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Executives

Stephan Eger

René Obermann - Chairman of the Management Board and Chief Executive Officer

Timotheus Hottges - Chief Financial Officer and Member of Management Board

Analysts

Matthew Bloxham - Deutsche Bank AG, Research Division

Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division

Ulrich Rathe - Jefferies & Company, Inc., Research Division

Simon Weeden - Citigroup Inc, Research Division

Justin Funnell - Crédit Suisse AG, Research Division

Hannes Wittig - JP Morgan Chase & Co, Research Division

Nick Delfas - Morgan Stanley, Research Division

Dominik Klarmann - HSBC, Research Division

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Deutsche Telekom AG (OTCQX:DTEGY) Q2 2012 Earnings Call August 9, 2012 7:00 AM ET

Operator

Good afternoon, and welcome to Deutsche Telekom's Conference Call. On our customer's request, this conference will be recorded.

Unknown Executive

This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel-related measures. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom's control.

Among the factors that might influence our ability to achieve our objectives are the progress of our workforce-reduction initiative and other cost-saving measures and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations and our network upgrade and expansion initiatives. In addition, stronger-than-expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development. Further, the economic downturn in our markets and changes in interest and currency exchange rates may also have an impact on our business development and the availability of financing on favorable conditions.

Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the group and operating segment levels. If these or other risks and uncertainties materialize or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.

In addition to figures prepared in accordance with IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, free cash flow, gross debt and net debt. These non-GAAP measures should be considered in addition to, but not as a substitute for the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.

Operator

Now please listen to the statement of René Obermann and Timotheus Hottges. After that -- afterwards, you are welcome to ask your question. May I now hand you over to Mr. Stephan Eger.

Stephan Eger

Thank you and good morning and good afternoon to our listeners in the U.S. We're presenting our Q2 results for the DTE group today with our CEO, René Obermann; and our CFO, Tim Hottges. Due to a very tight schedule, we'll have to end the call sharply at 2 p.m. CEST. [Operator Instructions] With that, I'll hand over now to our CEO, René Obermann.

René Obermann

Yes, hello, hi. We have delivered a good and a solid quarter. Supported by currency, group revenues were almost stable at EUR 14.4 billion, just 7 -- just 0.7% down. Adjusted EBITDA at EUR 4.7 billion was actually slightly above last year's level, and free cash flow in the first half of the year was essentially stable at EUR 2.8 billion. And on this basis, we reiterate our full year guidance and also our dividend policy, which is unchanged. This compares, as I believe, very favorably to almost all other incumbent operators in Europe.

Our solid first half results provide us with the necessary cushion to improve our competitive position in German mobile and in the U.S., with potentially some higher OpEx in the second half. In this context, let me also point out that we are not under-investing in terms of CapEx. Although first half CapEx, first half year CapEx came in 5% lower year-on-year, we are sticking with our full year guidance of CapEx on the same level as last year. In the U.S., the network modernization started in earnest only in June and will ramp in the second half of the year. And in Germany, we'll continue to ramp, especially the LTE and broadband CapEx in the second half of the year.

So coming to Germany, we had encouraging fixed line results and slightly improved mobile service revenue trends as well. Good net adds in broadband and Entertain and line losses at a historical low at just 236,000, 20% below last year. This is really reflecting strong customer retention and great service quality and good service and increasing service reputation by our customers.

In wireless, service revenue trends improved in Q2, and mobile contract net adds amounted to 464,000. But before -- I don't want to paint the picture too rosy. But the services trends improved, and I do believe that we might see an even further improvement in Q3 simply because the effects of the tariff migration and some wholesale extraordinary effect and so forth panned out.

We have started investing into measures to fight back on market share. And we gained profitable customers already in Q2, and we expect to continue this going forward. Our goal clearly is to regain the market leadership in service revenues.

Overall adjusted EBITDA margin improved to 42% supported by an adjusted OpEx reduction of 4.1%. Second quarter in Europe results reflect a higher bias on market invest already and a deteriorating impact from the economy and currency. Revenues were down 5.9%; and adjusted EBITDA, 8.8%. And the underlying organic decline amounted to 3.8%, minus 3.8% for revenues and minus 6.7% for adjusted EBITDA. Nevertheless, growth in key KPIs in these markets remained solid.

The highlight of the U.S. results was a further improved adjusted EBITDA and margin. Adjusted EBITDA increased impressively. And in euros anyway by an 18.6%, but also in U.S. dollars with 5.7% with a margin reaching 27.7% of total revenues. In euros, total revenues were up 8.7% due to currency, while U.S. dollar revenues declined by 3.1%. Finally, blended customer churn, contract customer churn improved from 2.6% to 2.1% year-on-year. However, it was offset by weaker gross adds, but the churn trend is encouraging.

In terms of the search of a new CEO, I have personally seen a number of promising candidates. The objective is to find a strong and entrepreneurial and a permanent CEO with relevant U.S. market experience pretty soon.

Let's take another quick look at the key group financials for the quarter and the first half year. In the quarter, reported net profit increased by more than 3/4 to EUR 614 million. This was driven by a different seasonality of special factors compared to last year. Adjusted net profits declined by almost 14% due to a higher depreciation in the U.S. You will recall that last year, we stopped depreciating the U.S., following the announced sale of T-Mobile USA. This was reversed in the fourth quarter. Free cash flow was down slightly in the quarter and essentially stable for the first half year, while cash CapEx declined by 13.5%.

Summarizing these numbers, I would like to remind you of the fact that this was not an easy reporting season for the European telecom sector, which is still facing economic and competitive headwinds from all angles. As a result, a couple of our competitors had to reduce their earnings forecast for the year, and they had to cut back on shareholder remuneration.

In contrast, we at Deutsche Telekom: a, delivered on our guidance with almost flat EBITDA and free cash flow, whereas some of our competitors showed significant weakness; b, we stay fully committed to the full year guidance of 2012; c, we stay fully committed to our dividend policy, of course, always subject to the necessary formal approvals, whereas some of our competitors, like KPN or Telefónica had either steep or complete dividend cuts; and d, we have even the strength to invest even more, for instance, in our home market in Germany, particularly now given a seemingly better regulatory framework. We'll analyze that and we'll talk about that in the session.

On Slide 7, you can see the organic decline in revenues and adjusted EBITDA. You see that it was almost offset by currency gains, mainly from the strength of the U.S. dollar. These currency gains explain the strong growth of T-Mobile USA observed in revenues and in EBITDA in euros. Besides the U.S., all other divisions had revenue declines in the second quarter. We'll explain these trends in detail when we come to the divisions.

In terms of adjusted EBITDA, profitability improved in 3 divisions: in the U.S., strongly in system solutions and in GHS; while in Germany, profitability was slightly down with a more pronounced decline in the Europe division.

Before turning over to Tim, who will lead you through the result of the divisions, let me just briefly comment upon the recent developments in German and European regulatory policy because it's so important, where a few decisive signals for our industry, as well as the European economy as a whole, was sent out just recently. Let me state very clearly. We appreciate the reorientation of the European regulatory policy as it was announced by Commissioner Kroes in July. A stable and predictable regulatory framework until at least 2020 is a prerequisite for long-term investments into modern broadband infrastructure. Finally, these arguments, which we -- our arguments were listened to. And finally, change is on the horizon. The announced stabilization of the price levels for free products, that improves the basis for calculation, for market participants as well as for you on the investor side.

Equally important is the planned abandonment of a cost regulation for new fiber networks as long, of course, as there is sufficient competition from other network operators, for instance, ULL's cable and LTE, and I don't think we have to worry about that. Competition is there, so the planned abandonment of a cost regulation for new fiber networks is welcome and can take place. These are steps in the right direction in order to provide Europe with a framework, which actually promotes investment into the infrastructure, into next generation infrastructure, and it does set a basis for entrepreneurial calculations.

Another positive news is the recent statement from the German regulator approving our revised so-called contingent model, the quota model for the wholesale of our VDSL network. Also, it's important message because these type of models reduce costs and allow for the scale effects, both for the wholesaler as well as for the reseller. And they helped to make these investments much more calculable. So I'm happy about that decision.

Most important for us is that regulatory policy will no longer only pursue price reductions. Thank God. But also going forward, take into account the necessary improvements in the overall framework in order to foster the investments. That's the way forward if we want to build the necessary infrastructure for Europe. We will evaluate -- in fact, we are already quite far down the road in evaluating these new framework and the opportunities, which result out of that. And we'll update you in the coming weeks on what it means for the business cases if we make more aggressive investments because we believe there are good opportunities coming ahead -- coming forward.

So with this, that was it from my side. I'll hand over to Tim, and I look forward to our discussion later on.

Timotheus Hottges

Thank you, René. Welcome, everybody. In Germany, we saw slightly weaker revenue trends and almost unchanged trends in adjusted EBITDA. Revenue declined by 3.1%, essentially due to weaker revenue trends in wholesale and others.

Mobile revenues declined by 1%, a slight improvement over Q1. Core fixed line trends are stable at minus 2.6%, while wholesale services revenues declined by 5.5%. Compared to the first quarter, revenues in network services were weaker due to lower volumes and price reductions.

Revenues in others declined by 14.3%, driven by fixed related and value-added revenues, such as our lower revenues from public telephones, directory assistance and the 0, 180 numbers. Despite the slightly steeper revenue decline, adjusted EBITDA trends remained essentially the same as in Q1 with adjusted EBITDA down 2.2% year-on-year. This result was due to stronger cost cutting. Adjusted OpEx declined by 4.1% compared to the 1.6% decline we achieved in the first quarter.

In mobile, the measures were initiated -- we initiated had some first results. Mobile service revenues declined by 1%, an improvement over the 1.8% decline in the first quarter. This was driven by continued strong mobile data revenue growth of 19%. Excluding the loss of one wholesale provider, service revenues would have been flat year-on-year. We still lost some further market share in terms of mobile service revenues, but the sequential decline in market share was much less than in the first quarter. Compared to Q1, we had the same growth rate in service revenues as our main competitor. The KPI were strong with mobile contract adds of 464,000 and strong smartphone sales as well.

We further expanded our LTE coverage to approximately 10 million households in rural Germany and plan to cover 100 bigger cities by year end. Consistent with our overall approach to coverage, we are focusing on dense high-quality LTE coverage right from the start.

We are pleased with our KPIs in German fixed. We defended our broadband market share of 45% despite the strong competition from cable. Overall, we had 47,000 broadband net adds in Q2. Once again, Entertain and retail fiber customer net adds were particularly strong at 105,000 and 48,000, respectively. Accordingly, consumer ARPA, or average revenue per access, improved by another EUR 0.30 to EUR 25.70. We continue to expand our broadband coverage, as you can see on Slide 10 in the upper right corner.

In the U.S., overall trends were quite similar to the first quarter. The highlights were strong growth in adjusted EBITDA, strong growth in branded prepaid customers and a better churn rate. On the other hand, branded contract losses were impacted by weak gross adds, at least partially due to U.S. industry trends, but also due to credit optimization initiatives and the relative lack of new smartphones.

The GALAXY S III only came at the end of the quarter, and that will help us throughout the rest of the year. Service revenues declined by 6.1% mainly due to contract customer losses. On the other hand, total revenues declined by just 3.1% due to stronger equipment revenues resulting from the shift to value plans and higher smartphone sales.

Our adjusted EBITDA improved by 5.7% as a result of lower volumes and the shift to value plans, but also due to strong cost cutting as evidenced by lower network cost and a significant sequential decrease in the G&A costs.

Overall, net adds turned negative again mainly due to lower wholesale net adds. The strong branded prepaid net add of 227,000 reflected the success of our monthly 4G unlimited prepaid plans. Among the U.S. carriers, we had the best branded prepaid net add number in Q2.

With regard to the implementation of our strategy, we made good progress in the second quarter. In June, we agreed on a spectrum swap with Verizon, which is conditional on the Verizon cable agreement. This spectrum swap, if approved, would significantly improve our AWS spectrum position in many markets. We started the network modernization in earnest in June and have already modernized over 250 sites. We expected to modernize at least 20,000 sites in the course of 2012. This plan has not changed.

Our cost reduction program, Reinvent, is going very well. We are well on track to achieve the target of $0.9 billion gross savings in 2012. And branded contract churn improved from 2.6% to 2.1% as a result of our churn reduction program, but also due to the seasonal trends.

Turning to Europe. Trends were weaker in Q2 than in Q1, both in revenue as well as in EBITDA terms. The main reason for this were a weaker economic environment in some of our markets, notably the Netherlands, the Czech Republic, Hungary, Croatia and the slowdown in Slovakia. Tax and regulation, we had roughly 10 million higher negative impact from regulation driven by Romania in Q2 versus Q1 and are still exposed to special taxes in Hungary and in Croatia. A still very competitive environment in all of our markets in which we even invested more in some markets compared to Q1. A positive one-timer in our Polish operations in Q2 2011 for last year is another reason for the deviation.

Despite this difficult environment, we performed well in Q2 operationally. To give you some examples, the higher market invest for this [ph] Q1 is reflected by the continued growth in key KPIs, broadband TV access and contract subscribers growth. Impressively, the smartphone share amounted to 60% of dispatched devices, up from 43% a year ago. We outperformed competition in some of our markets. In Greece, we outperformed Vodafone in terms of service revenue development. In Poland, we clearly outperformed our main competitor in terms of contract net add share. In the Netherlands, we outperformed KPN and Vodafone in terms of service revenue development. And in Romania, we are currently the only big player gaining mobile subscriber market share. So the reason that you have seen a further decline on the EBITDA side in the European business is due to more market invest in these respective regions.

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Let's do a deep dive in the markets where the saw the most important change in trends versus Q1, as can be seen on Chart 14 and 15. In Greece, we are still facing a very difficult economic environment and an unfair regulation on the fixed line side. Despite this, the colleagues of OTE continue to do an excellent job under these conditions. Operationally, we returned to positive broadband and TV net adds on the fixed line side and outperformed competition in mobile again. Service revenues in mobile, however, declined in the quarter due to a tougher year-over-year comparison against Q2 than in Q1. And postpaid revenues were under pressure driven by lower subscription fees and lower non-voice revenues. Higher SIM-only share is here the reason.

On the cost side, the management continues to deliver, resulting in an almost flat EBITDA and the more than 2 percentage points higher margin. For the remainder of the year, the OTE management team will focus on securing their refinancing, further reducing the cost base and maintaining momentum in both mobile as well as fixed.

Looking to Hungary, the overall economic and political environment stays difficult with the uncertainties around the new state entrant and the new usage-based special fee enforced since July 1, which Magyar Telekom will need to pay in parallel to the old telco tax until the end of 2012. Operationally, we continue to defend well our revenues, with underlying revenues x MTR being up 0.5% in the quarter driven by our IPTV sales, our mobile broadband offers and our new businesses. The drop versus Q1 is explained by the seasonality of some of our retail businesses, especially energy.

On the mobile side, we outperformed competition with our 25,000 contract net adds and had a 57% smartphone share of all dispatched devices. The decline in the EBITDA margin year-over-year to 34.7% is a result of the low margins of the new revenue streams in our business mix.

In Slovakia, a slowdown of the economy and the continued harsh competition had an impact on some business areas and on our financials. The negative revenue development was driven especially by fixed, notably, the ICT business where the government has significantly reduced its spending, but also mobile service revenues decreased by 8.5% due to a lower usage and continued prices competition.

Operationally, we showed again a good 10% year-on-year growth in our TV customers and spent significantly more as a feast [ph] in order to win 12,000 new contract customers in mobile. As a result of the revenue decline and higher market invest in mobile, even a good performance in cluster cost reduction could not prevent the decline in EBITDA margin to 41.6%.

In this context, let me make a few remarks about our joint venture, Everything Everywhere. We achieved a growth in service revenues of 3.4% x MTR. With 150,000 contract net adds, we achieved a solid market share of postpaid net adds. We even increased. Postpaid churn remained at a low 1.2%. And finally, the adjusted EBIT margin remains stable despite higher retention expenditures, and we are on the track to achieve GBP 3.5 billion of synergies by 2014.

The highlight of our system solution business results was a strongly improved profitability as measured by adjusted EBITDA and adjusted EBIT. Revenues, both external and total, were down due to general price declines. However, we are encouraged by an 8% growth in order entry in a difficult economic environment and several deal highlights, including British Petroleum, Daimler and Everything Everywhere. Adjusted EBITDA was up almost 11%, while adjusted EBIT grew by close to 56%. This reflects successful gross savings by EUR 147 million in the second quarter.

Before moving to the Q&A, let me briefly summarize on the Q2 financial as shown on Slide 17 to 19. As expected, free cash flow benefited in the first half from lower taxes and interest payments. Additional EUR 0.2 billion less CapEx contributed to the strong performance of almost stable free cash flow. CapEx are expected to increase in the second half. Therefore, the guidance of around EUR 6 billion free cash flow for the year remains unchanged.

In terms of bottom line, reported net profit improved by more than 3/4 to EUR 640 million. The biggest influence here was the different timing of restructuring charges compared to 2011. You will recall that this year, the majority of restructuring charges occurred already in the first quarter.

In addition, net profit benefited from an improved financial result and lower P&L taxes. The tax line again was lower as a consequence of T-Mobile U.S. being a continued operation again. That's the reason that we have preparations again as well. Adjusted net profit was impacted by an increase in depreciation, predominantly from the U.S. due to being fully consolidated again. This trend will continue in the -- through the third quarter and then reverse in Q4.

Let's conclude with the balance sheet, which remains in good health as measured by key ratios. Both shareholders' equity and net debt were impacted by the dividend payment in Q2. Year-on-year net debt was reduced by EUR 2.3 billion. The key ratios of net debt to adjusted EBITDA improved from 2.3x to 2.2x year-on-year while the gearing remained stable. We continue to have a stable outlook from all rating agencies and maintain undisputed access to the debt capital markets. Our very comfortable and low refinancing costs were intact as well in the second quarter of this year.

With this solid quarter, I'd like to hand over to René and be ready for answering your questions.

Question-and-Answer Session

René Obermann

Thank you very much, Tim. The Q&A session will be starting right now. [Operator Instructions] And then we start right now with Matthew Bloxham from Deutsche Bank.

Matthew Bloxham - Deutsche Bank AG, Research Division

I had a question on the balance sheet, and I guess to some extent, linked also to the comments that were made about regulatory policy and how that's helping clarify future investments. Obviously, we've seen rating agencies and balance sheet pressures have a direct influence on other operators in the sector about their strategic decisions on their use of cash flow. Just kind of wondering if you could give us an update on to what extent you're seeing pressure from the ratings agencies, and how that is always affecting your strategic decision-making process, to what extent investments might need to be balanced against the lower shareholder returns, for example, a different approach on the balance sheet?

René Obermann

Matthew, the sound quality was very weak. Therefore, I'll try my very best and try to repeat what I hope I have understood. The question is, with respect to future investments, I reckon your question is how do you balance these out against the rating impact and future shareholder returns. Is that correct?

Matthew Bloxham - Deutsche Bank AG, Research Division

Yes, I think that's a good summary.

René Obermann

Matthew, I think the outlined financial strategy, you all know with regard to our different stakeholders, was very balanced and -- over the last year. And our current investment prognosis for this year is absolutely intact and in a balance with this targets here. We're going to be able to invest -- to EUR 8.3 billion throughout this year that is based in our planning. And that will help us to fund the additional investments, which we have laid out for the U.S., as well, it is helping us with regards to the needed investment into the modernization of LTE and even fixed-line infrastructure here, especially in Germany. With regard to 2013 and beyond, that is something we have to discuss when planning or a change to the planning is due. That is not the case today. Therefore, we stick to our outlined financial strategy. As I said, it's very well balanced. We have a comfortable payout ratio with regard to our dividend. And therefore, at that point in time, we are not worried with regard to any kind of unbalance in this regard.

Stephan Eger

And we continue with Robin Bienenstock of Bernstein.

Robin Bienenstock - Sanford C. Bernstein & Co., LLC., Research Division

I guess more of longer-term question about the changes in fiber regulation. I'm wondering whether you think, given these changes, that investors should think about this leading to longer-term revenue growth in German wireline revenues eventually? And perhaps secondly, related to the U.S., given that your spectrum position has improved a little bit, you used to think about having a fairly short time horizon until you ran into spectrum constraints in the U.S. How far off do you think those constraints now are, and do you believe that some kind of deal is necessary there? Or do you think you can go alone for quite a long time now on the -- in your U.S. operations?

René Obermann

So the answer, Robin, is let's assume that what Mrs. Kroes has announced gets translated into national regulation pretty fast and that there is no more price downward pressure on the copper line on the last mile. That is already a big help because in business cases going forward, one always had to assume there were some more price pressure downward. Second, if there is no regulatory intervention, price intervention, on the new access networks and the whole thing lasts until 2020, then I do think, both in terms of new opportunities through high performance networks access tariffs as well as less price pressure on the old network, we should see new growth, or at least, stabilization in revenues in the forthcoming year. It's very possible in fixed line as well given the increasing trend of HD video and applications, which require high performance access. It's just that you see a customer trend on the application side, on the consumption side, and you see that even in the ARPU. So yes, there is a perspective now. And clearly, we have done our homework already with regards to what can we make out of this new opportunity and situation. It's just a bit early to discuss it here publicly, but we do think there are new opportunities to potentially be a bit more aggressive and a bit more -- with an intelligent and a bit more aggressive investment plan leveraging this and creating new sources of growth. But don't get afraid here. We are trying to always, as Tim said earlier, we're trying to balance out the different stakeholder objectives. And don't over-interpret what I'm saying. I just say we have more opportunities. We will invest more, particularly in Germany. But we still try and keep in mind that we have different stakeholders, not just the network side and the customers. Spectrum constraints in the U.S., we are -- I think we're pretty well positioned for the next, I'd say, 4 to 5 years at least. I think it's very difficult to make a precise calculation. We, in general of course, we look towards new opportunities for scale and spectrum. But in general, I think for the next couple of years, we're pretty good, probably 4 to 5 years.

Stephan Eger

And we'll continue with Ulrich Rathe.

Ulrich Rathe - Jefferies & Company, Inc., Research Division

Two questions. One is sort of backwards looking really on the quarter. What exactly would be your rationale for holding back on market investments in the U.S.? Clearly, 28% margin constitutes a bit of a sort of hold back in market investments. The other question is on the shareholder distribution. You are saying, explicitly reiterating the dividend policy. How about the share buyback element of that? Is that something we're -- that you can reconfirm in general, but also specifically on the timing of the 2 sort of outstanding tranches?

René Obermann

We have -- I said it in the short speech that the investment and the upgrade in earnest started really only to get traction quite recently. And we expect some more investments in the second half of the year, but network upgrade program towards LTE, give or take a few weeks. But it's more or less on track, and we still plan to launch by the end of the year, the LTE network. So no, there is no fundamental rationale for holding back on anything with regards to network investments. And market investments -- I mean Philipp put a lot of emphasis on these equipment installment plans and on bring-your-own-device kind of things. The balance may be a little too conservative, and therefore, in the second half of the year, as we said also in the early speech, we've probably put a bit more emphasis on the marketing side because churn has improved as you saw. But gross add share is not yet sufficient, of course, for a number of reasons, including the lack of iPhone, but also because of our SAC policy in the first half of the year. So we may put a bit more emphasis on the gross side, particularly in contract, because prepaid has already gone very well. That's all.

Timotheus Hottges

Maybe I'm asking -- I'm answering the question with regard to the share buyback and the dividend here. I think it is fair to say that Deutsche Telekom is not in a position, being defensive at that point in time. It's not that we have to reduce our indebtedness and that we have to sacrifice operation business or something as this -- in this timeframe, the opposite is the case where we are thinking forward what could we do with regard to the U.S. market, what we could do to further invest into the business in Germany. So therefore, if I look to the European landscape of telecommunication company, let me say it openly, I think we get not enough crediting for the well-balanced and sustainable shareholder remuneration policy that we have introduced and where we are committed to that one. Unlike our peers, our payout ratio, on the basis of free cash flow, is around 50%. And we make a strong statement in this call with regard to our future payout dividend policy, especially for the tranche 2012 paid to be in 2013. With regards to the share buyback, remember that we brought forward our 2011 share buyback to the end of 2010 last year. Definitely, we stick to our remuneration policy and our dividend commitments here. But the execution, the timing of the share buyback has not been decided upon the management. We're looking to the market environment. We're looking and comparing ourselves with the peers, and we will decide upon that accordingly.

Stephan Eger

Next one is Simon Weeden of Citigroup. Simon?

Simon Weeden - Citigroup Inc, Research Division

Yes, my first question is regarding OTE, whether or not you could update just a little bit on the refinancing outlook there and timings. But also could you comment on whether DTE might get involved to a degree, perhaps indirectly, perhaps by say, buying one of OTE's subsidiaries in such a way as not to increase the group's devaluation risk. And the second question is perhaps, given we see quarterly movements on the income statement on restructuring costs, but could you talk about the outlook for the cash flow impact of restructuring costs going forward, whether or not we should expect to see the EUR 1.5 billion approximate outflow pretty much every year for the foreseeable future, or whether that starts to diminish or even grow with inflation or something over time?

Timotheus Hottges

Simon, thank you. Back to answer first the question with regards to OTE. First, operationally, we are quite happy what these guys are doing in this difficult environment in the markets. Growing their market shares, improving, let's say, their margin, and at the same time, delivering on cash flow and as well on EBITDA in this difficult environment is quite challenging. And I think it's worth giving appreciation to the OTE team here. On top of that, they are very much focused and concentrated on getting their refinancing done independently from any kind of external support. And therefore today, the OTE has a lot of cash on its balance today. We have a cash position of EUR 1.65 billion as of end of quarter. And therefore, OTE is financed through until August 2013. After the disposal of 20% stake in the Telekom Srbija order, OTE is furthermore pursuing a deleveraging exercise, which should lead to additional liquidity headroom. And therefore, they have even announced the sale of Hellas Sat or a potential sale of Globul. And therefore in our base case scenario and under the precondition, OTE is able to fully refinancing its positioning. Deutsche Telekom, in this regard, we have always said that we are not automatically refinancing any kind of gaps here. We will only do that on -- we will never do that on an unsecured basis, as we always said. And in the unlikely case of not having its own access to the capital market, which I do not see, we always said, then refinancing has to take place at arm's lengths. But I like to state again, they are doing a big effort that they are doing everything independently at that point in time, and they made great progress in this regard. Your second question was, what amount of restructuring-related expenses are we expecting for the remainder of this year? This number is approximately at the same level as it was in 2011 between 1.4 billion and 1.5 billion.

Stephan Eger

We continue with Justin Funnell at Credit Suisse.

Justin Funnell - Crédit Suisse AG, Research Division

Yes, just I guess just coming back to the fiber question, and obviously you've got additional thinking. But I just wanted to know at an early stage whether you have any views on the question of fiber-to-the-cabinet versus fiber-to-the-home, whether there's a need to build fiber-to-the-home in Germany, whether it's worth the money. Secondly, is there -- or part of that question as well, is there a bit of give elsewhere in the group CapEx as your German-fixed CapEx goes up, can your mobile CapEx come down, perhaps in the second half of 2013, given that you're doing LTE build in both Germany and the U.S., and how big could that cushion be? And then my second question, German Mobile's done very well, despite E-Plus cutting price. What's going on there? We saw 6 years ago, E-Plus really damaged the market with a cheap prepay. Why is it this time is different, please?

René Obermann

Justin, yes, on the question of the fiber-to-the-cabinet versus fiber-to-the-home, sometimes in the capital market, there are great, not only analysts but also great business consultants. And therefore, we make use of excellent studies and documents written by people like yourselves, or in this case, analysts, and we looked at that. And actually, that was pretty, in many respects, pretty congruous to what we thought and how we felt about the opportunity on VDSL, for instance, or potentially even factoring if regulatory possible and so forth. So I guess what I'm trying to say is we do believe we have a smart approach and worked out in very many details. But it's a bit too early to talk about it because some of the parameters are still missing and also we need to discuss it with our folks internally on the supervisory board level. But just expect us to be very active in terms of how we can make best use of this upcoming opportunity. But however, we will tie it, we will link it closely to that the regulators do what the European Commission suggests they should do. Otherwise, we're -- we would make commitments, and then thereafter, implementation doesn't happen. So we would tie it to the implementation of these regulatory reliefs. And if so, then we'd have very smart -- we believe have a smart and effective investment program combining different technologies, including vectoring and become very, very competitive even against the cable folks. Certainly, the answer is not, Justin, to roll out within a very short timeframe fiber to the very -- to every apartment in Germany. That is not the answer because that kills enormous value. We want to do it in a way where that increases value. And again, we believe we have found a way to do that, but it's too early to discuss it in detail. Please expect us to come back to you, whatever, in the next probably 4 to 6 weeks or 8 weeks or so.

Timotheus Hottges

Maybe I'll answer the question with regards to the tariffs and price developments here in the German iPhone market. You have seen EuroPhone, you have seen Drillisch, you have seen United Internet with some new offers in the market, which are around EUR 20 on net flat offering here. And we take that very, very serious. So don't think that we are overlooking it and not comparing the performance of this initiatives here. Our intention in the mobile market and all our sensitivities are on regaining growth on the -- in the service revenue market here in the mobile environment on that turf. Therefore, we are very carefully watching what's going on. First indication shows that the EUR 20 offer is not really big successfully. It will hurt the old operator base more than maybe anticipated. The market reactions of the big players were mostly rational, especially from the D network operators so far. Our reaction, we have successfully addressed the price-sensitive customers with our discount brand. Comstar has a very competitive and comparable offer in the marketplace, so that could be offered under the roof of Deutsche Telekom. And as a premium operator, we're trying to keep price points stable, but we want to enrich the tariffs. And therefore, we have included the SMS flat to counter the IP cannibalization or we have increased our speed in order to demonstrate our network superiority here versus the E networks. And we just recently today, this morning, we saw another test where it was confirmed that our quality of the network's significantly better than from some of the competitors. We, anyhow, believe that the speed is the main differentiator by which a premium network operator could drive data and even ARPU over time. And therefore, it's not that we are trying now immediately to imitate any kind of lowest offer. We're trying to differentiate, we're trying to increase the attractiveness of our product. And if you look to our churn numbers in Germany, you'll see that we are quite successful in the answers for customers that what we're offering is something people even value.

Justin Funnell - Crédit Suisse AG, Research Division

Just on that question, mobile CapEx, is there a cushion there a bit, for your group CapEx figures?

René Obermann

The group CapEx guidance is completely unchanged, and which means Germany, about EUR 3.3 billion for this year in the segment. Thanks, Tim, maybe one additional info. We don't see any change in trends of hold-outs to E-Plus so far. I think that is also important to state. And as Tim rightly saying, we are countering on our second plan with Comstar and having actually quite good performance here. So now as Hannes was already mentioned in this call, I think it's only fair that he also asks a question. So Hannes, go ahead.

Hannes Wittig - JP Morgan Chase & Co, Research Division

Just on – 2 questions. First, in the first quarter [indiscernible] service revenues in Germany seems to deteriorate. Now they have rebounded in quite an impressive way. So I just wanted to ask if you could provide more color on just exactly how you achieved that so quickly given that normally our measures make a little hard to the see the effect? And maybe [indiscernible]. Secondly I just wondered…

René Obermann

We cannot -- we can hardly hear you, so I'm not too sure whether you're on the loudspeaker or in Siberia or whether it's our fault. Can you repeat the first question again?

Hannes Wittig - JP Morgan Chase & Co, Research Division

[indiscernible] that you will have to service third-party iPhones from [indiscernible].

René Obermann

So I'll try to reckon whether it's correct. So it's about the German service revenue improvement in the second quarter versus first quarter, what are the reasons for that. Is that correct?

Hannes Wittig - JP Morgan Chase & Co, Research Division

That's correct.

Timotheus Hottges

Okay. Customer growth, both in terms of direct customers, Hannes, and also service providers, a big chunk came from service providers, such as Turkcell, Lebara and others where we have started very focused offers for these target groups, but also direct customer, contract customers grew by more than 100,000, so that's one reason. Second is data is growing. Data is growing quite significantly year-on-year, I think again in the vicinity of 19%, so that contributes. But still on the other side, of the negative side, we still have the effects that customer migration into these new, better tariff systems which we introduced in '11, that is in effect. And also, we had enormous price pressure over the last 12, 18 months, in particular, also in the last 2 quarters on the corporate customer side. So I'm not happy yet with the situation. But I do have, I'm I think reasonably optimistic that Q3 may see an even improved picture with regards to mobile service revenues. But I can't, of course, say it explicitly at this point in time.

Stephan Eger

We'll take in your second question offline, Hannes, as the line is very badly. Now we'll continue with Nick Delfas at Morgan Stanley. Nick?

Nick Delfas - Morgan Stanley, Research Division

Just a quick one on the USA. First of all, why is the ARPU on the contract side so flat, despite moving more into the value plans? And maybe you can talk a little bit about how the mix is evolving there, so you recorded flat ARPU on branded contracts. And then secondly, what should we think about in the second half of the year? You indicated you wanted to be a little bit more aggressive in the U.S. At the same time, we've got iPhone 5. Should we be expecting another 1 million customers on branded contract be lost in the second half of the year?

René Obermann

Okay. I think the reason, Nick, is that slowdown in branded ARPU growth reflects the continuing migration of customers to cheaper tariffs, and particularly, these value tariffs. On the other side, we also expect to see a cash benefit from customers on value plans that are also on equipment installment plans, as those customers pay for equipment over a, about I think, 20-month contract period. This will not benefit the ARPU metric on the one side, but it does positively impact the cash flow side. So it has...

Nick Delfas - Morgan Stanley, Research Division

Just to be clear, I wasn't -- I was actually surprised that the ARPU isn't showing dilution from these plans. Is the standard contract ARPU actually going up?

René Obermann

It seems that there is some little dilution effect, so then the standard contract ARPU should be going up. I just don't have the exact percentage on both sides of the contracts. But maybe we can look it up whilst we speak and deliver the answer in a few minutes, Nick, if you allow. Because there is one negative effect and there's a positive effect.

Stephan Eger

So we'll get back to that. And then to the second question in the meantime, we're not giving a guidance for the expected customer losses in the second half. As René rightly pointed out, we have enough firepower to be more aggressive in the second half. We'll have a bit more support from network modernization. We'll have a bit more support from a better handset, including the Samsung Galaxy. But again, there are some effects, which we usually did see already in the first -- third quarter, so it's back to school. And there's, obviously, the introduction of the iPhone 5, which will have an impact as well. Whilst looking for the answer and getting back, we continue. I think Tim has it.

Timotheus Hottges

Look, I think it's a very complex answer due to the fact that in branded contract, we have the old tariff plans like FlexPay and others, and we have the new value plans included in well this ARPA number under branded contract. So the good message is I think that being more competitive on the price side and having reduced, let's say, our tariffing for the contract service, despite of this development, our branded contract ARPU hasn't declined. It has slightly increased from 57.26 to 57.35. So therefore, yes, there is some dilution from these new tariffs on the ARPU side. But we even have lost old tariffs, which were there with a lower valuation in our average ARPU number. And we are quite happy that it is an uptake than rather have had a decline on our ARPU. But we could go further into all of the tariff plans that you better understand, let's say, the exact ARPU prospects for the future.

Stephan Eger

We have time for 2 more questions. We start with Dominik Klarmann of HSBC, followed by Fred Boulan at Nomura, please.

Dominik Klarmann - HSBC, Research Division

A follow-up question around funding NGA investments. Are asset disposals in Europe on your agenda at this stage at all or can you exclude that? And then separately, maybe just your big picture view on America Movil's interest in KPN and Telekom Austria? And do you expect more such outside interest in Europe or even a bigger consolidation within Europe, say in the next 2, 3 years?

Timotheus Hottges

Look, as I said earlier, we are talking about different initiatives within the group with regard to improving our competitors in Germany on the fixed line side. We're even discussing how to improve our competitiveness in the U.S. There's -- and the moment where we would have, let's say, additional investment plans and additional investment coming or needed, that very moment we would answer the question on how we get these initiatives financed within the group. There are no decisions at that point in time with regard to assets disposals. They are anyhow not needed at that point, and therefore, let's balance out. Let's try to discuss that when the decisions are due. As René has said, we are intensively working on these initiatives, and therefore in short notice, I think we will have a very intensive discussion on some of initiatives coming.

René Obermann

You asked for the big picture with regards to the foreign investments from Carlos Slim in KPN and Austria and so forth. Look, it remains to be seen what -- how the influence from shareholding structure turns out to be. I do think he would do that with a long-term view and potentially seize the investment opportunity here in Europe, given the low valuations of European telcos and also a potential change in regulation. And again, I would concur with that. I think the regulatory framework, what I hear from Brussels -- by the way, thank you for supporting comments you made and many of you made in the more recent times. That was helpful because I think the Commission has understood that there is urgent need for action. And I do consider that equally a chance for follow-up opportunities now, if that is translated into national regulatory practice. So I think he would see it the same way, and therefore, it makes these investments in order to see value creation over the next couple of years. More consolidation may happen, but I do think, first of all, it should happen on the national side. And -- but I can't make any prognosis there. I'm watching this Austrian situation with great interest. I think we're more friendly towards the most recent consolidatory move. And I want to see what the regulators now do. But yes, over time, there will be more consolidation first on the national level and then potentially even on the European level.

Stephan Eger

And last one is Fred. Fred, go ahead.

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Just a quick question on your domestic broadband performance. You've been boosting a level of net adds, which is a bit lower than your usual trend the last few years. Is this something, which is an issue, or you think in a major market, it's not really a good metric to look at anymore? And secondly, if you can talk a bit about the appetite for high speed in Germany? I mean we see the take-up of VDSL is still reasonably slow. It's going up, but still at a very low level. So is there an issue of pricing there, and how do you take that into consideration when you think about what is the right network strategy for Germany?

René Obermann

Yes. On the lower net add share you asked for, look, I'm so relaxed because we are keeping our 45% market share on broadband. That is a very strong position, and I intend to get our teams ready for defending this mark, give or take smaller variations. But around 45% is a really strong position. And there is more up uptake on triple play now. We also have more success on VDSL. So no, I don't think the German situation broadband is bad. I think we -- however, we need to approach the Next Generation Access in a very smart way and need to expand our performance on the network side in order to remain competitive and fight cable. Otherwise over time, we might lose more share. But since we are aware of it and since the regulatory framework promises better amortization on those investments, you hear me currently fairly optimistic that over the next couple of years, the trend may be our friend again other than in the past. Take-up of VDSL, I think I answered the second part of your question as to my appetite for high-speed broadband. Yes, but not in such a -- it's not scary yet. I mean the -- so far we can perform, we can satisfy most of the customer appetite with VDSL. But again in the future we may have to do the vectoring in order to improve VDSL performance. We have to roll out further and aggressively the LTE side. I think it's manageable, but there is a growing trend, of course, over time for broadband -- for bandwidth, that's clear.

Stephan Eger

Thanks, René. And thanks, Tim. Due to the tight schedule, I think we have to end it. Should you still have further questions, get back to the Investor Relations department. We've also written down all the people who are still in the waiting list, so we will call you proactively in the next hour. And with that, have a good afternoon and speak to you soon. Bye-bye.

Operator

We'd like to thank you for participating at this conference. The recording of this conference will be available for the next 7 days by dialing Germany +49-1805-2043-089 by a reference number 435045. We are looking forward to hear from you again. Thank you, and goodbye.

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