Telefonica Deutschland Holding AG
XETRA:O2D
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Ladies and gentlemen, thank you for standing by. I am Moira, your Chorus Call operator. Welcome, and thank you for joining the Telefonica Deutschland Q2 2021 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Christian Kern, Investor Relations. Please go ahead, sir.
Thank you, Moira. Good morning, everyone, and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to Telefonica Deutschland's Q2 2021 results call. Before proceeding with the management presentation, we would like to inform you that the financial information contained in this document has been prepared under International Financial Reporting Standards. 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 detailed disclaimer as included on the first slide of this presentation. Using the provided QR code, you can also download today's presentation in the IR section of our company website. Here with me today are Telefonica Deutschland's CEO, Markus Haas; and CFO, Markus Rolle, who will take you through our presentation followed by a Q&A session. Markus, over to you now.
Thank you, Christian. Ladies and gentlemen, good morning, and a warm welcome to Telefonica Deutschland's first half 2021 results call. We very much hope you and your families are all well. Before presenting our strong half year results, I'd like to share some comments with regards to the recent severe floodings in Germany. Our thoughts are with those affected by those floodings and in particular, our sympathy goes out to anyone who has lost a loved one. In a business context, these floodings are more than just a reminder to focus and deliver on the so important ESG agenda. Part of our telecommunications infrastructure has also been affected by the floods. However, Telefonica Deutschland managed to resource swiftly the vast majority of its affected sites, thanks to the tireless commitment of our technicians and the good coordination among the MNOs and the overwhelming support of so many people. On our first assessment, we anticipate neglectable financial impact outside of our existing insurance cover. Now I would like to present to you our strong set of half year results for Telefonica Deutschland. Telefonica Deutschland is at the halfway point of its investment for growth program and achieved a record in revenue growth and OIBDA adjusted for exceptional effects in the first half of 2021. On the back of the operational and financial momentum in the first half, we are updating our full year '21 outlook to slightly positive growth for revenue and adjusted OIBDA. Let me share with you the key results highlights. Revenues increased by 2.9% year-on-year to EUR 3.74 billion in the first half. This is the strongest revenue growth in the combined history of our company. For the same period, OIBDA adjusted for exceptional effects added to an impressive 8.2% year-on-year to EUR 1.17 billion. This is the highest adjusted OIBDA recorded for the first 6 months in the combined company history of Telefonica Deutschland. Eliminating the support from some nonrecurring special factors, underlying OIBDA growth was still 3.5% year-on-year. CapEx to sales stood at 13.6% for the first 6 months with a continued focus on execution of our investment for growth program. As expected, the investment program is back-end loaded in 2021. Net postpaid customer additions reached close to 600,000 on the back of strong trading momentum, in particularly, during the second quarter of the year. We continued traction of the O2 Free portfolio, leveraging online channels and the reopening of our shops, from mid of May this year onwards. Net additions were also supported by O2 churn reaching another historic low level of 0.9%. These successes built on the highly rated O2 network experience and the well-received network marketing campaign. Also, the performance of partner brands was solid. In B2B, we have seen continued momentum over the past 3 quarters. We have gained numerous new customers in SME from a wide range of industries and have improved across almost all KPIs. The churn rate, for example, is at its lowest level over the last 5 years. At the same time, the sales pipeline continues to look promising. So we are well positioned for further growth in the business customer segment. In May 2021, Telefonica Deutschland and 1&1 have put their long-term partnership in future cooperation on a new contractual basis with the signing of a long-term national roaming agreement as envisaged. Telefonica Deutschland has secured valuable long-term revenue streams as the NRA has an initial contract period of 5 years, retroactively starting July 1, 2020, and can be twice extended. As part of the agreement, all remaining ongoing price reviews initiated up to now by 1&1 will no longer be pursued. As you can see, we are executing well on our free growth pillar strategy and our business fundamentals are intact as evidenced by our strong KPI trends. These achievements go hand-in-hand with our ESG strategy. We have recently published our latest corporate responsibility report titled Enabling Sustainable Digitalization. It is focusing on our program in aligning growth with the achievement of climate targets and social responsibility as well as digital inclusion. Our Responsible Business Plan 2025 is setting the course and steering KPIs for underpinning the company's ambition of achieving 0 net carbon emission by no later than 2025. On my next slide, let me share with you that the COVID-related impact has mostly annualized with key restrictions having been gradually removed over the course of the quarter. As a result, all O2 shops again opened since the beginning of June. O2 gross adds have been supported by a strong online contribution, and O2 churn continues to be at historic lows. Demand for prepaid top-ups has swiftly recovered following the easing of restrictions, including some increase in data demand. Only international roaming dynamics have not yet fully recovered due to some ongoing travel restrictions, limiting roaming activities. There has been a gradual easing of travel restrictions towards the start of the German school holiday, which could pave the way for further gradual roaming recovery in the second half year of 2021. Since the phased reopening of travel destinations, we are already seeing roaming revenues from non-EU-regulated countries at more than 50% of pre-pandemic levels in Q2 2019. Our top 3 international roaming destinations accounted for 40% of international roaming revenues pre-pandemic, and we are seeing encouraging developments here. Switzerland has gradually lifted travel restrictions since mid-May, Turkey has no travel restrictions since beginning of July, while restrictions for the U.S. persist. My next slide illustrates our great network progress, achieving network equalization with our 4G network expansion program in 2020. We have been awarded a very good rating in the highly regarded connect test. In addition, we have been awarded the third sequential time in a row with a very good rating in the fixed broadband connect test. Overall, these great network results for Telefonica Deutschland highlight our excellent network progress, well-recognized execution track record and strong market position. Recently, we also added the cable network of Tele Columbus to our technology-agnostic approach portfolio which provides the largest customer reach in Germany, including all available fixed technologies. As part of the current network campaign, we welcome to the very good network of O2. Interested parties can request a free test SIM card for a limited time to experience first-hand the very good performance of the O2 mobile network. On the next slide, you'll find an update on our successful 5G network rollout following the 4G network expansion push in 2020. We are now making rapid progress with our 5G rollout. O2's 5G network is live in more than 80 cities with around 2,000 antennas on 3.6 gigahertz spectrum. The strong 5G network performance has already been well recognized not only by winning a close second place in the [indiscernible] test, but also by coming first in the most recent user report of the Speedtest by Ookla. By the end of the year, our O2 network will cover more than 30% of the German population with 5G and the whole Germany latest by 2025. These statistics are just to highlight the progress in the future mobile network grid. Even more impressive is that the O2 mobile network transported 1 billion gigabyte only during the first half of the year 2021. To put this into perspective, we transported in the entire year 2019, the same amount of 1 billion gigabyte data only 2 years ago. Hence traffic is more than doubling every 2 years and O2 free postpaid customers are now using on average more than 10 gigabytes of mobile data per month. As you can see, we are well on track with our network build-out plan. So it is a good opportunity to remind you also of our refarming of 3G spectrum for more efficient technology deployment and our existing mobile network sharing initiatives of Deutsche Telekom and Vodafone as well as the Telixus transaction been executed. These contribute to achieve normalized CapEx to sales level towards the end of our investment for growth program. And there are 4 key initiatives to highlight. First, the trilateral white spot agreement with Deutsche Telekom and Vodafone provides access to additional up to 6,000 sites over the next few years. Our equal share of sites will be built by Telixus as part of our announced BTS program until 2024. The bilateral memorandums of understandings for active gray spot sharing with Deutsche Telekom and respective Vodafone adding in total another 2,100 sites over the next 1 to 2 years. Thirdly, committed to the German Mobile Act from 2019 spectrum auction there, our contribution of sites is also covered by our BTS program that I just mentioned. Finally, a selective choice of sites to be provided as part of the German mobile infrastructure fund, MIT, the complete the rollout activities. And all in all, they will ensure that we will get back to normalized CapEx level in the coming year. Before handing over to Markus Rolle, who will share more details of our Q2 performance with you, let me briefly summarize our strong first half performance. Despite headwinds during a hard lockdown, we continue to build successfully on the operational and financial momentum as well as the achieved network equalization. All KPIs are well on track and firmly confirm that the underlying operational and financial trends of our business are fully intact. In fact, even improving. We continue to execute our investment for growth program according to plan. On this encouraging background, we are updating our full year 2021 outlook to slightly positive growth year-on-year for revenues and adjusted OIBDA. Now Markus, over to you to discuss our Q2 performance in more detail.
Thank you, Markus. Ladies and gentlemen, a warm welcome also from me. I very much hope that you and your families have the ability to have some rest over the summer months after that really demanding year for all of us. Let me now take you through our strong Q2 2021 operational and financial performance in more detail. Our revenue growth accelerated to 5.7% to EUR 1,893 billion. This is reflecting the sustained MSR and fixed revenue momentum as well as some nonrecurrent special factor. But even excluding these special factors, our underlying growth is at 3.5% year-over-year. The MSR growth accelerated even to 7.4% year-over-year growth to EUR 1,370 billion, which is driven by the strong own brand performance with our O2 postpaid ARPU returning to growth in Q2, a solid partner performance as well as nonrecurrent special factor. Also here, excluding these special factors, our underlying growth is plus 4.3% year-over-year. The total revenues -- roaming revenues supported approximately 1/3 of the underlying MSR growth of 4.3%. Handset revenues declined by minus 1.2% year-over-year to EUR 318 million based on a more muted customer demand after a strong Q1 2021, while we still see a high-value handset focus amongst our customers. Fixed revenues continued growth to 3.5% and is coming in with EUR 200 million. This is mainly driven by the VDSL customer base growth. On my next slide, let us take a closer look at the strong Q2 trading performance. Mobile postpaid more than doubled year-over-year to 374,000 of net addition, which is mainly driven by the sustained traction of the O2 Free portfolio reinforced by the gradual reopening of the O2 shops and again, a solid contribution from the partner brands. The O2 postpaid churn continued to improve by another 3.3 percentage points year-over-year coming down to historic lows of 0.8%. This provides a clear proof point for the excellent customer experience on our O2 network. The O2 postpaid ARPU reversed its trend in Q2 and posted 0.6% year-over-year growth. Moving to our fixed broadband business. Here, we registered minus 1,000 net disconnections while net additions returned to year-over-year growth with the reopening of the shops already in June. The VDSL demand remained solid with 10,000 of net additions in the second quarter. Overall, our TAA net adds are including the fixed mobile substitution positive again in Q2. The fixed ARPU also continued its growth path with 1.6% year-over-year and is now posting EUR 24.20. Moving to the next page. Our OIBDA grew 10.8% year-over-year to EUR 612 million. This is reflecting the improved revenue quality, the operating efficiencies and an effective, especially around COVID-19, cost management as well as some nonrecurring special factors and received social security payments. We also show a strong underlying OIBDA growth of 3.6% year-over-year. The total roaming revenues supported approximately 1/5 of the underlying growth with a country mix playing here, of course, a key role. Our OIBDA margin came in at 32.3% and improved by 1.5 percentage points year-over-year. Within the cost breakdown, let me highlight that supplies were down by minus 1.8% year-over-year, reflecting the MTR cut as well as lower hardware cost of sales because of the different handset mix. It also reflected personnel expenses, which increased 1.7%, and they are driven by inflation-based salary increases as of the 1st December 2020, which are partly compensated by the received social security payments for our employees of the shops, which have been closed. Other OpEx increased 9.4% year-over-year, reflecting the commercial activities, where we, from Q1, faced some marketing spend as well as the 5G rollout cost, which are partly compensated by continued efficiency gains. Our commercial costs were approximately 66% of the other OpEx, and this is a broadly stable development year-over-year. Moving to the free cash flow and net financial debt on my next slide. Free cash flow improved by 21% year-over-year to EUR 382 million year-to-date. Working capital movements were negative with minus EUR 253 million and were mainly driven by a decrease in CapEx payables of EUR 158 million, increased prepayment of minus EUR 45 million, net restructuring impacts of plus EUR 9 million and other working capital movements of minus EUR 59 million, including net receivables of plus EUR 71 million, which was outweighed by other working capital movements, especially a decrease in trade and other payables. The lease payments, primarily for antenna site and lease time increased to EUR 368 million. As a result, the free cash flow after lease is already positive with plus EUR 40 million in the first half year 2021 compared to minus EUR 20 million in the last year. Our consolidated net financial debt increased to EUR 3,888 billion as of the 30th of June 2021, and that is mainly due to the full year '20 dividend payment of EUR 535 million in May as well as an increase in lease liabilities of EUR 131 million due to regular contract renewals. The resulting leverage ratio of 1.6x remained well below the company's self-defined target ratio of at or below 2.5x and leaves us comfortable leverage headroom with regards to the BBB rating with a stable outlook. Let me use my final slide to summarize the key takeaways of today's half year 1, 2021 results presentation. We delivered excellent trading momentum with the O2 postpaid and the net adds more than doubled year-over-year. Our revenue growth accelerated on the back of sustained MSR and fixed revenue momentum. We achieved also a strong OIBDA growth as a result of improved revenue quality and effective cost management. The free cash flow after lease shows the usual seasonality, mainly due to upfront lease payments, while it is already positive in half year 1 and our solid balance sheet, the strong liquidity position and our ability to generate free cash flow support total shareholder returns. Finally, we are updating our full year 2021 outlook to slightly positive growth for revenues and also OIBDA adjusted for exceptional effects on the back of our strong operational and financial momentum. Now we look forward to your questions as usual. Operator, please open the line for the Q&A.
[Operator Instructions]. The first question is from Georgios Ierodiaconou from Citi.
Yes. I have 2, one on CapEx and one on the fixed line business. On [indiscernible], I noticed you maintained your target for the year. I was just curious if you kind of run us through the run rate that's implied for the second half, I believe it's a couple of hundred million higher than what you spent last year. Just to get an understanding, if you are confident you can get there or whether there's a risk of some of these investments billing over into 2022 because of lockdowns and other delays? And then the second question is around the fixed line [indiscernible]. Markus, you mentioned that July is back to positive territory. I was just curious if you can run us through, firstly, how high -- how significant do you believe the lockdown impact has been on the net adds. One of your main competitors is also highlighting the same issue. And then secondly, if you could highlight the effect you expect to get from the TC and Vodafone agreement? And when do you go live on the Vodafone cable network.
Georgios, let me take your first question, Markus Rolle here, on the CapEx side. Yes, we are confident to deliver our investment program that we stipulated with 17% to 18% CapEx over sales we always envisaged that we have a kind of back-end loaded profile. But operationally, we are fully on track. We see now already a year-over-year increase of more than 10% in the second quarter. and everything is lined up to deliver also the targets that we have set ourselves operationally in the second half year. So far, we cannot see any big setbacks from the COVID-19 environment, et cetera. So we are on track to fulfill our targets in this year.
On the fixed side, we were already back to growth in June. And clearly, this continues over the summer months, clearly on the back of all sales channels now being available, especially the physical sales channels. On footprint. I think we just added Tele Columbus, as I mentioned, with another 2.4 million households. So overall, we can offer nearly every household in Germany a fixed product. site on Vodafone cable, Tele Columbus cable, Deutsche Telekom VDSL fiber and clearly the latest with UGG. So overall, we are in a very well positioned on top with 4G, 5G to get the fast to -- We call it Internet@Home to deliver the best fixed experience in the market. Clearly, we do not only count the wireless customers as it's in the [indiscernible] and the via line customers. Fixed mobile substitution customers come on top. And if you add all up, we are growing. So with the Internet@Home proposition, even within the lockdown, we were growing, as we also said on the last call, but clearly, we will now fuel additional growth clearly coming with the open shops coming from pure wireline as before.
Can I ask one final question. You mentioned the Internet at home that I was growing already, and that may have in publicly rolling at the expense of your fixed line KPIs. Can I also ask whether you are seeing any meaningful cable numbers already in your net debt? Or whether that's something that's yet to come in the second half.
So I think the fixed mobile substitution net adds are part of the mobile reporting that we have. But net-net, I think we had no 1,000 negative net adds on fixed if you only take the wireline part. And if you add to the growth that we have coming from FMS. So net-net, we are clearly growing the Internet at home customer base constantly.
The next question is from Andrew Lee from Goldman Sachs.
Just wanted to -- one question, but a couple of parts to it. The question really surrounds your OIBDA growth forecast for the year. Obviously raised today built on a strong share take in the second quarter. Just wondered if you could talk through the implied growth rate in the second half in a bit more detail and the drop off from kind of 8% in the first half to less than 1% in the second half. I know there's some special factors in there. but you've also called out, I think, more competition anticipated in the second half and the CapEx to OpEx shift of your network costs. I wondered if you could give us a bit more clarity on the scale of that CapEx to OpEx shift of network costs in the second half. And on competition, as Georgios alluded to, in Vodafone highlighted that it didn't spend any above-the-line marketing spend in the second quarter. I wondered if you could talk -- and was held back by lockdown. I wonder if you could talk to any changes you've seen in the competitive environment, early days, but -- into July? And how you're envisaging competition accelerating or changing in the second half of the year?
Andrew, this is Markus speaking. Let me take your first question on OIBDA. So indeed, we are very pleased with the underlying operational performance. You also highlighted leading to the 3.5% growth that we have achieved. And of course, now we are targeting to maintain that top line growth momentum that we have and make that also sustainable for the next years as part of our long-term guidance that we have given, where we strive for increasing margins. A couple of things that we need to have in mind with regards to our half year 2 performance, let me start with roaming. There is still, of course, that uncertainty around roaming. We said that we have some encouraging developments, but we are slightly above the 50% again. But there are also question marks. We have seen now that the U.S. have prolonged their travel restrictions. And, of course, needless to say is if people just travel within the European, we have just cost, but no revenues due to the Roam Like at Home regime. On top of that, we, of course, need to remain the flexibility to invest commercially. We have definitely value-over-volume focus. But if we see value pools appearing in the second half year now with the reopening of the shops, et cetera, we want to have the flexibility to invest into valuable gross adds. Last but not least, on OpEx, of course, there is a natural increase on some of the OpEx line, especially on the technology side, driven by the 5G rollout, but also driven by the cloudification of the -- of some elements, especially on the IT side. which will fly in over time. So Andrew, you will not see major step changes in cost, but you will see gradual increases, which are also, of course, partly associated with some inflation-based cost around energy, et cetera.
On competition in the second half year. I think we have a clear strategy in our investment for growth program. I think we invested into the network to grow, especially in rural areas in order to sell second products to our customer and further to grow in B2B. This has not changed. We clearly started our network campaign in May, one that was already foreseeable that the shops will be opened. And this is now a campaign that we plan for the long in order to build on the superior network quality we build, also the right perception. And it's clearly an ARPU-up strategy that we see. And seeing with the strong postpaid net additions that we have shown to the market that the strategy is working already after 6 quarters. So we stick to our strategy, we execute it. We clearly see in the segmented market that some of the competitors you were mentioning are drifting more into the discount segment, giving us more space in the high value segment, what we clearly appreciate. So from that perspective, we stick to our strategy and clearly are prepared in order to invest into the second half year because we have a market gain strategy. So we want to gain market share. And then so far, we need the flexibility also to invest into second half year. And we will just continue with the media campaigns that we've just started in order to facilitate the great performance of the O2 network.
Okay. That's really helpful. Can I just ask a follow-up. Just pulling all that together. So obviously, the headline guidance has lots of special factors, et cetera, in -- If you look at the underlying growth trends in EBITDA, how much of a deceleration in growth you're anticipating in H2? And is that dispatched in a bit of conservative outlook and competition?
At this moment of time, we feel comfortable with the updated guidance of slightly positive. So we do not expect to go negative for the full year. We have good operational business momentum. And you have to look at it really as a full year performance because not just a quarter is relevant we want to grow our business and our margins sustainably over the next years.
The next question is from Polo Tang from UBS.
Really just had 2 questions. So first of all, in terms of your partner business and the recent discussion paper suggested that permanent roaming could be an option for the market going forward. So would you be willing to offer permanent national roaming to 1 on 1 or come to a new longer-term MBA MVNO agreement if this takes a network build by none off the table. The second question is really just about the trajectory of partner revenues because it looks like one-on-one will not be activating any network until 2023 at the earliest. So on this basis, do you think partner revenues could actually see decent growth in the near term given a growing subscriber base and growing mobile data usage or alternatively will fall in unit prices for the MBA MVNO. I mean, that partner revenues could be more stable.
Polo. On your first question, clearly, I think what we signed is with 1&1 is a win-win deal. It allows 1&1 in accordance with the remedies to build a network is the long period in our industry, and we clearly stick to our commitments that we signed up to. The paper you mentioned by the regulator clearly also foresees that I think it's the first time they are dealing with the new law that has been taken in place that spectrum auctions are not a necessity anymore. So there are other options as other European companies are envisaging that there are smarter ways in order to foster investments into the industry by just extending spectrum by just exploring what could be was in order to explore the spectrum extensions. So I think from our perspective, Part 1, a long-term national roaming agreement I think we already achieved a long-term deal with net, and that's clearly a win-win deal. On the second part, you wouldn't speculate on the robot. I think we wait what we have public announcement up to now from some statements that have been made. We leave it up to now. the time being, as such, we build a baseline, a minimum baseline taking into account the current knowledge that we have. And clearly, if things would go slower or would change or would happen in a different way, it could clearly create an upside to our P&L, but we wouldn't speculate at this point in time. We have taken a very conservative baseline and that gives us long-term planning security, especially in gross margin contribution. And the things play out differently, we clearly could create upside, but it's too early to speculate.
Your next question is from Ulrich Rathe from Jefferies.
I have one question coming back to Andrew's question on the sort of competition. So you have a strong mobile customer intake. You're talking about plans to grow, but it seems that the major driver is also switching of customers from Vodafone to your network. How do you think that, that would unfold? I mean you have a better network and you are marketing that successfully, you're gaining share, but you have 1/3 of the market. So it sends the reason that no other operator, Vodafone or Deutsche Telekom will look comfortably on the California sort of producing the sort of net adds that you produced in this quarter over the long term if they don't get similar numbers. So how do you view that? Is that simply the way it is because your network is stronger? Or do you think there is a case here to simply not be so aggressive on the bases that it creates imbalance in the market and potential counter reactions? So I'm talking about your actions in view of sort of gaining share. And then a quick clarification. The roaming is already back at 50%. Could you just clarify, is that roaming out, roaming in or both? Is that the full quarter of Q2? Or is it a run rate? And how do you expect that in your current business plan to unfold in the second half? Do you think there is a chance this will actually continue to sort of pick up towards, I don't know, 80%? Or is the 50% what you essentially assume for the second half now to plateau?
Thank you, Ulrich, for your questions. On your first one. I think with our strategy, as I outlined, I think we are very targeted. I think it's a segmented approach that we have. We clearly go into the B2B segment where we are heavily underrepresented. We gain in rural areas where also our market share is significantly below our fair market share. And a second product, selling Internet at home into the base, I think, is a market standard. And by doing that, we are not the cheapest in the market. We are not the most aggressive in the market. I think we have an ARPU-up strategy. So we drive value. So it's all about profitable growth. And this is also what you can see in the numbers that we published this morning. It's about profitable growth, and we believe the market is big enough on the one side to allow us to grow in rural areas in B2B and clearly also from additional products like fixed mobile substitution, while at the same time, mobile data growth is still growing doubling every 2 years. I think that's the natural source for everyone in the market to grow and to benefit from distill unbroken mobile data growth that is coming more and more strongly.
Well, let me take the second part of the questions with regards to roaming. So what we were referring to is the growth, where there's the pre-pandemic level. So for example, if we compare now Q2 2019 to Q2 2021, that gives you that roughly slightly above the 50% recovery versus the normal revenue we did prior to the pandemic. That refers to outbound roaming, so people being abroad because that was also the most effected revenue stream in roaming -- visitor roaming. So people coming to Germany was not so much affected from COVID. And now you ask me the crystal ball question, which I unfortunately also cannot answer at this moment in time. On roaming, we really have highest volatility. It really depends, and you see that changing on a daily basis on the travel restrictions, can you go on holidays into that country or not, et cetera. So we see that first signs of recovery, but the rest really depends on the COVID-19 situation going into the second half year.
Next question is from Steve Malcolm from Redburn.
I've got a few questions actually. One on cash flow and 1 on the revenue outlook, if you could maybe help me. Just on the cars, maybe you can help us sort of think about the full year. I think your lease costs were up about EUR 32 million year-on-year in the first half. I guess that's a reflection of the Telxius deal. As we look into the second half is it right just to annualize that increase and then build in the second punch coming through? So I guess we're looking at extra 5 cash lease costs of around EUR 75 million to EUR 80 million for the full year. And then on working capital, obviously, you normally have a very big outflow in the first half, inflow in the second half. Do you expect the pattern to follow broadly the same trajectory as last year and end up neutral for the year? Although, I guess, last year, you had the [indiscernible] payment. So maybe help us think about that as we think about cash flow? And then just on the revenue side, you seem to have a very big increase in your prepaid revenues. In my calculations, I think nearly half of the underlying EUR 56 million MSR increase came from prepaid. Can you just help us understand what the moving parts behind that are, if that's right? And then sorry, just on roaming, just coming back to that. Can you just give us what the actual year-on-year revenue impact was from roaming? I think you gave us an EBITDA contribution 20% [indiscernible] increase, but I'm still a little confused as to what the sort of net roaming contribution was in Q2 '21 versus Q2 '20. That would be great.
Okay. Steve, let me take your first question. On the free cash flow, we are following the normal seasonality in inverted come and we do not expect major differences from a working capital perspective as we have seen that also in the previous years. Apart from the topic that you just described and indeed, leases are increasing. We are expecting the second chunk of the taxes transaction, the remainder of the 40% now in the second half year, which will also then gradually increase the leases, coming to that increased run rate of EUR 90 million that we already mentioned to you, which will be then further on down the road, filled up with build-to-suit commitments amounting up to another EUR 40 million. That is what we have shown. The prepaid versus postpaid mix, I can honestly not realize. We have increased predominantly on the postpaid side and just a limited extent on the prepaid side. But let's follow that up with your models with the IR team afterwards. I think we can clarify that for you.
I can ask one quick follow-up. Just -- I'm curious about the free SIM offer that you're giving customers, can you explain exactly how that works? Do they have to take a sim and then put it into an existing device? Do you give them any sort of lease devices to help them improve the experience? It seems like a good idea, but I -- from a practical sense, I'm struggling customers would actually use it. Any clarification on that and the benefits you're getting from that program would be really interesting to hear.
Absolutely. So first of all, these free sims for months are not part of our customer reporting. So have these free sim customers in our reporting. So the numbers we reported this morning are real customers. We have a long-term commitment with us. But we clearly see the try and buy offer that is currently out there and attracts many people who had in the past were not sure if 2 also in rural areas is serving them in the best way. And I think we get great demand for that. So I think we are sending out many of these online. We are offline, but also clearly in the shops now again. And then it's a good opportunity to upsell because you have the customer data, the customer is happy. They see that the network performance is really, really good. And then clearly combine it with a bundle. So it's for us, a great sales trigger in order to then translate and transform these contracts into long-term agreements. So clearly, we hope that in the second half year, the net growth will also be fueled by the funnel that we create here. So overall, we see a good also activation rates on the SIM cards we sent out. And so they are really used and tested and that makes us confident that could also be a good sales channel for us going forward.
And I don't think Markus actually answered the question on roaming. If you could maybe just tell me what the actual in euro millions number was Q2 '20 versus Q2 '21 would be really helpful.
So we do not disclose the details out of that. But as I mentioned already, roughly, that gives you an indication, 1/3 of the MSR growth was driven by roaming and roughly 1/5 of that was the EBITDA growth.
Okay. So roughly EUR 20 million, I guess, if we look at the underlying sort of EUR 56 million MSR increase was a revenue increase.
You will do your math.
Next question is from Joshua Mills from Exane.
Two questions from me. The first is just on the exceptional effects on EBITDA this quarter and also in 2Q 2020. So just to clarify, is all of the EUR 12 million you talk about this quarter related to partner settlements? Or does that also include other effects? And going forward, how should we think about these partner settlements on a quarterly or an annual basis? It seems like they keep coming up, but you exclude them from the cost of label business. So are they going to come again in 2021? And how do you define them as exceptional? What makes it different to the normal negotiations? And then the second question, hopefully more straightforward, is just on fixed line. So Q1 results, you talked about the fact that TD was being quite aggressive through some online sales channels and kind of hinting that you felt that the regulator might need to have a look at that. Have things changed either from the perspective of DT changing the offers or from your negotiations with them on the contingent model?
Josh, let me take your first question with regards to the exceptional effect. So yes, I can confirm that these EUR 12 million mentioned here were due to partner settlements that we have conducted. Last year, indeed, we -- and it's a coincidence that this happens in the same quarter. We had a negative of EUR 25 million. This year, we have that positive of EUR 12 million. But as it is the nature of exceptional effects, we do not expect this settlement to be recurring and to appear in the future. We have a very special business model with a lot of partner activities. But from our perspective, we have now really settled the topics, and we do not expect any other exceptional effects at this moment of time.
On the fixed rate, I think we are still in constructive discussions with the regulator. We still see that wholesale prices are undercut in certain online sales plans and still an area of concern. There's more midterm rate that we have started. But clearly, we believe there's a case that you cannot undercut wholesale rates even in certain channels, if you want to have a fair level playing field. So this is ongoing and clearly we keep you updated.
The next question is from David [Reid] from Bank of America.
I think some of my questions on the EBITDA have been broadly answered. I just got a little bit of a sort of top-down question that I'm just trying to figure out is your EBITDA growth, your underlying EBITDA growth has lagged your MSR growth. And I just want to sort of understand that dynamic. We might almost -- it seems like there's a little bit of a lack of operational leverage there somehow. And I'm just trying to understand that. I don't know whether there's an obvious answer I'm missing. I do understand some of the marketing ramp, et cetera. But any of the drivers that means you don't get the same level of EBITDA growth as you do your service revenue growth facts.
Okay, David. Let me take it. So first of all, of course, we are driving our MSR growth to translate that also into margins going further. Of course, there can be some volatility that depends also on the underlying streams within the MSR, of course, that you have to take into account. For example, if people do roaming in European countries, we have no additional revenues, but additional cost. So the COGS profile can also vary on the different revenue streams that customers are doing from that come a little bit of volatility. And of course, there is always the commercial side in with which we breath because we have that value pools that we are tackling. Markus was describing that also in more details with regards to our commercial approach. And if we see opportunities to invest into sustainable customer growth, for the future. We are doing that. And we had strong net add momentum now in the second quarter, and that is, of course, also reflected here in that development. underlying, we are fully on track, and we are showing a decent growth from our perspective.
The next question is from James Ratzer from New Street Research.
Yes. So the first one I had, would just love to hear a bit more about the competitive dynamics in the market in particular, between the high end and the lower end of the market. I mean, you made some reference to this earlier, but I just wanted to kind of confirm what you were saying you're suggesting you're seeing kind of slightly less competitive pressures at the higher end of the market, is that right? But it's also, be intrigued to hear what you're seeing at the low end. I mean Vodafone has launched a third low-end brand I mean, are you finding the competition at the lower end of the market, in particular, is hotting up at the moment? And then the second question -- I mean, follows on a little bit from one of Steve's questions earlier, but just going back to the prepay number, you did report prepay ARPU being up almost 9% and year-on-year. And I know there's an easier comp versus Q2 last year. But even adjusting for that, it does look really quite strong. So I would just love you to give any more commentary around what is happening in prepay. Is this just top-ups increased from the low comp last year? Or is there something more structural happening within your prepaid business?
James, thanks for your questions. On the first one, as you said, I think there has been another rebranded no-frills brand being launched in the market, I think is the 30th or the 40 of these brands. And as I said, from our perspective, segmentation works in Germany especially between the segments. It's the ethnic segment, the prepaid segment and there are different brands in there. So from our perspective, is sort of real concern. And clearly, there's more focus currently on the segment below EUR 10 in the market. And with the superb network quality on O2, we clearly have the chance to enter now into more high-value segments because there's a choice now. There's a price value choice for customers at certain price points to really experience a great 4G and also 5G network to a different price level than before. this is the room where we currently focus on, especially in rural areas. There's now more choice than before in B2B. There's also more choice for many SME customers than they had before. And it's a completely different segment than the fishing in the in the low end of the market below EUR 10. So I think it's a segment came from our perspective, and that creates from our perspective for Telefonica, big opportunities to execute our strategy.
So let me then go into the second question, James, with regards to the prepaid development. Of course, also, we are following here our approach of developing the value of the customer. and increasing the ARPU with higher pack bookings, et cetera, being attractive and stimulating the usage of the customer further. So similar what we do on postpaid, we are also pursuing that route on the prepaid side. We have here now, of course, the special factor that Q2 last year was in full lockdown. And therefore, pack bookings were at a very low level because people substituted the traffic with their WiFi at home. We now after the travel restrict or the possibilities to move, not travel restrictions, but the movements in Germany have increased again. we see, of course, also that these pack bookings are on a much higher nivo than in the previous year. plus the simulation effect that I mentioned before. But if we take it a step back from the absolute MSR growth, we still see that the majority -- really the vast majority comes from the postpaid side and prepaid is also adding but to a much smaller portion than the prepaid ones.
Markus, I mean, are you able to give any indication of what you see the kind of underlying growth you're seeing in prepaid revenues are at the moment kind of excluding the COVID effects from last year?
We do not -- we said -- so COVID is behind us, at least for the time being. This is why we focus more on the reported level. And let's -- if you have some more details that you want to discuss, let's really follow that after that call with the IR team, please.
Today's last question is from Jakob Bluestone from Credit Suisse.
I'll keep it to one question. you reported a 70% sequential increase in mobile net adds and you sort of attributed that to the reopening but your fixed net adds still seem to have been held back by lockdown. Can you just help us understand why did mobile benefit from reopening but fixed line didn't? Is there something sort of fundamentally different in terms of why one saw a rebound and the other one didn't?
First of all, we see a rebound in fixed already in June. We have again positive net adds as part of the quarterly numbers. that Tele carries over into the third quarter. Clearly, we had a strong online push also what we achieved in the second quarter. While we didn't know how long the lock-in is -- and I think that it worked out quite nicely that we had a nice volume effect from online and off-line coming in, in this quarter. So fixed is more a product to explain. It needs more service is also an upsell to most of the customers. And so far, we need the physical service. You might be a different performance on that one. But as said, once the shops are there, we clearly see also that the run rate of gross adds of wireline product is increasing. The home spot, for example, is a product that we could also sell online nicely. It's simpler to explain, it's a plug-and-play product compared to a wireline product. So that underlying growth also helped us clearly to drive the great Q2 performance while the FMS customers are counted in the mobile postpaid net adds as we outlined. So overall, we are not concerned -- So I think important is that it's now coming back, and this is what we can confirm.
I hand back to Mr. Markus Haas for any closing remarks.
Thank you very much for dialing in this morning. We are pleased to present our very strong set of results, as I outlined. And from that perspective, we leave it there. And if there are follow-ups, please contact the IR team. We are happy to answer all your questions. And with that, we wish you a nice Wednesday. Thank you. Bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for participating. Goodbye.