Earnings Transcript for O2D.DE - Q1 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by. I am Maria, your conference call operator. Welcome and thank you for joining the Telefonica Deutschland Q1 2022 Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. I would like to turn the conference over to Mr. Christian Kern. Please go ahead.

Christian Kern: Thank you, Maria. Good morning, and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to the Q1 '22 results call of Telefonica Deutschland. Before proceeding with a 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. Also, 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, today's presentation is also available for download on our website. With me today are Telefonica Deutschland's CEO, Markus Haas, and CFO, Markus Rolle, who will take you through the presentation followed by a Q&A session. Markus Haas, without further due, over to you.

Markus Haas: Thank you, Christian. Good morning, ladies and gentlemen. And a warm welcome to our Q1 2022 Results Conference Call. We are delighted to present a you again, a very strong set of results driven by sustained and profitable growth. Let me highlight the main KPI s, which our CFO will explain in more detail in this following presentation. Revenue grew more than 5% year-over-year. OIBDA posted more than 7% growth on sustained, profitable, top-line growth. CapEx to sales stood at 13.6%, well on track for our targeted normalized CapEx to sales service by year-end. Mobile postpaid net additions were close to $300,000 this quarter, continuing our strong trading momentum, while the O2 postpaid churn rates temporarily came in slightly higher but still at low levels of 1.2%. Overall, we had a strong start to the year, confirming our market momentum on the back of achieved network parity and sustained ESG leadership. This year is the year to celebrate the 20th, birth of our corporate 02 in Germany. Since our launch of 02 20 years ago, we have made mobile access mass-market ready and help digitalization to make our breakthrough with society. Initially starting as the new challenge in a German mobile market, O2 had to be more innovative than its competition. We delivered the innovations and positives that developed and change to German mobile communications market, ongoing. For example, we launched the , a mobile milestone with O2 free speed bucket tariff with surf guarantee, not to forget O2 free speed tiered unlimited tariffs. As Telefonica Deutschland, we are now lightening up the next stage of digitalization in the occasion of our 20th anniversary. And we are offering with O2 Grow, Germany's first growing data tariff on a promotional basis. With the innovative O2 Grow, we are making mobile data even more accessible for our customers. Stopping the 40 gigabytes for our O2 Grow customers automatically receive an additional 10 gigabyte free of charge every year, up to 240 gigabyte. With the connect option, customer can use the overall data volume across up to 10 mobile devices. This is another key contribution to democratized access to the sustainable digital future to create a better everyday life for everyone. Moving on to my next slide, sustainability has become a key success factor for our business. We are delighted to say that sustainability has been an integral part of Telefonica Deutschland's DNA already since 2005. this includes taking responsibility and focusing on our business impact on society and the environment. During our recent annual ESG rotor including our Chairman, Peter Loscher, we have continued our highly constructive dialog with ESG investors. This is always a great opportunity to showcase our leading ESG position among European takers. Most importantly, it allows us to understand even better the constantly evolving investor demand with regards to this important topic. Thanks to our strong ESG performance, we are proud to be top ranked in leading ESG ratings, as well as being included in the key ESG indices. We also encourage you to take a look at our just published annual corporate responsibility report, which summarizes well our achieved ESG milestones for the year 2021. Our ESG delivery is based on the successful execution of our Responsible Business Plan 2025 with a key focus on three key pillars, environment, by building a greener future, second, social, by helping society to thrive, and third, governance, by leading, by example. With regards to environment, our program reduced repair recycle is an important building block for applying the principles of the circular economy and extends our commitment to a sustainable future. Conserving resources means above all reducing the consumption of natural resources, keeping resources in use for as long as possible. And finally, recycling them responsively to reuse value of raw materials. For example, we saved over 17 tons of plastic by delivering more than 8 million sim cards in half sim card format last year. By no later than 2025, Telefonica Deutschland plans to eliminate completely the use of non-recycling plastic in its own logistics. On social, we are focused on supporting society as communication is one of people's basic needs. In this unprecedented time, this is even more important, especially for people suffering from the war in the Ukraine. Therefore, Telefonica Deutschland is providing free roaming in costs, as well as free sim cards for Refugees from Ukraine. Furthermore, we are offering financial support and professional opportunities for interested refugees in Germany via the form UA talents. Moving to governance. It is worth highlighting that we have further strengthened the independence of our Supervisory Board composition. As a result of these ESG initiatives, we are all better recognized with top rankings by leading ESG rating agencies such as Sustainalytics and EcoVadis. On my next slide, I'm excited to highlight the strong execution focus of our investment for growth program and the excellent progress of our 5G roll out. Let me flex just a few key achievements. Our rapid 5G network expansion has reached another important milestone. We have already successfully passed 40% 5G pop coverage. Hence, we are well on track for the targeted 50% mark by the end of this year. Our passive and active network sharing agreements of the current MNOs enhanced both network densification and CapEx efficiency. Finally, let me reiterate that Telefonica Deutschland has already passed its CapEx peak last year. So we are well on track to achieve normalized CapEx to sales levels towards the end of this year. Before handing over to Markus to take you through our strong operational and financial performance in more detail, I like to reiterate, our full-year 2022 outlook and midterm guidance. Our full year 2022 outlook is fueled by our strong operational momentum. As management team, we remain focused on profitable top-line growth and continued cost efficiencies. We are confident to manage the increased inflationary costs pressure since the start of the war in Ukraine within our full-year 2022 outlook. Finally, we have announced a dividend proposal of €0.18 per share for 2021 to our AGM on May 19th, which is in line with our strong commitment to an attractive shareholder remuneration. Markus, now over to you to take us through the Q1 results and highlights in more detail.

Markus Rolle: Thank you, Markus, and also, good morning, ladies and gentlemen, from my side. Let me now take you through Q1 operational and financial performance in more detail. Our Q1 revenues continued to post strong growth and were up 5.2% year-over-year to $1,946 million. This growth momentum was mainly fueled by the sustained and profitable mobile service revenue growth and also strong handset sales. MSR increased 3.3% year-over-year in Q1 to $1,351 million. This positive trend is reflecting the continued good commercial traction of the O2 brand. In fact, O2 postpaid MSR is by far the biggest absolute driver of our year-over-year MSR growth. Also, we had some support from the recovery of international roaming while the accelerated MTR glidepath was a drag of minus 1.7% year-over-year. Handset revenues were supported by the good availability of devices and posted plus 13.2% year-over-year growth to $392 million. Fixed revenues were minus 1.6% year-over-year to $197 billion in Q1 mainly as a result of the decline of the low margin international carryout voice business resent by mainly the lower European termination rates. More importantly, our retail fixed broadband revenues continued their growth path and were up 1.8% year-over-year, reflecting the increasing share of high-value customers in our customer base. On my next night, let's take a closer look at the trading performance. Mobile postpaid delivered strong growth with 287 K of net additions in Q1 2022, which is an up of 30% year-over-year driven by the well received O2 Free portfolio and a solid contribution from our partner brands. Churn in the O2 brand was plus 0.2 percentage points year-over-year, mainly due to the anticipated temporary effects from the EECC. However, churn levels remain on low levels of 1.2%. O2 postpaid ARPU was broadly stable year-over-year on the back of a combination of the accelerated MTR glide path and some enhanced focus on customer loyalty. This included retention and download benefits, for example, for second sim cards and friends and family offers. We continued to see strong O2 uplift from first sim crosses. MSR growth is also supported by second and third sim, which naturally contribute lower output ARPU. X MTR impact. The O2 postpaid ARPU continued to grow plus 0.3% year-over-year. Ahead of the recent dash of our gigabit cable offers, the fixed broadband business registered minus 10-K of net disconnections, mainly driven by legacy ABSL and some anticipated temporarily higher churn on the back of the EECC introduction. Our technology agnostic, O2 My Home product remain popular, with cable and fiber gaining traction, as well as sustained demand for our fixed mobile substitution offers. Including FMS, net additions were positive in the first quarter. Fixed ARPU maintained its gross parts with increasing share of high-value customers in the base and is up 2.8% year over year. Moving on to my next slide. OIBDA posted strong growth of 7.2% year-over-year to $602 million as a result of further improved operational leverage in both fixed and mobile. The excellent OIBDA growth, it's reflecting own brand momentum, further efficiency gains, as well as some international roaming tailwinds, which are more than offsetting the drag from the MTR cost. Our OIBDA margin improved to 30.9% in Q1, which is an up of 0.6 percentage points year-over-year. Within our Q1 cost laid down, let me highlight the following key points. Supplies were flattish at 0.4% year-over-year, as the positive effects from the MTR cut were more than offset by the volume-driven higher hardware cost of sales. Underlying personnel cost were flattish at 0.9% year-over-year, with a lower FDE base, partly compensating for the general pay rise we did in December 2021, with 1.75%. Other OpEx were up 4.9% year-over-year, reflecting the technology transformation and the commercial activity, including an enhanced retention focus and a more normalized marketing spend versus a lock down quarter in the previous year. On the right side of the slide, we show our free cash flow with its usual seasonality and our healthy financial leverage. Free cash flow amounted to $222 million in Q1. As usual, we paid the buck typically more than 40% of our annual lease payments in Q1 amounting to $275 million. This is only marginally over the last year. As a result, free cash flow after lease stood at negative minus $52 million for the first quarter. Working capital movements of minus €86 million in Q1 were on a similar level as the prior year, and are mainly driven by the anticipated unwinding of the CapEx payables minus €78 million, increased prepayments for minus €44 million. And other working capital movements of €39 million included a debt reduction in trade and other parables of minus €194 million, which was outweighed by a movement in trade and other receivables of plus €278 million mainly due to silent factory. Our consolidated net financial debt amounted to €300,213,000,000 as of 31st of March, resulting in an unchanged healthy leverage ratio of 1.3 times. On my final slide, we reiterate our full-year 2022 outlook, fueled by the strong Q1 performance and the gross momentum carried over from the last year. As a management team, we are highly committed to deliver, again, strong operational and financial performance in 2022. Unchanged, we expect low single-digit percentage growth for both revenues and OIBDA with further margin expansion, while compensating regulatory headwinds and managing the increased inflationary cost pressures. Also unchanged, we expect the CapEx to sales ratio in the range of 14% to 15% approaching normalized CapEx to sales levels towards year-end. Finally, as mentioned Markus, the dividend proposal of €0.18 per share for 2021 is in line with our announced dividend flow up for the financial years 2021 to 2023. Now we look forward to getting your questions. So, Operator, please go ahead and start the Q&A session. Thank you.

Operator: Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you're using speaker equipment today, please lift the handset before making your selections. 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 Georgios Lerodiaconou with Citi. Please go ahead.

Georgios Lerodiaconou: Good morning, and thank you for taking my questions. I have two please. The first one is around the cost phasing for the year. So clearly very strong margins this quarter. I believe Markus you have also relatively easy combed in the fourth quarter, given the investments you've done commercially in 2021, but do you mind just perhaps giving us a bit over color as to how we should think about the different cost drivers during the year. And then my second question is around the fixed line performance, more on the KPI side, I understand the revenues were impacted a bit on some low-margin wholesale. But you did have negative net additions this quarter, so just wanted to, A. get your views on how the market is evolving both in terms of growth and competitive intensity, and secondly, if you could perhaps address how you plan to reverse this trend in the current quarter. Thank you.

Markus Haas: Good morning, Georgios. A - Markus Haas speaking. Anything for your questions. First of all, we clearly expect positive OIBDA growth in every quarter this year. We had a very good start into the year, and we're clearly currently looking forward what is the overall situation from the market. But overall, as said, we're very confident to deliver our full-year guidance and to see how the year's coming. But we clearly expect growth in every quarter this year. On your second question on fixed, we were in the process of renegotiating our fixed wholesale terms with the cable operators and have been able to clearly improve the products and the conditions. And for that, we clearly, as you have seen with our birthday campaign, relaunched cable on our network with a very attractive offer on competitive levels. But clearly, now also been able to match the quality in the product features that competition had before. So we're very clearly now seeing or expect a strong uplift for the rest of the year on fixed trading, on wireline trading, on the back of renewed conditions on the cable networks. And so far, we already knew in Q1 that this was coming, so we clearly now have -- with the acceleration as seen fourth here.

Markus Rolle: Georgios, let me add some more detail, this is Markus Rolle speaking. For the cost phasing, apart from the one-offs that we had in the previous year, we expect this year, of course, to be a much more linear cost phasing because in the previous year we were still hit by the lockdowns and all the topics driven by COVID in the last year. So in January, cost-saving -- cost is expected to develop more linear we will have somewhat less pronounced support from roaming, as you know, because travel activities restarted throughout the mid of last year again, and we also expect some cost increases in line with our plan and expectations. For example, the enhanced roll out will result into slide cost increases on the network side, but all anticipated in the guidance as well as also the inflationary topic.

Operator: The next question is from the line of Ulrich Rathe with Jefferies, please go ahead.

Ulrich Rathe: Thank you very much. My first question would be on O2 Grow that somehow had time limited offer, but just conceptually, I was wondering how you think about that? Nobody knows whether -- what the price which -- for 40 gigabytes is going to be in 20 years time and to products that have framed around this, the market is around this growth towards that endpoint. You cited sustainable model that you can translate into other products or is this simply complete one-off and then not the model for tariff structures in future. Second question is on the comments that you made on the output dilution due to challenges in the first quarter. Could you give us more color in what exactly you did to the proactively there and in what way that affected the upward growth in the first quarter? Thank you very much.

Markus Haas: Thanks, Ulrich, for your questions. On the first one, on the O2 grow. O2 grow is clearly an upgrade credit tariff for us, I think it comes with the 30 EUR price point, it's a timely limited offer as you rightly said, and from that point is clearly strengthening, again, loyalty and it's clearly also for existing customers who want to do an up-sell from the packages they're currently on. It's a very attractive offer from our perspective, it's for us clearly a test and what we currently see is we have no plans so far to increase it beyond the BARFTA campaign, also clearly set, but from our perspective, every customer that comes with O2 grow, will increase our average ARPU in O2 postpaid. So as again, it's strengthening our positioning, it's strengthening loyalty in the base, and it's an innovation, it's an innovation tariff, it's a different concept to unlimited tariffs. And from that perspective, we clearly hope that many customers will go for the tariff in order to continue our growth momentum that we have already seen in the first quarter.

Markus Rolle: Hey, Ulrich, let me take your second question on the ARPU development. I think first of all, our underlying development, our operational development is fully intact. O2 is by far -- the O2 postpaid by far the biggest contribution to our MSEA. However, in Q1, of course, we were facing the MTR cut in our ARPU, without the MTR cut, our growth would have been, again, at similar levels like you have seen in the previous quarters at around 0.3%. But let me explain you also the mechanics behind a little bit more. So we are still very well performing from our perspective on the first sim card, as Markus was mentioning, O2 grow is also contributing to that one. We are still gaining customers far above the average ARPU that we have in our customer base. However, we are more and more on the retention side and also, of course, gaining second sim cards, third sim cards, family and friends offers, etc. They come with a lower ARPU contribution, so they could dilute that ARPU KPI, but they're also contributing nicely to the overall MSR growth, and of course, we know the customers, they can also within good profitability into place. So we should not just solely look at the ARPU KPI, which is still healthy from an underlying perspective, we should also look into the bigger picture where you have some effects that we have to take into consideration, but all, I think going into the right profitable direction.

Ulrich Rathe: Right. So the comment in the reports on the ARPU impact off the retention was specific into the second and third sim cards for friends and family and these effects that you commented long before.

Markus Rolle: Correct.

Ulrich Rathe: Okay. Nothing else going on. Okay. Thank you.

Markus Rolle: Thank you.

Operator: The next question is from the line of Polo Tang with UBS, please go ahead.

Polo Tang: Morning. Thanks for taking the questions. I have two. The first question is at least about your 1-gigabit cable broadband offer. So you're promoting it for 30 years per month, but can you comment about how much traction you're currently seeing with that product? And can you comment on what you're seeing thus far in Q2 in terms of both postpaid net ads and broadband net ads. My second question is really about that free cash flow after leases. So you've seen quite an active working capital drag of minus each 6 million in Q1, but how should we think about working capital for the full year? If I look at your one results, I can see scope for consensus, large EBITDA higher for the full year, also deliver CapEx for the full year. And will this be offset by negative working capital movements and over the course of the year? Thanks.

Markus Haas: Thanks Polo, for your questions. On your first one, one-gigabit birthday promotional offer on fixed based on the cable infrastructure has a price step-up after 12 months. So on average, over 24 months, including then the two costs for the router, we are matching basically competition, but clearly the first 12 months is an entry at tariff that we give. But you're already need to commit into the higher tariffs after 12 months with a step-up in pricing. We clearly expect by being able to sell this also actively in our customer base in our mobile customer base, attractive take rates. We just launched a week ago and we clearly see that your offer is getting attraction. As you know, we are not communicating forward-looking statements on gross adds in mobile and fix, but we clearly believe that we can underpin the current momentum going into Q3 and Q2, especially in both quarters, to a continue on, very healthy momentum you've seen on the first quarter already kicking in from the very strong Q4 that we have delivered in 2021. It's a continuation of the momentum that we see and all these offers will clearly support the current trends that we see.

Markus Rolle: Hi, Polo, good morning. Let me also take the second question. So first of all, I think from an operational and cash flow perspective, we are on similar levels like in the previous year. We have roughly an up of EBITDA of $40 million and also additional CapEx of $40 million versus the prior year. So here we are marginally at the same level. And also the working capital movements that we see are nearly on prior year level. So nothing unexpected, this is currently happening, we are seeing, of course, the prepayments that we are usually doing with roughly 40% for the full-year amount in Q1 kicking in negatively into the working capital changes, and also, of course, the reduction in CapEx payables from the CapEx peak of last year. We have as always that back-end loaded cash flow profile and we expect that to normalize as it also has done in the last year. So nothing unexpected happening from a working capital perspective, Polo.

Polo Tang: Thanks.

Operator: The next question is from the line of Andrew Lee with Goldman Sachs, please go ahead.

Andrew Lee: Good morning . I just had also a question on the free cash flow generation, so thanks your commentary just now, Markus, on Slide 10. Just trying to understand even with the Q1 waiting of prepayments that your free cash flow of $222 million, which you highlight on Slide 10 compared to $248 million a year ago. What are the incremental headwinds because as you said, you have done honest CapEx is flat or very slightly up year-on-year? So what's providing that $13 million headwind and I think past partly there's some silent factoring or handset financing in there. I wonder if you could explain just what exactly is going on there just so that we're able to model through the year, that'll be really helpful. And then just secondly, what's the outlook for cash taxes for this year to-date? Should they remain the minimus for 2022 and into 2023? Thank you.

Markus Rolle: Yes, Andrew. Let me take both of your question. So I think we see minor movements in working capital from absolute numbers. So you cannot really see an underlying trend of changes. For example, silent factoring tranches that you are doing can be on a higher level or a lower level on a quarterly basis that depends also on the number of handsets being sold, etc. So we expect no underlying trend changes, no headwinds that you were anticipating there. But just some movements that you would -- that you have seasonality driven. And on the cash tax, indeed, we are expecting to pay minimum taxation level due to the big tech carry forward that we are having. However, we have to have in mind that the cash tax that this year will be slightly higher due to also techs pay out of the previous year that has been not yet cash tax relevant. Plus also anticipating then an amount for this year and -- for last year and the prepayment for this year. So you can currently calculate and we're still not finalized about that, but roughly within cash out of up to €100 million for the full year.

Andrew Lee: Okay. Thanks. I still don't fully understand the $30 million decline in free cash -- in the free cash flow from $350 to $220 but I guess -- I think you think that's just some kind of different phasing of . So

Markus Rolle: It's quarterly phasing that we see but we can also follow that up and review to get the modeling right with our IR team afterwards. So if nothing from structural perspective that moves into the wrong direction, but we will follow up after this call with you, with Christian and Marion. Okay?

Andrew Lee: Thank you very much.

Operator: The next question is from the line of Mathieu Robilliard, with Barclays, please go ahead.

Mathieu Robilliard: Thanks. Good morning. I have two questions, please. First, with regards to the competitive environment in mobile, I'm just curious is the change in law regarding customer lock-up, I just wanted to understand if you're seeing any changes in dynamics in many of the segments. And second, I wanted to confirm that the share of wholesale revenues in postpaid MSR hasn't changed too much versus the previous quarters or years. Thank you.

Markus Haas: Good morning, Mathieu, it's Mark speaking. From our perspective, the EECC impact I think is as expected, so we saw the technical effects in the first-quarter. Also having a look at the mobile number portability base, I think we are of healthy rates, so we really have strong gains, so from that perspective. But clearly not all sim cards as we discussed in the last quarter are coming back, so we had not used cards, you have cleanups in the base that you also have seen. But overall, expect every slight increase of churn in the first quarter, full normalization expected in the second half year, so we saw this technical effect, but mainly no impact on the numbers on revenue and all, it was the overall asset technical effects, but no worry at all going forward.

Mathieu Robilliard: I'm sorry if I can interrupt, and no change in competitive behavior from other players around this?

Markus Haas: From that perspective, clearly, we have been -- implemented this in a compliant way. Not all competitors have standard in the first step. Clearly, the regulator now really reminded every man to be compliant, so from that level we have clear, fair level playing field, and also on debt level, normal promotion in a season rational market and no disruptions from this side. And now, after everybody has implemented that in our compliant way, we also see a fair level playing field.

Markus Rolle: Good morning, Mathieu. Let me take the second part of the question with regards to the hotel revenue that we also see, again, a solid contribution to our MSR from our partner business, but a steady contribution. Assets, by far the biggest growth comes from the o2 brand also following our strategy. And here we are trailing in percentage of the postpaid MSR still in the mid to high twenties as we have seen it also in previous quarters.

Mathieu Robilliard: Thank you very much.

Operator: The next question is from the line of Joshua Mills with BNP Paribas. Please go ahead

Joshua Mills: Hey guys. Thanks. There are two questions from my side. So the first one which is be on trying to break down the very strong EBITDA this quarter and into the operating . So I think in the past you've indicated that EBITDA contributions can come from all three of your revenue segments, so service revenues plus handsets plus . Has there been any change in how much handsets which drop a lot this year have contributed to the EBITDA? And going forward, if you can maintain this low single-digit as you call it, 3%, 4% MSR growth, do you think that a mid-single-digit EBITDA growth profile is sustainable. And then the second question from me would just be on a comment you made earlier Markus, around the optima inflowing the higher-quality subscribers that you're seeing. I think our own data and what we're seeing results which suggests that you're capturing more and more customers from Vodafone. And I just wanted to check that whilst the case and if so, how do you think about that potential for competitive response on the new management team? Thank you.

Markus Rolle: Okay. Let me start with the first question. Josh, with regards to EBITDA contribution and of course what we said before, you have three areas of growth from an operational leverage perspective. Of course, by far, the biggest one is the mobile service revenue contribution. But we see also improvements from the fixed performance that is also there. With regards to your last topic around handset of course, that we are and always having some margins on the handset business, but not significant margin contribution. We had good momentum now in Q1, we had good availability of handsets also, and we were able to bring that across. But handset is always just a means to an end for us because we just do that in order to sell mobile or fixed line subscriptions to our customers with zero to very low margins that we can generate. With regards to the forecast so we feel comfortable with our outlook that we have given of low single-digit percentage growth and as always, Josh, we will monitor that throughout the year. And if we see room for updating the guidance, we would announce that at the appropriate moment.

Markus Haas: On your second question, Josh, the key to success is killing network parity. And also in the first quarter, independent tests have reconfirmed, again, the same network quality between the other two players in the market, so from that perspective, we see healthy inflow coming from all networks to our network, and that clearly also allows us to have on an underlying basis, also, they're taking into account the MTR cut growing postpaid ARPU on our own brand. So we see clearly inflow from all ends of the market and key basis for that is network parity that has been reconfirmed in continuous investment and support delivery also on 5G rollout in the first quarter, that's the basis, and this clearly drives the financial performance.

Joshua Mills: Great. Sorry, if I could just maybe come back again on the handset point and sorry to belabor it, but higher handset revenues accounted for more than half of the revenue growth this year. And I just want some for anything different, about how you're selling the handsets over time to customers. And can you just give us an idea of whether this a low-single-digit margin or a 5 -10 percent EBITDA margin, you generate from the handsets in this quarter specifically.

Markus Rolle: No. So Josh, we did not change the fundamentals, we are still building on our very favorable by Hendi model that we offer to the customers. And of course, we always monitor the market development below, and if we can -- if we see opportunities to optimize the margins, we will do. But if we need to be competitive, where we will also do. We had a good availability, which was the main driver for that positive handset and growth in Q1. Other than probably other participants in the market, especially Apple and Samsung had with us a very, very good availability and that drove also then the revenues and as a result also some margin improvements that we have been able to do. So no structural changes, and we always depend here on the market development.

Joshua Mills: Thank you very much.

Operator: The next question is from the line of Pilar Vico with Credit Suisse. Please go ahead.

Pilar Vico: Hi, good morning. Thank you for taking my questions. I have two on my side. The first one, after Markus just mentioned that the cash tax could be up to 100 million Euros for this year, this look like a big step, so I'm not sure if you could provide a bit of a breakdown here on what are the moving parts, and also what could we expect for 2023 guidance. And now moving back again, sorry for this, on the EBITDA guidance. It has been reported a 7% growth, which looks quite high versus what was announced with the 2022 guidance. So I don't know if you could provide a bit lighter on the headwinds that we could expect towards the end of the year. Thank you.

Markus Rolle: Thank you, Pilar. And let me take those questions. With regards to the cash tax. So you'll see an accumulation of the minimum taxes being paid, basically accounting for probably nearly three gifts of taxes that we need to pay. Therefore, you've come up to that higher amount of $100 million and afterwards you see basically if you divide it by the three in that range and normalization of costs that depends on the profitability levels that we see. But we still expect that minimum tax to be viable for the next year as we discussed it because of the big tax loss, carry forward of nearly $15 billion that we still have ahead of us. So I think that's on the first question. And the second question was with regards to the good start into the year. Yes, we can confirm that good start into the year. We do not expect major headwinds apart from the moving parts that I was describing. Some less support from roaming due to the good seasonality that we have seen already in the prior-year, some cost increases as anticipated from the network rollout, the transformational activities and also from inflation. And of course, we need to, as always, remain the flexibility to invest into the market. We want to take our fair share from the market. And therefore, we need to remain the flexibility. So no headwinds expected, just trends that we also wisely anticipated and as Markus said, we're expecting also EBITDA to grow in the next quarters.

Pilar Vico: Thank you very much.

Operator: The next question is from the line of Steve Malcolm with Redburn. Please go ahead.

Steve Malcolm: Hi, there. Thanks for taking my questions. Sorry, Markus, I want to come back on the tax point, I missed some of the answer there. Just to clarify. I think you have about a $70 million liability on the balance sheet for the tariff sale from last year. So you say that the incremental P&L related taxes for this year are going to be $20 million to $30 million, and is that roughly how we should think about it going forward? I guess you take 60% of your profits because you can shield those in tax direct, is that how to think about it going forward? And then just on your lease exposure, can you help us understand how much of those leases are directly exposed to inflation and how much are going to escalate just going forward. Thanks a lot.

Markus Rolle: So Steve, indeed, you did -- everything what you did, was appropriate. So of course, then on the future you depend on the profitability that you will be able to generate. But from the calculation perspective, you are, from my perspective spot on. With regards to leases, yes. Well, it's a mixed back. Some -- something is inflation linked, others have just graduated leases or even fixed brands that really depends on the different contracts. As you know we have nearly 30,000 different leases side with different landlord, et cetera, parts of let's have been now transferred to ATC as you know, but of course there are many contracts behind with many different structures. And even if you have lease compensation in it, it doesn't necessarily mean that it this drawn, and also not drawn for the full amount of leases because only parts are applicable to leases. So from an overall perspective, we do not expect a big amount for this year. We expect an amount in the low-teens, as we -- as we have anticipated already in the last call and that is leading then to the before described lease increases that we will see for this year that build that annualization of the ATC deal to come, which is starting in July. So then we will have the 19 million increase the run rate, which will increase us from the 602 million that we had in 2021 a bit plus then the low-teens number that you would -- that you can add. So all in line with our expectations and as indicated in the last quarter.

Steve Malcolm: Okay. Thanks very much.

Operator: The next question is from the line of David Wright with Bank of America. Please go ahead.

David Wright: Hi, guys. I think everything's been covered recently. Well, but I might just extend a little on Josh's question and the fact that you have got this very strong network momentum and we see the independent schools obviously parity mentioned, but I think in 5G now, you're definitely starting to look ahead at Vodafone, and I think the second derivative of your momentum starts taking you past Vodafone on pretty well all metrics over the next 12 months. Would you agree with that that you feel like you are at some point in 2022, you are the second best network in Germany. Can we be that blunt? Thank you.

Markus Haas: That would be a great birthday present for the O2 brand this year. As said, I think we are making very good progress. We also feel comfortable with reduced CapEx envelope compared to last year to achieve our network targets. And I said there's full momentum. I think we have all the sites. We have all the equipment that we need up to now, so we'd also do not see currently supply shortage on network equipments. Overall, the machine is running and we go full steam under one side to deliver superb 5G network experience and also attract clearly B2B customers. So is both. I think our strategy on network parity was built on first, getting the whole market share and significantly growing B2B, and thirdly, achieve two or three product customers. All three revenue pulls that we attract are working, and from that perspective, we're in a good position to continue the momentum that we see. And as such, we are pleased with the current progress of the network roll-out, and let's see what the next independent tests will tell us. But clearly as said, the variety of tests is so close now, and especially the test that has been conducted in the first quarter, shows that there is network parity and it depends also on the details of to test. But as said, we will do everything to continue and to accelerate our network position of course, we will not stop.

David Wright: Okay. Thank you very much.

Operator: The next question is from James Ratzer with New Street research. Please go ahead.

James Ratzer: Ah, yes. Good morning, everybody. Thanks for taking my questions. Two questions, please. I think surprising we got this far on the core without our question on inflation. So it's just interest in any updated thoughts you might be able to give on your ability to pass through inflation directly to consumers I think in the past, you'd indicated that this was difficult. It's clearly not allowed in Germany under existing contracts. But I was wondering if you had any updated thoughts around from book price rises to reflect the impact of increased inflation levels in Germany? And the second question, please, I had was we just love to if you could give an update on progress within how many homes have you now paused within that joint venture? How many customers have you signed up? You'd how many pre -committed customers, if you've got when you do starts deploy any update on that asset, we much appreciated. Thank you.

Markus Haas: Morning. A - Markus Haas speaking on your first question on inflationary environment. I think we remain focused on profitable growth, continued cost efficiencies, and clearly managed increase inflationary impacts. As said, our exposure to inflation is quite limited. We don't run a fixed network, so it's only on mobile basically. And all the costs leave out are actively managed. There's no impact on guidance 2022 and going forward, we clearly see smart pricing initiatives. I mentioned on the last call that we have been able to reduce the number of pack days and allowances in prepaid from 30 to 28 days three years ago. We clearly see opportunities in the B2B segments. We see up-sell opportunities to bring customers in higher tariffs and we clearly constantly monitor the market if there are also initiatives. For example, we'd sell 5G only at the price point of €30 as clearly as part of our killer product, The M, but we don't sell it in lower tariffs. So there are certain opportunities to clearly increase willingness to pay in tariff. And from that perspective, we constantly monitor the market. And from that perspective, we have all levers in our hand to clearly manage the situation, to commit our mid and also short-term guidance on inflationary pressure. And as such, the best that we have delivered its growth, especially Opto growth in the first-quarter and we are clearly committed to deliver profitable growth going forward. At the same time, leveraging cost efficiencies and smart moves, especially on prices with upsell opportunities that we have executed and we'll execute in the future. On I think the business has been fully established and more and more customers are connected. We don't publish a detailed number, but already a five-digit number of customers we have been able to gain just to give you a flavor from the momentum that we see and our o2 fiber. So we had the anchor customer based on the wholesale agreement being signed between Telefonica Deutschland and we make very good progress, especially in the rural area. So the machine is now up and running. And we constantly grow this business. So we are still the anchor customer and continue to be so. And from that perspective, the progress is from our perspective going well.

David Wright: Thank you. Have -- you said how many homes you've passed as well within that asset?

Markus Haas: I think it’s a -- it's a and currently the number is not published, but clearly if you have five digits number customers, not all customers are using it, you can assume that the number is higher.

James Ratzer: Great. Okay. Thank you, Markus.

Operator: Next question is from the line of Adam Fox-Rumley with HSBC. Please go ahead.

Adam Fox-Rumley: Thank you. Good morning, everyone. I had a question on ESG SG. You were very clear in your presentation how important it is to the company, but I wondered if you could talk about it a bit more from the outlook business perspective, is it an element that's either attracting customers today or one you think will attract customers in the future? And I suppose one area your net zero commitments helping you to win business in corporate who are interested in their own sky through emissions in due course. Thanks.

Markus Haas: Many thanks for the questions. First of all, yes. I think from our perspective, it is an essential part of our strategy in for example, governance and taking care about data as in Germany, essentially. So data protection executing in line with compliance is extremely important. So from that perspective, clearly you could say housekeeping or is a high chain factor because you have to comply with the rules anyhow. But for example, that we give customers choice to use data or on a consent basis to change their permission to data management. All these kind of things are relevant. So good governance is important for our customers besides network quality and pricing, of course. And with regards to your second question, also, the neutrality target, clearly, we support in B2B in this inactive part, also to climate balance sheet of our customers. So if they use us, we can have a positive contribution to their climate targets. And it's clearly more and more also becoming a decision criteria because we will be the greenest and the fastest greenest network in the German market in the coming years. And if they use our services, they could clearly also positively contribute to their own climate targets. So it's becoming more and more also a relevant factor for business customers. Yes.

Operator: At this point in time, no further questions will be taken. I will now hand the call over to Mr. Markus Haas, CEO. Thank you.

Christian Kern: Closing remarks coming in.

Markus Haas: Many thanks for joining our call this morning, we are delighted to have presented to you a really strong start of Telefonica Deutschland in the first quarter. And we're happy to follow up next Friday in-person in London.