Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Telefónica Deutschland Q3 2022 Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I'd now like to turn the conference over to Mr. Christian Kern. Please go ahead.
Thank you, Stuart. Good morning and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to the Q3 2022 Results Call of Telefónica Deutschland. Before proceeding with the management presentation, we would like to inform you that the financial information contained in this document has been prepared under IFRS. As usual, this presentation may contain announcements that constitute forward-looking statements, which are no guarantees for future business performance and involve risks as well as uncertainties. Certain results may materially differ from those in these forward-looking statements due to several factors. We invite you to read the full disclaimer on the first slide of this presentation. Finally, the presentation is also available on our IR website.
With me today are Telefónica Deutschland CEO, Markus Haas, and CFO, Markus Rolle, who will take you through the presentation, followed by a Q&A session. Markus, without any further ado, over to you, please.
Thank you, Christian. Good morning, ladies and gentlemen, and a warm welcome to our Q3 2022 results call. Thank you for taking the time to join us. Today, we are delighted to report another strong set of results. The focused execution of our strategy is the main driver of our commercial and financial success. We are gaining market share with more than 32% of mobile service revenues as of half year. We are the clear number two in the German market. This is a positive trend we are confident to build while our business model is proving resilient despite the significant increase in inflation due to the war in the Ukraine. Far, we have managed the impacts of the inflationary environment well. Fueled by the strong nine-month performance, Telefónica Deutschland is upgrading its full-year 2022 outlook for the second time this year.
We are now targeting full year 2022 revenue and OIBDA growth of low mid-single digit percentage growth. We have entered the final quarter of our successful three-year Investment for Growth program and are making excellent progress across all our targets. Here are just a few key highlights. On mobile growth, we are consistently winning market share and mobile service revenues driven by our profitable growth quarter after quarter. Germany is a rational yet dynamic mobile market, and we anticipate this to remain the case. On B2B, on our targeted SME segment, we are driving client momentum and are gaining share. We are offering our customers not only sophisticated solutions for their telecoms needs but also savings potential. On smart bundling, we are focused on driving our household penetrations as well as increasing conversions.
As a result, we are growing the share of our customer base benefiting from more than one of our services. On ESG, we are focusing on the delivery of our ambitious responsible business plan 2025 and are well-recognized for our ESG achievements. The widely acknowledged network quality improvement and sustainability roadmap are the foundation for Telefónica Deutschland's more for more pricing strategy. On the back of the ongoing strong mobile data demand, we have already successfully launched our first pricing initiatives in the market. We are considering furthermore for more price adjustments for new tariffs across our whole portfolio and segments over the coming quarters. High customer satisfaction and low churn rates are much appreciated reflections of our overall achievements, supported by our O2 can do spirit. On my next slide reflect our strong KPIs for the nine-month period.
Markus Rolle will discuss our Q3 performance in more detail in the second part of our presentation. Mobile post-paid net additions were close to 1 million, leveraging the high O2 brand appeal in the market. O2 post-paid churn being broadly stable at 1% in combination with strong NPS for the O2 brand are reflecting high customer satisfaction with our services. With regards to our financial performance, revenues are up close to 6% year-over-year. OIBDA growth is almost 5% year-over-year, driven by profitable top-line growth. CapEx to sales at 14.9% comes with excellent progress in our 5G rollout. Overall, our strong nine-month results are driven by our sustained commercial traction and financial performance. Moving on to the next slide.
We are focused on capturing future growth opportunities across the entire sales funnel by leveraging our increased O2 brand and O2 product awareness. Customers do not only value us as game changer with O2 can do spirit but also highly appreciate the widely acknowledged network quality improvements. For quite a few years, we have offered our customers more and better services at a similar value for price proposition while simultaneously investing into our network and ESG leadership. Already in 2020, we achieved network parity. Since we have continued densifying our network, added coverage, and doubled available network speeds. As part of driving growth through our more for more pricing strategy, we have successfully launched first pricing initiatives in the market. For example, the O2 Grow tariff promo has ended, and the innovative tariff is positioned at the well-received price point of EUR 35 per month since early October.
Recently, the O2 my Home tariff portfolio has been expanded by a 500 Mbps cable offer, and the 1 Gbps cable promotion has been withdrawn. As mentioned, we are planning furthermore for more price adjustments for the new tariffs across our portfolios and segments over the coming quarters. The next slide shows our latest network successes. As a result of our focused execution in the Investment for Growth program, we have made excellent progress with the network modernization and 5G rollout. We are well on track to complete the swap the entire core network to Ericsson technology by year-end. 5G pop coverage has now reached around 75%, already overachieved the year-end target due to the rollout efficiencies within an unchanged CapEx envelope.
The O2 network is well established as clear number two in Germany in the latest Smartphone Magazin's 2022 mobile network test. For the first nine months, Telefónica Deutschland achieved, as one of the only two German mobile networks, the top rating outstanding. With Telefónica Deutschland approaching the end of its three-year Investment for Growth program, we are confident to maintain the high quality of the O2 network with normalized CapEx-to-sales levels. In this context, it is worth noting the just reported Q3 marks the CapEx peak for the final program year. Overall, these latest network quality improvements not only further increased NPS across Telefónica Deutschland's brand footprint portfolio, but also allow us to enhance further our energy efficiency. Hence, we have launched a three-year energy savings program with a target run rate of around 20% of gross energy savings by 2026.
The program incorporates key building blocks such as AI-supported network standby, free cooling initiatives for network elements, and switch to single RAN technology. Turning to the next slide. Telefónica Deutschland continues to shape sustainable digitalization and transformation of future economy and society through focused execution of its responsible business plan 2025. We are delivering on our climate protection targets and are well on track to reduce CO2 emissions by 90%. At the same time, we are neutralizing residual emissions latest by 2025. We recently signed a 10-year PPA at favorable prices, secured 30%-40% of our annual electricity demand, and decreased our dependency on market volatility. The PPA ensures direct sourcing of green energy from a green offshore wind park starting in 2025, further improving our green energy quality.
Overall, management's ambition remains to limit full year 2023 energy costs with the goal to remain broadly stable year-over-year. We are well underway in our energy negotiations, supported by the latest market developments on regulatory measures, price caps, efficiency measures. We made very good progress on our energy cost supply for 2023. Besides the efficiency measures that will allow a stable consumption year-over-year, we also entered into short and long-term supply negotiations and deals. The long-anticipated German government decision from yesterday to cap the price per megawatt hour at EUR 130 for 70% of last year's consumption will allow us to keep our total energy costs at broadly stable levels between 2022 and 2023. To put the regulation into context, the 130 price point is approximately 20% below the average price paid in 2022.
We expect on that basis the finalization of additional already negotiated supplies deals for 2023 and 2024 in the coming weeks. Also, the company takes concrete measures to be CO2 neutral along the entire value chain by 2040. In addition, Telefónica is even more focused on its social responsibilities by helping society to stay connected in these challenging times, dominated by war in the Ukraine and economic as well as political uncertainties. Telefónica Deutschland has been one of the first European MNOs responding to a request for support by the Ukraine Ministry of Digital Transformation. We donated a mix of new and refurbished hardware network components that can be used without restrictions for the expansion and repair of several thousand mobile sites in the Ukraine. Among our social programs, we have launched a digital guide for kids.
As a result of our combined ESG initiatives, we are well-recognized with top ratings by leading ESG rating agencies, including Sustainalytics and EcoVadis. Before handing over to Markus Rolle to take you through our strong Q3 performance in more detail, we'd like to share with you on my final slide some more color with regards to full year 2022 outlook upgrade. Similar to the updated outlook at half year, sustained and good business momentum is also the key factor supporting today's outlook upgrade. Our strong first nine-month performance was mainly driven by the ongoing strength of the core business, building on high O2 brand appeal, including strong customer demand for an innovative O2 Grow tariff, network parity, and ESG leadership. In this context, we upgrade our full year 2022 outlook for both revenues and OIBDA to low- to mid-single-digit % growth.
Besides absorbing other inflationary headwinds, the outlook upgrade includes anticipated energy costs of up to around EUR 210 million already in October. Energy prices at the spot markets dropped significantly on the back of improved supply situation across Europe. The assumptions of our regulatory headwinds are unchanged. We announced the outlook upgrade after careful consideration of the challenging macroeconomic and geopolitical environment on the back of the war in Ukraine. So far, we have managed the impacts of the inflationary environment well with our core business consistently delivering sustained and profitable growth. At the same time, we are continuously monitoring and analyzing the impact on the company from further developments of the COVID-19 pandemic, as well as the war in Ukraine. Markus, now over to you to take us through our Q3 results in more detail.
Thank you, Markus. Ladies and gentlemen, good morning also from me. It's my pleasure to discuss now in more details another quarter of strong commercial traction and sustained financial performance of Telefónica Deutschland. Revenues continued to show strong growth in Q3. They were up 6% year-over-year to almost EUR 2.1 billion. This is driven by the sustained MSR growth momentum and a record Q3 for handset sales. MSR maintained their growth path, posting 3.7% year-over-year growth to EUR 1.47 billion. MTRs remained the expected year-over-year headwind to the MSR growth, and roaming was broadly stable year-over-year, as travel patterns over the summer were somewhat more geared towards EU versus international destinations.
MSR growth momentum was mainly driven by the ongoing strong O2 brand appeal in the market that resulted in strong commercial traction, in particular, high customer demand for our successful tariff innovation O2 Grow. Handsets recorded a record Q3 on continued strong demand for high-value 5G-enabled devices and also a good device availability. Handset revenues grew 18.9% year-over-year to EUR 403 million, with a broadly neutral margin contribution. Fixed revenues were up 0.5% year-over-year to EUR 204 million, driven by the growth of the fixed retail broadband business, which is posting 1.6% year-over-year growth in Q3 2022. This is reflecting the steadily growing share of the high-value customers in the base. My next slide shows Telefónica Deutschland's sustained commercial traction.
Our mobile postpaid business continued its growth momentum in Q3, leveraging the high O2 brand appeal in the market and the success of our tariff innovation O2 Grow as the driver of the growth sets. The contribution from partner brands was again solid. As a result, net additions totaled to EUR 304,000 in Q3, 2022. Churn in the O2 brand remained at low rates of 1.2%, with a slight year-over-year increase driven by the anticipated temporarily higher churn due to the second wave on back of the EECC introduction, namely the churn bump, that is expected to normalize towards the year-end. We continue to see strong ARPU uplift from the first SIM gross adds, while MSR growth is also supported by second and third SIMs, which naturally contribute lower ARPUs.
The O2 postpaid ARPU was down -1.3% year-over-year, mainly reflecting a combination of the accelerated MTR glide path and our continued focus on customer loyalty, including retention and bundle benefits for second SIM cards and friends and family offers. The underlying O2 postpaid ARPU ex MTR was marginally down due to the aforementioned year-over-year trends in international roaming. Worth keeping in mind that roaming in Q3 last year had already recovered to close to pre-pandemic levels. Fixed broadband registered 19,000 net additions in Q3 2022, driven by the popular cable tariffs within our technology-agnostic O2 my Home portfolio. Also, fixed churn was marginally up to 1.1% as a result of the EECC implementation, mainly affecting legacy DSL portfolio.
Fixed ARPU developed well in Q3 2022, and was up 1.5% year-over-year to EUR 25.10. This is giving clear evidence of the improving customer base mix towards high-value customers. Let's move to the financial performance on my next slide. OIBDA expanded by 4.7% year-over-year to EUR 642 million in Q3 on the back of the continued focus on profitable growth. Our own brand momentum is again the key driver of the improved operational leverage in mobile, combined with further efficiency gains and some roaming support. OIBDA margin was marginally down to 30.8%, mainly reflecting the extraordinary growth of the broadly margin neutral hardware revenues. Within the cost line, it's worth mentioning that supplies were up 4.7% year-over-year as the volume-driven higher hardware cost of sales more than offset the positive effects from the MTR cut.
Personnel expenses were slightly higher year-over-year, +2.5% year-over-year, reflecting the full year 2021-2022 salary reviews, partly compensated by year-over-year lower FTE base. Other OpEx increased by 11.2% year-over-year, reflecting the higher energy cost, the technology transformation, and the commercial activity in the quarter. This, of course, also includes the relaunch of our O2 can do claim to further enhance the O2 brand appeal in the German market. On the right side of the slide, we show our free cash flow with its typical annual seasonality. Free cash flow amounted to EUR 710 million year to date, with working capital effects from the annual prepayments unwinding.
That resulted in a positive free cash flow after lease of EUR 190 million, compared to EUR 170 million clean of the Telxius deal in the prior year. Let me discuss the free cash flow in more details on my next slide. Our business model is proving resilient. We are managing the inflationary environment well, and we are on track to a strong free cash flow generation with our usual back-end loaded free cash flow after lease profile. Now, being in the final quarter of our successful three-year Investment for Growth program, we continue to report broadly stable operational cash flow trends.
Year to date, underlying operational free cash flow, excluding last year's infrastructure transaction, was flattish year-over-year at EUR 965 million, despite the fact that we saw in Q3 the peak of the investment in this quarter, which is usually a Q4 feature. Year to date, underlying free cash flow after lease was higher by EUR 20 million year-over-year at EUR 190 million, despite the full effect additional lease costs from our recent infrastructure transaction. Also this year, we expect our free cash flow after lease to follow the typical back-end loaded profile. Overall, working capital movements of -EUR 239 million year to date have improved versus prior year's level of -EUR 258 million. Operational working capital movements have improved compared to last year, only showing a small consumption of -EUR 33 million, mainly driven by prepayments.
As in H1 2022, the strong reduction in CapEx payables was the main driver of working capital consumption, given the favorable payment terms agreed with our vendors as we execute our Investment for Growth program. Once we have reached steady state in CapEx post the completion of our investment program, the corresponding working capital changes will be neutral on an annual basis. Others of -EUR 50 million is reflecting the non-working capital related cash out, reflecting here the net interest payments as well as our equity contributions for UGG. Finally, consolidated net financial debt amounted to around EUR 3.4 billion as of September 30th, which is flat year-over-year. Leverage ratio of 1.4x remains well below our self-defined upper limit of 2.5x. Reflecting our strong financial position, Fitch just reconfirmed our BBB credit rating with stable outlook.
Given the rising interest environment, let me also reconfirm that Telefónica Deutschland has no short-term refinancing needs, and all drawn facilities have been agreed at fixed rates. Hence, any potentially higher interest rate would only have an impact on the company over time. Before we kick off the Q&A, I like to summarize the key points of today's presentation. As a management team, we are highly committed to the O2 can do spirit and to deliver long-term shareholder value on the back of our strong set of the nine-month results. We see excellent progress of our network rollout and achieved 75% of 5G population coverage with an unchanged CapEx envelope based on rollout efficiencies. Network is the foundation for delivering continued strong commercial momentum and further pursuing our revenue and OIBDA growth path. We are focused on both executing our more for more strategy and also the ESG roadmap.
Hence, we are upgrading our full year 2022 outlook for both revenue and OIBDA to low mid-single digit percentage growth. Now we look forward to your questions. Operator, please go ahead and start the Q&A.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. We would kindly ask you to ask a maximum of two questions per participant. One moment for the first question, please. The first question is from the line of Polo Tang from UBS. Please go ahead.
Morning. Thanks for taking the questions, and I have two. The first question is really just about the trajectory of mobile service revenues. For Q3, how much of a benefit was the Lebara MVNO in the quarter? How much of an uplift was there from roaming? I'm just trying to understand whether the 3.7% service revenue growth you saw in the quarter is a reasonable run rate going forward. What are the headwinds and tailwinds that we should think about on service revenues going forward? The second question is really just about broadband. Can you maybe comment on how much traction you're getting with your 1 Gb per second cable broadband offer, and can you remind us what your price point is? Thank you.
Hi, Polo. Good morning. Let me answer your first question on the mobile service revenues. Indeed, we have seen a very decent performance in our Q3 results. Let me reiterate the point that again, O2 is by far the biggest growth driver of the mobile service revenue trends. With regards to your questions, of course, Lebara contributed according to the migration that has been finalized in Q3. But of course, the full run rate of a mid-double digit to high double digit million amount is only expected in the next year, once we see it completely unraveling. Roaming this quarter, as said, in the call was pretty stable.
We saw travel patterns slightly shifting towards the EU destinations, not so much abroad. This is the reason why it was pretty stable in this quarter. If you look into the different parts, you see a good reflection of the underlying run rate with our Q3 figures. Going further, we expect, of course, to continue to growth momentum with our O2 brand. We will also see the next steps in the MTR glide path as anticipated. Other than that, we expect a continuation of the trends that we were just discussing for Q3.
On your second question, Polo, our key growth driver for fixed broadband in the third quarter was on the back of the cable infrastructure on the renewed wholesale conditions we had on cable, especially on the 1 Mb product. On that one, we're matching market competitive prices in the third quarter. As I have now taken out the promotions as part of the More for More strategy and included the 500 Mb offer in the portfolio. Key growth driver of the very strong net add performance in fixed was on the back of the cable offer.
Thanks.
Next question is from the line of Joshua Mills from BNP Paribas Exane. Please go ahead.
Hi, guys. Thank you for taking the question. It's two for me. The first one is just to get more of a detailed question on the bridge you were using to get the stable energy costs next year. I guess if we assume that usage is stable, and under the government proposals, about 70% of your energy will be 20% cheaper in 2023 and 2022. You've still got 30% outstanding, where based on the current forward pricing, electricity costs about twice as high as it sounds like you paid on average in 2022. When I do the back of the envelope math on that, I think I'm getting something like a EUR 50 million or EUR 60 million headwind to overall energy costs. What are the offsetting factors in your bridge that get you to see those costs flat?
Is it lower energy usage, or is it things like the removal of surcharges related to the green energy subsidy? Just hearing that walk through of the bridge would be very helpful, I think, for all of us. Then the second question I had was just around the broader competitive environment in mobile. We've seen a few tariff changes in the end of Q2. Obviously, you're gonna push this more for more strategy, but we did also see churn pick up this quarter, and it sounds like the Telecommunications Act has rolled over in terms of a negative into Q3 rather than just the first half of this year. How should we think about, firstly, churn as we go into Q4? Then more broadly, what do you see in the market out there? Thanks.
Good morning, Josh. On your first question, I think the starting place is the EUR 210 million that I mentioned for 2022. We do not expect that the regulation will go backwards into 2022, so will only apply on, from January onwards. The starting base for the broadly stable energy cost for 2023 is the EUR 210 million. Yes, you're right. The EEG law that also helps a little bit next year, and helps us in the comparison. As said, what we currently see is that the prices have significantly decreased over the last three months since August, once we peaked. As said, with efficiency measures, without the EECC law, that's away now forever, as we all know.
The regulation and also the current negotiation strategy that we have between short and long term, we are very confident and will underpin this also by finalizing the deals that are already negotiated in the coming weeks to have broadly stable energy costs for 2023 for Telefónica Deutschland. On the competitive environment, what we have seen from our perspective is, on the one side, the second wave of implementation of EECC, that was this famous termination button. As with the EECC last December, we saw a peak of cancellations. We also managed them from our perspective very well with the churn performance we published. We also see now cancellation entries are going down again. It's the same phasing that we have seen with the first wave of the implementation.
Q1 churn was stronger. Q2 strong, churn was better. Now it's a little bit higher, but we also expect for Q4 a normalization of the positive churn trends that we have already seen in the second quarter after this last wave of the regulation has been implemented.
Great, thanks. Just on the EECC law, I think that's a EUR 25 million saving year-on-year in 2023. Is that about right for the bridge?
We were basically paying back in 2021 roughly EUR 15 million-EUR 50 million, Josh. In 2022, we started paying and we paid roughly EUR 15 million still. That is then also the additional potential that you have as a reduction for next year. Because next year we will pay nothing as Markus has stated, Josh.
Great, thank you.
Next question is from the line of Mathieu Robilliard from Barclays. Please go ahead.
Yes, good morning and thank you. If I could follow up on energy and obviously very positive news that your bill wouldn't be increasing in 2023. I don't know if you can answer to that, but do you have a sense as to how much consensus was expecting as a headwind in energy costs in 2023 versus 2022? Linked to the energy question, how does 2024, and I realize it's very far away, would compare to 2023? Do you already have a PPA deal for 2024? Or do you think maybe the benefits from the government could be extended? A very short one on free cashflow. It seems that so far you haven't paid a lot of taxes on a cash basis. I was under the impression that the tax bill this year would be a bit higher than usual.
Maybe you can give color on that. Thank you.
Good morning, Mathieu. On your first question, I think consensus on energy headwinds for 2023 hasn't finalized. We have seen different figures in the market. From our perspective, it's. We clearly say broadly stable between 2022 and 2023, because we have now all puzzle pieces together, for 2023. We were always confident because the regulation was discussed for several months now, and also with the combination of short and long-term PPAs, we got access to the favorable terms, that we will now lock in. Going forward for 2024, the regulation might be extended for one quarter, until the end of March 2024. We will finally wait for that because that would give us another lever also to have broadly flat costs for 2024 or even a reduction. I think let's see how the situation goes.
It's too early to conclude on 2024, but at least we would expect the same levels also, especially with the efficiency measures that we want to reduce by 20% by 2026 compared to the 2021 levels. We clearly also see a stabilization of the energy consumption on that level. It's a little bit too early to get consensus for 2024, but from today's perspective, extension of the regulation for one quarter, we would at least also see broadly stable costs for 2024 or maybe we see upsides. It's too early to conclude on that. There's too much uncertainty on 2024, and we might see upsides. Thank you.
Good morning, Mathieu. Let me take the free cash flow question. Indeed, we are following the normal seasonality of free cash flow, and if you compare the first nine months, you can see that we had a quite decent free cash flow performance also compared to previous year, despite the fact that we had the CapEx payable outflow, as anticipated from the CapEx peak in last year. Indeed, there have not been initiated any major tax payment in this year up to now. If the authorities ask us, we have to pay immediately. That's also I think widely anticipated in the consensus and the reason why we feel comfortable with the consensus level out.
Thank you very much.
Next question is from the line of Mr. James Ratzer from New Street Research. Please go ahead.
Thoughts around the trends on the postpaid own brand ARPU that you've seen that's slipped a little bit this quarter compared to last. I mean, if we get some better roaming comparables in future quarters and some of the price actions that you've talked about, should we see this as a bottom on the postpaid ARPU trends and that could improve from here? Just be interesting to get your thoughts around the own brand postpay ARPU momentum. Then the second question I had, please, was regarding your white spot build-out. I believe you made the commitment at the end of 2019 to reach 6,000 white spot coverage sites.
It'd be interesting just to get an update now on how many of those 6,000 you have rolled out to today, and how we should expect the phasing of that, and whether you can hit the end of 2024 deadline. I think you had to reach those 6,000 white spots. Thank you.
James, good morning. Let me take your post-paid own brand performance question. Indeed, we have been slightly softer this quarter on a comparable basis due to the fact that we had less roaming support than in the previous quarters. Why is that the case? Already before we saw more traveling gearing up towards EU, where you are in the regulated terms and not so much into the non-EU countries during the summer months of this year. Of course, if that unwinds in the future again, and we have more travels again into non-European countries, we might see again some tailwind from that. On top of that, I would say that our underlying ARPU trends are fully intact.
We are still leveraging with the first SIM cards the opportunity of the upsell, so we are gaining higher value customers than our average customer base. Example is the O2 Grow tariff, which comes in at the EUR 30 price point, and now onwards at EUR 35 price point. We clearly see ourselves here on the upsell path. With regards to the future development of the ARPU aspect, it's always the mix between the first SIM card, second and family and friends SIM cards that we penetrate, which come with slightly lower ARPUs, but on the other side, also with a very good value contribution. For us, O2 will remain the main driver for the overall MSR development also in the future.
It's not so relevant if an ARPU is slightly down or slightly up, in one quarter. For us, the overall MSR contribution is the main driver.
On your second question on the white spot sharing, there are two things. First of all, we currently see opportunities to maybe extend this white spot sharing from passive to active share from our perspective. To use the gray spot technology also in these areas, so we are in talks here to go ahead and also create joint synergies and also efficiencies, especially on energy going forward in these areas. We currently see that we might not need the full 6,000 to cover these areas, because with our normal rollout, we made significant progress in the last 12 months, as well also as competitors rollout. We made progress. We will next year have more clarity on the concrete ramp-up plan. First towers and sites have already been built, but we might see less need to build, not 2,000.
We, you know, it was a split of 6,000 divided by three operators, and we are currently processing to really see what is the most efficient rollout to cover the same area, but with less towers to be built. So overall, good progress, and we might also see further efficiency upside if we would extend the passive to the active.
Thank you, Markus. Can I ask how many of the 2,000 that you and then Telxius originally committed to have actually been built now?
Well, from our perspective, we gave a full bundle also of towers that we need for our own. It was in total 2,400 that they put into the basket of the build-to-suit basket that has been agreed with American Tower. This build basket might be a little bit lower, but then we can fill them up with other sites and towers. I think from that level, we have full flexibility here. Especially for the white spots sharing, we might need less towers than originally thought to cover the same area.
Got it. Sorry, but then of that 2,400, sorry to ask, go on about it, but how many of those have actually been built so far to date?
A few hundred. The minor part.
Okay. Thank you very much.
Next question is from the line of Pilar Vico from Credit Suisse. Please go ahead.
Hi, good morning. Thank you for taking my questions. I have two on my side. The first one is around the net add figure. It is a slowing down versus Q2 2022, despite benefiting from Lebara migration. How big of a tailwind Lebara is? We would have expect probably shops migration to pick up. That means that ex-Lebara is slowing down. The second one is around the current macro scenario. We've been just walking through the energy moving parts. If a short-term PPA agreement were about to be closed in full year 2023, that means that the impact that we could expect would be lower than the one registered in full year 2022. Probably also around the net debt figure.
We know it's a low level, but how should we think about the interest costs in full 2023? Thank you.
Hi, Pilar, good morning. With regards to your net add questions. We discussed already the drivers. We saw a very good momentum on the gross add side. We saw slightly higher churn due to the second wave of the introduction of EECC, and that resulted in slightly north of 300,000 net adds. Lebara is not contributing to that net adds because Lebara is a full MVNO with an own registration, and for full MVNOs, we so far do not count in our customer base. It's not driving somewhat of an underlying slowdown that you were stipulating there. It's not accounted for in the net add numbers.
On the macro environment, I think overall, as we've seen, I think we had a very reasonable wage increase by 3.4% in 2022, plus a one-time payment. It still waits until 2023. We are not unionized, as a company. From that level, we clearly see also reasonable developments going forward because also here, the state aid helps our employees in order to bear energy costs. Yesterday, it has also been decided that the December payment for gas will be reimbursed by the government, completely. Also in September, there was already a EUR 300 payment by the government to all working people in the country in order to compensate for the energy costs. There's not the expectation of a full inflation compensation by companies. It's a mix.
What companies can do, and this in our event, we agreed to 3.4%, and what the government is putting on top in order to compensate for the current energy rise that we've seen this year, but we clearly also see now prices going down. On that level, we see the macro outlook also on a healthy level, although company-wide, we also expect a small recession next year. The institute has said that it's -0.3% on GDP growth for 2023 forecasted for Germany. Up to now, as we've seen with the very strong handset sales and with the strong demand for our services, mainly driven by mobile data growth, so far we have been proven extremely resilient in the current macro environment.
Yes, Pilar, there was a third question underlying, so I take that also with regards to interest rates. As said, we have changed our interest profile in fully fixed rates for all drawn facilities. We have no big refinancing needs before the expiry of our bond in 2025. With that, we expect rather stable interest developments also for the next year. Honestly, I do not have the crystal ball to currently give an indication about the interest rate that we would pay for a bond in 2025.
We will monitor up until then the market situation very carefully, what are the best instruments, et cetera, and I'm sure that we will also be able to close a favorable financing deal. Interest rates will only hit us over time, and we are pretty advanced with our strategy and have everything drawn in fixed rates.
Thank you very much. Next question is from the line of Yemi Falana from Goldman Sachs. Please go ahead.
Morning. Thanks for taking my questions. A lot of focus, rightly so, has been on keeping energy costs contained, but perhaps I can shift the topic slightly. Firstly, what is your confidence level that we could see rising prices in the German mobile market next year? Seems like the positive commentary we were getting in recent quarters has died down slightly of late, so any color on that would be appreciated. Secondly, on the CapEx side, clearly the third quarter is your CapEx peak, but given you guide on a CapEx to sales intensity, it does seem like absolute CapEx could trickle up from here. Any color you could give on why that ramps down or potential ramp downs and what's fading away into next year, that gives us confidence on the underlying free cash flow development would be great. Thank you.
Thank you for your question. On your first question, our confidence level is very high. In order to continue our more for more strategy, I think we've done first moves. We expect a further announcement cross-portfolio for January 2023 for our mobile portfolio for all brands, going in that direction based on better network quality, higher speeds and more data. On that level, we clearly see a good opportunity to continue and accelerate the more for more strategy in mobile in the German market.
Yes, let me take your CapEx question. Year to date, we are at the upper end of the guided range, between 14%-15%, so 14.9%, to be clear. We expect that the peak quarter was this time preponed due to the good rollout activities that we have been able to improve our 5G network, and therefore was in Q3 instead of Q4. For the next years, we go into normalized CapEx levels again, and we have stipulated that to be around 14% CapEx over sales intensity. We have no reasons to change our opinion to that one at this moment of time.
Mr. Falana, are you finished with your questions?
Yes, that's very clear. Thank you.
Next question is from the line of Georgios Ierodiaconou from Citi. Please go ahead.
Yes, good morning, and thank you for taking my questions. I have a couple of follow-ups, please. The first is on energy costs more in the medium term. I just want to understand a bit what your options are, and you mentioned PPAs. Do you mind updating us on some of the levels at which these PPAs are being negotiated? You mentioned around, you know, the average you paid in 2022 was 20% higher than EUR 130, which is the government price cap. Are the PPAs significantly lower than that? I think in some other countries they are, but I'd be interested to understand that. Also, if you don't mind giving us an indication when PPAs will make the bulk of your energy hedging. Is it by 2025, 2026?
Just to get an idea how long you could be at risk from volatility in the market. My second question is around the retail performance and the price increases that have just been discussed. I mean, your KPIs are clearly still strong, but there's been an increase in churn. There's also a bit of a reduction in postpaid ARPU despite the new, tariff plans being introduced. I'd be curious to hear from you how you think it's going in terms of the price increases or the tariff increases, in terms of ARPU that you are implementing, and how long do you think it will take before we see tangible support in terms of the ARPU you are reporting? Thank you.
Thank you, Georgios, for your question. I think the lion's share of the volume of PPAs will kick in latest by 2025, significant share. The price points that we currently can see and lock in are also significantly below the regulated price that has been implemented. From that level, it's good news for us, because with managing consumption and energy consumption and at the same time having access to pure green energy on long-term PPAs that are significantly below again and brings us into a even more healthy situation, we are very confident. On the second question on churn, as I said, we see churn going, so the cancellation entries are already declining. We had this peak on this termination, but then, because always when a new thing is implemented, then there's a run.
Overall, we see a good stabilization. Clearly, as said, it's our target to reduce churn even further. I think that's the clear target. On post-pay trading, we are not worried. We see good, saw good income. While we don't publish profits, but we can clearly see we were also benefiting from the churn situation. We do not expect that it is a Telefónica-only development. We saw more churn in the market overall, but we're also gaining from a very strong intake in the third quarter, so to partly compensate. On that level, we clearly see a momentum. Going forward on trading, we clearly expect stable levels. Let's not forget, we have a combined post-paid net add number published. It's not only the O2 part in there.
From our side, we can clearly say we see churn going down again, and that makes maybe the full picture more visible.
Yes, let me take the second part of the question, Georgios, with regards to the ARPU development. As stated, the driver for that slightly softer development was roaming in Q3 and not the underlying performance, which is fully intact. Here we are prospectively following the more for more strategy across our whole portfolio. You have seen the first moves already, more to follow up. Of course, on the transactional level, it will always take time until it flows through in the overall ARPU development. We are pretty confident also on that development going further, especially for the first SIM cards, which are then comparable to the average ARPU.
On the second and third SIM cards, we give the usual discounts, as said before also, but have also a very decent and good value contribution. ARPU is not the only one to look at. It's more the overall MSR development, and that is from our perspective, also promising.
If I could ask a very quick follow-up, is more on the time you think before the price increases start to have an impact on your financials. If you or Markus, just to clarify, you mentioned much lower in terms of the PPAs. Some of the specialized utility journals have the German PPAs now are at around EUR 90 per megawatt hour. Is that roughly the level we should be thinking about, the kind of deals you are now negotiating, or is there any major differences in either direction? Thank you.
Yes, there are more benchmarks out there, but the ballpark is going in this direction, yes.
With regards to the more for more strategy, of course, it will be a supporting element for the MSR growth starting in 2023 already. Will, of course, completely unwind just with an annualization of the effects that we do. Then also hopefully have the chance to continue on that road going further. It will be our normal life, Georgios, to follow that more for more. It will start 2023, and then it will kick in over the next years.
Thank you.
Next question is from the line of Usman Ghazi from Berenberg. Please go ahead.
Hi, gentlemen. Thank you for the opportunity. I've got two questions, please. The first question was just on other expenses. You know, it came in at EUR 671 million in Q3. They're up almost EUR 70 million. You know, and that there's a big step up in this relative to Q2, for example. I know some of it might be energy, but I mean, that's unlikely to account for all of the increase. And I know that the comp base was already high for this cost item. So can you indicate you know, if this is merely just higher commercial spending in order to sustain the net add momentum or is something else?
Is there another reason for the big step up in Q3? That was the first question, please. The second question is just coming to the CapEx payables point. You know, we saw, obviously, CapEx peak in Q3 last year. We've seen a CapEx payables unwind this year in the cash flow. Now, again, we've seen a CapEx peak in Q3 of 2022. Is it fair to assume that there will be another, you know, a final round of CapEx payables unwind in FY 2023? Thank you very much.
Yes, Usman, let me take your question first on other expenses. You mentioned already the mix. It's of course the energy cost, which is a driver, but also the non-recurring investments into the transformation of our legacy systems, and of course also the commercial investments that we are doing. They are non-recurring, and they always depend on the market opportunities that we see. For example, this quarter, we have taken the opportunity to relaunch our O2 can do claim in the market, and of course that is also all fully reflected in that overall increase.
With regards to CapEx payable unwinding in 2023, yes, of course, the investment program will further unwind in 2023 also. As said, we are expecting to increase the free cash flow in the next year further, and the intention is to have a full dividend coverage after the finalization of that investment program, which we do by the end of this year.
Thank you.
Next question is from the line of Steve Malcolm from Redburn. Please go ahead.
Good morning, guys, and thanks for taking the question. A couple. One is just on lease costs. I think consensus has the cash lease cost rising by about 3% next year. You know, obviously, German inflation is running way ahead of that. Can you just help us understand, you know, how the pricing works on that? You know, when the resets are done, you know, and whether that 3% consensus rise is still realistic. The second is just on spectrum and the current consultation on flipping the 900 and the 800 expiries and whether you think there's a sort of plausible. Give us a sort of timing, an idea of timing when we could expect the results of that.
A and B, you know, do you think there's a realistic route to all four operators having some 900 spectrum, given that I guess DT would have to give up quite a bit to get there. Any thoughts on that would be interesting to hear. Thanks a lot.
Yes. Let me take the first question with regards to lease cost. So of course we have the special situation that we still have the Telxius deal flowing into our lease costs. Here we are developing in line with the expectations. After the transaction is annualized, we expect the lease cost run rate roughly to be increased by EUR 90 million, which is also anticipated in the consensus figures that I have seen. With regards to inflation, it is a complex on the leasing side because it's not that obvious.
First of all, you have components that are not at all exposed to lease, but you have also leasing components that could be, depends then on the individual contract. Just as a reminder, we have 27,000 lease contracts out there, and they all have individual regulations, and most of them have no automatic lease compensation in that, but they need to be actively asked for. A moderate increase on the lease cost, going further from an underlying perspective, I think is a fair assumption to be taken.
Let's take just also one thing into account, that's also anticipated of you guys, is that we will see further lease cost increase from the so-called build-to-suit sites that Markus was discussing before, which will also gradually increase our lease envelope over time. Also that will not come as a chunk, but it will build up gradually over the next years with the fill in of the white spots and the other activities that we are undergoing.
Okay. Is 3% it sounds like. Is that maybe a little conservative for next year? Or, you know, can you comment on where you think that's likely to be in terms of the actual outcome?
We do not guide concretely on that percentage, but it is within the range that the model could give you.
Okay, brilliant. Thank you.
On spectrum, Steve, I think what we've seen in September was a concept paper, where the regulator on the one side acknowledged that the 800 MHz should not be auctioned, it should be extended for free for eight years. I think that's a positive, that's good from our perspective. We now go into the next iteration of a cornerstone paper, and then there will be a draft decision, and then there will be a final decision. We still expect a process of up to six-eight months in front of us. The concept paper is not legally binding. It was just a market test from our perspective, where it looks like. Clearly, our arguments have been heard that low-band spectrum should be extended. I think that's the first good thing.
On the other side, we still see room for improvement here. The question is, do we really need an auction at all? From that perspective, while the 600 MHz will be available later and new entrants' rollout is delayed, as we all learned in the last weeks, the availability of 600 MHz spectrum might be sufficient in order to achieve all targets. We still believe that the extension of the whole portfolio of the 2025 ending spectrum would be the best solution, and then making the 600 MHz spectrum available to the whole market a little bit later in 2028. From that level, let's see. As said, key target for us was
The 800 extended. It was also in 2010 the spectrum that was more expensive than the other parts of the spectrum. They were extremely cheap in this four-player auction in 2010, if you all remember. On that level, this is clearly a positive part. On the other side, let's really see. We really need an option from our perspective to achieve all targets. We will analyze and submit our position, and then we will see the first cornerstone paper in the first quarter next year, and then we will see how this will go further. Thank you.
Okay. Thank you.
In the interest of time, the final question will be from the line of Adam Fox-Rumley from HSBC. Please go ahead.
Thank you very much. I just have one quick clarification, which was around the statement kind of in the cost of living area of discussion. Because in your commentary around post-paid ARPU, you talk about enhanced focus on customer loyalty, including retention and bundle benefits. I just wondered to what extent that was reflecting a need to kind of give better pricing to customers or whether that was a market factor or whether that was reflecting kind of customer behavior that you were seeing. Secondly, I don't think you'd do this, but I just wanted to check to see if you could provide any updates on the OGG business, the ramp-up and its network build. Thank you.
Good morning, Adam . Thank you for that question around the post-paid ARPU development. Indeed, we have no back book repricing problem. I can confirm that because I think that was the underlying question that you had. The opposite is the case. Also, our customer base really values the good network quality that we can provide, the service, et cetera. Here we are also following the clear upsell path. If we of course in a retention moment sell a second or a third SIM card on top, that somewhat dilutes the overall average ARPU of the customer, but is giving us additional overall gross margin contribution, and that is the concept behind.
It's not that we have to ask or give customers additional discounts to maintain them within our base. That is something that we rather see as an upsell and cross-sell opportunity.
On the OGG, I think from our perspective, we do not publish official numbers for OGG, but we see very good progress, especially in the homes passed development. From that level, we are well on track. Also, the share that we as an anchor customer with O2 fiber take in the areas that have been deployed is very promising. It's already a five-digit number of fiber customers that they have been able to gain under the O2 fiber brand. On that level, we make very good progress with the OGG as a customer, but also as a shareholder.
Great. Thank you very much.
At this time, no further questions will be taken. Markus Haas, I would like to turn the call back over to you for closing remarks. Please go ahead.
Many thanks. You have seen that in busy times we have been able to deliver superb results again, quarter after quarter. Germany is a good market to be in. We clearly see our Investment for Growth strategy is paying off. We are now in the last quarter of this three-year program. We have over-delivered on the promises that we made thr years ago, and from that level we are really looking forward for a strong Q4 trading and will report full year numbers in February 2023.