DTEGY - Deutsche Telekom AG (DTEGY) CEO Timotheus Hottges on Q2 2022 Results - Earnings Call Transcript

Deutsche Telekom AG (DTEGY)

Q2 2022 Earnings Conference Call

August 11, 2022 8:00 AM ET

Company Participants

Hannes Wittig - Head of Investor Relations

Timotheus Hottges - Chief Executive Officer

Christian Illek - Chief Financial Officer

Conference Call Participants

Andrew Lee - Goldman Sachs

Polo Tang - UBS

Emmet Kelly - Morgan Stanley

David Wright - Bank of America

Adam Slater - HSBC

Jacob Bluestone - Credit Suisse

Robert Grindle - Deutsche Bank

Georgios Ierodiaconou - Citi

Joshua Mills - Exane BNP Paribas

Steve Malcolm - Redburn

Ottavio Adorisio - SocGen

James Ratzer - New Street Research

Usman Ghazi - Berenberg

Simon Coles - Barclays

Presentation

Operator

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 you over to Mr. Hannes Wittig.

Hannes Wittig

Good afternoon, everyone, and welcome to our live 2022 Second Quarter and Half Year Webcast and Conference Call. As you can see with me today are our CEO, Tim Hottges; and our CFO Christian Illek.

Tim will first go through a few highlights for the half year, followed by Christian, who will talk about the segments and our group financials in greater detail. And then, we have time for Q&A.

Before I hand over to Tim, as always, please pay attention to our disclaimer that you'll find in the presentation.

And now I hand over to Tim.

Timotheus Hottges

Hannes. Thank you, Hannes, and welcome to our first half and second quarter [2022] (ph) earnings call. We had another strong quarter, good results on both sides of the Atlantic and we made continued progress against our strategic priorities.

T-Mobile reported two weeks ago, they delivered strong growth in all key financial numbers, strong customer growth and a guidance upgrade, as usual. Outside of the U.S., we also delivered 4.4% organic EBITDA AL growth in the first half, over EUR3 billion free cash flow and a guidance upgrade as expected.

A couple of weeks ago, we announced our tower deal with Digital Bridge and Brookfields, great guys. We are taking EUR10.7 billion of the table, it's good for the winter and we keep 49% of a great and well positioned asset, so that we have a lot of let's say influence and impact of the future prospects of this entity. Today good news for you, we are rising our ‘22 guidance on both sides of the Atlantic for the Group and so we remain well on track for all our capital market targets. I have to say, we are ahead of our Capital Markets targets in almost every category. The flywheel keeps working.

Moving onto organic IFRS on the next page. T-Mobile US EBITDA AL was slightly down, but this is intentionally, because we are unwinding handset leases. Without this, our growth in the U.S. would have been 7.9% growth. We are a telco, yes, don't forget that. Germany remains strong as well growth of 3.3% and the European segment was another one, another time, very strong 5.7% growth, despite the new Hungarian revenue tax which I really hate.

Group Development grew 15% and the systems grew another 15.7% even here, we see that our transformation is on a good way. Germany has now delivered 23 consecutive quarters of EBITDA AL growth. Europe 18 quarters and for the Group, organic Group EBITDA AL grew by 0.7%.

Excluding T-Mobile handset lease, our core EBITDA AL grew by 6.5% year-on-year. I think this is the most important number for us here operationally. Organic service revenues for the Group are up by 4.5% so far this year. I think even good results. Organic service revenues ex-U.S. are up by 1.8%.

Now let's look at our market leading networks. We now pass over 11 million European homes with FTTH. Of this, close to 4 million already in Germany. We are on track for our planned 2 million fiber homes, which we are passing this year in Germany and the machine is really scaling up. Our ultra-capacity 5G network passes 235 million U.S. homes, way ahead of our competition and on track of 260 million by year-end. I think now our brand proposition in the U.S. is paying off more and more. I get the feedback from customers, we win all the network test, we are really leading 5G in the U.S.

This week, T-Mobile agreed to acquire a highly attractive and complementary portfolio of 600 megahertz frequencies to further strengthen our network leaderships and for the ones in this Group on our technicians, the 600 megahertz is backbone. This is really the working bandwidth, which is carrying a lot of traffic. In the future, it will significantly help us to extend even our spectrum leadership in the U.S. and the capacity plan which we are having U.S. is really a strategic spectrum play.

We cover 93% of Germany with 5G and 37 in Europe, up from 29% at year-end. And there are lot of discussions going on, you know, how we can accelerate as well in this field. Our customer growth remains strong. Mobile customer growth accelerated on both sides of the Atlantic. Our fixed line growth was a little bit slower, partially due to temporarily impact of the new German Telekom laws, but definitely and Christian will talk about that later on, much stronger than from our competition.

Coming to ESG. ESG is on the top of our agenda, by the way, not only from strategic targets, but as well on a day-to-day business when it comes to the energy efficiency of our company. We are making good progress against our environmental targets with a 10% year-on-year decline in energy use in Germany. By the way it's 14% and the 7% improvement in energy intensity for the Group.

We are also delivering on our social agenda with multiple initiative and please have a look in YouTube, Instagram, TikTok wherever you want, on our latest campaign against hated speech in the internet highly recognized. Company against hate speech support for refugees, our T-Mobile project for helping 10 million people in the U.S., there are a lot of activities going on in this social category, but we will push further on this topics, especially on greater diversity, which would be recognized.

Given the importance of this, this year I decided to take over the responsibility organizationally for ESG and be assured that we will now even make an acceleration on this ESG agenda going forward. We have started by extending ESG targets beyond the Board of Management to all DT managers. So, this is already implemented. I'm happy to announce that we will host an ESG Day for investors and our media people on the October 12, to give you very much details about our activities, which we are taking. T-Mobile raised its guidance two weeks ago. Today, we are also raising our full-year guidance, for our ex-U.S. business and for the Group as a whole, second time this year, by the way.

You can see our new guidance on page eight. While looking to this numbers, please keep in mind that we are much richer than what you see here, because this numbers are based on an exchange rate of $1.18, while consensus is based on $1.08. Also remember that our guidance excludes the first quarter contribution from T-Mobile Netherlands this was EUR190 million EBITDA AL. Ex-U.S., we now expect EUR14.3 billion EBITDA AL and EUR3.8 billion free cash flow, both up EUR100 million and both ex-Netherlands.

For the Group, we now expect guidance for adjusted Group EBITDA AL of around EUR37 billion EBITDA AL. For Group free cash flow, we reiterate more than and more than means more than, EUR10 billion and for adjusted EBITDA as we reiterate more than, I mean more than EUR1.25. That's said, given our strong first half and the strong U.S. dollar, the emphasis here is clearly on the more than.

Let me wrap up this overview with the next page. I love it. Here you can see our strategic agenda that we showed you at our last Capital Markets Day. We are rapidly delivering on this agenda, both on the operational and on the portfolio side. I'm always surprised how constructive a company can work from its home office perspective and how fast things get executed. But anyway, that's a side comment.

We just see that everything is on track or already executed. Still some homework to do. Our leverage is not yet back in the corridor. On the contrary, the strong dollar has pushed things out a little bit further. We now own 48.4% of T-Mobile, not yet the majority, which we desire. Thanks to T-Mobile swift and highly successful merger integration, we're getting close to the point where a buyback can be launched. I'm getting so many questions, what will we do when the buyback comes? I think the answer is about balance, balanced capital allocation.

Surely we will want a good portion of the TMUS shareholder returns in cash. On the other hand, it would be unwise to rule out some further TMUS stake increases. Our North Star is long-term sustainable growth in DT earnings per shares and again here with more than EUR0.90 after the first half year, I feel in a very good position.

With that, let me hand over to Christian, who has worked day and night on getting all the details for you for the Q2 results and he will guide you now for every single detail. And I have a break.

Christian Illek

Thanks, Tim, and welcome from my side. Today, we're going to start with the review of the operating segments. And let me start with T-Mobile U.S. Tim said it already excellent, financial results have been reported two weeks ago, 6% service revenue growth in the second quarter, and according to U.S. GAAP, more than 10% EBITDA growth.

As a result guidance was raised. Let me just flush out some important elements synergies were raised by EUR200 million EBITDA after leases was raised by EUR200 million and customer growth was increased by EUR600 million.

Let's focus on the customer growth of T-Mobile U.S. business. And what you've seen is 1.7 million of postpaid net adds that is the strongest results which T-Mobile has delivered in any of its history. 380,000 new postpaid accounts, this is best in the industry and best ever for T-Mobile and stunning result also in fixed wireless access with close to 600,000 net adds in the last quarter. On top postpaid churn was down by to 0.8%, which is for the first time below Verizon's churn.

So, and this all happens despite the Sprint integration in the first half of this year. On top the postpaid ARPU has increased by 2.8%, that also led to a guidance increased and ARPA was up 3.3%, again led to guidance increase from the U.S. folks. I think it's amazing results and they clearly stand out relative to what we've seen from the U.S. competition.

Let me move over to Germany and Tim said is already 23 quarters of consecutive growth in EBITDA. EBITDA grew by 3% and it was fairly largely driven by profitable revenue growth. After a slight depression, which we've seen in our fixed business last quarter, you see that our service revenues returned back into solid growth. And let me note, this contribution is coming from both segments; B2C and B2B. So the B2C growth in the last quarter was on fixed 3.6%, B2B was growing by 1.7%.

Mobile revenues grew in total as service revenues by 2.6%. We obviously had headwinds from the termination cuts, but they were offset by recovery of the visiting and roaming revenues. The loss of the Lebara MVNO has not impacted our numbers yet, but this will fully materialized in the upcoming quarter and -- upcoming quarters after that one.

Moving to the fixed business. You see that we're seeing a slowdown in the net adds in broadband, and this is coming from three effects. One is, we're seeing a slower market growth, which is largely driven by higher penetration. We see a -- I would say, an acceleration on this effect by the impact of the Telekom's [indiscernible] and the headwind, which we expect -- which we've seen in the second quarter is around 15,000 to 20,000 net adds in that given quarter.

On top, there is an additional adverse effect which is coming from full fiber. The time gap between signing up for fiber line and getting connected as a new customer, is taking much longer than it does at the DSL infrastructure and we only accounting customers, who have been connected. So these three effects basically deflate the net adds which we have seen in Q2.

But having said this, what you see is very, very nice upselling effect in the fixed line business and the broadband business. If we just compare Q1 2022 versus Q2 2022, the percentage of customers having a broadband line, which have at least 100 megabit increased by 2 percentage points. And the number of connections on fiber increased by almost 300,000. So we're absolutely remained comfortable with our CMD guidance which is above 4% broadband revenue growth every year.

Let's move over to retail and wholesale. As promised in the last quarter, and despite some ongoing headwinds, our retail fixed revenues returned to growth. Wholesale were showing a 1.5% growth rates as we promised you in the last call and that was due to the rollover of last year's headwinds, but also due to price increases in the commitment model. In the second half, we expect that the growth will moderate again and this is due to the regulated reduced unbundling fees.

If go on the next page on mobile. You see we have a healthy intake on mobile net adds, 194,000 this given quarter. This is very much driven by strength in B2B and Congstar and that offsets the adverse effects coming from the Telekom’s law in the consumer segment. So with that, I would conclude Germany and move over to Europe.

And here again, strong performance. Organic revenue growth was up 4.2%, exactly the same number you've seen in the first quarter. Mobile service revenues grew by 2.4% same effect. The recovery in the roaming environment basically offsets the adverse effects from the termination rate cuts. The organic revenue grew by 4.5% and we have to book the half year impact of the Hungarian revenue tax in this quarter results. If you would exclude that, the EBITDA would have grown by 7.8%. I can only hope that this is a cingulated issue that someone is coming up with this kind of extra tax. So, what we're seeing in Europe and I think we have some visibility that Europe will see greater headwinds from the energy cost relative to Germany and the U.S.

And finally on the next page, you see the strong commercial results being at mobile net adds, broadband net adds or FMC net adds. So very, very strong and solid results from the European segment.

Let's move over to GD/Towers. GD/Towers added net 900 sites over the 12-months. And this is coming from 1.3 billion new builds, but also be decommissioned 400 sites in that portfolio. Very nice organic recurring revenue growth at 9% and very nice organic EBITDA growth at 6.5%, I would say another strong and peer-leading performance.

Finally, let's get through T-Systems, and what you see is that the organic revenue basically is flat. We have a nice increase in EBITDA of 14%, which is higher than the previous -- on average in the previous quarters. The order entry was solid and is slightly reduced relative to last year's Q2. On the last year's Q2 we booked a very large deals. So this is not a like-by-like comparison.

So finally, let's get to the financial results on a reported basis. In Q2, you see that revenues grew at close to 6% EBITDA after leases. On an adjusted basis grew by 5%. You see a decline in the adjusted EBITDA, ex-U.S. of 3.4%. This is due to the fact that in the meantime, the Dutch and the Romanian business has been a deconsolidated. If we would take an organic view on the adjusted EBITDA, ex-U.S., it would have been a growth of 2.7%. Nice 9% growth in adjusted EPS EUR0.49 a share in the given quarter. Free cash flow was stable despite the fact that we had 16% higher CapEx. And our financial net debt grew by 10% ex-leases and 14%, including leases. And I will get more into the details later on.

So as mentioned on the free cash flow, the free cash flow was stable relative to last year's free cash flow and the key drivers are more than EUR0.5 billion more free cash flow from operations, less lease payments of roughly EUR200,000 and they offset the higher CapEx spend of EUR700 million in this given quarter. If we basically take a look at half year results on free cash flow, you see a nice growth of 22% relative to previous year's free cash flow. And we are absolutely well on track. How did you this more than, we're more than confident to basically meet the greater EUR10 million.

On adjusted income, we saw a growth of 16% or more than EUR300 million. It is very much driven as you can see by the EBITDA growth. All up, now we basically have in the first half year generated EUR0.94 per share as a result on EPS. Also super confident that we're going to meet our guidance which is one -- greater EUR1.25.

So finally, on page 25, please. You see the development of the net debt and Tim said it already, net debt grew EUR8 billion Q-over-Q. That is basically being driven by three effects, the dividend payout of EUR3.2 billion in Q2. The share price -- the share increase in the U.S. of 1.7% to 48.4%, which costed us EUR2.2 billion and there is FX effects of EUR4.6 billion, which is clearly driven by the stronger dollar. But I think it is needless to say we are benefiting a lot from a stronger dollar on many other metrics.

So we're taking a look at leverage ratio. Including leases now, we are close to 3.3, excluding releases, which is the metric which is most often used by our peers, we are close to 2.8. So we still have to do some homework in order to get back into the quarter until end of 2024. But let me stress out, I'm confident that we're getting there and you see also support coming, for example, from the tower transaction, which will basically generate EUR10.7 billion as proceeds and that will lower our leverage ratio, including leases by 0.1 turns, excluding leases by 0.2 turns.

So finally, a couple of additional comments: first, on the pension deficit. The pension deficit has been reduced by EUR2 billion -- by more than EUR2 billion. This is very much driven by the higher interest rates. We have now a pension deficit of close to EUR4 billion and we are coming from above EUR6 billion in the last quarter.

And finally a couple of words on the inflation and we have to deep dive in Q1. So let me focus here on the German business. You know that we are well hedged in Germany throughout '22, '23, very good coverage into '24. We will benefit from the retirement of the renewable energy surcharge. And therefore, we have pretty good visibility in the energy costs up until '24.

Also, we reached a sensible wage agreement with the German Union, which gives us visibility for the next two years and most of the cost items when it comes to procurement, for example, construction cost for fiber, our long-term contracts, which are very well protected and our leases are being determined with our M&A which we closed prior to deal with Brookfields and the other guys and therefore we have an inflation cap in Europe.

On top finally, you know, that 85% of interest costs coming from the U.S. 100% is based on fixed. Outside the U.S., meaning DT ex-U.S., half of them is based on fixed term. So we're only exposed to 50% on the ex-U.S. interest cost.

With that, I hand it over to Tim.

Timotheus Hottges

Thank you, Christian. Let me wrap up this and share the main takeaways. These are difficult times for all of us and a lot of, let's say, Black Swan events are happening in short-term here and therefore, being the anchor of stability and giving clear guidance in the future, but not even stopping the transformation that is I think the main attitude, which I expecting here from leaders and from the whole organization, we should not fall into [Foreign Language] as we say in Germany. Something like German [Foreign Language] is the worst advice for the way forward. Innovation and transformation is the path to sovereignty.

Our strong execution in the U.S. continues. But many best ever quarters in a row and guidance was raised for the second time this year. Outside of the U.S., we delivered 4.4% growth organically on the EBITDA AL and we are also raising our guidance. While inflation is the challenge we have high long-term visibility for the key cost drivers, especially on the energy cost in Germany and in the U.S.

We raised our stake in T-Mobile U.S. to 48.4%. It brings us clear site of to our goal of owning the majority in the U.S. and we successfully completed our GD/Tower transaction on a record total valuation here and we are taking EUR10.7 billion proceeds of the table, while retaining 49%. We are well on track with regard to our capital markets mid-term targets, both operationally and when it comes to our portfolio as well.

And with it, we are happy to answer your questions and to get ideas about how we can improve.

Question-and-Answer Session

A - Hannes Wittig

Thank you, Tim. And now we start with the Q&A part. [Operator Instructions] And we are beginning the Q&A with Andrew Lee at Goldman Sachs, please.

Andrew Lee

Good afternoon, everyone. I just had a question on macro sensitivities, not really inflation impacts, but on you specifically, but more on your B2B macro sensitivities, just referencing the context of some pretty aggressive declines Orange and indeed BT. So the question is just how you think about your B2B macro sensitivities and what is leading indicators do you look at?

And can you give us any context in terms of how you think about B2B being more or less sensitive now then B2B was in the previous economic downturn such as the global financial crisis? Thank you.

Christian Illek

Okay. Andrew, our B2B business performs very well, 1.7% revenue growth this quarter. So not comparable what we have seen from other European operators here and this was achieved despite headwinds from big public sector contracts in 2021 and some headwinds in IT. I think what we can expect is maybe if there is a recession coming that some of the IT spendings of companies will be cut, there is at least what we have seen at the beginning of the lockdown period.

But we don't see that in our business. Our segment is very healthy based on connectivity, where we have a very strong position and we had a very strong first half. Just to give you a number here, first half mobile revenue growth in B2B was 6.6%. So this was a very solid quarter. And based on the connectivity, we have very interesting services customers require for the digital ecosystem, being it SD-X services. I would and let's say the development of our classical MPLS business and on the other side, unified communication services. So, the capability to work from everywhere integrated into the business towards customers require.

On top of that, we have intensively, and if you would ask me, what have you done over the last weeks aside of the tower transaction, spent so much time on the development on our B2B portfolio. And you know that we have a strong digital service business within our Group and more and more of our mid-sized customers asking for different reason, mainly driven by the way, by efficiency, you know to get support for connectivity including digital services. And that is, let's say, what we are now consulting, what we are developing with the customer, and what we are selling to them, including the system integration capabilities which we have.

So, I think we are very well positioned to digitize the -- Mittelstand, which is one of the growth areas here. We don't see a cut of IT spends yet. So, we are growing in this field under point in time and we have a lot of new products in the market, which will help us to compensate our potential shortfall. So our B2B perspective is more optimistic than what we have seen from our competition.

Hannes Wittig

Thank you. And with that I move on to maybe two additions. I think we have the advanced IP migration obviously helping us also in Germany, compared to our peers. And we also grew B2B very clearly in our European franchises and also in Europe, we are not seeing, IT, so let's say contracts currently being curtailed or anything. So moving on to Polo at UBS, please.

Polo Tang

Hi, thanks for taking the question. Just two quick ones, the first one is about use of cash going forward. So you mentioned earlier in the presentation that you will participate in the team's buyback to realize cash, but you haven't ruled out increasing your stake in team's further a bit what's your latest thoughts in terms of buying back shares at the Deutsche Telekom level medium term?

My second question is really except Telefonica Deutschland have announced their intention to raise prices across the mobile portfolio. So is the scope for DT to follow and how do you think Deutsche Telekom -- sorry Telefonica Deutschland's move will impact the market? Thanks.

Thanks. Polo. So how on use the cash? You know, first of all, we will participate if -- is there share buyback coming. At the share buyback, we haven't reached the 50.1% yet. When it comes to buying back our own share, we're absolutely open to this. Look, we have approval from the shareholder Board meeting until if I'm not mistaken 2026 in order to buyback up to 10% of our nominal capital from DT. So, there is one of the levers, obviously that will depend on the development of the DT ex-U.S. business and how this is being developed in the summer of price relative to the other parts.

But that is one of the levers. Once we have achieved our three targets, which is 50.1% in the U.S., deleveraging and continuing with the fiber rollout, and the 5G rollout, if there is excess cash that's part of -- that could be part of the equation absolutely.

Timotheus Hottges

With regard to the question about raising prices, first, raising prices and discussing about the prices is not something, which we should do over in investors call now with the competition here, it always depends on our ideas, how we are gaining or keeping customers.

And let's talk about the Mobile business. We have launched a totally new portfolio of mobile tariffs into the market following the idea of family tariffs in the U.S. and our idea is mainly to participate in the market, which the big telcos are not focusing on at that point in time, which is this a second brand, second cart business in the German market, which is by the way 50% and more.

We want to have all family members in Deutsche Telekom. This is the retention, the stickiness but it has -- what should be as well affordable for our customers. So, in Germany, the stingy mindset is that father gets the best network, may be mother as well, if she behaves properly, and the kids are getting, let's say, an [ugly] (ph) tariff or something like this. And they're not starting with Deutsche Telekom, despite the fact that everybody knows that this is the best network. And this is exactly the mark which we are addressing right now.

Second, what you have seen on our ARPU levels by what we have offered in the market is a more for more logic and we were able to upsell into this one. This resulted in an ARPU growth, so not increasing prices, but increasing the value customers are getting. They are willing to spend a little bit more, upselling and more for more and other paradigms, which we are pursuing.

It is not easy to increase prices. If the costs and all, everything is inflationary, I'm ready to increase our prices as well. But you should know, for me, it's more important to keep customers happy with us than forcing them out of Deutsche Telekom, because the moment we increased prices, customers have a termination right and churn is more expensive than developing upselling and more for more strategies in our proposition.

Nevertheless, if our cost are increasing proportionately over the time, new tariffs, you know, might become more expensive for new customers here, because we have to earn the money for the infrastructure and the investments as other industries are doing as well. And therefore, I understand that Telefonica is thinking the same way.

Hannes Wittig

Okay. Thanks, Tim. And with that, we move onto Emmet at Morgan Stanley, please.

Emmet Kelly

Yes, thank you, Hannes. Thank you for taking the question. And my question is for Christian, please. The question just coming back to slide number 35 in the appendix. Can you maybe just give us a little bit more detail on the outlook for energy costs? How the increase in spot prices can feed through to higher OpEx and maybe to Germany EBITDA over there -- over the next two to three years, please? Thank you very much.

Christian Illek

Emmet, when it comes to Germany, we don't expect over the next two years a significant increase in energy cost, because the retirement of the renewable energy surcharge is approximately north EUR100 million. And the second piece is that we have a very good coverage, especially for '23, but increasingly for ‘24 when it comes to secure pricing in ’23, it's more than 80%.

Emmet, where we are exposed, and I think we got to be transparent on this one as we don't have the same coverage in the European business. And obviously, what you are seeing is that the forward prices are fairly aligned among the different countries. So where I see some headwinds, is in the European segment and that can be north of EUR100 million. But the way how the European segment is responding to this is, they are actually increasing prices to pass on these cost inflation impacts and net-net this is so far net positive.

Timotheus Hottges

Even if, Emmet doesn't want to have an answer from me on this topic, I have to say Emmet, by the way, for all the investors, Emmet has made a fantastic video interview with some of the leader of the teleco industry recently and it's worth looking. He is a great interviewer.

So independent from that one, let me go to two topics. The first one is, due to the fact that we might have a difficult winter in Germany in front of us, we have started already to reduce our energy consumption in the company. And as I said earlier, we have reduced it already by 14%, more to come. We are even considering a consolidation of buildings with regard to heating and other activities. And on top of that we are intensively working on PPAs. Last week, we announced that we have a partnership with Stuttgart, which is the biggest renewable energy provider here in Germany and with this agreement, we are committing for 16 windmills parks to take the energy perspective. So, this will give us a guaranteed price for the energy consumption which we have.

And on top of that we are fulfilling our ESG targets. And there is more to come. There is another deal, I'm not sure whether it's announced already, but it is approved, which is in Poland, where we have a partnership as well, a PPA with solar and the windmill parks. So this will directly help us you know, to cover our energy supply and to fulfill the ESG targets.

Hannes Wittig

Thanks, Tim. Moving on to David at Bank of America, please.

David Wright

Yes, thank you for taking the questions. I guess, Christian, you mentioned about the leverage and you are very confident in bringing those levels down. But you have set yourself a very high bar with the IFRS 16 target. And when we do talk about us to lease, you're already at a level, that I think a lot of your peers would like to be at and you have the benefit of maybe more rapid EBITDA growth, your past the peak CapEx in the U.S. So this is good cash generation. It feels like now that leverage could be coming down quite quickly and again relative to peers, arguably much more prudent. It feels like maybe the wrong question to ask in a rising rates environment, but is there any potential to maybe relax those targets?

And I guess my other question you've obviously got the net proceeds from the Towers deal due on completion. Do you think you would like to own more than 50% with TMUS pretty well ahead of the buyback? You've obviously got a much cleaner route through the auctions to a lower priced entry point. Thank you very much.

Christian Illek

So on the first question, maybe we are a little bit more prudent than the other guys. But I want to lead in that direction as well. And what we said at the Capital Markets Day is we want to reach the corridor, which ends the 2.75% by end of 2024. I would much -- I feel much more relaxed if we're getting into 2.5%. So this is why I ask the organization to stay very focused on the leverage target.

Secondly, I think, take a look what has happened at the interest rates. About two years ago, the treasury rate in the U.S. was close to 0%, now it's 2.25%. So we don't know what's happening on the refinancing market. So it's better to buckle up and stay super disciplined on this one.

And thirdly is, look, I'm coming from 3.3%, so let's have that discussion if I'm getting closer to the corridor whether we can losing the target a bit yes or no. On the 50.1%, I think the answer is we have three targets being set and Tim talked about them in the presentation. One is the infrastructure build out, being at 5 or 5G. The other one is 50.1% and the third one is, get back into the leverage corridor and I think we want to fulfill all three of them. And once we have fulfilled them, then there is obviously an open debate, what's the best value creation vehicle whether it's been increasing this year in the U.S. or whether it's buying back share in -- on the DTE level or doing something different. But we are not at this stage yet. So therefore, I think we want to maintain the consolidation. We're super disciplined and focused on this one, whether we increasing our share beyond 50.1% is depending on fulfilling the targets, which I've basically described.

Hannes Wittig

Thanks, Christian. And we move on to Adam at HSBC, please.

Adam Slater

Thanks very much. I wonder firstly, if you could talk about the fiber to the premise build plans in Germany for the second half, please. Because I think I'm right to say you need to double the pace of your fiber build in the second half. So just kind of any process related stuff around that would be helpful.

And then secondly, in reference to your prepared comments on the Telekom’s tax in Hungary, I just wonder if you could talk about the level of engagement with the countries that you're working in whether or not there is more to be done there or whether you just see this is very much a one-off event? Thank you very much.

Christian Illek

Okay. Let me start with the telco tax in Hungary. So we have been super explicit that obviously if this is becoming, let's say, more persuasive across the footprint that we have to obviously take action on the CapEx level. And that lobbying has taken place on a local level. You can be rest assured that all the Natco leaders I'm talking to political stakeholders and tell them, look, we are very dedicated on investing into your company -- into your country and providing best possible networks, but you have to give us sufficient funds in order to fund this. So that's the way how we're doing this. So it's not like Deutsche Telekom is making very public speech on what we expect from the different countries, more happening on the local level. And I'm hopeful that the Hungarian tax is the only incidents, which you're going to see in this respect, but cannot promise this, no.

Timotheus Hottges

Maybe to get a little bit deeper on this one. First I am in personal contact with President Orban on this subject, had already two discussions on this one. Second, I left a clear letter on this subject that we think this is anti-investments, what he is pushing forward, and I was very clear that this might have even a consequence on the rollout of fiber going prospectively, because the [indiscernible] stay the same and therefore we have to take actions around that one. So there is a very open and clear dialog around this one. We have a very good infrastructure in Hungary and that's no doubt, but this is definitely counter-productive for investments.

Second, with regards to the FTTH run rate, by the way EUR2 million is not our target. Our target is EUR2.5 million and I can tell you we are trying to get EUR3 million a year for the same money, which we have laid out. So we are even trying to improve the productivity of constant discussion with Srini and the technical team on this one, because we are now learning how to improve the productivity and the rollout. We have [indiscernible] where we don't do the construction alone and we do it with the cities, I have constant dialogs with the municipalities with regard to when they are open the streets for rennovating. Water pipes and others that we are using this for putting our faber into this one. And on top of that we have this internal competition with Glasfaser NordWest and with our Glasfaser plus activities where we've created internal competition, who is doing it at a cheaper base.

So with regard to the second half of the year. Look, this is the normal build out things. There are a lot of construction going on, but they are not counted yet, because they are not installed, finally installed. So this is the normal, kind of, build up procedure, which you have in every construction. I can tell you I'm more convinced that we do a little bit more with the money we're having then less with regard to the numbers I have seen. So therefore this is the seasonality of the build out our target stays and I see us even accelerating on it.

Hannes Wittig

Last year, we also had the same seasonality. So you can look this up. So we are not -- we are fine with our targets. Jacob at Credit Suisse, please.

Jacob Bluestone

Hi, good afternoon. Thanks for taking the questions. I have two fairly quick ones. One, can you just help us a bit with the outlook for your German broadband adds? You mentioned a few different drivers, the Teleco law, the slowdown in the market and the fact that it's taking longer to connect customers. I guess, just '23 net those out, do you think your broadband growth will slow further from here or do you think it might actually rebound? And also if you could maybe just comment specifically whether you're seeing pressure from fixed wireless access within that?

And then just very briefly, I think you mentioned very strong growth in Congstar and Mobile. Can you maybe comment a little bit on the performance on the Magenta brand? Thank you.

Christian Illek

Hang on a second, thanks. On the broadband trends, which we expect is, well, the slowdown in the market will not disappear soon. I think that's something we all have to deal with, but what's going to disappear is the take [indiscernible] impacts and we said in the second quarter, there are estimated around 15,000 to 20,000 on net adds. And that will pass away over the course of the second half of the year.

And the third one, the time gap between a pre-sales of fiber line and the connection is something which is currently a very, very focused activity area, how we shorten that time frame that should also help us when it comes to the broadband net adds in the future quarters.

Timotheus Hottges

Look, we discussed that Christian, and one of the issues is, in the past and it was Deutsche Telekom, who was offering their customer base to the others to gain new customer net adds. Now our churn is at a record low. And by the way, you might have question where is the line losses number in our presentations. We took it out of our presentation, because they are not existing anymore. So the overall market is not any more feeded by the customer base of Deutsche Telekom.

The second thing with regard to broadband is, if you look to the net add market share, which we have gained in the first half year, we are significantly above our 40%. So this is more a market issue, how strong the market is growing than rather than you know a performance issue in our company. Then again what Christian has said, we had this -- still this headwind from the telecommunication law here. But nevertheless, I'm more optimistic, especially if I see orders coming in for the FTTH services which coming soon. There is a lot of interest with regards to higher bandwidth and that is something which we are fulfilling. So 4% broadband revenue CAGR is something we are expecting and I'm expecting even a slight increase for the net adds over the next quarters.

Your question with regard to Congstar. Look, it's a great performance of that company in the way how they are coming along the flexibility, which they are giving to customer segments here and we appreciate that. But nevertheless our prime focus on the mobile side is the acceleration of our next Magenta proposition. We want to see a significant growth on customers in this field and the first weeks, now starting July 1, are very encouraging. We have seen a 100,000 new subscriptions on next Magenta already. And I'm very excited that we found a very interesting proposition, which is replacing our former idea.

So therefore, this is the focus area. Congstar is very nice to have but this was due to the fact that we had no new proposition on the Magenta side until July 1, which is now the prime area of advertising.

Hannes Wittig

Fixed wireless access, you want to comment on this.

Christian Illek

Okay. So on fixed wireless access, Jacob. I would say there is a distinct difference between the US and the German environment. Two reasons, one is obviously we have competitive overlapping fixed infrastructures like cable, like our vectoring network which is covering 80% of the households. So therefore, that's different relative to the U.S.

And second point is, take a look at the price points you have in the fixed line environment. It's somewhere in between EUR30 to EUR40 and you don't have the same distinct price advantage if you subscribe to a fixed wireless access relatively -- than you have a net in the U.S. So we don't expect this trend to replicate here in Germany, relative to what you've seen in the U.S.

Hannes Wittig

And we are not seeing it on the ground. So this is clear statement from our German partners. And anyway, next we move on to Robert at Deutsche Bank, please.

Robert Grindle

Yes, good afternoon, and thank you. Tim, with much lower leverage ahead at the gear level from deals, team of buybacks and growth, are your thoughts turning to M&A in Europe at all? Four to five years ago, you said that any spare euros would go to the U.S. and that was a great call. And I'm just wondering whether do you feel the same now?

And Christian, I heard what you said about the discipline of the leverage target at Group level. My [choose] (ph) simultaneously also start talking about net debt and leverage on an ex-U.S. basis, perhaps, bringing focus to the end of valuation and dividend cover of this [Technical Difficulty]? Thank you.

Timotheus Hottges

Thank you, Robert. First there is no M&A Europe. Our European consolidation ambitious we are putting now into the focus, to be very clear. European from its telecommunications infrastructure is becoming more nationalistic. There are a lot of, let's say, national interests with regard to the assets there. Second, I think the Kingdoms are very well protected by their CEOs and they don't see maybe the bigger story line behind combination here. They are more focusing on managing their universes. And thirdly, I'm not, you know, seeing big appetite from investors, European market consolidation.

Look, I have to say the world is changing and maybe I see something a little bit earlier than others, but the softwarization of Telekom and frame it Telekom-as-a-service, global connectivity offers, and I'm not only talking IoT, even talking the business communication service side and the like. The softwarization of Telekom's is from me, a very interesting area, which we have to position ourselves and the more of the software you're developing, the more interesting the scalability across borders become.

So there are new cross-border synergies and if you -- I'm not sure how deep guys you are in it, but the CPaaS logic, the area around companies like Sinch's Twilio, the areas about Vonage and companies, who are defining a software layer based on the vertical last mile infrastructures, mobile and fixed line mass mile offers, telcos are offering, it's an interesting proposition which is growing at high rates in billions. So, this is an area where we have to present otherwise telecos gets cannibalized. And there are more things, you know, look how we have standardized now across our whole businesses, TV and the Audi car development, home OS, the operating systems for the routers, the one app, you see the software is becoming more and more relevant and it gets standardized across countries.

So the more countries you are offering, the better the economies of scales are in this regard. So this is something I see coming. But I don't see on the other side from telcos in Europe a big degree of consolidation work. So to be very clear, I'm not pushing for this. I'm not having this on my priority list, not at all.

My next priority list, after the U.S. priority which we hopefully will fulfill sooner than later is to improve Deutsche Telekom's business into a more digital teleco, with regard to better productivity, lower cost, better customer service, better Big Data Management, cloudy fade infrastructures, and the so-called horizontal layers, which we need to provide a global connectivity. This is the area where we're investing. This is the area where we see the biggest benefit for our customers and for our profitability. My appetite to consolidate the European market is limited.

Christian Illek

Okay. Robert, on your question with regard to leverage. Let's put some data to itself. So, if you take a look at our current leverage, which is 146 including leases, 106 belong to the U.S. and 38 belong to the ex-U.S. business. And if you take a look on the leverage increase, which we have seen from the beginning of the year up until now, more than 100% of the increase was due to activities in the U.S. So what you can allude to is that the ex-U.S. leverage is actually currently better than the overall average and obviously the U.S. leverage.

The second one is, if the tower deal will close, obviously, the proceeds will be allocated to the staff, how you call it, and that will further drive down the leverage of the ex-U.S. business. And on the dividend, look, I think, we can have an argument whether you allocate 100% of the dividend, only to the DT ex-U.S. business, because that would be the assumption that TMUS doesn't play a role for DT shareholders. So, but right now the way how to describe this is that the dividend is completely being covered by the DT ex-U.S. business. Hope that answered your question.

Robert Grindle

Thank you, folks.

Hannes Wittig

And of course the T-Mobile buyback, as we said, will also be relevant going forward as you also mentioned. So with that, we move on to George at Citi, please.

Georgios Ierodiaconou

Yes, sir. Good afternoon and thank you for taking my questions. Actually a couple of follow-ups. First on the leverage and the team's situation. I just wanted to maybe get your views on how you expect to deal with true-up situation on whether you proactively try and be above 50% as things stand in case there is the issuance of shares or whether that's something you expect to address at the time?

And then maybe as I want to go around the leverage question just asked, in the presentation, you are talking about going into the corridor by 2024, but in your answer earlier around interest cost you, kind of, I think Christian, you kind of implied may be is good to be prudent earlier. If you don't mind, just help us putting the two things together to maybe better understand your behavior around the team's buyback when it starts?

And then my second question is for Tim. And obviously there has been the contract extension. Recently, there has been some press reports having a couple of weeks ago in one of the German newspapers suggesting that there is a succession planning already going on Deutsche Telekom. I know in the past, it's been like very process-driven around successions and obviously the handover from to Christian was over a period of time. Is it something that already is in your mind and you're considering or is that go completely making up stories based on -- I am excited this coming over from one of your competitors. Thank you.

Timotheus Hottges

Let me start with the first thing on the capital allocation. And by the way, I'm not sure whether for everybody the true-up a logic is clear. We have agreed with SoftBank that there will be 49 million shares being issued if the team U.S. share price exceeds $150 on a 30-day give up until the end of 2025, that's the logic on this. So in this case, this will dilute us if this is taking place from a shareholder perspective.

Now in our consideration you should always have as well that we still have a shares agreed that we can buy them from Softbank at a price of $101 per share. And on top of that, that we have a swap in the market for shares at a price of $142. I'm not sure whether this is the forward correct. So, therefore we have somewhat, you know, put some securities around our potential acquisition on shares of the U.S., which makes us independent from the market development. Now for us, and I'm not sure whether this is your question, including true up, we want to achieve a clear 51% shareholding in the U.S.

Second, timing. Look, we have always made the timing based on observing the market, taking opportunities, trying to understand where our partners tent in this regard. So therefore, we are discussing all options at every time, but I'm not releasing the state of that discussions here, my hope is that we have this problem solved earlier than 2024.

Christian Illek

George, thanks for the question on the leverage, and whether our stated guidance is actually prudent one. Look, if you compare leverage with leases and without leases. The difference is more than 0.5 turns. If you recall it back as we introduce the IFRS leverage number, we assume that the lease impact will be a quarter of it -- of a point and not half of a point. So assuming this stays the same and bear in mind, if we close the deal on towers, obviously, that will come additional lease liabilities in our balance sheet from the DFMK business and the Austrian business. But let's assume for the time being, that delta is 0.5 points. If we get into 2.75 without leases, I would be at 2.25. And I think that is very prudent and this is how we want to keep the discipline in the organization.

Timotheus Hottges

Now there is a question with regards to the my personal plannings. And my earlier leave off -- leaving the company. Now listen very carefully. Yes, it's true, I'm leaving, I will leave tomorrow for one week to Mallorca and hang out there. And after that week, I will come back and then if I fight from tea as always I have done it. This whole story from hundreds slot. Its the summer. Honestly which I found amusing because it's a fiction. It's a totally in off investigated, sorry, I do not know what they are constructing together.

It is true that we have hired back, by the way. Metsa, who did an outstanding job at O2, I have to admit, and he was my personal assistant for years in the past. He is a great marketer. He is very young and very agile and very happy and he is coming home. And therefore, I'm very happy that he is decided to come back to Bunn to the area and joining Srini's team, because we have a loss of one guy there who did a great job as well. But for personal reasons unfortunately he had to leave.

Now, to construct something out of this from my succession, if now every leader in this organization is already an indication of my leave, then we have a lot of funny stories to talk for. I'm very committed. I just, you know, decided to extent my contract here. You know that one of the issues for me is renovating the team and building the next generation with the right skills for leading this company beyond our 10-years and I'm excluding Christian as well. He is not the youngest as well. But this, though you don't look like -- young like me. I'm turning 40 in September, by the way, guys, you should do that that is around birthday and I have one wish to all of my investors, which you can do from round birthday at September 18, give me 20. I need that to reimburse the party.

Hannes Wittig

Okay. I hope you remember this is 18 of September 20-years and besides, we would not let you go. So with that, we move on to Joshua at Exane, please.

Joshua Mills

Hi guys, thanks for taking my questions. Two for me, that's a follow on to just broadband [Technical Difficulty] spectrum. So if you [Technical Difficulty] this quarter and it does [Technical Difficulty] some kind of market slowdown. If I will cut the number also [Technical Difficulty] the churn is fixed for [Technical Difficulty]. So my question is if [Technical Difficulty] game change in the fiber [Technical Difficulty]

And the second question just on the U.S. spectrum side. So, yes, [Technical Difficulty] previously. It gives you more visibility and security and as a few of [Technical Difficulty] particularly in 3.5 gig bands, [Technical Difficulty] So, maybe a question of [Technical Difficulty] yourselves, but are there any plans in [Technical Difficulty] acquire that spectrum. And if so, [Technical Difficulty]. Thanks.

Timotheus Hottges

Joshua, on which kind of network are you? I'm sure you're not on a Telekom network. That is for sure, you know. If so I can promise you, you know, there is something, which has to get fixed, because the connection is very bad. Anyhow we're trying to interpret it what you have said, because we couldn't follow up on all the elements here. I think, I have answered the question on broadband in the second half of the year with regard to the development there and Christian reflected on this one as well. We have seen some slower. We see some increase, but we -- you know, we don't see it coming back to the same levels as we have seen it last year.

And what we see is that upselling higher speeds and fiber is definitely something which is supporting our commitment with regard to the service revenue growth, which we are seeing and our market share is very well intact and beyond the 40%, which we have set out. So therefore, in principal from a commercial side, everything is fine. On the net debt side, it is slower than what we have seen last year.

Second is the U.S., 2.5 gigabit bands. Look, if you're talking about the wideband here are, we are not talking about that one because we're in the middle of the auction. You can follow the development here. We always have said that we are interested to acquire that spectrum. But let me spend a sense on the spectrum. We have now got the 600-megahertz spectrum, which is covering two-third of the U.S. It's a very attractive, very interesting spectrum. I said earlier that it's the work band of which you need for big traffic, which is helping us a lot. It will help, as you know in our mid-band strategy as well. We have 200 megahertz of mid-band in this area, which gives us unique positions towards our competition and we are playing that out, just giving your high speed internet as one example.

The thing what we see is, that in the U.S., we do not see -- but you know, I cannot you know, 100% promise that, but what the planning is and what we know from the FCC and other institutions, there are no big spectrum auctions coming after that. It's very important as well for our financial planning, because we have seen a lot of let's say spectrum auctions recently. We went through that. We got an interesting fraction of it. We keep or we kept or we even improved our spectrum leadership in the U.S. during this phase. And now we foresee for the next years, significantly more quiet period with regard to spectrum acquisition.

Hannes Wittig

Excellent. Thank you. Sorry, Joshua, you were a bit hard to understand that's what Tim was referring to. So if you want to follow up, we can do that maybe later. And with that, I'll move on to Steve at Redburn, please.

Steve Malcolm

Yes, good afternoon, guys. I got for a couple of one in the U.S. and one on sort of broader European energy issues. Just in the U.S., one of the great joys of modeling is try to understand the difference in U.S. GAAP and Europe IFRS GAAP. And when I look at the IFRS numbers, it looks like U.S. EBITDA was down 3% in Q2 for the U.S. GAAP, was very different picture up of 10%.

Can you help us understand what the major differences are this quarter? I get it though, you are restructuring and special factors, but let me just help us understand how to reconcile that and why we should broadly ignore the IFRS numbers and concentrate on the U.S. GAAP numbers, that'd be great.

And then just coming back to energy. So, you guys done a really good job on hedging and well done on getting your energy usage, though, it seems like you're ahead of the curve, as you go. But I guess we tend to look at this in a kind of one dimensional way about your costs. When you look across your territories, are there any one you particularly worried about going into the winter with rising costs, I mean obviously in the U.K., we're going to see a two or 3-fold increase which is going to place a lot of pressure on consumers?

So just interested in your thoughts on the German market, European market, where you might see real pressures on disposable income and the possible changes to consumer behavior, and besides that, are you in your continued declining thinking about possible blackout to the winter and how you might change your strategy if that stuck, if that does happen? Thanks.

Timotheus Hottges

So I can start with the, it may be IFRS bridge. So the IFRS bridge we have guided at EUR600 million for the year. This is the normalized number. The guidance stands. The volatility is induced by energy repurchase -- forward purchases the re-pause as we call them, and they have been a drag in this quarter. Last year they were a -- last quarter end of the year before they were a tailwind. So that explains the volatility in that number. The normal number you should work with is about EUR600 million like as per our guidance.

Christian Illek

Okay. Let me follow up on the energy question. First, what I said is, I think we're pretty confident up until, including the year '24 that the energy impact in Germany will be limited for the two factors I already mentioned. One is the retirement of the renewable energy surcharge. And the second one is our hedging coverage, especially in the year ‘23 and it is absolutely -- I'm absolutely know the position to forecast now the forward prices in ‘24, you see there is a lot of volatility.

I think what we also said in Q1 that about two-thirds of the U.S. energy costs has been hedged and Hannes was alluding to the financial impact of the repo hedges. Where we are exposed, and I can only be transparent on the segment level is in Europe, there are some countries where you're not allowed to go for multi-hedges and the coverage in Europe for next year is around 15% -- 50% and therefore obviously we are running up and down with the forward rates. And as I said, that can be an effect which is beyond the EUR100 million in the next year.

On the other side, what we're seeing is that you see broad price movements in the Eastern European market, and that's not only coming for us. It's also coming from competition and they are absorbed. You saw the very strong commercial figures in the European segment, so I don't see kind of an optimization behavior of consumers yet, since everyone is kind of moving in the same direction. And on the blackout, sorry, I'm not in the position to. You going to do that blackout?

Timotheus Hottges

Look in Germany, we have this alarm tools alert for the gas fossil, the gas supply. This has no direct impact for Deutsche Telekom due to the fact that our -- we are consuming energy and not gas in this regard. But nevertheless, Deutsche Telekom is under the regulation of critics -- perceived as a critical infrastructure and therefore in a high privatization when it comes to shortage of energy, so this is a governmental and security protection, which has been laid out here.

And by the way, I would expect, I'm not in every detail here that this is as well tool for other countries that the communication services are somewhat protected. We should not forget that if there is a blackout of a country, or the region, maybe our networks will work, because we have apart from the external energy supply for our networks, a certain degree of independent energy supply and batteries, which we then can use. We have even diesel aggregates for the Big Switch houses and alike. I cannot release here how long this will take and how long we can operate with our networks, independent from energy supply because that is not for disclosure.

But we should not forget the moment where the networks are operating, but there is a blackout of certain regions. Customers cannot use their services anymore, because handsets require energy as well. So, therefore not an easy scenario, but I can tell you we do not expect blackouts in winter on our energy services, at least not impacting our networks and we are anyhow more protected from the security laws critics in Germany than other industries.

Hannes Wittig

Just maybe following up on the questions Josh had, because he sent me the text email now and he asked about, are we seeing more impact from over builders in Germany?

So I would say, clearly there is some activity going on. It's not really the driver, let's say, for the incremental picture that you are seeing. And when you look at our situation, of course, maybe you can see that there always has been some infrastructure competition that we have dealt with and one element of is fiber, one element is cable, one element is regional carriers, et cetera. So there is no fundamental change in the landscape here that we currently see.

And now we move onto Ottavio at SocGen, please.

Ottavio Adorisio

I would have about energy and the second teams, enough has been said, and focus on fiber and the commercial and the new pricing. On the fiber, I noticed that on the fiber new has -- it's been a really steady decline on the wholesale more than compensate from the strong retail. If you can specific give a bit of color of what's going on the wholesale demand for fiber?

Then the FTTH numbers you provide, I believe they are not including the JVs quoted on out of the scope. So if you can tell at any stats if you already been rolling out FTTH through the JVs and if you've got something in terms of number of past and CapEx you done?

And the third one on the fiber, it’s basically the push looking a new website. You've given with the housing associations. I guess with two years before the end of the ancillary cost privilege, you basically -- because both in opportunity there. So it looks that you are pushing in terms of you are offering to proactively your services and I want to know how is going in terms of housing association, is that registering the property for connections, have you seen any changes over the last six to nine months? That will be grant.

The second one, it's on the family plans and I heard what Tim has said and -- but, I have been looking at Deutsche for a long time and I was just wondering what you said, is something that has been ongoing for quite a while. So we've seen family plans for years through in the U.S. So it's not a new and the low market share on the budget segment, it's also something that constant. Your -- Deutsche Telekom is obviously focusing on the premium one in the business.

So I was wondering why we have been waiting so long to formulate this offering. It's a great offering. I agree, but why comes now? Is just because the 5G give you more capacity, more flexibility in pricing or there has been a trigger for that? Thanks.

Christian Illek

Okay. Let me, maybe start with some factual question. So I hope FTTH numbers do include joint ventures except GlasfaserPlus, which is the new joint venture for the rural areas that we agreed late last year and became went live earlier this year. So the order of magnitude of the contribution that we are expecting from the existing joint ventures is about 10% of the total EUR10 million target.

The family plans. I would also say, we are still the first ones to in -- innovative, maybe you want to add something on this but further and on the first question, if you can go back to the first question, just quickly here.

Timotheus Hottges

Ottavio is right. Ottavio you're right. We’ve to slow. And I have to say that. We have to slow. Yes. And that is something where I'm very happy that Srini is now pushing for these things. You know, I think, you know, we saw this big market opportunity already. We were very much focusing this market over our Congstar brand in the past and about secondary brands where we had a wholesale agreement with and now we have said no, why should we lead then over indirect channels. We should take them over my channels.

And if you criticize us for this, you're totally right. It was -- we are too late on this one, but now we are there and we are the first one and I can tell you it's not easy to populate this new logic into the tariff stream. So it took us quite some time to get it operationally here and that is why I'm not seeing any reaction from the competition yet on this side because they cannot switch it on overnight. They need a couple of months to get that implemented in the same way. So therefore, let's take that as a good learning session that we should earlier that maybe logics from the U.S. or other markets into the German environment.

Let me answer the question on fiber and the discussion here. Look, the simple answer on why is this wholesale market declining by the retail market is growing for us, because we want that, because the margin on our retail is better than the margin on the wholesale side.

And second, you know, you have a direct contact with the customers. You can do upselling, just, you know, think about convergence product and that is let's say what this company is about, about great service and delivering directly to the customers. Nevertheless, we are fast and we like to do wholesale as well. But we saw Vodafone migrating. Customers from us are way into their own DOCSIS world and therefore you know, this is one of the reasons that we saw some decline in this field. So I think that's a very logical development.

The good thing is and I’ll just -- we’ll have to stress that here, please have a look on this page, where Christian showed the development of our wholesale revenues with the change from the contagion Model into the commitment model, we had this dip and now we see positive growth on the wholesale revenues in Germany again, as promised.

With regards to the housing associations. Look, first this new law is with related to the housing associations, which has not been only in the contract yet, but for the new ones, for the new installations. Nevertheless Srini is intensively working with housing associations to connect them to FTTH there. So, we are working on this one and I hope that we can show some interesting names during the course of this year. I know things are going on, but I cannot release at that point in time already done deals.

Hannes Wittig

Thanks, Tim. [Operator Instructions] And we move on to James at New Street, please.

James Ratzer

Yes, thank you. Hannes. Then I'll try to limit just one question, please. I had a question regarding the dividend. As you look back of what you did last year between the Q2 numbers you just reported and the next time you spoke to the market, the Q3 you disclosed your plans for the 2021 dividend. So I was wondering if we could, if you match the same timeframe this year, how you're thinking about the dividend for '22? When -- if I look at your adjusted EPS in the first half of EUR0.94 and just keep your EPS flat in the second half, you're heading towards EUR1.50, I mean EUR1.46 for the EPS, so well ahead of the EUR1.25 target. I know some of that's boosted by the FX rate.

I mean, if you keep the payout ratio the same that's up about EUR0.76, so quite a bit ahead of consensus. I mean, I was wondering if you could talk through some of the variables that just the tower sale bringing in more cash make you feel more confident. If you go to the top of the 4Q to 60% payout range. Thank you.

Christian Illek

James, I will not give you a distinct answer on your question. You know, that we have an intact dividend policy in place, which is 46% of adjusted EPS and obviously is linked to EPS growth. I think your observation is right. We have a very nice development of the EPS happening throughout the first half of the year. And I also gave an indication that we're very confident that we're going to hit that greater EUR1.25 by the end of the year, meaning I don't see kind of an effect, which will massively drag down the EPS in the second half. Whether it's going to be EUR0.76 what the consensus says, little up or a little down will be decided, as you know, usually at the Q3 numbers when we're presenting them. But I would be positive on the EPS growth readings through the numbers which you have seen in the first half.

Hannes Wittig

Yes. Thanks. And we move on to our last two questions or persons, one is Usman at Berenberg. If you could go ahead please.

Usman Ghazi

Hello. Thank you for the opportunity. I wanted to touch based on the free cash flow performance excluding the U.S. Over the last, if I just roll -- do a rolling 12-month excluding the Netherlands, you're already hitting something like over EUR4.0 billion. I know the CMD guidance was EUR4 by 2024. So just with regards to that, is there I mean, I guess that does give you with some flexibility whether you want to pay forward some suppliers et cetera to get some savings benefit ‘23, ‘24, but just wondering how you're thinking about the headroom that you've created on the free cash flow upside excluding the U.S.?

Christian Illek

Look, Usman, I would stick with the guidance which we have given at the Capital Markets Day you see that we have a nice EBITDA increase when it comes to GTX U.S. growth. On the other hand also that we are increasing our cash umbrella and have increased our cash umbrella with regard to fiber rollout in Germany, so I would stick with the EUR4, and take it basically as the commitment going forward. But I don't want to give an indication whether we’re going to pay suppliers upfront or not, especially --

Hannes Wittig

Working capital management.

Christian Illek

That's working capital management. It is -- you can benefit it or not, but especially not with regard to ‘24.

Hannes Wittig

But let's say we feel good about it basically.

Christian Illek

That's what I said earlier, very confident. I said very confident.

Hannes Wittig

Yes. Okay, and it's good to be on the prudent side of things. With that the last question from Simon at Barclays, please.

Simon Coles

For the price increases or reducing promotional discounts in German fixed, I heard the answer on mobile earlier. You're obviously doing very well in the fixed side and taking share well ahead of competitors. You're flagging that you're seeing strong demand for uptake. So I'm just wondering why we haven't seen necessarily a change in the pricing from Deutsche in fixed in Germany, so far given it feels like this is possibly an opportune time to do that given how strong your position seems to be in the market? Thank you.

Timotheus Hottges

Look, the first thing is please give us some credit for how disciplined we were. Seeing the price attacks from Vodafone during the course of this year and last year, we were always convinced that good quality of the infrastructure, reliable and secure infrastructure, supported by the best service is the best promotion you can have independent from the pricing.

Second, we were able to upsell into higher speeds, which were available and that is one of the reasons that we have seen this revenue growth on our side, on the ARPU side. Now I am not excluding that we consider for new tariffs, higher base tariff here. So therefore, I think we should face the realities as well. Our portfolio should always be smart. Our negative is not service or network. It's obvious, you know, our price worthiness, that is obviously, you know, the challenge which we have. And therefore, how we play it and if we play that we have to do that in a very wise manner. I can guarantee you one thing, I will not let my customers churn away and let them out of the contracts by giving them a termination, right?

But nevertheless, we are thinking and working on this one. And I have to say in Europe, we have already increased prices in markets where we have a CPI indices. We have even changed contracts in the way that we can adapt to this kind of changes in our supply chain and inflation rates better in Germany. This legally not possible, so therefore, we have to do that for new tariffs. And we have a lot of new propositions in the market like FTTH where we can start at another price point. And in this area, yes, I take that as a feedback and even it’s an inspiration we think about it and let's see how we can implement it.

Hannes Wittig

Excellent. So with that, we come to the end of our conference today. Thanks for your interest. And even though it's hot, and it's the middle of summer. So it's much appreciated. And any further questions, please contact the IR department. Thanks, Tim. Thanks, Christian, and I give back to the operator.

Christian Illek

Thanks guys.

Operator

We like to thank you for participating at this conference. We’re looking forward to hear from you again. Goodbye.

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Deutsche Telekom AG (DTEGY) CEO Timotheus Hottges on Q2 2022 Results - Earnings Call Transcript