Good afternoon, and welcome to Deutsche Telekom's Conference Call. At our customers' request, this conference will be recorded and uploaded to the Internet. May I now hand over to Mr. Hannes Wittisch.
Yes. Good afternoon, everyone, and welcome to our Q2 2019 conference call. With me today are our CEO, Tim Hultgils and our CFO, Christian Ehlich. As always, Tim will go first go through his highlights for the year to date, and then Christian will talk about the quarter in more detail, and then we have time for a Q and A. 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.
Welcome everybody here also from my side. Thank you, Hannes, for introducing. And let's wrap up where we stand. Look, from a summary perspective, I can tell you first half year, all hands on deck at Deutsche Telekom. And just as a preliminary, I can't remember a quarter during my 20 years at Deutsche Telekom, which has shown numbers like this.
We had 7% growth on revenues, 8% growth on EBITDA, 24% growth on the earnings. We had a lot of willingness to transform within the company. We have announced changes in our shop footprint. We have announced changes within T Systems portfolio. And even on the unorganic side, we made a lot of progress with integration of Tele2 and UPC.
And on top of that, we had this good step forward in our approval process within the U. S. So I think a lot of things are heading towards the right direction, and I'm very happy about where we stand after half year. All our operating segments are growing on both sides of the Atlantic. Our EBITDA after leases is up almost 8% year to date.
Organic sales are up by 3.2%. Organic EBITDA after leases grew by 3.7%. And our ex U. S. EBITDA grew by 1.8% in the first half.
Our free cash flow is up by 9% like for like and adjusted earnings grew by 3.9%. So the things are moving. CapEx in the U. S. Was front loaded as per guidance, while ex U.
S. CapEx was broadly stable as we promised. We are well on track for our 2019 guidance and every key metric and for every segment. And we are well on track for the long term growth guidance we gave at last year's Capital Market Day. Moving on to Slide 5.
The foundation for our strong growth remains our good investments in networks. In Germany, we already passed over 22,000,000 homes with super vectoring speeds up to 2 50 megabits per second, and we are on track for our 28,000,000 customers or households being approached by year end. This year, as outlined at the Capital Markets Day, we are completing our German FTTC footprint, and we are beginning to ramp up our FTTH deployments. Initial focus here is on the subsidized build out in white spots in the business parks and on collaborations. We made further progress with our IP migration reaching 93% of German lines, so up from 90% last quarter.
So we are well on track to finish the German B2C migration this year and the B2B migration. Next year. German LTE coverage close to 98% full year target. Our telco added another 1400 new sites in the last 12 months. This is on track with our ambitious plans to increase our site footprint by onethree by 2021.
This quarter was, of course, big for spectrum auctions, not just in Germany, where we could all watch the daily drama on the Bundesnetsagentor website. In Germany, we acquired 130 megahertz of additional spectrum at a cost of 2.2 €1,000,000,000 110,000,000 of the spectrum are additional to our current footprint. 80% of our base stations are already ready for 5 gs. We have all the ingredients for leading the market in 5 gs, and this is clearly our goal. In the U.
S, we successfully participated in the 2 millimeter wave spectrum auction. We were able to boost our nationwide average holdings to almost 500 megahertz at a cost of only $840,000,000 While we are busy building our low band 5 gs network, at the end of June, we also launched our first 5 gs offerings based on millimeter waves in 6 American cities. Moving on to Slide 7, and our momentum with customers remains very strong. More than 13,000,000 German homes already subscribed to our fiber products, 2,400,000 more than a year ago. In Germany and in our European markets, we added 2,000,000 converged customers in the last 12 months.
We added 3,100,000 mobile Concorde customers, of which 1,700,000 organically. And T Mobile continues to grow strongly. You know the numbers, and raised its guidance for 2019 branded postpaid net adds again towards a new range of €3,500,000 to €4,000,000 This compares to an initial guidance of €2,600,000 to €3,600,000 net adds. T Mobile also raised its 2019 EBITDA guidance to $12,900,000,000 to $13,300,000,000 up from an initial $12,700,000,000 to $13,200,000,000 T Mobile also said they expect CapEx at the top end of their previous range. At the same time, we are happy to confirm our €13,400,000,000 €13,400,000,000 EBITDA after lease target for our U.
S. Operation ex U. S. Operations here, so the European footprint. However, we only confirm but don't raise our group guidance at this stage.
The reason for this is a higher than expected U. S. GAAP IFRS translation, mainly related to the so called power purchase agreements. These are essentially forward swaps related to our complete shift towards renewable energy. Because of these swaps, we now expect the U.
S. GAAP IFRS translation at around €700,000,000 this year instead of an initial €600,000,000 This pretty much offsets the T Mobile's EBITDA guidance hike at the group level. In the appendix to this presentation, you can also find the guidance for each segment, which we again confirmed this quarter. While we are delivering on the financials, we remain busy working on the portfolio. This remains a key focus.
Let me start with the big news we had 2 weeks ago when T Mobile entered a consent decree with the U. S. Department of Justice. We also announced several agreements with DISH. These agreements mark further important steps towards final approval of this transaction.
We continue to see this as a major win win for U. S. Consumers and our investors. You can find the details in the various filings. We reiterate our €43,000,000,000 synergy target, but we are particularly pleased that the agreements protect our plans to supercharge the Un carrier as we intended it.
We will spend an unprecedented $15,000,000,000 to aggressively leverage a unique combination of frequencies, a market leading 300 megahertz in total. We will create a totally transformative and superior 5 gs network, so we are ready to successfully compete and U. S. Customers stand to benefit whichever way you look at it. We have now gained many important approvals and we remain confident and optimistic about the remaining regulatory steps in the U.
S. Back in Europe, we have fundamentally strengthened our operations in Austria and the Netherlands, while we have exited Albania. We have carved out our Dutch towers and are working on our Austrian towers. And by the way, our German tower cargo has been legally separated since 2002. I was surprised about the excitement that Vodafone announced separating their tower business in Europe.
But anyway, as a next step in our T Systems transformation, we have announced to transfer our telecommunications and classifieds ICT portfolio unit from T Systems into the German segment by mid-twenty 20. We might discuss this in more detail later on, but this is an important step to focus the business more towards the customers in the respective area of telecommunication. This will create a more efficient and customer friendly setup. And we have decided to carve out the system security and IoT portfolio units to make them more agile and competitive towards the different customer groups, which we are aiming. With this, you see that Deutsche Telekom is working hard on all fronts within the very competitive landscape we are facing.
I will hand over to Christian, who will give you more details on the financials of the Q2.
So thank you, Tim, and welcome from my side. So let me start with the Q2 financials displayed on page number 10. Reported revenues this quarter were up by 7.1%. Organic growth was 2.9%, very similar to the last quarter. Reported EBITDA after leases grew by 7.1% and that would have been 3.5% organically.
So how do we grow outside the U. S? EBITDA growth DTX U. S. Was up 2.9% this quarter and that would have been 1.5% growth on an organic basis, which is a little bit below the guided run rate, but it's very much due to phasing in the DHS and we're absolutely comfortable to meet our full year guidance.
Free cash flow was up by 5.4% this quarter, a bit below the full year run rate. But you know that our cash flow is quite volatile. And you can see this if you make a comparison on the first half year results where free cash flow grew at 11.4%. Adjusted net profit grew by 7.4% or roughly €100,000,000 and the strong increase in the reported net profit obviously is related to the Telcolect settlement, which we faced in the Q2 of last year. Let me move to the operational performance by segment and let's start as usual with Germany.
Total revenue grew by 1.2%, very much driven by total service revenue growth, but also by increased handset revenue growth. EBITDA after leases grew at 2.4% this quarter, same number as you have seen in Q1 and is very consistent with the full year guidance. As we're moving to the service revenue, you see that the service revenue overall grew at 0.6% this quarter, and that was very much driven by the performance in mobile service revenues but also wholesale. Headwinds, obviously, we're facing also due to the IP migration in the fixed retail revenue side. Fixed retail revenues declined by 1.4 percent, which is a bit worse compared to the last quarter.
Wholesale grew at 2.1%. And on the mobile side, we had a service revenue growth of 2.4%, and that includes a negative impact of 0.6% coming from regulation. Don't be too optimistic for the next quarter. Next quarter, we are facing 2 negative effects on the mobile service revenue. Obviously, we're going to see the full quarter impact on the international calling regulation, which we haven't seen in the Q2.
And this will coincide with a tougher comp effect next quarter mainly related to the visitor revenue phasing from last year. So that will probably weigh a bit on next quarter's service revenue results. But overall, we're absolutely confident to meet our 2% CAGR guidance, which we have given to you at the Capital Markets Day. So if you move into the next page, you see the steady performance on the mobile side. We had another 150,000 140,000 net adds, which was fueled both from B2B and B2C.
On Page 14, you can see that the mobile data usage continues to grow. And the last quarter, it was 3 point 2 gigabytes, up from 2.8 gigabytes in the previous quarter. And also, we see a steady growth in the convergent offerings now in the last quarter, 54% of all Magenta branded mobile contracts are part of convergent relationship. That's an increase of 8 points compared to the 46% from last year. And 23% of the broadband households are now in a converged contract.
That's another increase of 3 points compared to the 20% last year. Moving over to the German fixed performance. As you can see, we had quite a bit of a soft increase on the mobile broadband net adds. This is driven by a couple of factors. One is, overall, we're seeing a slower market increase overall in the German broadband market, while at the same time, the IP migration impact continues to be fairly stable.
If you exclude the IP migration, we would have been well above 30% in net all operational teams are now we have all hands on deck and actually to basically increase that momentum going forward. We had the 15th consecutive quarter where we have more than 500,000 fiber net adds. This is a very strong performance. As you can see, we have seen some softer performance on the wholesale side in the recent quarter, but that remains a steady growth engine to us. Finally, we added 58,000 TV customers consistent with the better growth which we have seen in the recent quarters.
Taking a look at the revenue trends on the fixed line side. As I said earlier on, our retail revenues fell by 1.4%, very much driven by a weaker single play and other revenue performance. On the other hand, the broadband revenue growth remains to be fairly stable with 2% 2.3% growth, also in line with what we have seen in the last quarter. Let's move on to our usual slides from T Mobile US, who have already presented their great results, including another guidance upgrade 2 weeks ago. We won 1,800,000 new customers.
This is now the 25th consecutive quarter with more than 1,000,000 net adds. Our EBITDA growth under IFRS was 6%, slightly below the 7% reported by T Mobile under U. S. GAAP. And Tim explained it, this is very much driven by a negative impact on IFRS driven by the power purchase agreements.
Taking a look at the performance metrics for T Mobile. A stunning postpaid churn rate was 0.78% compared with relative to the recent year in 2018 or even 2017. I think the commercial results, as we have seen that also in the previous quarters, underpinned by a very strong network performance. And the cost of service were slightly higher compared on a year by year basis because we received some hurricane related reimbursements back in the Q2 of last year. Moving on to Europe, Page 19, 300,000 additional mobile contract net adds, 330,000 new converged customers.
That brings us to a household penetration in Europe to 45 percent. This is an increase year over year of 11% points. Steady broadband performance was 63,000 net adds and a slight increase on the TV side, but we have some pretty hefty competition in Romania here. So this strong commercial performance obviously continues to fuel the financial growth, which you can see on Page number 20. Reported revenues were up by 2.8%.
EBITDA on a reported basis was up by 5.9%. If you basically make a comparison on an organic basis with which means take UPC out of the equation, revenues were up by 0.4% and EBITDA by was up by 2%, which is slightly better than the last quarter. This is why we remain absolutely on track with our full year guidance and also with our Capital Market Day targets, which we have given to you. Next slide, Page 21, is T Systems. On T Systems, I think we're making good progress on a very ambitious transformation plan.
But let me clearly state, there's still a way to go. Our order book continues to develop positively. You see that we have a 15% increase year over year. Revenues are fairly stable. On an EBITDA side, let me do a comparison on a half year performance.
On a half year comparison basis, EBITDA has increased by 19%, and that also keeps us very confident that we're going to reach our full year guidance of €500,000,000 EBITDA and also we'll be committed to our Capital Market Day targets. Next segment, Group Development. Obviously, the results here are impacted by the consolidation of Tele2 Netherlands, and we had an inter segment transfer of Dutch Towers from T Mobile into GD Towers as of January. The organic sales grew by 2.1% and EBITDA grew by 6.3%. The underlying Dutch mobile service revenue growth accelerated to 3.3% based on steady commercials.
And as Tim already said, during the last 12 months, we have added 1400 physical sites here in Germany. So we are well on track with our footprint expansion of 9,000 sites in between 20 18 and end of 2021. On the tower side, the recurring rental revenues grew by 3.4% while EBITDA after leases grew at 2.9%. Everything is on an organic basis. Let's get to the last two financial charts.
One is dealing with free cash flow, net debt and net income, and then we get to the balance sheet ratios. As I said earlier on, the free cash flow grew at 5.4%. This was mainly driven by higher operating cash flow while which was overcompensating the front loading of the CapEx spend in the U. S. From a guidance perspective, we're fully on track with the guidance which we have given.
The net debt has increased by €3,800,000,000 Q over Q. This is very much driven by 3 factors. 1 is the payout for the group dividend. The second one is additional tower leases, which we contracted in the U. S.
And the third one is driven by payouts, especially for the millimeter wave auction in the U. S. And that drove net debt to a 3 point €8,000,000,000 higher level compared to Q1. Net income, as I said earlier on, was up roughly €100,000,000 That was very much driven by a stronger EBITDA performance despite the fact that we had to face higher depreciations and also higher payouts to minorities. If we move into the final chart, which is basically showing the balance sheet ratios, you see that all our ratios, whether it be in rating or whether it be in the leverage, are still green.
Everyone has to mention that we are really at the upper, upper end of the corridor when it comes to leverage. We have given ourselves a target of 2.25% to 2.75% and now our leverage ratio is at 2.74, but we expect a slight improvement towards the end of the year. So if I sum it up, I would say it was another good to very good quarter in Q2. We're delivering against our 2019 guidance. We're in line with what we have said at the Capital Markets Day.
And with that, Tim and I are ready for questions. Thank you.
Great. Thank you, Christian. Thank you, Tim. And now we can start with the Q and A. You can also send us questions by webcast.
And sometimes I get some for via e mail, which is also fine. So let's start with the first question, which is from Polo at UBS.
Yes. Just a few questions. Just in terms of German mobile, now that the German spectrum auction is over, what are your thoughts about the prospect of network sharing in Germany? And what are your latest thoughts about the risk from a 4th mobile network build? And my second question is really just following up in terms of the German broadband market and the commentary.
You obviously highlighted that there's a slowdown in terms of the broader market. We've also heard it from some of your competitors. But what is your perspective on why the market is slowing down for German broadband? And has this continued in terms of July August?
Polo, this is Tim. So let me start with the network sharing agreements and the discussions which we're having. I think we have said publicly that we are open to collaborate in order to improve the capacity utilization of the existing sites. I think Vodafone also stated their willingness to collaborate. There is an obvious place for sharing, which relates to some of the coverage obligations which we're having, especially from the 5 gs auction, which has been defied, especially the white spots or the waterways, where it make totally sense to collaborate.
Now that said, you should know that with our tower code, which we have established 2,002, we have already quite a few tower collocations. The ratio is today on our towers is 2.3 times. So that we have to find out where this kind of collaboration and tower sharing is in addition is possible. We are exploring currently alternative sharings options from a technical and from an economic perspective. So it's too early to say where we are heading to.
But in any case, let's share a little bit the principles how we are approaching our virtual telecom is coming with a significant more investments and amount of towers in the German landscape. And therefore, it's not that I give you one slide tower and you give us the access to the rest of the towers. That doesn't make sense. So this should be following the principle of reciprocity. So 10 from me, 10 from you, that makes totally sense.
Then we have a benefit out of this. This is the one idea. The second one is we haven't decided on the way how we are sharing. There will be definitely a sharing based on the passive side. That's an easy one.
But whether we go into run sharing and other sharing capabilities, this is from a technical basis not so easy and we have to really understand whether this is feasible. One last sentence towards white spots. There is an initiative from the government to build sites in rural areas. I think the idea is here to build a passive infrastructure with connectivity, which we can use then for our antennas. And we definitely support this idea because these are areas and the very rural areas in the countryside and even in natural reserve areas where it is very difficult for us to get any house sites so that the government is then supporting us and this makes totally sense.
This will help to reduce the build out costs and it will give them full coverage everywhere prospectively and that is something which we are supporting as well. So we are in a good dialogue with the Minister of Infrastructure and on the subject as well.
Let me continue with the German broadband market. So what we're seeing right now and if you compare the net adds of the other competitors in Germany is that the overall market growth is slowing down. One of the arguments which we are getting is we had a, let's say, an artificial migration impact in Germany coming from people from the outside entering Germany, which has slowed down significantly. This is one of the reasons. At the same time, as the market slows down, our forced migration rates keep at the same level.
So the impact of forced migration becomes higher. What we also see is that most of our competitors continue to offer longer promo periods compared to us. And therefore, obviously, we have to think thoroughly through on how we basically change that momentum in order to increase our net addshare. Do we see anything longer term, July, August? I think it's a bit too early to tell.
I would say the only thing which we can influence is our play. So we have to optimize our go to market. We cannot do anything on the market development. We'll see that. But expect us that we're working on our net edge share, and I think everyone is basically in sync here.
Polo, I think I missed one part of your question, which was with regard to Eins and Eins and the mobile network build out of the next operator, which has been seen. Look, the first thing is we have now an incoming 4th network operator. But on the other side, Weins and Einsdelisch is not a new player. It's already an established player in the market with over 9,000,000 customers. And so therefore, he has already, say, a base which he can use to utilize a prospective infrastructure he's going to build.
As part of the merger remedies, Einsatz and Einsatz has national roaming rights on the Telefonica Deutschland network. So he's even enabled during the phase of building his infrastructure to use existing capabilities of 1 of the operators. And therefore, we take that very serious. I think there is a decision for a new operator being made. And we will react we will react accordingly here from our perspective without going into the details on this one.
But we take him quite serious with his ambitions to build out an own infrastructure. Given his 25% build out requirements by 2025 and the spectrum he has acquired, we expect that at the beginning, he will act regionally limited, so in specific areas. He will combine that then with the national roaming he has on the Telefonica network to offer countrywide service. I think all things considered, we will see some impact on the market from this player. It's good to have him because it will even help in the rural areas to have another kind of pillar for building sites and building infrastructure.
So I hope that the bet the government and the political leaders here made at the end of the day pays off.
Okay. The next question is from Mathieu at Barcap.
Yes, good afternoon. Thank you. First, coming back to tower and actually network sharing. So the EC, I think yesterday, sent a statement of objections to your planned network sharing agreement in the Czech Republic. I was wondering if you think this is a very special situation or special case or actually you think we should make some read across for similar deals in other countries.
And you were just mentioning Germany. So I was wondering how you read that statement in the context of Germany. And the second question, I'm sure you have a little bit of spectrum auction fatigue. But I guess the outcome of the spectrum auction wasn't exactly what the regulator and the government expected. And I wanted to see if you thought they could be thinking differently for future renewals, say, maybe 800 megahertz in a few years' time in order to try to avoid the kind of outcome we got?
Thank you.
Okay. So let me start with the Czech situation. So first of all, let me note that the state of rejection is not a final ruling. And obviously, we're strongly opposing the preliminary conclusions which have been drawn by the EC. We strongly believe that the network sharing has vast benefits when it comes to innovation, when it comes to better efficiency by retrieving cost synergies and so forth and obviously providing better quality.
To your question, whether we're seeing a read across, no, we don't see a read across across different countries. 1st, we have to see how the final ruling will look like in Czech. Secondly, we're taking things also we had that discussion on M and A. For example, in the Netherlands, on a country by country basis, the EC has been very clear about this that they're taking everything on a country by country on a case by case basis. So we don't see a real cross on this one.
Yes. Look, I would not call it a spectrum fatigue, which we're having here. I think there's a normal course of business here, and there are auctions going easier. Others are more difficult. I just want to draw your attention to what happened on the millimeter wave auction in the U.
S. I think it's a fantastic outcome for the U. S. Market and even for deploying high bandwidth in for the U. S.
Citizens. I think the German auction wasn't as easy, and I was clear what was coming out. I was announcing that even publicly. But at the end of the day, the auction was chosen or the methodology was chosen as we know it. I think the design has contributed to higher costs at the end of the day because a shortage was created on spectrum.
And that was why it took longer. Now on top of that, I think reducing the increment as they did it during the auction was even another failure of the Bundesnatzaghen tour in the way how they designed it, which ended then in a very long process of uncertainty. And on top of that, I think even taking 100 megahertz of spectrum out, where it's totally unclear how this is getting allocated to the industry and to the players and maybe being fully unused at the end of the day in most parts of the country, I think this is a design failure of this German auction. Now without going too much detail because I think it's not making a big difference for our investors here at that point in time, I will we are working on a letter on a suggestion what in the future should be done differently in this auction and in the auction designs. And I think we are still contesting the auction in court in the way how it was designed in parallel because I think this was in a lot of areas was unfair how it was designed.
So water under the bridge management always have to live with their interdependencies. So we take it as we as it is and we move forward. And we are designing our rollout plan according to this And there's nothing else to be said as that we are trying to avoid mistakes as happened in the upcoming auctions.
Great. Thanks, Tim. Thanks, Christian. Next is George at Citi, please.
Hi, and thank you for taking the questions. I have 2. The first one is around the U. S. Steel.
And I know you can't comment about the details, but more about your thinking on how to approach the objections that some of the states have expressed. And what I wondered is whether you have any plans to engage in a dialogue with them perhaps in order to find a settlement before or whether you think given the support you have from the relevant authorities, it makes more sense to just wait it out and wait for a final court decision? And my second question is around the network sharing options that you have. The 2 operators that share in Germany, but maybe also in other countries, not just in Germany, have kind of left the door open in their conference calls for a single for some more collaboration in legacy technologies, perhaps even a single 2 gs network where the other 2 or 3 operators can roam. And that way, you feel a lot of spectrum, you get rid of a lot of costs and equipment and everything else.
Is that something you are considering also? If that's the case, if you could share with us which what's the framework in which you think you maximize the synergies from? Thanks.
George, let me start maybe a little bit broader with the view on the U. S. Situation and where we are. Look, I think we stepped over a big hurdle recently with the DOJ approval. Now and for us, this is a major milestone which was achieved because we have now both from the FCC and from the DOJ, we got the federal support.
And yes, the process was much longer and more complex than we all thought. And yes, there were remedies being imposed here on us. But what I can tell you is the deal mechanics and the deal logic is fully intact. Our deal logic was always to build out a 5 gs network, which is unique in the U. S.
Market. And part of the remedies is that we build 97% upon in the next 3 years and 99% in the 6 years on 5 gs services beyond 100 megabit per second. And this is part of the package, part of the remedies, part of, let's say, our strategic plan. The €43,000,000,000 synergies are confirmed and not tackled. And the profitability and the long term cash generation is supported or is, let's say, confirmed from us as well.
So I think this the deal logic is intact and having now both federal institutions supporting the deal. What we have had to accept was that there is another operator being created. And DISH as the remedy taker is taking the Boost, the Virgin Mobile and the Sprint prepaid business, which is almost 9,000,000 customers. He's getting 800 megahertz of our spectrum. He is supported by a 7 year MVNO on this one.
And on top of that, if we decommission shops and sells, he even can take this to build his own infrastructure. So if we see all of this packaged together, our logic is intact, but nevertheless, there is a significant opportunity for DISH to build a credible disruptive 4th wireless carrier in the U. S. With the Remedy. So I think we found a very balanced approach on all the sites to support the customer interest, to support the competitive interest and as well to support the network build out in this environment.
So I think we are very convinced about this deal logic when we go now into the court and when we are trying to get the justification and support for this. Clearly, the states filed their lawsuit before our agreement with the DOJ. And therefore, we believe that a lot of, let's say, these remedies, which I just described, are addressing their concerns already. And but nevertheless, we will be willing to engage with the state AGs, including those who are part of the lawsuit to fight kind of reasonable agreement. Today, we expect that we meet in court, which is now organized or let's say for the beginning of December.
The 9th December is the court where the lawsuit is taking place. And that is the time or the date why we are working on TOWARDS.
Okay. When it comes to the network sharing, especially in Germany, sorry to disappoint you, it's a little bit too early to basically comment on details because we haven't had detailed discussions yet. What we always said throughout the 5 gs after the 5 gs auction period to build out the rural areas as we are being obliged to do so. It doesn't make sense for anybody to do it on themselves. So there is a rationale self.
So there is a rationale obviously to go for network sharing option. The easiest way would obviously passive network sharing, but I think that is contingent upon the discussions which we have to have. And you see that we have quite a variety of sharing agreements in our portfolio, just remembering you about the T Mobile Check and O2 question, which we just had. I think when it comes to the German tower market, one thing is very clear. From a tower perspective, that's going to be a growth business because we're going to see additional demands and build out in the rural areas.
We will have another player who has to build out a network. So there is obviously a lot of towers to come to the German markets. From a tower perspective, it's really attractive market.
Great. Thanks. So next is Akhil at JPMorgan.
Yes.
Hi, good afternoon. Thanks for taking
the questions. Can I just now kind of follow-up on the topic of towers? Obviously, you've talked about network sharing, but Tim, you mentioned at the beginning or early on in the call, your surprise at the share price reaction of Vodafone's comments. I guess just keen to understand how you think about that. I guess network sharing and synergies have been talked about for a long time by yourselves and others.
I guess the shift people perceived from their end was an attempt to try and monetize the valuation arbitrage that is perceived between tower valuations and telco. So to what extent are those things you're talking about internally thinking about how do you think about the merits or not of actually financially spinning out towers? So I guess that would be my first question. And then the second one is on the U. S.
I guess it's a bigger picture question. I mean you've obviously talked about the deal logic remaining intact despite the remedies. How do you think about the operational performance in U. S? I guess one of the things that stands out since the deal was announced is the extent to which Sprint numbers have missed consensus numbers.
We've seen, if you look at Street numbers, double digit cuts to EBITDA midterm. I guess, how do you think about the execution risk that, that entails? And I guess, your confidence in actually delivering on the objective of that transaction financially? Thanks a
lot. Okay. Let me just go again into the tower question here and the regarding first Chairman I signed even the first Chairman I signed even in the first context of this company. And since then, we're operating independently. We have now a new attempt to that business, new management and significant cost savings in our EBITDA.
Just to give you an example, after 6 months, €270,000,000 is €4,000,000 I think that was the number, which we have seen. So we improved the performance of this company by every day, which is, by the way, creating value. 2nd, Christian said it, this business is heavily growing. And today, it is 100% owned by Deutsche Telekom shareholders. So the moment where we monetize that business, that moment, we might lose this opportunity.
So therefore, you have to find the right timing to monetize this business. I strongly believe that even our towers have a value of 20 times on what we have seen in the market. And I saw some sell side now even putting into the sum of the parts here, which I think I highly appreciate that because it is creating more transparency about the asset base of Deutsche Telekom. Now guys, give us some credit. With our GD troops group development with Thorsten Langer and Christian on this, we have a track record on finding the right way of monetizing assets.
Remember, when we did the MetroPCS deal at 15.60, it was a strike price when we did the deal. Remember how we monetized Scout, how we monetized Strato at the right valuation, nobody expected. Look just on the small transaction of Stroyer, where we had a loss making T online portfolio in a shrinking click rate business, which we exchanged into stock, which is how today more than €550,000,000 worth of equity value. So I think we have some track record on how we monetize it. And by the way, it is not the question of how, it is more it's not the question of whether we do it.
It's more the question how we're doing. Are we considering an IPO at one point in time? Are we trying to merge with somebody on this one, creating synergies beyond the portfolio which we have? Are we selling pieces of that one? Are we going out of a majority at that point?
Or are we developing that business for a while knowing that this asset is growing? So please give us the credit for what we have done and the benefit of the doubt. Be aware that we are looking of every opportunity which is rising in the marketplace. I'm very open on that one. That is why I pushed the business into group development where it is suited today.
And let's comment when we realize value than rather announcing something and then running after all commitments. So the second question, let me think, the U. S. Bigger. Deal Logging Intact, operational performance in U.
S, Sprint missing consensus. Look, I'm not commenting on any kind of internal discussions whether this business is intact, it's delivering on OpEx and CapEx synergies. And if you want to realize the value you need on the total business and not only half of it, you need it all. Look, customers in spectrum are at the more or less at the amount of what we have in mind. So I'm not commenting on any re trade here in the conference call.
Please understand that.
Yes. I mean, we have clearly confirmed the OpEx and CapEx synergies of the transaction. I think you also heard Braxton on the call that where we are in terms of our leverage assumptions and EBITDA business case. So next question is from Ulrich at here, Jefferies please. Yes.
Thanks very much. My first question is about the Remedy deal. I think in the past, we've heard you discuss the risks that DISH has a bit of a litigious track record. What is it that protects you from this in the current deal? Is it the structure of the contract?
Is it maybe that the industrial logic of this deal aligns you better? Or what gives you the confidence that this is a good deal partner in this from this particular angle? And the second question is, coming back to the broadband slowdown, I was just wondering, is there an element in the reasons also that you are now discounting and test the best by discounting the offers initially and that when customers sort of get back to paying full price, that there's sort of a bit of a bill shock there? Or is this simply not an issue when you look at the numbers of what's happening in your own customer base?
Yes. With regard to the first question, not easy to answer. First, you meet in these deals always new partners, and you never know how the future is looking at that point in time. And I know Charlie Ergen now already for years. We once had a discussion to merge our businesses.
That's quite some time ago. I meet him on a regular basis. I think he's a great entrepreneur in how he has driven the business. But we know about his reputation. And therefore, the only thing what we can do is to protect ourselves by drafting and Now you have seen the 8 ks filings and have read them.
So you know about what has been said about the protection rights. I do not want to disclose I'm not allowed to disclose anything which is going beyond that with regards to protections in gender controls and other things. So therefore, please trust us on that we have an appropriate and diligent way of how we are drafting contracts here.
So when it comes to the broadband question, so specific answer to a specific question, no, we don't see a bill shock. So we don't see a significant increase in churn once the customer has to pay full price. What we're seeing is that competitors are still significantly more aggressive on promos than we are. And I think we have to think through how we get to an operational full potential when it comes to go to market activities, whether it's going to be an upsell or whether it's going to be specific offers to specific reasons in order to bring up the net add ratio on the broadband side. But it's not like customers are leaving us once they're seeing their full price.
Great. Thanks. Next is Mandeep from Redburn, please.
Thank you for taking the question. I just wanted to so just a quick question on the dividend. Is it reasonable assumption should the T Mobile deal complete this year that we should just assume the dividend for Deutsche Telekom will be 0 point 50 dollars Is that a reasonable or fair assumption to make? If you can maybe just help us with that. Thanks.
Look, I can only come back to our dividend policy. And we said there is a floor, which is 0 point 50 dollars I've been asked the question especially if the deal closes this year, what's going to be the full impact of the combined entity. We said it's EPS dilutive. But since we don't have full visibility in the Sprint books, we can't tell you the exact number. So I cannot confirm a 50.
I cannot confirm anything else. I think we just have to simply take a look into the combined entity and then take a look how EPS is impacted.
Knowing how important that question is for our shareholders, Chris and myself, we have said that by the Q3 results, after discussing that with the Supervisory Board and giving a direction towards this and knowing exactly where our business is heading to, which looks quite positive at that point in time, we will give you an indication by the next quarterly results on how we think about the dividend for 2019.
Okay. And with that, we move on to Christian at HSBC, please.
Yes. Thank you. A couple of questions. First one is on your earlier statement on the U. S.
Where you said basically, I think literally, we don't raise our U. S. Guidance yet. So I mean, do you see that there's upside if they hit the higher end of their own guidance? Is that why you're still a bit cautious where they end up?
Secondly, there was a decision on stream on, and I think you are now basically allowing EU roaming so all the customers can use it outside of Germany. Can you quantify maybe the financial impact from that? I mean, you already guided for a lower H2. Is that one of the reasons? And then lastly, on T Systems, yes, there was some announcement that you're transferring the connectivity business over to the German unit.
Can you maybe quantify the EBITDA effect impact? I mean, I think the total business of T Systems is around €500,000,000 or so this year, which would be transferred, just to have a feel. And then is it fair to say generally that you're a bit behind maybe on your restructuring plan? I mean, was that transfer always part of the plan or is it kind of a new development? Thank you.
So let me start with the stream on question. Obviously, there were quite a bit of intensive discussions on whether we would allow roaming yes or no on the EU on the StreamOM proposition. We finally came to the conclusion that we will include this because we're forced to, but we don't make a statement on the financial impact of that, I would say, proposition expansion.
Let me give you a little bit flavor about what we're doing at T Systems and what's happening there. And by the way, we announced to our employees that we are working on this one. The work group has not been finally negotiated with the unions. And we will need as well the support of our supervisory board, which is meeting beginning of September. So we are working on this project, and I think it's worth doing this.
What are we doing here? And look, there were the dark times of Deutsche Telekom when a lot of battles took place and where the question was which kind of business belongs to A and which kind of business belongs to B. And there were some artificial borders being built in the company. And one of the leading ones is the telecommunication services business. Because just to give you an example, if we are negotiating governmental contracts, these governmental contracts are discussed with T Systems, but the execution with the municipalities or even with the states is taking place in the Deutschland business.
And this is creating interfaces. Another example, and I remember that battle when Rene sent me in that battle in 2006 when he said, We will never give up our T Mobile business. It will never be negotiated by T Systems. And I was successfully negotiating that at that point in time. So the entire sales organization and even the pricing for every big customers on mobile is in the German business and not at T Systems.
The T Systems business only handles a margin when they are selling to the big corporate customers mobile services. On top of that, we have product houses who are developing the latest products like the MPLS substitution products, the SD WAN services. When it comes to connectivity services in FreeMove and other areas. So we do that twice. We do that either on one side and on the other side in the organization.
So you can question and you could criticize me for why, Tim, have you waited so long on bringing this business together? Honestly, we had so many other big things to get resolved over the past that it wasn't it was always on my list but never on the priority list. Now cleaning up all the garage here. We are now even in that corner. And there's another element.
We even want to make sure that the classified business, all the business which are related to secure service for the for governmental issues that they are very close to the core network and how we're operating. So therefore, we decided and we are aiming for bringing these two business together to be more efficient, to be more customer oriented, to make it out of one hand with one leadership and with an even stronger attempt to grow the business. I think pro form a financials will be provided with the 2020 numbers coming out. I think there is no change in the financial guidance on a pro form a basis here. And I think we are talking about 1 third of the revenues of the systems, which are affected by this reorganization within the organization.
On top of that, the TC business, the telecommunication service business, is very close to 2 other businesses. 1 is the security business because networks should be over secure. And the second one is very close to the IoT business because a lot of, let's say, business applications are in the IoT running over this infrastructure. Now we're going to want to create another now silo organization here. And therefore, we take this company companies independent.
We build own companies around T SEC and a known company about the IoT, so that this company has 3 kind of areas which they're selling to. The first one is Germany, the second one is T Systems and the third one is to markets outside of this footprint. So we put a P and L behind that. You know that I'm a big fan of this individual entrepreneurial ownerships of businesses and just pointing on the Netherlands or looking to other areas where we have done that, we see that there is a correlation even with the success we are having. So therefore, this is a second attempt to grow significantly these two areas in our B2B portfolio.
So this is the reason behind systems and what we are doing there. And we will report in the next quarters about the success and the process we met. Coming to your third question and coming to the U. S. And coming to the guidance.
Look, T. O. M. U. S.
Has increased this guidance by 150 $1,000,000 in the midpoint. However, we now expect that the bridge between the IFRS and the U. S. GAAP results will be around 0.7. In our own plan, it was just 0.6 $1,000,000,000 And I laid out where it's coming from, mainly from this bonds for renewable energy.
And you know that we have a total new attempt towards the sustainability in that group. We want to be based on renewable energies by 2021 already for all emission within the group. And our ambition is by 2,000 and 30 to reduce our energy consumption by 90%. This is one pillar of our big sustainability program, which we have laid out here. Maybe it's worth that we put that into one of the next capital next quarter results to show you what we are aiming for.
And therefore, we have an additional cost, which is showing up in the IFRS numbers, but not in the U. S. GAAP numbers. This is the reason that we haven't increased our guidance. If this would not have been the case, probably would have done that.
But that is the reason that we are that this guidance is in Entekka. Let me say another sentence on where we stand. And you have seen the numbers. Honestly, we worked hard into the year. We have a new management team here.
We have a new CFO. We have a lot of new managers in the business. And we had to sort out who is doing what and to gain our traction. If I'm now looking after the Q2 on
the business, I think we have tractions on all angles
of the business, The track which we have on cost side, you've seen in Germany, the cost is the indirect costs are improving. Towards the targets we've laid out. And even the operational business doing very nice, 8 consecutive quarters now in a row for our Germany and Europe business where we are growing revenues now. So this is not only just a 1 quarter event. This is already sustainable focus.
So I see that this company is forward and working forward. So therefore, if we're moving the likelihood that we see exceeding is higher than failing. That is clearly my assessment for 2019.
Okay. Thank you, Tim. And next is Fred at Bank of America, please.
Hi. Good afternoon. So a couple of questions. Firstly, on the U. S, if you could share with us expectations on timing.
So you gave us the date of the state AGs. But once this is past us, what's your updated view on timing? And it's interesting comments on your commentary on Q3 dividends. So will you be in a position by that time to have had that look into the numbers and refreshed your math? And lastly, on leverage and dividend outlook, are you looking at a 1 year or more kind of multiyear dividend outlook?
2nd point on broadband, just more general strategic view. As a market leader, your message used to be focused more on upselling. I mean, shouldn't the focus be on share of revenue instead of net add more specifically? Or do you think you have to continue to be at around the 40% target share of adds as an important milestone? And then very quickly, whether you had any thoughts into 5 gs pricing.
Vodafone has launched its 5 gs price premium on all the price points in Germany. You have that €85 price point, but if you could tell us a bit more about your pricing strategy in Germany on 5 gs? Thank you.
Okay, Fred. Let me start. First, U. S. Expectation on timing.
The first thing is there has been a delay. You know that. Now for the federal sorry, for the for the trial, the 9th December is now the time which has been defined. That said, this is, let's say, what we are working on, What the implications on the closing is going to be, that is too speculative at that point in time. So we are focusing now on the 9th December with regard to the next milestone and almost the last milestone in this long procedures here.
No, it's not good that we have so long time period of uncertainty. But if you look to our operational performance, if you look to the T Mobile business, I'm not so worried. I'm not too worried too much because we are working on a very strong operational track here, and I do not see why this should break within the next 4 or 5 months. 2nd question, what I've said on the dividend, we have a dividend policy. We're at the Capital Markets Day and we have clearly said that our dividend is following the earnings per share growth for the next years.
And this is intact. What we haven't foreseen is that because everybody was expecting the closing in 2019, what is happening if the closing of this year is not taking place? What is then the dividend? What is the logic behind that? And we know that there is some uncertainty in the market at that point in time.
Look, we had so many things to do in parallel. You cannot define a dividend if you do not know what you earn at the end of the year. So therefore, I think with the diligent approach and with some patience, and I know guys, I know you're all not patient, but this is, let's say, what I can only tell you at that point in time. We will have now in the next 8 weeks an intense discussion with our looking to the numbers while we foresee how the performance of this year going to look like and expecting that maybe the closings is not going to take place during the course of this year, what would be an appropriate dividend to be paid off to our investors. This is the path which I described.
And to give you an indication because it's anyhow subjected to the Board approvals and to the Annual Meeting, giving you an indication as we always did it in the past in the Q3 is something which Christian and myself are aiming for.
So let me take on that broadband question, Fred. And I think it's not an eitheror. It's a both. We always had an ambition to have a 40% net add share, and we always said that we want to have our organization to focus on more upselling given our great opportunity, which we have on super vectoring. So I think they have to basically handle both vectors, volume and upselling.
And I think what you've seen in the recent quarters years is we have always shown a steady hand when it comes to pricing. So there's a difference between promotional activities and structural pricing activities. So don't expect any surprises on this one. On the strategy on 5 gs pricing, I think it is way too early to discuss price points. And if we discuss price points, we discuss price points with everyone.
But I think we have a strategy in mobile, which is more for more. And I think we should apply that strategy, which has been proven successful also for the 5 gs environment. And since this has given superior experiences, I would expect a continuation with a more for more strategy when it comes to 5 gs pricing.
Excellent. Thank you, Christian and Tim. And we take 2 more questions. I think the next one is from Andrew at Goldman.
Thank you. Good afternoon, everyone. I had first question again back on Taos and on the efficiencies. But one of the perennial problems is operators retaining efficiencies that they've achieved. What gives you the confidence that you can retain efficiency benefits, especially when the typical response we see when operators in the market each make savings is that they end up giving these benefits to the customer in the form of lower prices?
Densification. You've highlighted I think you're highlighting a more towers to customers approach, and you obviously highlighted some more deployed sites in Germany. What do you think is the increase in densification of towers you need in Germany in the long term for 5 gs? And how does that or does that differ across markets?
Okay. Andrew, so I think whatever we will do with the towers will always be subject to protecting our network leadership. I think we have clear leadership in Germany. We intend to protect and extend this leadership. 5 gs is a great opportunity for this.
I think at this point in time, you referred to our 9,000 site expansion plan, which we first laid out at the full year results 2017, so in February 2018. And that plan is intact. But frankly, it mainly relates to coverage rather than densification. Of course, there's always a bit of densification going on. But the plan of the 9,000 sites plan is mainly related to motorway coverage, railways, white spots to the extent that they're economical for us together with other carriers.
And that's why they usually actually also macro sites rather than rooftops going forward. In the 1st year, it's more focused on rooftops going forward, more macro sites. That's all in the guidance that we gave at the Capital Markets Day. And I think we will then, of course, also consider the build out obligation related to the 5 gs auction. I emphasize that this 9,000 plan preceded the auction.
And the coverage obligation, those will add to the build out plan that we have. But again, they are more related to coverage rather than densification. And so I think the focus will for the next few years will be still be on coverage rather than densification. I think with that, I just move on to Wolfgang Schveicht, who is Bankhaus Lampe who is asked who wants to ask the next question. Wolfgang?
Yes. Hello. Good afternoon. Two questions from my side. One again on System Solutions.
Can you give us an idea how your plan for the classical IT part of T Systems are? We learned that you pulled the sale of the mainframe business to IBM. But is there still an idea of a kind of bigger deal for the complete classical IT part? And the second one on the German fixed business, you indicated ongoing problems going into Q3. Are you, however, confident that the sub segment can grow into the second half?
So do you expect some kind of Christmas business here?
First question with regard to the System Solutions. So if we're moving on with the TC part and with the classified business, so the governmental security service and we will have then a kind of IT service company, which is the T Systems part of it. In these areas, we have a lot of business where we have applied a kind of portfolio strategy approach. This portfolio approach means a very focused approach towards the markets which we have behind that. And it means as well the cash accretive business this business has, these portfolio elements have to develop over time.
As we have said, we are not tolerating any kind of losses anymore in the T Systems business. And if a business is not performing in the right angle, we even consider portfolio measures to move forward. Now the sale of the Mainframe business was a disappointment. And honestly, we oversee the antitrust side on this one because we thought it's in better hands if IBM would run it. We will now find a solution.
We are working on a solution. It's too early for me to disclose that, but I think we are very close to solving that issue. And for the other classical IT areas, we have our turnaround plan, which is intact. Adele is doing a great job. You have seen the numbers.
Order entry is growing. We have seen profitability rising. We have planned 10,000 layoff in these areas. We have a very clear strategy towards offshore facilities and on top of that improving quality. All parameters are in the right direction in green.
And we will move on delivering on the commitments which we have given you. So, IT service Diensliced on the one set and the telecommunication service on one hand on the other side. This is, let's say, the way how we are moving forward. And if the business is not performing, as cash losses are existing, we take decisive actions, not excluding even a sale of parts of the business.
On the German fixed performance, let me elaborate a bit on Q2 and then give kind of a direction towards Q3. In Q2, we had quite a bit of a weak IT business, and we expect this to increase in the current quarter. As I said earlier on, we're working on plans in order to increase the net adds as well as the upselling. I don't have any specific indications right now on the Christmas business, so we haven't discussed that in detail in great detail yet. But let me leapfrog from the Q4 to the Q1.
And as we said, the B2C IP migration is going to be finalized at the end of the year. Obviously, the forced churn effect from consumers will disappear in the Q1 of 2020.
Okay. Something to look forward to and a few things, I hope. And with that, we come to the end of the conference today conference call. If you have further questions, please contact us at the Investor Relations department as always. And with that, I thank Tim and Christian, and I hand back to the operator.
Thank you. Goodbye, guys. Thanks. Bye.
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