Telefónica Deutschland expects significant synergies from E-Plus merger already in 2015

-Number of customer accesses increased to 47.7 million at year-end 2014
-Integration process fully on track with first milestones successfully completed
-Combined1) annual revenues of 7.79 billion Euro in 2014
-Underlying combined1) OIBDA reached 1.46 billion Euro in 2014
-OIBDA excluding material extraordinary effects to increase by more than 10% in 2015
MUNICH. Telefónica Deutschland has made good progress on its way to become the leading digital telecommunications company in Germany following the first-time consolidation of E-Plus Group in the fourth quarter of 2014. Mobile service revenues were slightly up by 0.3% year-on-year excluding the impact from mobile termination rate cuts. This positive development was mainly driven by the successful data monetisation strategy. The total customer access base of the company increased by 1.6% on a like-for-like basis to 47.7 million accesses due to the strong trading momentum in the mobile postpaid segment. Underlying Operating Income before Depreciation and Amortization (OIBDA) for the full year reached 1.46 billion Euro on a combined1 basis excluding extraordinary effects2) and restructuring costs. From this combined1) basis, Telefónica Deutschland expects to grow OIBDA by more than 10% year-on-year in 2015. The company also anticipates to achieve a run-rate of around 250 million Euro Operating Cash Flow (OIBDA minus CapEx) synergies already in 2015, which is approximately 30% of the target run-rate of Operating Cash Flow synergies expected after five years.
From the right: Thorsten Dirks, Rachel Empey, Markus Haas
Thorsten Dirks, CEO of Telefónica Deutschland, commented: “Our fourth quarter results confirm that the merged company has successfully kept its momentum. We have achieved important milestones during the first five months of our integration and transformation program and set cornerstones for future success. 2015 will see us making further significant moves towards creating the Leading Digital Telco.” Rachel Empey, CFO, added: “Our outlook reflects our continued focus on data monetisation from a strong position as a leader in the German mobile market and underpins a strong value proposition for our shareholders.” Results for the fourth quarter and the fiscal year 2014 include E-Plus Group as of October 1, 2014. Unless indicated otherwise, like-for-like year-on-year figures are based on combined1) figures for 2013 and 2014.

Continued high demand for LTE

Telefónica Deutschland added 318,000 net new mobile postpaid customers in the fourth quarter of 2014. This excludes the impact from a postpaid customer base adjustment of 428,000 in the former E-Plus Group driven by the finalisation of harmonisation of criteria and the disconnection of a partner. The underlying positive development of net additions was driven by the focus on data monetisation, increasing uptake of LTE, and innovative digital products and services. At year-end, the total mobile access base of Telefónica Deutschland amounted to 42.1 million, which reflects an increase of 2.4% on a like-for-like year-on-year basis. Including 5.5 million fixed line accesses, the company’s total access base increased by 1.6% on a like-for-like basis to 47.7 million accesses. LTE continued to be the main driver of smartphone demand by new and existing customers. Smartphone penetration rose to more than 75% in the consumer postpaid segment of the O2 and BASE brands.
Underlying Operating Income before Depreciation and Amortization (OIBDA) in the fourth quarter of 2014 was 354 million Euro. This excludes a 401 million Euro extraordinary effect from restructuring costs in the fourth quarter of 2014 as a result of the merger with E-Plus Group. The underlying OIBDA margin in the fourth quarter amounted to 17.6%. OIBDA development reflected the contribution from the mobile data business and ongoing commercial investment in activities that resulted in sustained trading momentum. Including the one-off restructuring costs in the fourth quarter, quarterly OIBDA amounted to −46 million Euro.

Q4 2014: Mobile service revenues further improve to flat year-on-year development

The improving revenue trend of the previous quarters was confirmed in the fourth quarter of 2014 as mobile service revenues reached 1.39 billion Euro, stable year-on-year on a like-for-like basis. They increased by 0.3% excluding the impact from mobile termination rate cuts. The upward revenue trend was driven by the continuously growing demand for mobile data bundles. Accordingly, non-SMS data revenues reached 499 million Euro in the fourth quarter while mobile data revenues including SMS revenues amounted to 723 million Euro. Mobile data revenues further increased their share in total mobile service revenues to 52.0%, based on the growing LTE uptake and the resulting demand for larger data bundles. In sum, Telefónica Deutschland generated total revenues of 2.02 billion Euro in the fourth quarter which was a largely stable performance over the previous year on a like-for-like basis. This was supported by the above-mentioned trend in mobile service revenues and strong handset sales as customers increasingly adopted LTE-enabled devices. Quarterly fixed-line revenues amounted to 274 million Euro (-7.7% year-on-year) which represented an improvement over the previous quarter. This was mainly based on growing demand for high-speed VDSL accesses, demonstrating the positive effects of the attractive agreement with Deutsche Telekom. Underlying Operating Income before Depreciation and Amortization (OIBDA) in the fourth quarter of 2014 was 354 million Euro. This excludes a 401 million Euro extraordinary effect from restructuring costs in the fourth quarter of 2014 as a result of the merger with E-Plus Group. The underlying OIBDA margin in the fourth quarter amounted to 17.6%. OIBDA development reflected the contribution from the mobile data business and ongoing commercial investment in activities that resulted in sustained trading momentum. Including the one-off restructuring costs in the fourth quarter, quarterly OIBDA amounted to −46 million Euro.

FY 2014: Combined 1) annual revenues of 7.79 billion Euro

Total revenues of Telefónica Deutschland for the full year 2014 amounted to 5.52 billion Euro on a reported basis, consolidating E-Plus Group with effect of October 1, 2014. On a combined1) basis annual revenues would have totalled 7.79 billion Euro. The company generated mobile service revenues of 3.58 billion Euro on a reported and 5.53 billion Euro on a combined1) basis in 2014. Mobile data revenues for the full year reached 1.79 billion Euro on a reported basis, driven by growth in non-SMS data revenues. Fixed line-revenues amounted to 1.14 billion Euro year-on-year. Underlying OIBDA for the full year excluding an effect from restructuring costs of 414 million Euro reached 1.46 billion Euro on a combined1) basis. OIBDA on a reported basis was 679 million Euro. As a result of charges related to the acquisition and integration of E-Plus Group and other effects, the company reported a total loss for the fiscal year 2014 of −721 million Euro.

Increase in CapEx in the fourth quarter with a focus on LTE deployment

As previously announced Telefónica Deutschland started a new investment cycle in the fourth quarter of 2014 with a clear focus on the accelerated deployment of the LTE network. The company also initiated the integration of the Telefónica and E-Plus networks with the objective to create tangible improvements in network experience for its customers already in the first half of 2015. Compared to the combined1) CapEx in the third quarter of 2014, Telefónica Deutschland increased CapEx by 53% to 438 million Euro in the final quarter of the year. For the full year, CapEx amounted to 1.16 billion Euro on a combined1) and 849 million Euro on a reported basis.

Strong Free Cash Flow higher than prior year

Underlying Operating Cash Flow (OIBDA minus CapEx) excluding the impact of one-off restructuring costs amounted to 300 million Euro in 2014. Including this impact Operating Cash Flow was ‒169 million Euro in 2014. Reported Free Cash Flow pre dividends and net payments for the acquisition of E-Plus Group (FCF) for the financial year 2014 reached 719 million Euro, higher than in 2013 (699 million Euro).

Integration moving ahead at full speed

Following the start of the integration of E-Plus Group in early October, Telefónica Deutschland has already made significant progress on its path to building the leading digital telecommunications company in Germany. The company immediately started first joint initiatives in the operating business by additionally offering its business customer products O2 Unite as well as Digital Phone and Digital Workplace through the E-Plus business sales organisation. Retail customers are also able to benefit from attractive new products. In BASE shops and E-Plus online channels, they can now order the fixed line product O2 DSL for their homes. Important milestones for the organisational setup were achieved with the installation of the first three management layers early in the fourth quarter. The process of installing the fourth management level was completed in February 2015. At the beginning of February, Telefónica Deutschland furthermore concluded an agreement with the Workers Council on the reduction of 1,600 jobs until 2018. Approximately 50% of these reductions shall be implemented during the current year. These measures are mainly related to the removal of duplicate functions after the merger of the companies.

Outlook: OIBDA excluding material extraordinary effects2) expected to increase by more than 10% in 2015

Going forward, Telefónica Deutschland’s strategic framework is built around three key priorities:
-Keep the Momentum from a leading position in the mobile consumer and partner markets, while growing in customer segments, such as SMEs or digital households from a better quality platform.
-Integrate quickly and extract the full value of expected synergies from the integration of both infrastructures and organisations while progressing on the development of the LTE network.
-Transform the Company into a truly end-to-end digitally oriented Company, both from an internal and external perspective.
Our aspiration is to become the Leading Digital Telco, which will be cemented in the future by three success factors: 1. Offer the best high speed access experience to our customers, with a flexible combination of the latest technologies for mobile and fixed broadband access. 2. Ensure a superior customer experience to customers across all channels and throughout their customer journey, with tailored offers per customer segment designed to monetise increased demand for mobile data and a more efficient and digital customer service. 3. Achieve Operational Excellence while the integration of both networks and organisations is taking place, with a progressive improvement of efficiencies while consistently delivering on customer expectations.
In 2015 (year one in the integration schedule), we already expect to achieve a run-rate of around 250 million Euro Operating Cash Flow (OIBDA minus CapEx) synergies, which is approximately 30% of the target run-rate of OpCF synergies (800 million Euro) expected after five years. In line with our vision to become the Leading Digital Telco in Germany, in 2015 we will put an even stronger focus on the development of our customer base. We will continue to be the value-for-money choice for our customers and partners while keeping a strong view on data monetisation. As a result, we expect mobile service revenues in 2015 to remain broadly stable over 2014 combined1) figure (5,528 million Euro). The fixed business will continue to play an important role, leveraging increased demand for high-speed access and flexible propositions to facilitate our customers’ digital journey. We expect a gradual progression of improvement in OIBDA throughout 2015 driven by the capture of synergies from the integration of organisations and initial projects for the combination of networks, the focus on operational excellence with increased scale of the business and a higher contribution from mobile data. From a 2014 combined1) base of 1,461 million Euro, we expect Operating Income before Depreciation and Amortization (OIBDA)3) to grow more than 10% year-on-year. The fourth quarter of 2014 reflected the start of a new investment cycle for the new Telefónica Deutschland, and for 2015 we expect synergies to outweigh the additional investments to be made to accelerate the deployment of the LTE network and the initial works for the consolidation of the two networks. As a result, we expect that CapEx4) in 2015 will show a high single digit percentage decline year-on-year from a combined1) base of 1,161 million Euro. With regards to shareholder remuneration, it is our intention is to suggest to the general shareholders’ meeting a cash dividend of at least 700 million Euro for the year 2014, payable in May 2015. In line with our publicly stated dividend policy, the Company intends to maintain a high pay-out ratio in relation to Free Cash Flow while keeping the leverage ratio5) below 1.0x over the medium term. With regards to the integration of the E-Plus Group, synergies expected to be realized in the near future might be considered when making a dividend proposal for future years. For further details on KPIs and developments as well as the dividend policy, please see the IR section at www.telefonica.de.
(1) Combined figures are approximate and the result of the aggregation and then consolidation of Telefónica Deutschland and E-Plus Group financials according to Telefónica Deutschland Group accounting policies. The combined figures are further adjusted by material extraordinary effects, such as capital gains or restructuring costs based on estimates made by Telefónica management and resulting in combined figures we believe are more meaningful as a comparable basis. (2) e.g. capital gains or restructuring costs (3) Excluding material extraordinary effects, such as capital gains or restructuring costs (4) Unless indicated otherwise, CapEx is excluding costs related with the renewal/acquisition of spectrum licenses (5) Leverage ratio is defined as Net Financial Debt by LTM (Last twelve months) over OIBDA excluding non-recurring factors