again, very good. We're really happy with the development of the segment. Revenues were up 0.4 percent. EBITDA up 1.9 percent on an organic basis. Revenue grew by 2% and EBITDA by 3.4%.
This is coming from a weakness in some of the Eastern European currencies. And remember that we have deconsolidated Albania out of the equation. So if you take a longer perspective on the development of the European segment, they have now shown an EBITDA growth in 9 consecutive quarters. So and the growth is, which I really like, is coming from 2 angles. It's coming from service revenue but also continuous cost reduction.
And I think that is the most stable way
on how
you can drive EBITDA performance up. Taking a look at the customer numbers, contracts net adds mobile up 110 broadband net adds up 50 FMC net adds up 2 40, but we have now more than 50% of all households in the European footprint enjoying a convergence offering from our company. So and the TV net adds are pretty much in line with the previous quarter, and they're being dragged by Romania performance.
T Systems.
I think on T Systems, we're making progress on the transformation. Transformation. You can see that we're seeing on a last 12 months basis an increase in the order entry of 3.4 Revenues are generally flat year over year, but we're seeing an improvement of the EBITDA performance, and that is largely due to the cost transformation. As we have informed you already, we're transferring the communications piece of the T Systems portfolio into the German segment. This is planned to be finalized by the mid of 2020, and we're confident that we're going to deliver on those.
And we're seeing some very, I would say, positive signs, especially on the public cloud growth, as you can see, which grew by 28% in the Q1. Group Development, very strong performance both in revenue growth and EBITDA growth. Revenues up 3.8%, Adjusted EBITDA up 2 5.5%. This is very much fueled, and you can see that on the next page, by the very strong underlying performance, especially of the T Mobile Netherlands business. They grew their mobile net add base by 67,000.
Mobile service revenues on an organic basis grew by 5.5%, and we still have a healthy broadband business. So that gets you all up to a growth rate of almost 11% on a year by year basis. So, GB Towers, I think the story continues. We have added 1800 sites, physical sites in the last year. We're continuing to grow our recurring rental revenues.
We're trying to move down the cost in order to drive EBITDA. So all up, I think we're really happy with the tower business, how it evolves. Although we're seeing right now in the COVID environment that the anticipated 2,000 sites, which we wanted to build in Europe in Europe, I'm sorry, in Germany, are a bit too optimistic because we are being delayed by regulatory delays. And therefore, we have to review that number of what's going to be the final outlook. So let me close out on Page 31 on the free cash flow.
So here you see the bridge. So the free cash flow, obviously, we have a negative impact coming from cash flow from operations, which is negative €500,000,000 But bear in mind, there's a €700,000,000 reduction of factoring being included. Overall, our interest costs have increased by €1,500,000,000 That includes the repayment of the zero bond of 1 point 6,000,000,000 and this is why you see that number is being taken out of that bridge. We have slightly lower CapEx in the footprint that basically attributes to the U. S.
And also to Germany. And we have some other effects, which basically gives us the number of €1,300,000,000 As I said earlier on, if you take in the factoring out of the equation, that free cash flow after leases would have been in the vicinity of $2,000,000,000 this year. So therefore, as I said, we're confident it's being baked in our $8,000,000,000 guidance and we're confident that we're getting there, as we said for this year. So on net debt, net debt, you basically see the IFRS cash flow effect, which is 3.3000000000. That is prior to the repayments of lease liabilities.
They account for roughly €1,000,000,000 So what you see is that the repayment for leases and the newly acquired leases are basically netting themselves out. It's €1,000,000,000 on each side. Obviously, we have to reflect for the millimeter spectrum acquisition in the U. S. We had, I would say, 2 nonoperational effects, I would call them.
The U. S. Has basically secured prior to their refinancing, €9,600,000,000 They have secured the interest free interest rate, And we basically signed up for a forward payer swap that has moved in a different direction, especially from Q4 into Q1 this year. So that basically puts a burden on €1,000,000,000 on us. And there's a free cash flow effect, and there's also a negative effect coming from the embedded derivatives out of the T Mobile U.
S. Loans, which accounts for roughly €400,000,000 So I would say I leave it where we are right now, where we're talking about the leverage ratios, which are still in the corridor, which is 2.6, and I'll open it up for questions.
Thank you, Christian. Thank you, Tim. And now we can start with the Q and A part. As always, if you'd like to ask a question, please press star 1. On your touch tone phone, I will announce your name, and it's your time to ask a question.
Should you require to call maximum today in the interest of time. So I'll start with Akhil at JPMorgan.
Good afternoon. Ben, for taking the questions. I only have got 2. So the first is just on COVID and the, I guess, bigger picture around how this could and is impacting the business. Tim, you mentioned at the beginning that COVID has been highlighting the critical role companies are playing.
You've highlighted the strong demand that you're seeing on your network. I guess I'm just keen to understand how you're thinking about how this could develop and evolve the relationship you have with regulators and politicians. Obviously, it's been a view over recent quarters. Keen to see whether you think this can and will evolve that thinking? And then the second thing on the ex U.
S. Free cash flow, it's very helpful to get that data today. In the slide that you presented, if I understood it correctly, you're showing that you generated a relatively similar sort of €3,000,000,000 between 20 17 and 20 19 per annum if we add back the factoring impact. Obviously, this year, there's quite a big step up to €4,000,000,000 ex the factoring, which is obviously what the target will be for 2021. Can you just help us better understand what the moving parts are there to give us that sort of acceleration just to help us better think about what the trajectory might be going forward?
Thanks a lot.
Kiel, thank you. Look, let me highlight this COVID situation. And the first moment, and we should not say that, but we saw that as an opportunity to reposition our business, especially in the political environment and in society. And therefore, we immediately, after 1 or 1.5 weeks, we launched this big initiatives around WebEx for free, about Disney plus for free, about the 10 gig for every customer. So we said, we make your life easier.
What's digitization with our networks during that crisis? On top of that, we had initiatives like 10,000 smartphones for the closed elderly houses and elderly homes. So to keep these people in contact with their spouses. So and this was highly regarded,
well regarded in society here in Germany.
In my a list of all the appreciations and thank yous, which we have got from politicians, from the industries, from big customers. Some of them really had trouble because they were not prepared for the crisis. They had not sufficient VPN services. They didn't have the WebEx tools intact and the like. And our organization was unbelievable fast in the way of delivering.
You can write the question why this is not the normal time to market in normal times, but it is interesting to see how a society and companies are working when there is a big societal purpose to be handled. Now I can tell you, I just saw another ratio around the tax companies, and there were people asked about what they think about the service orientation of the company. And Deutsche Telekom moved up by 14 places, 14 places in that crisis. So I think there is something, some credit, some capital we build up on this one. Now to be honest, today, I would not praise any regulator or any politicians.
Our critics, our criticizers are very, very quiet. They're not showing up, but they are there, and we know that. There's people who always know things better, and they're only looking for their political selfish interest or they look for lower consumer prices. They're still alive, but they're very, very quiet these days in our markets. So we haven't seen a big change in the political landscape.
I think I will use this new normal to address the relevance of infrastructure and the need of this superior infrastructure networks because we know one thing. The new normal is not going to be the old situation. It's going to be totally different. We expect significantly more home workers, so we need new products and skills for home workers. We will see more relevance for network infrastructure.
I think Deutsche Telekom has proven how reliable our networks were. I always stress the issue of how much money was invested in the past, and that is now proving the right thing. We have no need for extra capacities. Our networks were never in any region at the limit of its capacities. So I think it's just a great start.
Our political leaders are on another topic. I had very intense discussion with Thierry Breton, for instance, which were very encouraging because he understands the industry and he understands the language of what our problems and challenges are. I get a lot of, let's say, positive feedback from Berlin. But nevertheless, let's see whether they're taking actions afterwards. This acceleration law is on its way.
The IT security law is on its way. It's getting approved soon with regards to the vendors we are using for our 5 gs build out. So there are decisions coming soon, but I would say the sentiment is much better, but action hasn't been taken.
So Akhil, on the free cash flow question, and this is roughly out of what's in my head. Between 'seventeen 'eighteen, why have we seen basically a negative development? Remember, we didn't have the same growth in EBITDA as we have seen it in 'nineteen. And secondly, remember in 'eighteen, we had peak CapEx. And that was the reason why we said, okay, we have to come down from that level.
From 'eighteen to 'nineteen, I think we're seeing a strong EBITDA growth. We obviously stick to our CapEx guidance. But in 'nineteen, we had a lot of special factors, which impacted our free cash flow growth, and we hope that this basically plays out in a more even way in the future.
Next question is from Polo at UBS.
The first one is on COVID-nineteen, but asking it maybe a slightly different way because bigger picture, if we fast forward 12 months, what do you think the longer term impact will be on the consumer side? So do you think it will be easier to put through more for more increases because people will be more focused on network quality and reliability? Alternatively, do you see a risk of consumers spinning down to cheaper tariffs in near field brands just given economic pressures? That's the first question. And the second question is really just about now that the Sprint deal is complete, can you clarify the dividend policy going forward and talk about your deleveraging profile?
Because I'm just asking because you've obviously been a little more explicit about your ex U. S. Free cash flow. So it's $3,300,000,000 this year, dollars 4,000,000,000 next year, but there's more than covers the dividend and minority payments, which are about SEK 3,000,000,000 a year on top of this. You also have your share of the new TLA U.
S. Cash flows. So therefore, how should we think about dividend going forward and your deleveraging profile?
Look, Polo, what we see today is very clear. People are very happy if they have a good service, a good network and they stay with it. I think they will question how they can improve their home office skills and their tools at home office. We are just using a fraction of what home workers can use. Just to give you an example, I'm sitting at home not in front of my pet or my small screen.
I have a big screen. I have the WebEx conference, by the way, not so expensive, with a big 4 ks screen where I can share documents. I have a whiteboard where I can collaborate with people. I have I could easily collaborate in a way with people working from home. Now not everybody has these capabilities.
We have to learn this new tool, Slack and others, to better collaborate and to find solutions in the way how we're operating. Now I think people, within the next 12 months, much more think about what they can do, what they can do to improve their home office environment because people like to work from home. By the way, we see that, that moment, while taking people back into the office, it's interesting that especially the middle management, they don't want to come back. There is a lot of people who like the situation which they are, no commuting, more productive time, maybe even sharing a bit more of their private life. So any this is something which is coming.
And we will build products around this because Deutsche Telekom is perfectly positioned for that one. We have the supermarket share on B2B. More than 50% of the traffic is on our network, which worked nicely. We have hardware and software components on our hand, which we can easily use, and we have the skills which we use internally as well. The second question is with regard to the B2C side.
On the B2C side, what we see is the strength of brands. And by the way, we have always said that. It's nothing new. In this crisis, the strong brand with a clear proposition, and in our case, service proposition behind is what matters. And I'm very happy that Magenta and Deutsche Telekom is perceived in most of the markets number 1 position, And that's what we see.
We have almost no churn. We get great customer feedback, and that helps us a lot. And therefore, I don't believe there might be a tax here and there that people think with lower prices, they can just convince customers to move. But I can tell you this is not affecting us long term because this is a fraction of the market. The biggest problem is on reliability, affordability and the image of a brand.
And the most important part for that one is superior network. That's our total conviction now before the crisis, and that matters right now. Do you want to sit at your home and having a home office where you're constantly a network problem? Yes? No.
No way. I saw a lot of, let's say, incumbents or other players who had big network issues during the crisis. We didn't. And I can tell you this is we see it already. This is something in the customer satisfaction which will significantly help us to move up.
A committed service for us, Ward. I know incumbents here are players in Europe who had in the 1st weeks 25% sickness rate from their field forces. In our case, due to the commitment to the brand, the people had a higher health rate, so lower sickness rate, since the beginning of COVID. It's less than it's 1%, 1.5%. It's unbelievable.
This is the German civil servant. The moment he gets a societal task, he moves like a machine. I'm sorry to make a joke, but there is some truth in it. But this is working nicely. So my answer is, honestly, this is a big opportunity for us.
I see that. I don't see that there is time for slashing prices. I think there's time for better quality of infrastructure. We are back positioned in this one. I've just mentioned the European drive test where we became 1 in Europe with a big distance to the others.
And therefore, this is and the brand and our Magenta brand is very strong these days. So I think we are well positioned for growth in these areas. And fixed line sees a recovery on top of that in the B2B sector, which gives us opportunity as well.
Polo, Christian here. Although you asked the question only on consumer, but let me flesh in another point of view when it comes to B2B and public sector. I think that crisis is an eye opening event for them that they have to rely way more on digitalization infrastructure than they have in the past. And that applies to B2B customers. And we can see that also how many customers basically subscribe to new video services, but also when it comes, for example, to public sector investments, I.
E, digitization of schools. I think our schools here in Germany are not equipped in the way how they have to be if you want to go to a remote schooling system. And that obviously offers a lot of opportunity.
On the dividend side, look, I think it was a very strong commitment. I remember Orange and other companies cutting for political reasons the dividend. It would have been an easy one to say, look, there's a lot of, let's say, opportunity for us to cut the dividend as well. But we want to be reliable. We want to be that you can rely on us.
We have promised the €0.60 We went for the COVID situation. There were a lot of arguments against it, but I think we've earned the dividend. We have a high income increase even in the Q1. We see good outlook for the year, and therefore, we said we are committed to the €0.60 And that is what we do and which we're going to recommend to the annual meeting at the 19th June. So that's, let's say, what we're doing.
I think this has a long term value for long term investors. That's my that is our Christian Smiles conviction that this was the right thing to do. Now with regards to the next dividend increase, we have a policy in the market, and we're trying to fulfill always what we're promising. But it's not the now the time, the Q1 to talk about, let's say, what we are paying next year. I hope that all our developments and growth prospects are getting accomplished.
Okay. Thanks, Tim. Next is Andrew from Goldman Sachs.
And I wanted to ask a couple more questions on the European free cash flow generation. The Slide 15 you gave and also on Slide 31, they're a great help in enabling us to understand the underappreciated strength of your European business that you've flagged for a while. And Slide 15 shows you appear on track, as has been mentioned in previous questions, to get to your €4,000,000,000 free cash flow guide for 2021 in 2020 if we strip out the factoring headwind. So the first question, how should we think about your scope to deliver 2021 free cash flow above your guidance? And specifically, what elements of the free cash flow can be better than expected?
And then the second question is your free cash flow your European free cash flow hasn't covered the dividend when we strip out spectrum spend and other costs, that you don't include in your free cash flow definition. But do you think that this could be the case in FY 2021? Or are there any other costs or risks we should be aware of in the next couple of years? And specifically, what factoring headwind should we expect in FY 'twenty one? Thank you.
So on the free cash flow guidance on 'twenty one, Look, I think it's always been our philosophy that we want to basically deliver promises and aspirations, and that's the €4,000,000,000 but if we're performing better, we're performing better. And you can see that in the revenue development, the EBITDA development over the past years. So, I will not rule it out, but I will not basically increase now the guidance for 2021. And on the other factors, are there any extraordinary factors in our free cash flow 2021? I don't I'm not aware of this.
I don't know whether anybody is aware of this, but
Hannes. I would add, if you think about other factors, spectrum, Germany had a big auction in 2019, and Germany has big auctions basically every 5 years. Europe has a bunch of auctions coming up, but tipped in to be smaller, we had Hungary done. In terms of factoring, well, I think the word headwind in the context of factoring is wrong. I think although it may be, let's say, confusing factoring, but factoring, we reduced the factoring this time.
So the outstanding factoring balance, we did not need to do this. There was no need to do this. There will be no need to do that going forward, right? So this is just a choice that we made. And it is cash flow management.
You don't have to worry about it, okay? Next is Christian Jern from HSBC.
Let me say one word. I want to stress again how proud I'm on what Srini Gopalan did in Europe. 8 consecutive quarters, he's now growing his EBITDA. He's growing his free cash flow, sorry, 10 quarters already or 9, sorry, whatever. So Christian is 9 quarters now.
He is delivering on a consecutive EBITDA and free cash flow growth, which is now materializing in the numbers which I showed you for Europe and the strong contribution we get from him for dividend and for the investments. 2nd, he has not lost market share. He has gained market share except from Romano in every single market. And on top of that, the customer service and the net promoter score, TRIM, as we call them, have improved significantly as well. On top of that, he found a way that we are going to cover the entire footprint with fiber to the home in the converged markets up to 50% within the next years.
So I think this is an impressive result. It's not on the expense of customer satisfaction. The opposite is the case. And we have created a flying wheel here, which I find very impressive, which is naturalizing in the free cash flow statement.
Thanks, Jim. So next again is Christian at HSBC.
Yes. Thank you. I have two questions. One is actually on the U. S, which is going to be your most important market going forward.
Just high level, how do you actually what's your view now that you have grip on the Sprint assets, the value of the customer profile, the churn rates overall? I mean, were you what surprised you positively maybe or negatively? I would be interested in that. And related to that, I'm a bit worried about the best debt going forward in the U. S.
Given the unemployment rates we've seen in the U. S. So what is your expectation the U. S. Market when it comes to debt debt?
My second question is actually on Germany and B2B. It's clearly an important part of your business and it's around 30% or so. So what are you seeing in terms of the impact on the business or project delays, fiber to the home delays or whatever you can share in that respect would be helpful for us to model?
With regard to the T Mobile U. S. Guidance and integration, I think the best thing is just to go back to what the U.
S. Folks had last week.
And I think they have given a clear guidance also on customer numbers as well as on financial figures, which also include bad debt and the assumption and the implication of the COVID crisis. On the German B2B, first of all, what we're seeing right now is especially our large customers' project delays. And the question is whether these product delays will basically move into they're going to kill a project or they just postpone it. The second one is on the infrastructure business, on the rollout of our FTTH infrastructure. We don't see a lot of impact right now.
So we had a very explicit discussion with our Head of Technology and he said, on FTTH, I can deliver my numbers as I promised. I don't see any kind of indication that I have to basically take down that number. That is different for provisioning
of new mobile sites, as
I said earlier on. So the 2,000 sites, which we basically indicated at the beginning of the year, they are not in reach right now, and we're working together on a new forecast on this number. And other than that, I think what we're seeing on the German B2B, especially on the infrastructure side, is very robust business so far. And as we have Furlough in Germany, that helps you also on your bad net number. We don't see any impact on bad debt so far in the German business.
But I have to admit, this is a bit early to make that assessment because that takes a longer period of time until it kicks in. But given the fact that we have furlough, you will see a lower unemployment rate in Germany and you will see lower insolvent disease. These are things which may impact bad debt. So, so far so good. And this is the reason why we're basically keeping our EBITDA guidance stable at 13.9
percent. And we're also keeping our CapEx guidance stable, so we're not taking out CapEx in order to achieve any free cash flow number. So that's not the idea at all. And next is Steve at Redburn, please.
Yes, we hear you well.
Hi, Doug. Right, a couple of questions. One is on 5 gs. Darren, see your comments on sort of speed of coverage rollout. Can you help us just understand what proportion of your contract mobile base is on sort of the high usage LTE tariffs at the moment that might be interested in a 5 gs offer?
And what's your plan around this? Are you hoping to take market share from Vodafone and Teffy at the high end through this accelerated rollout? Is it more about defending the existing base? And then second question on the pension, which is slightly boring, but I know that your pension provision went up by €1,000,000,000 in the quarter. Obviously, you've got the BT stake in there.
That's fallen quite a long way. You've just lost a couple of €100,000,000 of dividend. How worried should we be that more of your cash will get consumed by the pension going forward given those movements?
Look, first thing is, I said it, I think, last time already in our quarter results. We are very confident about our network leadership on 5 gs in Germany. And this is due to the spectrum position which we are holding. This is due to the sites advantage which we have in our country and especially as well with the speed and the commitment our organization has these days with regard to the rollout. Big advantage.
Reforming and deploying 2.1, which helps us a lot from the propagation of the network. So we are not only covering the cities, we are where we are anyhow, but we have even a good coverage across the country where we are strong. And the second one in the cities was 3.6. We are going to be able to increase the speed significantly. Now I'm not giving all the details about the rollout because this is the quarter results, and this is not a market launch.
But I promise you, we will give you more detail in summer around this thing here, our detailed plan about pricing, about handsets, about rollout and about the cities where we are. What we know is that we have 4x more coverage of German citizens than Vodafone, who is our biggest follower in the German market. Now this gives us confidence from the speed and from the spectrum position to be there. When it comes to the acceptance of this new product, who's better positioned for the early adapters than Deutsche Telekom? Tell me one other player in Germany.
There is none because the B2B basis is by far with a big advantage at Deutsche Telekom. All the big corporates, all the big Mittelstandler with Deutsche Telekom, we have a super advantage here in our market share. And when it comes to the high valuable customers, due to the early start with the iPhone, which we have for 2 years or even longer on an exclusivity basis, we have this high value customer base in our holdings. 35% of all our customers are on M tariffs and 15% are on the L tariffs. So these are the ones who will probably immediately where the early movers are sitting.
So I think we have a good upselling opportunity within our base. That's definitely the case. And we hope we get early adopters from who are not with us as well in this regard. So I'm confident that our existing base is the right thing to address this new opportunity.
So on the pension funding, so our coverage in the pension funding is roughly 50%. So we're well funded, and there is no risk
be expected.
On the other side, obviously, we're not happy with the performance of BT, which basically came down by €1,000,000,000 euros I think, which is also in the pension fund, recovers to a certain degree in the pension fund and the other assets as well. And obviously, we're also dependent on the IFRS interest rate in the pension fund. But we have a well enough funding from a coverage ratio in the pension funding. However, one has to acknowledge that obviously the dividend decision which BT has taken obviously impacts us on future cash flows on these 12%.
Okay. Thank you, Christian. And that's in the context of the €4,000,000,000 but that we reiterated today. So Fred at Bank of America, please.
Hi, good afternoon, Tim. A couple of questions on my side. So firstly, on the Huawei. So you mentioned some clarification coming from in German. Can you update us on what's going on in Germany?
Is there any political pressure post the current crisis restricting your potential user or Huawei? And if you can give us a bit of sensitivity and special risk if there were to be restrictions? And then secondly, I think your comment from on Germany and on the fixed strategy, your comment from February where I think that you were not losing CEVA Vodafone pushing harder, gigabit speed, etcetera. So and you were also talking about requiring some regulatory clarity before pushing bit faster on fiber. So if you can update us on your thinking right now.
You mentioned BT. I mean, they followed now in pushing harder on fiber. At the same time, Q1, you had very solid net adds. Tim, you mentioned a few times you're delivering superior network quality. So you seem to be pretty comfortable with the current hybrid strategy and the current tuning of the year.
So a bit of an update on that would be useful.
Okay. Thanks for the question. The Huawei issue is look, for us, and we always say that security is of the highest priority for us. And having seen the common approach from the EU Commission on this one, we welcome this data factory, which they brought out with regard to the 5 gs. So all vendors, everybody has to commit and to sign up to security commitments, and we don't need that from a single vendor.
We need that from all vendors because a lot of components are not only coming from the 3 network or for network providers but as well from software companies and others. So banning a specific company, I think, doesn't make sense. We want to have competition in this regard. Now we follow the political recommendations. So far, in Germany, it's not ready.
All tests have been made. It was scheduled for Q1 due to COVID-nineteen. It got postponed. But today, the news is full that the government came to a conclusion, which they will announce within the next days. So they came up with an idea.
Now on the U. S, we anyhow have no exposure to this one. So we are talking Germany and our European markets, where we pursue our multi vendor strategy going forward. And yes, there are always very critical thing voices who are just want to ban every Chinese vendor in the core network and as well in the RAN network. And then there is even a more moderate approach, which is focusing very much on the security functionalities of the infrastructure.
Recommendations. 2nd, we are working towards a Chinese free core network infrastructure. That is where all the aggregation is taking place, and that is what we are willing to commit. And this is the for us, the most relevant thing. The second one, what we are doing is we are highly lobbying for an open RAN approach because we believe Open RAN, the software which is giving us the opportunity to combine any kind of access nodes in the infrastructure with all the different bands which we are using from the spectrum position, is the way going forward.
It makes us commercially and as well from a security perspective more independent. This is something which we are highly lobbying and which we are committing to. So having a legal enforcement on this one, we will heavily support. And I think this approach, including a very balanced multi vendor strategy, is the way going forward. And recent discussions in Berlin show me that this is very much in line what they are going to be going to ratify within the next days.
So I do not see an additional political risk or any kind of this for us, but let's see. Now coming to the German fixed strategy and coming where we are on this one. So first, I'm getting not tired on telling everybody, wasn't this a super smart idea from Hannes to say, let's go for vectoring and super vectoring? I remember he was once told me for hours on this one when I wanted to go into fiber. And then I hired him, and I put all the money behind vectoring and super vectoring.
Now we are covering more than 80% of the households with bandwidth up to 2 60 megabit per second. And this was the backbone for the COVID-nineteen crisis and which made Germany workable throughout these difficult times, fantastic. I think it couldn't have worked better out. But this rollout is coming to an end, and money is free. And you know that we have to push harder on full fiber, so fiber to the home.
I do not go into every detail, but there are areas where we can regain market share from cable. There are areas where we should now only build the newest technologies. And there are areas in the B2B sector, which are in the school or educational governmental area, where we are deploying fiber now with an accelerated momentum. Yes, we are up to €2,000,000 This requires, we call it, the fiber factory. So a highly productive BSS and OSS system, a totally new build environment in our IT and in the delivery.
This is up and running. I'm very encouraged about what's there. And so now it's time to roll up and to improve our FTTH rollout. I'm not where BT or other companies are at that point. I don't want to commit long term numbers.
Let's now see how we are finding the right spots where we are making the right profitability and take up rates with customers. Let's scale up productivity in this regard and then move forward in the German environment. That's our approach, and there's money sufficiently available to get up to this €2,000,000 run rate.
And from an operational point of view, let me add just one observation. I think many of you were concerned as Vodafone introduced their 1 gigabit offer at €40 here in Germany, that this may be a start of a new price war or that they're taking massive share from us. I think that quarter one has proven that this is not true. I think our net add share is higher than Vodafone's net add share. And I think it's also a good explanation that competition is more than just speed.
It's speed. It's reliability of a network. It's the service quality which you're providing, and it's overall the brand. I think there are many components playing into this, and it's not only just about speed.
Thanks, Christian. Next is Jay Coble, Credit Suisse.
Hi, good afternoon. Thanks for taking the question. I'll give you one question. You kindly provided quite a lot of detail, particularly on the revenue side of the impact of COVID-nineteen. I was wondering if you could maybe expand a little bit more on some of the things you've seen on the cost side.
So maybe a little bit more color on what's happened with your commercial costs over that period, maybe some commentary around your outbound, how big the impact was from lower outbound roaming. So just any color around that would be quite useful.
I'm struggling a bit with the question because we don't want to give you too much detail. Obviously, what we're saying is the COVID impact is negative on us, and you can see it in our list. And we have mitigation measures in place, which basically makes us confident to keep the guidance. On the roaming costs, I think there are 2 elements on roaming. I can ask that answer that question specifically.
It's obviously the wholesale side. And there's the retail side. We were talking about the scope of the retail side. On the wholesale side, basically, the net revenue position which we're having is almost 0. So we're basically balancing visitor roaming and roaming costs out.
And that was proven in Q1. That's proven in the last months, and this is how we want to run the business. And obviously, on the project delays, there's also CapEx associated and cost of goods sold associated with this. But I think it's all baked in into our guidance number of 13.9
percent. And I don't want
to go now into a component level and explain what is going to be kind of every cost element, which we can also save on top.
But listen, maybe some more flavor. On the roaming side, we are not talking about the roaming in Europe because this is part of the tariffs and the diesel volumes anyhow. So the interesting part of the roaming impact which we are seeing is coming from outside of the roaming
here in
Europe, so more the amount of travel which is going outside of this territory. Now the question is, this is something which is hopefully coming back then by the end of the year. When it comes to the handset revenues, I think there's significantly less more handsets both on volumes and on price, which is helping us. But the lower churn from a profitability is even better for us on this regard. We are learning a lot about travel.
And I can tell you one thing, I will less I will travel less. We should make more roadshows with you guys than WebEx and rather being stressed from London or other places and running between office the offices. So this is definitely something which is an example of how the world is going to change. So we will see significantly less travel expenses. Some cost recovers, yes, definitely, but not the entire one.
We're sitting here and discussing as well about a hybrid organization. So there will be changes coming that we might don't need all the office spaces which we have today and that we have more home office available. So we will work in hybrid structures going forward. I do not know what the impact on the retail structure is going to be. We anyhow decided to reduce our shop floor, our shops, respectively.
And there are a lot of events which we had in the past, which we're going to either cancel or which we put in digital formats. Our digital IX is taking place next week, fully digital already. So by the way, please feel invited to this conference for our B2B capabilities. But this conference, we put into digital, and they have a higher productivity. So we have a constant discussion about how we're shifting costs at that time in the organization, and it's helping us a lot to compensate for shortfalls on the revenue side.
Thank you, Tim. And I do want to add that on the commercial side, I think others have already highlighted you anyway have IFRS 15. But the bigger point for us is we haven't seen that much loss of business because we have compensation. For instance, one thing that people need to realize is call centers are a big channel for customer for connecting with customers. So we have had actually very little I mean, we have the page in the presentation that shows it, very little drop in gross adds, right, even at the time of actual shop closures.
So that doesn't give us a lot of cost recovery, but cost recovery is always, let's say, lots of little things rather than one big thing here. Okay. Next is George at Citi, please.
Good afternoon, and thanks for taking my questions. The first one is behind regulation. And I know you addressed a vendor point. I just wanted to follow-up and ask whether interface or kind of the interfaces for Open RAN, is that something you expect to only get on 5 gs or whether it could be spectrum and therefore allow for a much more dynamic migration? And on the same polymer regulation, there was also concerns a few months ago that perhaps we could call in Budes Navagintur in the event that our roaming arrangements were not met.
It appears that maybe towing down that, let's wait now. But I mean, just to hear if you think there is any risk in your view that we're getting to these protracted kind of processes. And then the second question is around capital allocation. And I appreciate that already a lot of things have been done in the U. S, Netherlands, Austria, and the balance sheet may not be as flexible as it was a few years ago.
But I just wanted to ask the question based on your framework on returns on capital employed, whether you see opportunities, whether it's just German fiber or whether there are other opportunities where you think it will create value?
Look, on Open RAN, the good thing is that there were 2 I remember 2 initiatives in our telecommunication industries in the past, O RAN and Open RAN. They were not the same, by the way. And they are now all aligned. And all the big telcos are working on these initiatives going forward. And this Open RAN initiatives is not stopping and not be limited to just the integration of 5 gs.
It should be enabling us to entire disaggregate the entire RAN infrastructure going forward. So this is the way we are approaching. Now on this way, technically, there will be steps. So if we can open it up for 5 gs first, that would be great. That's the first milestone which we need.
And then going forward, I think for all bearers, this is the way how we are addressing it. Now there will be anyhow a total different way of how the infrastructure is going to be designed in the future. Full disaggregation, cloud native infrastructure, where we are differentiating between classical infrastructure or network access and where we have all the applications or services on top of that. So and they would be always software based and cloud based. So this is, let's say, the way how we are reshaping the networks as an industry, not only Deutsche Telekom.
And we need these open interfaces. We need this kind of open source APIs to manage the vendors in a new way. That is what we are driving. That's what we are pushing strategically, what we do anyhow and getting regulatory support on this one to become independent from single vendors, I think this is highly appreciated. On the regulation,
let me try to give an answer, and it's based on our path of this. If it's related to national roaming, obviously, we're in good faith talks with 101 as prescribed in the German auction obligation. You will hopefully understand that we don't disclose the current status of the talks. We always said that we're in principle. We're open for 3rd party business at reasonable commercial terms, but what we don't like is free riding.
And I think that is the cornerstone of that current discussion. And again, as we said, also prior to the 5 gs auction, there is no legal obligation to provide natural roaming. And this is still the status. There is only an obligation to consult
and to negotiate in good faith.
And I think with regards to the capital allocation, there are always the capital allocation and portfolio management is always part of our story. It has been and it will be. Now and opportunity in German fiber, look, I think it's not a capital or a money issue which we have. It's not a funding issue. It is more a commercial situation and a regulatory situation where we feel challenged.
Germany, with their build out obligations, 120 meter deep in the ground, all the construction planning requirements, approval phases, plus the labor force. On top of that, the construction costs. Then the question about the layer for infrastructure cost in the houses, who is taking our care of that one. Then the regulatory environment of wholesale excess for everybody. This is very much and big time challenging the commercial logic of this fiber rollout.
And we have to learn how we make this a profitable one. And there is no need to rush into something stupid. We take the opportunities which we see in the market, and it's not a money issue. It is more the question about finding the right keys to unleash the value in the services. Unleashing as far as more value, I think, yes.
Look, openly, we know that we have this Dutch situation where we always thought it might be a potential IPO. We're sitting on the best tower portfolio in Europe, which there's nothing new which we can comment on today, but we are totally aware about this market and the business which we have here on hand. So there are still opportunities in our portfolio, which gives us ways to unleash value beyond the operations.
Thanks, Tim. And the broad outline is, of course, what we showed in the Capital Markets Day 2018 and including the capital allocation that was provided there in 2018. James, at New Street, next, please.
Yes. Thanks very much indeed. I had two questions. So first, I mean congratulations on the, I mean, great set of results. I wanted to like actually follow-up on that capital allocation question with a specific point.
I mean SoftBank has talked about a $41,000,000,000 asset disposal program Clearly, some of their shares in T Mobile could well be part of that. I mean, do you feel you have the balance sheet strength at the moment to be able to buy additional shares in T Mobile if they wish to sell to you? And then second question, just be really interested to hear a bit more about the kind of current impact you're seeing in Germany on SMEs and B2B, I hear what you're saying about 80% of T Systems revenues for this year being already contracted. Impact on the way T Systems will be reporting their numbers going into 2021?
Yes. I can make SoftBank. So SoftBank currently owns 24.7%. We own 43.6%. SoftBank is subjected to lock ups, which are public, so you know them.
So there are different phases. The 1st year, they cannot sell any shares. Then 5 years a percent in the year 2 10% in year 3 and then the remainder. So we are a TMUS committed shareholder. We have control of this company.
We have a guaranteed control of this company of 67%. So it's a great business to have, big attractive opportunities going forward. So we believe into the stock. But now going beyond that and speculating about, let's say, whether this stock coming to the market or this is the deal which we have just been made, and therefore, I cannot speculate on anything around this M and A talks.
On the B2B side, James, especially when it comes to bad debt, just to explain the difference in Germany, I think we have this furlough system where you basically support people that they're not going into unemployment. And we also have a lot of state aided help, especially for small companies. So that is quite different to many other countries so that we don't expect these amount of insolvencies, which you may see in other markets. Simply right now, we don't see anything. But as I said earlier on, on the bad debt, it is just too early to make a clear prediction because we basically went through one paying cycle.
And now we have to see whether there's kind of a degradation in numbers. What the business segments are basically reporting back to us is very limited increase. But what we have done is we have run some stress tests and said, okay, what if it takes 3 times that duration? What if the impact is going to be bigger? So this is something at least which is in our equation, but right now, we don't see anything.
And that is, in Germany, different relative, for example, in the U. S.
Thanks, Christian. Tim, we take 3 more questions now. We start with Emmet at Morgan Stanley.
Yes. Hannes, thank you very much for taking my question. Just in the interest of time, I'll just keep it to one question. Tim, just a big picture question for you, please, about 6 line. I remember when you were CFO under Rene 10 years ago, you used to say you saw no reason why the fixed line business couldn't be a grower yet to perpetuity and that's where we are now.
And when you look at the COVID crisis, it feels like many of the So you see the eSchooling, you see the work from home, the end So you see the e schooling, you see the work from home, the entertainment in the evening. It all seems to be quite fixed line centric. And then as you look at your line losses, these have slowed hugely now. And if I really won the clock 10 years ago, line losses are running about 300,000 or 400,000 lines a quarter. Now it's 100,000 lines.
Can you say a little bit about what you think maybe the long term impact of this crisis is on your fixed line business and maybe whether we've reached a final turning point and that fixed line revenue growth could actually become quite a bit more positive than it has been?
So you gave the answer in your question already. So look, what I see is I see a very strong development on fixed line. I see that business customers really appreciate the service which we are offering. They need us. I see that most of the services which we're having are on great VPNs and secure already, and we can now expand significantly in this area into the midsized companies in Germany and in other areas across the globe with new technology, new software.
So we are working with Microsoft and some others and Cisco on some new propositions we're going to bring to the market very soon. So yes, I see the prospects. Look, the issue on the consumer side is, if you would ask me what do you believe more today, the fixed mobile substitution. So I've caught cutting from mobile or a renaissance of the fixed line infrastructure, I would make my bet on the renaissance of the fixed line side. And that's what I see for the future.
The only thing is, every market gets what he deserves and what he's asking for. And I think we have solved the issue around our European markets. I think the question about how do we improve the rollout of the German FTTH rollout, prospectively, that's an open question, which I'm debating heavily. I can tell you one answer. Cable is not the answer.
That's for sure because that's the shared manium. I think it's anyhow fake news that they call it a gigabit network. It's not. I just saw the very important Connect net test, and it was mentioned in the net test that they said, better to have a reliable 2 50 megabit of Deutsche Telekom than a loss promised on 1 gig from Vodafone. And therefore, I think there is a way of higher bandwidth which we can provide with FTTH, but it has to play take place in an environment where it's worth investing.
And we will not invest in something which is not paying off.
Great. Next is Simon at Barclays, please.
Just back to factoring. I guess you said we've seen a lot of peers actually increase the use of factoring. So I'm just wondering why you've decided to reduce it this year, last year and the year before. And I guess linked to that as well, if we look at free cash flow before reducing factoring, it actually covered the previous dividend. So I'm just wondering if you have any thoughts on that.
The question is to did we actually did you could you hear Tim answering the last question because he's not sure he had the microphone on? That was Emmet's question. Emmet?
Yes, we did.
You did? Okay. Good. Or Simon, you can answer that.
On the factoring question, that's very simple. We saved a lot of money by reducing the factoring, and that support is obviously our cost base. And if we can afford it, we have taken that opportunity, and we'll continue to do so. On the second question, what is I don't get the second question, sorry. Free cash flow.
Can you repeat the question, please, Simon?
Yes. Just looking at free cash flow, if you hadn't already factoring, it looks like it would have covered the previous €0.70 dividend. So I'm just wondering, find out, it's obviously a wonderful thing, but any comments around why you made the move that you did?
I think we have to go back to the communication as we changed the dividend communication. That was back in November. And we said we had a totally uncertain situation in front of us. We were prior to the beginning of the States trial, and we said, okay, there's no clarity on whether we're getting the deal through or not. And in order to give you more guidance, we basically decided to change our dividend communication and also the payout from €0.70 to €0.60 and at the same time, basically said €0.60 is the new minimum.
So I think that was the rationale, and it was not the rationale that we couldn't foresee whether we can cover it with the free cash flow.
Thanks, Christian. And next is and final question is from Ulrich Rathe, Jefferies, please.
The first question is you alluded to correlations you're having at 1,000,000,000 at several points. What is your current expectation on the Telecom Act in terms of timing, but also on the 3 key issues, if you have views on that, on the limitations to contract length, what will be in there? My second question is, I think you talked about the shops and the impact. Now you almost have a laboratory experiment that so seeing the impact of closed shops among the business, has it fell down 8%. Would this change your plans that were you talked about in January of closing a 5th of the German shops?
Actually, you were talking about closing a 100 shops. Is the learnings from the lockdown, does that mean you might have to scale that back or accelerate it? Or how do you look at that?
Ulrik, let me pick up the second question when it comes to the shop closure. First of all, the shutdown with 100 shops, that program remains intact. But what we're going to do is once we're moving into more normal territory again, we will basically sit together and take a look at what is the most optimal channel distribution strategy because what we're seeing at the shop closure was that traffic was nicely picked up, our call centers as well as our online channel. And I think this is a picture which we're actually seeing across the board. So that's not only true for Germany.
And obviously, these learnings have to be factored in. But as we have just finalized the negotiations on the German shop Gesellschaft, we continue to execute against this one. And then we have to see whether we have to change the channel distribution going forward. But it's too early to tell right now, but we have seen a very nice response, as I said earlier on, as we had to close the shops from the call centers and the online channel.
By the way, I think there is no shock, and our idea is to
be very close to our customers.
Our concept is regionalization. Our team is first time resolution and a very short ways to surrounding around where the customers are living. I think with our footprint, we are covering this. And that is, by the way, not only true for Germany, it's true for the U. S.
And other markets as well. So I think there is an impact, but we will see. We always adapted it. I think it was made bigger in the press than it really is. And commercially, we always look on whether it makes sense or not.
With regard to the first question our first question, maybe to bringing everybody into the loop. End of January, 2 federal ministries, they came up with their own legislation draft related to shortened contact durations and ease the termination options for customers. And there's this Ministry for Prochorschotz, I don't know what that is in English, consumer protection, consumer protections, which aims to shorten contract durations to 12 months. The Ministry For Economy, as the who is actually responsible for this decision, wants to stick to the 24 months. We expect to learn more details during the revision of the German telecommunication law, which is the reference and what you are mentioning, which is expected by mid of next month.
It's a little bit delayed because of the COVID situation. If implemented, this needlessly complicates current subsidization plans, as you know, which have high customer acceptance, and we would have to develop an alternatives to that one. But you have to note that already today's consumer have the right to conclude a contract with a minimum contract period of 12 months if required. So I think the EU code, which is required for this as well, explicitly allows the conclusion of long term installment contracts with end users for the construction of physical infrastructure. So therefore, we have the capability of doing so.
And according to the new EU code, the automatic renewal of 12 months will no longer apply, and the notice periods will be reduced to 1 month. This is already anticipated in our plans. So look, at the end of the day, we have opportunities for prepaid services. We have contract periods of 12 months if required, and we have the 24 months contract. What customers very like, much like, are the handset prices being low or being allocated throughout the period.
And therefore, the 24 months duration makes a lot of sense. So look, I think our hope that at the end of the day, the customers are considered and not some administrative decisions here. And I don't see us so frightened on this one, but the discussion is out, and we will I'm trying to convince them in the direction of this of the how the market is developing this right right now.
And just to add, we are hopeful to have a sensible ruling regarding the rental privilege as well. And with that, our conference call today is now ending. Thank you all for participating from the home office, presumably in most cases. And should you have further questions, please contact us at the Investor Relations department. Have a great day.
Keep safe, and speak to you soon.
We'd like to thank you for participating at this conference. We are looking forward to hear from you again. Goodbye.