Christian P. Illek on Group Financials - Deutsche Telekom's Capital Market Day 2024 #DTCMD24

This is happening on both sides of the Atlantic, and you're going to see a very strong beyond 10% EPS increase and also a ROSI increase to 9%. What we're going to do with the excess increase of EBITDA and the XUS business, we will both spend this into extra capex but also into increasing free cash flow. We heard about our dividend communication yesterday: 90 cents plus the 2 billion share buyback for 25, and that is something which we feel is positive news. We were talking about the extra 15 billion of surplus which we're going to use, and Tim said it earlier today, predominantly what we're seeing right now is either in share buybacks or T-Mobile US share increases, but we also keep a little bit of flexibility because three years is a very long period of time; you don't know what's exactly happening, so we have to have some regulatory room here. So this is the review. I don't repeat it very long: we tripled free cash flow over the course of the last Capital Market Day period. We beat our EBITDA guidance as a group but also in the XUS business. The ROSI will be at the end of the year beyond 6.5%, and as we said also in the Q2 call, the adjusted EPS is north of 175. I think as important as those numbers are, obviously the strategic targets: getting beyond 50% in the US, actually getting into the leverage corridor in the second half of this year, so in Q3 that number will be below 2.75, and obviously we adhere to our dividend policy and paying out 40 to 60% of adjusted EPS, and what you've seen so far was bang in the middle, it was 50%. Let me repeat this because this is important: we're always talking about this flywheel. If you add cash capex and spectrum spend over the last four years, that adds up to close to 90 billion euros. 90 billion euros. This is why we are generating above market share customer acquisitions on both the fixed line as well as on the mobile business. And what for me is important is consistency. If we go into the penultimate CMD and basically take a look at our track record, you see that on average we have grown service revenue in the vicinity of 3.2%. 2020 was the corona impact especially in the European business by loss of roaming revenues and IT revenues, but bottom line this is very much consistent in terms of delivery. Same was true for EBITDA: it's roughly 7% over the course of six years. And if you take a look at the free cash flow, obviously there was the acceleration coming from the US due to the synergies which have been generated by a constant increase. And adjusted EPS was almost linearly growing to greater than 175. I think that shows that this is not only happening over the past four years but also in the previous four years. Coming to the XUS business, let me start with the middle of the chart. As you know, we measure ourselves with these traffic lights. Obviously when it comes to net cost reduction which we promised was the 1.2 billion, then this thing like inflation hit us, so we delivered basically zero. You see how it pans out. Germany the region actually had a net saving of north of 300 million. Dominique was talking about the cost increases in Europe; we couldn't manage the energy cost increases and the salary increases, so there was actually an increase of 200 million. At T Systems, we changed the business model to a certain degree; we have a higher share of digital solutions which obviously is a people-driven business which led to an increase of IDC on the T Systems business. Still we outperform on EBITDA, and the reason was volume growth but also value growth especially driven by more for more, and that led to basically an operating leverage improvement of five percentage points IDC as a percentage of service revenue. So how does that translate to free cash flow? The commitment which we have given in 21 was 4 billion, but Tim was saying what we have sold in order to get to the 50%. So if you deduct the Dutch business, the Tus business, and also the fixed line business in Romania, that would reduce that free cash number by 500. So we delivered what we promised, not more, not less. Not less because our EBITDA was higher than expected; that helped. Not more because we had two headwinds: one was obviously interest cost which increased by 200 basis points over the course of the period, and the other one was we spent higher capex especially strategically in Europe and also we had to face some cost inflation on the capex side when it comes to construction. What we don't factor in is obviously the dividend which we're receiving from the US despite the fact that technically would account for free cash flow ex-US. So leverage. I think to be honest, we didn't have line of sight as we communicated the 2.75 back in 21, but I'm happy that we got there. So you see on the leverage ratio we are below 2.75 with leases or below 2.3 excluding leases, and all the other ratios which we're committing ourselves to, whether it's been equity ratio, the liquidity reserves is well above the next 24 months, and also the rating is with the triple B+ bang in line of what we wanted to achieve. So payout you see our progressive dividend payout over the course of the past years with a 90 cents announcement from yesterday, and obviously we're happy with the TSR. Torsten have given you an indication where the share price is at the next Capital Market Day, so stay tuned. Okay, so this is basically the testament of what we have delivered in the past. So let's look forward and take a look what we're trying to achieve going forward. So strategy first: I think what we as a management team do is strike the right balance between having a long-term mindset—this is why we're so dedicated about fiber investments, for example—while at the same time delivering short-term results, and I think this is not a contradiction. You see a highly experienced team, and I think that's an advantage because this team who's given the commitments is also the team who has defended what we have delivered. What we're trying to do is always a balance: capital allocation. So we want to have a balance between customer acquisitions and profitability, we want to have a balance between investments and shareholder returns. I think that's our philosophy. You have seen us executing, especially in crisis mode, quite successfully whether it's been the corona crisis or the Ukrainian crisis. We found measures in order to mitigate those headwinds, and I think you can bet on us this is going to happen in the future as well. Where's the acceleration coming from? Well, we're spending our surplus on EPS or creative investment opportunities, being at the US or being at a share buyback, so that will help us to drive EPS going forward. I'm getting to the final numbers later on. So this is what you see as a commitment for the group going forward: 21 billion of free cash flow, and let me remind you what Peter said yesterday, that includes a 5 billion federal income tax drag in 27 which has to be spent in the US. 9% ROSI, which is well well well above the benchmark independent of where the interest rates are going. I think very good EBITDA growth ambition for the group: 4 to 6%, XUS 3 to 4%, and EPS is growing by roughly 50%, greater than 50% over the course of the upcoming period. These are the numbers. I think from the US we have presented them yesterday; I don't have to repeat them. Let's focus on XUS. So XUS, our aspiration is to grow by 2.5 to 3% EBITDA, by 3 to 4%. Obviously we will increase capex to a certain degree. If you take 23 as a baseline, it's roughly half a billion or 21% of service revenue, and that will lead to a slight increase in free cash flow. So you may ask yourself why is a 2 billion EBITDA increase only translating in a 300 million free cash flow increase? Let me give you the explanation. First of all, a 2 billion EBITDA increase comes with a 25% tax burden which accounts for 500 million. Secondly, as we are investing into the surplus and we don't delever, obviously we have to finance this. So if there's 15 billion which is going to be reinvested into the business and you take the current XUS interest rate at 4%, it's 600 million. Then you deduct the taxes to the order of 400 million out of the 700 million column, which basically brings down the EBITDA. The second one is we're spending about 200 million more into US pensions, which basically brings down our pension deficit. And then we have some working capital and sale and leaseback effects which basically account for the 700 million, leaving us with a wiggle room of 800 million, of which we want to spend roughly half a billion into capex, so you see the slight increase of roughly 300 million of free cash flow increase into the business. I think we have so many opportunities right now to spend into the business; I really appreciate that the teams have good ideas on how to creatively spend into the operational business, and therefore I sacrifice a bit of my free cash flow growth XUS and also I'm sacrificing, as we're getting later on, on the leverage because we have changed the leverage target a bit relative to the previous time. But let me start first with the IDC. You see here that our operating leverage has improved over the course of the period in the last Capital Market Day (2020 to 2024) by five basis points. This is the new metric; it gives us more flexibility how we want to measure our productivity increases going forward. We aspire to get 3 to 5% improvement. This is a little lower than the previous one; this is very much driven by the German wage agreement which we had, and Claudia was talking about the main drivers for this gross saving of 1.5 billion. So 700 million purely Opex is coming from artificial intelligence; this is of course labor productivity. So we shouldn't fool ourselves; you've seen to what extent things are going faster through the systems, and obviously that frees up capacity. You see the network scaling over 100 million. There is the classical stuff which has to be done in any case like real estate optimization and procurement. Real estate selling has become a little tougher nowadays since we have this home office philosophy. And there is a long tail of initiatives which account for 400 million, of which the largest is shared services. But this is necessary in order to achieve our 3 to 4% EBITDA growth in the XUS business. Let me turn to ESG. We have conducted a sustainability day back in 2022 where we basically have given ourselves targets what we wanted to achieve. You see we're broadly in line with our aspiration, but let me pick out two critical items. The one is green PPAs; we said we wanted to be at 50% by the end of 2025. We will be at 50% in Germany, but it's hard to strike attractive financially attractive deals in Europe in order to get there, so that's going to be a big challenge. So far we have to make sure that we strike the balance between having green PPAs but at the same time having financially attractive deals on the table. And the second one is also circularity, especially in the mobile space, which obviously needs attention. Let me move on to scope three, which is obviously the biggest driver for CO2 emissions. You see that they account for 98% of our total emissions. We have basically secured that 51% of the procurement purchases are SBTI-aligned so far in order to meet our target which is a 55% reduction, but that will in 2030 require a lot of work especially with the suppliers. We actually put some teeth into the supplier selection process so that alignment with our strategy obviously is counting into the decision-making process for suppliers. And we're also working with customers and providing them with completely recyclable packaging and all this stuff in order to meet those targets. I think we don't get any kudos for this, but I think it's worthwhile to mention the services which we are selling to our customers are saving five times the amount of CO2 which we emit, but nobody is accounting for this. But I think it's worthy to mention. So this is good news. Spectrum: we spent about 15 billion of spectrum proceeds in the past period, and that led us to a position that we have a clear leading position in the US, a leading position in Germany, a competitive position in the European segments. Some countries have a leading positions, others don't. On average I would call this competitive. But if you take a look at what's at the horizon, there's no big auction coming neither in the US nor in Germany. We expect there's going to be the 5-year extension, nor in Europe. And the last one: when we come into leverage, we have given ourselves a new target. So it's not the quarter of 2.25 to 2.75; I feel comfortable with the 2.75, we all feel comfortable that we basically at 2.75 we don't have to go down to the midpoint, that secures our rating which is triple B+, and that's the new guardrail. What you also see is a healthy development of maturities on both sides of the Atlantic, whether it's Europe which is the magenta part or the gray part which is the US. You also see our liquidity position; we have 14.5 billion of liquidity at hand if we need it on the XUS business. So I think this is something which gives you comfort also in developing the business going forward. Our dividend policy stays the same: 40 to 60% of adjusted EPS. We have now announced the 90; the payout next year is around 6.5 billion. So I think that's an attractive package, and we will decide every other year on how we spend on dividends and share buybacks. Coming to my most important chart: if we're delivering 4 to 6% adjusted EBITDA, the US announced their capital allocation, so the capacity of 80 billion, of which 10 is allocated to committed deals, 50 up to 50 for shareholder remuneration, and an extra capacity with no clear plans behind. Peter was very vocal about this, and no foreranking, an extra 20 billion on their balance sheet to have wiggle room in the upcoming years. And if you basically keep the leverage at 2.75, you get a significant headroom. So if you take that headroom and you deduct the necessary investments into the business, if you deduct the future DTU dividends beyond what we're also paying out in 25, if you deduct the share buyback of 2 billion next year, you are still left with more than 50 billion of extra headroom. And the primary purpose of this extra headroom is either increasing the T-Mobile US stake, and Tim said yesterday if we would go 100% into T-Mobile US we would be in the high 50s, but we want to keep flexibility any other year whether we're going to invest into T-Mobile US or whether we're going to invest into an additional share buyback of DT given the undervaluation. And we need to have some wiggle room in case something's happening nobody's seeing right now. So that's the way how we want to spend the surplus. And that gets me to my last chart. Since we are measured on EPS, you see how the 2.5 is basically being built up; obviously it's coming from the operations plus the extra invest either into T-Mobile US or Deutsche Telekom share buybacks get to 2.5. But there's additional potential which we haven't quantified; we talked about global scale yesterday, we talked about beyond core investments, and obviously the US said whatever you have committed as M&A is not being built into our numbers. So for example, US seller would come on top of this. So that is kind of how the EPS is building up. I'm with Torsten on the earnings multiple; we're leading in many respects, but we are not leading on the P/E ratio in our sector. So let's see whether the market is changing its mind. And obviously we maintain our dividend policy as we've stated it, and with an increasing EPS you can expect an increasing dividend. That gets me to an end and to the discussion. Thank you.