Telefonica Deutschland Holding AG
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Good morning, ladies and gentlemen. Thank you for standing by. I am Francie, your Chorus Call operator. Welcome, and thank you for joining Telefónica Deutschland Q2 2022 Results Conference Call. [Operator Instructions] It is my pleasure now, and I would like to turn the conference over to Mr. Christian Kern. Please go ahead, sir.
Thank you, Francie. Good morning, and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to the H1 '22 Results Call of Telefónica Deutschland. Before proceeding with the management presentation, we would like to inform you that the financial information contained in this document has been prepared under IFRS.
As usual, this presentation may contain announcements that constitute forward-looking statements, which are no guarantees for future business performance and involve risks as well as uncertainties. Also, certain results may materially differ from those in these forward-looking statements due to several factors.
We invite you to read the full disclaimer on the first slide of this presentation. Finally, today's presentation is also available for download on our IR website. With me today are Telefónica Deutschland's CEO, Markus Haas; and CFO, Markus Rolle, who will take you through the presentation followed by a Q&A session. Markus, without any further ado, over to you.
Thank you, Christian. Good morning, ladies and gentlemen, and a warm welcome to our half year 1, 2022 results conference call. Today, we are reporting another very strong set of results, while we remain focused on our strategy execution. On the back of the strong half year 1 performance, Telefónica Deutschland is expanding its full year 2022 OIBDA outlook range upwards.
We are now targeting full year 2022 OIBDA growth of low to low mid-single-digit percentage growth versus the initial guidance range of low single-digit percentage growth. We are always in the final 6 months of our successful 3-year investment for growth program and well on track to deliver what we have promised in 2019.
Here are the key highlights of our strategy delivery. On mobile growth, we have delivered consecutive profitable growth in mobile service revenues over the last few quarters, expanding our mobile market share. The underlying trends are intact in a rational, yet dynamic mobile market, which we expect to continue.
On B2B, we see momentum and gain further share in the targeted SME segment. We see growth supported by our mobile core business as well as by our project business with increasing demand for new services and in fixed as well. On smart bundling, we are increasing our household penetration and are growing the share of our customer base with more than 1 postpaid SIM.
On ESG, our ESG achievements are well recognized and remain focused on executing our ESG road map laid out by our ambitious Responsible Business Plan 2025. On the back of our significantly enhanced network quality in 4G and 5G and continuous strong mobile data demand, Telefónica Deutschland is planning more for more price adjustments for new tariffs across its portfolios and segments over the coming quarters.
For quite a few years, we have offered our customers more and better services at [ similar ] Value for money proposition, while simultaneously investing into our network and ESG leadership. In 2020, we achieved network parity. Since then, we have continued densifying our network, added coverage and doubled available network speeds.
At the same time, we are making strong progress with the 5G rollout. And achieved our 50% pop coverage target for year-end and 2022 ahead of time. We have recently increased our year-end 5G coverage target to 60% pop coverage within an unchanged CapEx envelope due to rollout efficiencies achieved. We are proud to say that the O2 network successfully services customers every day with data traffic doubling every 2 years.
Our overall achievements are also reflected in high customer satisfaction and low churn rates.
On my next slide, let me highlight the main half year 1 KPIs, but Markus Rolle will discuss our Q2 performance in more detail in the second part of our presentation. Mobile postpaid net additions were more than 660,000 in half year 1, driven by continued commercial traction of our core business strength.
In Q2, we are also celebrating the 20th anniversary of the O2 brand in Germany with the introduction of our innovative tariff O2 Grow. High customer satisfaction with our services is evidenced by the O2 postpaid churn being broadly stable at 1% year-over-year and a strong NPS for the O2 brand.
On financials, revenue is up more than 5% year-over-year. OIBDA posted almost 5% growth on sustained profitable top line growth. CapEx to sales at 14.1% delivered strong progress with 5G rollout. Overall, our strong KPIs reflect our continued commercial traction and sustained financial performance.
Moving on to my next slide. Telefónica Deutschland remains highly focused on delivering its ESG road map and is on track to reduce its emissions by 90% and neutralizing residual emissions latest by 2025. This quarter, I'd like to flag our social responsibility and digital inclusion commitment.
Especially in these challenging times, social connectivity is even more important with people suffering from war in the Ukraine, and economic as well as political uncertainties dominating the daily news. Therefore, we are even more focused on our social responsibilities. Here are just a few examples, support for the Ukrainian people was the main focus of this year's Volunteering Day.
Our employees were highly committed to help refugees from Ukraine with hands-on support such as providing language services to children and coaching for online job applications. We are proud of some highly committed employees founding the volunteering start-up civil relief to offer people from the Ukraine transport and organize food as well as accommodation.
To help maintaining mobile communication services in Ukraine, Telefónica Deutschland donated mobile network equipment. We are also supporting society by enabling an exclusive digital transition with initiatives such as the German Digital Day headed our Berlin-based base camp or we were promoting digital literacy by teaching digital skills across all generations.
Helping to protect and to drive a sustainable environment, our employees also took part in the company's environmental weeks, initiatives included collective cleanups and climate workshops demonstrating employees commitment to local environmental protection.
As a result of all our combined initiatives driving our ESG agenda, we are well recognized with top rankings by leading ESG rating agencies, including Sustainalytics and EcoVadis.
On my next slide, I'm excited to highlight the network achievement of having reached our 5G year-end pop coverage target of 50%, well ahead of time. Therefore, we have raised our ambition to 60% pop coverage by year-end with an unchanged CapEx envelope. Let me just flag some of our key network achievements. Our strong 5G network expansion includes now a densified grid of 14,000 5G antennas, mainly driven by new technologies and rollout efficiencies.
Our network parity is well recognized by the leading network tests going forward, our passive and active network sharing agreements with the current MNOs enhance both, network densification and CapEx efficiency. On fixed line, we are benefiting from the rollout progress of new technologies and higher speed classes in our wholesale portfolio, where we're increasingly seeing traction of our 1 gigabit services.
Finally, let me remind you that Telefónica Deutschland is now in the final year of its 3-year investment for growth program and has already passed its CapEx peak last year. Before handing over to Markus Rolle to take you through our strong Q2 operational and financial performance in more detail, I'd like to share with you some more color around our upwards expanded full year 2022 OIBDA outlook range.
Our full year 2022 outlook is fueled by strong business momentum in the first half of the year. This strong first half year performance was mainly driven by the ongoing strength of the core business with high customer demand for the O2 Free portfolio and was supported in the second quarter by the anniversary of us to celebrate the 20th anniversary of the O2 brand in Germany.
Telefónica Deutschland expands its full year 2022 OIBDA outlook range upwards to low to low mid-single-digit percentage growth with unchanged assumptions for the regulatory headwinds. We are making this positive change to our outlook after careful consideration of the challenging macroeconomic and geopolitical environment on the back of the war in Ukraine.
So far, we have managed the impact of the inflationary environment well with our core business consistently delivering sustained and profitable growth. At the same time, we are continuously monitoring and analyzing the impact on the company from further development of the COVID-19 pandemic as well as the war in the Ukraine.
Markus now over to you to take us through the Q2 results in more detail.
Thank you, Markus. Hi, everyone, and a very warm welcome and good morning, ladies and gentlemen. Let me now take you through our strong Q2 operational and financial performance in more details. Revenues maintained their growth path in Q2, and they are increasing by 5.8% year-over-year to just over EUR 2 billion. This is driven by the sustained MSR growth momentum despite the tougher comps in the quarter and on the back of strong handset demand.
In detail, MSR grew 2.3% year-over-year to just over EUR 1.4 billion. Despite the negative impact from the accelerated MTR path combined with tougher comps in the quarter. We have been able to deliver underlying growth of 3.4% year-over-year. The MSR benefited from the ongoing strong commercial traction of the O2 brand as well as some support from the recovery of international roaming.
Handsets see also continued strong demand for high-value devices, and we also had, again, a good device availability. And that drove our handset revenue, which is posting 24.1% year-over-year growth to EUR 395 million. Handset margins are broadly margin neutral. In fact, we had a small headwind in Q2 year-over-year.
Fixed revenues grew 0.9% year-over-year to EUR 201 million, where retail fixed broadband growth posted a 2.5% year-over-year increase in Q2, reflecting the increasing share of high-value customers in our customer base.
On my next slide, let me take a look into our solid trading performance. Mobile postpaid maintained its commercial momentum on the back of a strong customer demand for the O2 portfolio and a solid contribution from our partner brands. As a result, net additions totaled to 374,000 in Q2, which is stable year-over-year. Churn in the O2 brand was flat year-over-year at very low levels at 0.8% and the anticipated temporarily higher churn on the back of the EECC introduction started to normalize as anticipated in Q2.
The O2 postpaid ARPU was marginally down year-over-year on the back of a combination of the accelerated MTI (sic) [ MTR ] glidepath and some enhanced focus on customer loyalty. This included retention and bundle benefits, for example, for second SIM cards and friends and family offers.
But of course, we continued to see strong uplift from the first SIM gross adds. And also worth mentioning is that MSR growth from an overall perspective is, of course, also supported by second and third SIM, which naturally contribute lower ARPUs. Though ex MTR impact, our underlying O2 postpaid ARPU continued to grow with 0.4% year-over-year.
As Markus has already highlighted, the new gigabit offer and our technology-agnostic O2 My Home product remained popular with both cable and fiber gaining tractions. Our fixed broadband business registered 5,000 net additions with a churn of 1.1%, which is marginally up mainly as a result of the EECC implementation.
Fixed ARPU continued to grow as a result of the increasing share of high-value customers in the base and stood at EUR 24.70 in Q2 '22, which is an up of 0.5% year-over-year.
Moving to my next slide. Our OIBDA grew 2.7% year-over-year to EUR 629 million in Q2 despite tough comps in the quarter. Our underlying OIBDA growth was even 4.7% year-over-year. The OIBDA growth reflects, on the one hand, the improved operational leverage, mainly in mobile on the back of the continued own broadband momentum, and on the other hand, further efficiency gains and some international roaming tailwinds.
With that, we have achieved several consecutive quarter of OIBDA growth by our focus on profitable growth. Our OIBDA margin this quarter stood at 31.4%, which is down minus 1 percentage point year-over-year, mainly reflecting the strong growth of broadly margin-neutral hardware revenues.
With regards to our growth, let me highlight the following key points. Supplies increased 12.9% year-over-year as the positive impact from the MTR-cut were more than offset by volume-driven higher hardware cost of sales in context of the before mentioned strong handset revenues.
Our underlying personnel expenses were down minus 0.6% year-over-year. The other OpEx was up 2.7% year-over-year, and this is reflecting the technology transformation, the commercial activity and a more normalized marketing spend versus a partial lockdown quarter in the prior year.
As of today, we see no meaningful changes in the payment behavior of our customers. We saw only a slightly higher mainly volume-related losses due to the strong handset sales. On the right side of the slide, we show our free cash flow with a typical annual seasonality.
Free cash flow amounted to EUR 373 million year-to-date. It is following the annual free cash flow pattern. We paid a bulk of the annual lease payments, and we also substantially reduced the CapEx payables. This results in a negative free cash flow after lease of minus EUR 22 million year-to-date, with free cash flow after lease already turning positive with EUR 31 million in the second quarter.
Let me discuss the free cash flow in more detail on my next slide. First of all, we are well on track for a strong free cash flow generation. On the upper right-hand side of the slide, we show that we have achieved a stable operational cash flow trend even during our investment for growth program.
Year-to-date, operational cash flow amounted to EUR 673 million, which is an increase of 3.7% year-over-year. As mentioned, free cash flow in half year 1 was broadly stable year-over-year. Free cash flow after lease in Q2 was making already a positive contribution of EUR 31 million despite the well-flagged additional lease costs from our recent infrastructure transaction.
As discussed in the past, Telefónica Deutschland has typically a back-end loaded free cash flow after lease profile illustrated at the lower right-hand side of the site. The key seasonal factors impacting the free cash flow after lease in half year 1 were the annual prepayments, for example, leases, half year 1 typically accounts for more than 60% of the full year lease payment and also seasonality driven higher CapEx and handset costs in Q4 of the previous year.
Overall, working capital movements of minus EUR 281 million year-to-date were on a similar level as in prior years, whereas the composition has changed. The main driver was the reduction in CapEx payables in the amount of EUR 239 million, even more pronounced than usual, given the CapEx peak of the investment for growth program in Q4 2021.
Operational working capital movements have improved compared to last year only showing a consumption of minus EUR 42 million, mainly driven by the prepayments, while trading-related positions were broadly offsetting each other.
The others of minus EUR 19 million reflect nonworking capital related cash out and mainly consists of net interest payments and some financial investments, for example, our equity contributions for the UGG. As a final remark with regards to working capital, once steady state in CapEx has been reached, the corresponding working capital is expected to become neutral on a yearly basis over time.
In the light of the rising interest rate environment, it's also worth mentioning that our consolidated net financial debt amounted to around EUR 3.7 billion as of the 30th of June, which is down year-over-year. This resulted in a healthy leverage ratio of 1.5x, which is well below the company's self-defined upper limit of 2.5x.
Telefónica Deutschland has secured fixed rates on all drawn debt instruments and facilities. Hence, any potential interest rate hikes would only have an impact on the company over time.
On my final slide, I'd like to summarize the key points of today's presentation before we kick off the Q&A. As a management team, we are highly committed to deliver long-term shareholder value and achieved again strong operational and financial performance in Q2, driven by the delivery of a continued strong commercial momentum following the revenue growth path on sustained MSR momentum, achieving OIBDA growth driven by improved MSR quality and delivering on our ESG commitments. Hence, we expand our full year 2022 OIBDA outlook range upwards to low to low mid-single-digit percentage growth.
Now as usual, we look forward to your questions. Operator, please go ahead and start the Q&A.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from -- excuse me the pronunciation, Georgios Ierodiaconou from Citi. Sorry, sir, please go ahead.
I have two -- the first one is around pricing. And obviously, Markus, you mentioned during your introductory remarks that you're planning to look at more -- for more price adjustments. I'm just curious to hear from you your thinking on that. We heard from one of your competitors the other day that they expected other players and maybe the market leader to lead the way. It will be interesting to hear your thoughts and also whether you expect any of these price adjustments to have financial impact already this year? Or is it something that's mainly going to benefit 2023?
And my second question is on the cost side, again, for this year and next, if you don't mind. And I just wanted to note that your guidance implies a small slowdown in EBITDA growth in the second half versus what you've delivered already? I know it's not a very precise guidance and there may be a bit of movement here and there.
And you do have some tailwinds from Lebara contract and also from high commercial expenses in the fourth quarter of last year. So my question is, are you already seeing some energy and other expenses, mitigating these positives in the second half? And if you could perhaps give us an indication about your 2023 expectations of energy costs?
Georgios, I will take your first question. I think as stated on the back of now full network parity, especially in mobile, we clearly see opportunities on more -- for more cross portfolio. So that means all brands, so not only the O2 brands or cross portfolio in the segments where we operate in order to offer new tariffs with more-for-more logic included, and the journey already starts this year. We clearly expect flow-through effects not before end of this year.
So clearly, starting this especially in acquisition and also in extension of contracts, but especially also in the prepaid segment. So we take a full portfolio view on the back of really high-quality network being built on 4G, 5G, more data demand and clearly see opportunities across portfolio in more-for-more.
George, let me take the second question. So first of all, we expect commercial momentum to continue also into the second half year. And that is, of course, including some tailwinds, as you were mentioning from Lebara but also some less pronounced roaming advantages versus the prior years that we have to take into account.
But the overall trend and momentum is fully intact. And that gives us also the room to expand our guidance to low mid on the upper end. And here, we are confident that all topics around inflationary, we can definitely compensate. As said before, in Q1, we had already roughly 2/3 being hedged. Now we are at 80%.
And if you have a reminder if -- even if we were to buy at today's spot market prices, you are coming to a very low double-digit million amount, which we will fully compensate within the guidance range that we have given. And that is also the reason why we are comfortable with the actual consensus, which is out there.
With regards to energy cost 2023, we are currently preparing long-term agreements over the next years, which, on the one hand side, built on our ESG positioning going further -- to really get good energy that we buy. And that will help us then also to further improve that positioning and makes us also independent from spot market prices. And we will update you as soon as we have finalized the concepts around that.
If I could ask a follow-up, what is roughly the current level of hedging you have for next year? Is this something you can share with us?
We see this as a package Georgios. So I think we have access to long-term PPAs that allows us also to overwrite additional commitments we have. So that gives us the flexibility going forward as Markus said, to combine the ESG strategy with very favorable long-term independent energy costs.
[Operator Instructions] The next question is from Polo Tang from UBS.
So I have two. The first one is really just about Huawei because there have been press reports suggesting that there could be a full ban on the use of Huawei equipment. So what's your view on this? And can you talk through the potential impact on Telefónica Deutschland? And my second question is really just to kind of clarify the impact of Lebara. How much of a benefit did you see from the Lebara MVNO in Q2? And can you remind us as to whether you need a SIM swap to migrate the subscribers?
Polo, On your first question, I think as stated, we have the lowest exposure in the market. And we have full refund agreed with Huawei in case on 5G, there would be a replacement needed on core, we already deployed Ericsson. And as said, our share is below 50%.
Fundamentally, nothing has changed. So the government confirmed that the position is still in place despite the press articles, and there are no facts on the table. So overall, we feel very comfortable in a nutshell, lowest exposure in the market. Our Plan B is cost neutral for Telefónica Deutschland. And as said on the call, we are already on Ericsson.
Polo, let me take your second question with regards to Lebara, so I can confirm that the migration has started in Q2, and we expect that to end at the end of Q3. That's the current estimation that we can give to you. And in order to answer your question, probably, yes, it requires a SIM swap for the Lebara customers. That is also the reason why it takes time.
And that answers also your follow-up question with regards to the benefits we have seen. So we see a legible contribution of Lebara to our P&L in Q2. As always said, these effects will build up now through 2022 and the full effect of that will be visible from 2023 onwards.
The next question is from Akhil Dattani from JPMorgan.
I've got two questions as well, please. Can I ask a first question just as a follow-up on the topic of pricing. So what I really wanted to understand is that you've mentioned quite clearly in your previous answer that you're confident in a more-for-more approach, which is understandable. I guess the real thing I wanted to understand is what makes you confident to do that ahead of your larger peers taking those sorts of moves.
And, I guess, normally, we would see the incumbent go first. So is it that you just think your discount relative to the incumbent peers is too great given your network quality parity, or is there some other rationale behind that? So I guess the question is what's giving you that confidence? And linked to that, I guess there's been a lot of discussion around family plans given Deutsche's tariff proposals earlier this year.
So I guess I'd love to understand if you have that data point, what your average number of SIMs per household is across your footprint, just so we know where that is.
And then the second thing was just around working capital. You made some comments in your introductory presentation around handsets and the fact that, that is not just been low margin, but I think if I understood correctly you said that there's been some drag related to handsets on EBITDA and cash flow. So if you could just qualify what that was.
And then in terms of just cash flow, working capital overall, are you able to give us any sort of sense as to what you think the full year working capital number would be?
Thank you for your questions. I'll start with your first one. What makes us confident that is for Telefónica O2 the right time for more-for-more. First of all, clearly, we see equalized churn rates after EECC. So we are through the [ first wave as ] expected. So the technical effect of Q1 has completely neutralized in the second quarter.
And this is clearly based on extremely high customer satisfaction, high NPS, high service, high satisfaction also with our cross-channel delivery and performance that we show and clearly also on the back of equalized network quality. So on that level, and this combined with additional significant increased data demand that we see coming also on the horizon with new devices, with new products, new streaming services implemented. We believe -- we deliver also in the future value for money. So we are not giving up our value proposition in the market.
But having said that, where we currently stand, we see more-for-more initiatives in a new portfolio coming up, where we will clearly step up the ladder. And this not only in -- with one brand, it's a cross-brand portfolio approach on the brands that we operate here in Germany. So also in the prepaid area with additional services and additional data, but also in our second-tier brands like Blau and others.
So I think there's cross portfolio that we see because everybody benefits from this great network where we have now nationwide coverage with 100 Mbit by the end of the year and clearly significantly increasing 5G footprint for our premium customer. So on the back of that, I think, it's from our perspective, we are serving our customers well, and we are prepared to give more and even better services for more. So I think that's the basic concept.
On your second part of your first question, I think if you look at the facts, only 25% of households in Germany has more than 2 people or only in 25%, they live more than 2 people. So from that level, our SIM penetration is lower than, of course, free SIM cards. It's between 1 and 2 in the whole customer base.
So from that level, we are very well positioned with our bundle benefits that we give for mobile, mobile and mobile fixed. So we are, from that perspective, at a position that also do not see any exposure to recent moves of competitors in that level because at the end of the day, 75% of the market are not addressed with these propositions. So it's more niche, if you take it from us as a mass market player in mobile.
Akhil, let me take -- then the working capital question. So first of all, your handset topics, I would start with the P&L impact that I was just mentioning. We had, again, very strong handset revenue. This is very clear. But we had, despite maybe then in prior quarters, where we have been able to scheme, we had this quarter a broadly neutral margin on the handset.
And my comment was meant that from an year-over-year perspective due to the slightly higher margin in prior year, we have now slight headwind, which is legible, but on the other side, we also do not generate our margins from the handset business. This comes clearly from our MSR development and the quality of the MSR development that we are able to deliver.
With regards to working capital, here also our program is meant to be neutral from a handset perspective, because on the one hand side, we have our My Handy program to the customer where we give the customer installment plans over time. And we neutralize that via our silent factoring program that we have in place in order to have barely any effects on the working capital apart from some phasing depending on the number of factoring transactions, silent factoring transactions that you do.
With regards to working capital for the full year, of course, we do not guide on working capital. But here, I want to again reiterate the comment that I have made before on the call. We have that back-end loaded cash flow profile as in prior years also, and we are confident on a strong free cash flow development from an overall perspective.
And on top of that, expect after the CapEx payables outflows of the CapEx peaks in the past, working capital to be a rather neutral position for the next years. So normalizing to a neutral position within the next years.
The next question is from Ulrich Rathe from Jefferies.
So my first question would be the wording of the EBITDA guidance is maybe a bit labor term, this low to low mid-single digit, sort of if you look at it in a different way, would you say that 4% consensus that you collected prior to results is reasonable? Or maybe a bit aggressive. Second question is coming back to macro uncertainty. So you're saying you're seeing only volume-related impact so far. Could you describe a little bit what outlook you have, where you see the risks and what you have baked into the guidance at this point?
Yes. So Ulrich, I can confirm again that we are comfortable with current consensus level, which is around the percentage that you have described. And with regards to, yes, macro preparation, I think, we have a well-established system in place with good credit check mechanisms, et cetera, that filter out as it has done also in the past, customers who have a low probability to pay. We are, of course, always looking into the different ratios.
As said, currently, percentage-wise, we do not see any effects. And we also see that there is a good commitment of our customers to pay their bills, et cetera. So from today's perspective, everything fully intact, but also all mechanisms in place to protect us from negative developments by really being careful on the transactions that we are doing.
Maybe to add on that one, we have now on all channels implemented trade-in programs also to fuel the next wave of high-quality smartphone that we expect to arrive soon in the German market. So we have known all channels trade-in programs installed together with the handset manufacturers in order to clearly make the affordability of handsets possible.
We also have this installment plans very flexible from 12 with onetime payments, 12, 24, 36 and even 48 months for high-end smartphones in order clearly to have affordability in these uncertain times for everybody, also for high-value smartphones. So this is running extremely well as of the USP that we have in the market, and that clearly -- is clearly also driving the successful hardware business that we have recently seen again in Q2.
The next question is from Andrew Lee from Goldman Sachs.
I just want, if possible, want just to follow up on Georgio's question at the start, just on the OpEx headwinds. It's obviously a big debate across the market right now. And it's really struggling to get any sense of context or sizing on your -- on those headwinds into 2023. So I just have two very specific questions. One is on the lease price escalators, what is the inflation linked cap on those lease prices, even if it's just a range, that would be good to note we obviously know them for the [ Telcos ] themselves.
And then secondly, just on the energy headwinds. Obviously, you've got PPAs that can help from 2024 out onwards and there are puts and takes. But if we just take the spot price today and what you know today, which is the best guess anyone can do. What kind -- what's the what kind of expense is the energy headwind in 2023? Just a range of numbers would be great because it's very hard at the moment to get a sense to the scaling of it from your answers earlier.
Thanks, Andrew, for your questions. I can fully understand that the uncertainty currently that you see in the energy market is very difficult to model your perspective. What we can say up to now is we have access from a -- to cover the full decade starting next year with a long-term PPA, we are an attractive customer for energy companies because we have slightly rising demand coming from 5G and additional sites that we build and clearly also in recession times, our industry is not at risk at all because mobile demand and mobile usage is given at any time.
So -- and also, clearly, the ratings that we enjoy clearly help us to have access to extremely attractive conditions for the full decade, including next year. We will go out once we have signed the deals that are currently underway. So from that perspective, it's clearly -- our target is to neutralize any impact. I think that's clearly our ambition level.
Let's see how much we can do, but we don't see really major impact for next year and the coming years. So from that level, as I said, we are really in a preferred position to manage this situation with the circumstances I mentioned extremely well. But we will go out once we have signed the deals going forward. So from that level, we don't expect big headwinds.
On the leases, I think also as well, we do not have automatic escalator that just take the current situation into our contracts. We have half of our sites -- parts of the deals of the rooftops. The other part of the rooftops is still controlled by us completely. So on that level, you have to rent for the ground lease, you have to lease for the steel. And we have different elements in there and they all apply different parts.
So from that level, there's not an automatic escalator that you could apply. So far, I think we managed this extremely well, and this is also a dialogue with the tower companies, how we will continue that one. So also on that level, it's clearly management attention to achieve the best outcome for Telefónica Deutschland going forward, and that's not an automatic escalator just to be very clear, that applies to our full lease cost.
Okay. So still struggling a bit just on the scaling. Obviously, you're in a good position on the energy costs, but if you take that into account, as I'm sure you are, what's your anticipated numerical headwinds? And what is the current hedge at the moment, that percentage of your energy costs that are hedged. Obviously, you're going to do more, but what's the current level. We know most of our other companies, it's about 30% to 40% and rising.
Well, as I said earlier, we will override existing commitments with a long-term PPA. So from that level, we are in a good position. As I said, we don't publish a detailed percentage for the commitments we have given for the coming years up to now. So we will come out with a full concept once it's ready.
The next question is from Mathieu Robilliard from Barclays.
I have two questions, please. First, in terms of the free cash flow, I think you explained very clearly that it is back ended this year as it was in the previous year. But maybe given the focus on this topic, I realize you don't guide on free cash flow, but obviously, you've disclosed some consensus numbers for free cash flow for 2022, which I think is around EUR 482 million after lease. And if you could indicate if you're comfortable with this level one way or another, that would be very helpful?
And the second question was on wholesale contribution. Any big changes in how much the wholesale revenues are contributing to your total revenues?
Okay. Mathieu, let me take your questions. Indeed, I can confirm that with the consensus published on our website, we feel comfortable. And with regards to the handset revenues, it's for us, Mathieu a nonevent because it remains in the high 20s as a revenue share of the postpaid. So that's -- there's no changes -- fundamental changes to it. Our growth that we are generating, I think, that is important is high-value MSR growth and that comes from our O2 growth that we are able to accelerate further.
The next question is from Joshua Mills from BNP.
Question I've got two. The first is going back to the Huawei question. So I think in the past, what you've told us is that around 45% of the radio access network is Huawei, and then with regard to the core, the comment you make is that the new network, the new 5G contracts being built with Ericsson. So my question is really of the legacy 4G core network, how much of that is currently Huawei? And where does that come down to because I understand if you're upgrading to go through the process, given the headlines, just understanding the percentage exposure to Huawei and the core, I think, it's pretty important.
And then the second question is hopefully more straightforward. On broadband net adds last quarter, you gave a helpful breakdown of where they were coming from biotechnology. And you could see that the cable net adds were particularly strong. So I'd be interested if you could give us a bit of color around where the growth is coming in your fixed broadband numbers, which are obviously positive now and an approximation perhaps of where the cable number came in as well.
Josh, thanks for your questions. On your first one, yes, you're absolutely right in radio, our exposure to Huawei is the lowest in the market with below 50%. And as said, we are completely refunded in case the government would take actions. But just to be clear, there's no change. So the government hasn't changed its position. And up to now, we don't see any changes coming?
If so, and that's your question, what would be in the hypothetical scenario, we clearly would be reinforced. 4G would not be part of any legacy technology under this definition. It would not be affected at all. So, clearly, over time we would renew our network as we do also here. So there's nothing additional to the normal renewal cycle that we have.
In the core network, we're up and running. So we have replaced more or less all key systems up to now. So there's not any additional cost that we have. So also here, we are in the renewal cycle. Our 5G stand-alone network is ready. We switch it on its mass market relevant already built so that we are fully underway and in the plans that we have foreseen.
So in the hypothetical scenario, you would see -- we wouldn't see any additional cost or any additional exposure less than the swap time and the efforts that we would have on swap -- but also on that one, we would be completely indemnified by the vendor you mentioned.
On your second question, cable composition is part of [ gross add ] our performance. And we clearly see that the [ birthday ] campaign has been extremely successful. So 30% of the gross adds that we are currently doing are on cable. They will flow-through once the customers are active. So the order becomes active after several weeks.
So with the Q3, where we are already up and running, we would clearly see a significant higher increase of cable intakes as part of the fixed wireline gross add volume. We have Internet at home also contains fixed mobile substitution. But on the pure wireline, we currently see up to 30% of intake already coming from cable. It's a significant increase to the status before we renewed our wholesale contract with Vodafone on cable and also Tele Columbus, they are also part of the promotion that we have carried out. And so on that level, we are pleased with the positive development that we clearly now see on cable intake.
Just to come back on Huawei. So I understand your point about having the lowest exposure. It sounds like you're talking there about just the radio access network. But on the core network, if you had a U.K. type scenario where you were required to [indiscernible] strategy on that. The recent sense of Huawei, I'd assume and you refer to the equipment. So am I right in thinking you still have to pay extra in order to get in there and swap the equipment out. Again, understand that nothing has actually changed, but it's clearly becoming a bit more of a topic of discussion in the German press.
The replacement cycle of core ends this year. So I think it's all underway, Josh. There's no additional risk also on core.
The next question is from Pilar Vico from Credit Suisse.
I have two on my side, please. So the first one is around SME. So I'm not sure if you could give us a bit of color on how it's evolving and what is the current market share achieved? And the second one is, sorry to come back again, better around handsets. So we saw last quarter so margin flowing through to EBITDA. While this trend has not continued this quarter?
On SME, we clearly have a double-digit market share, but it's a low double-digit market share, as we always say on that level, and we are really pleased with the growth that we see. So the key growth that we see is coming in this segment. So customers up to 500 employees. So companies with 500 employees. So on that level, we grow step by step, quarter-over-quarter, and the funnel is filled up, and in that level, we constantly grow our market share. So that's the key growth source of our B2B growth under the current plan.
Pilar, let me take your second question for the handsets. I think we flagged very clearly in, for example, the first quarter, that we had good availability where the market had not good availability -- and we use that, of course, to optimize and scheme.
Markus mentioned last time, we are businessmen, of course, we use that also to optimize the margins. We have seen that now evolving in the second quarter. We had, again, very good demand, as you can see from the strong traction that we are doing and the increase in handset revenues. However, there was also good availability in the overall market.
And that means that this optimization that we did in the times where we had just availability of the handsets, we couldn't pursue in the second quarter. So that's simply it. So we are back -- also here, we are not in negative territory. We are back to normality, I would say, with broadly margin-neutral business on the handset side.
The next question is from [ Zahir Ramcharan ] from Redburn.
It's actually Steve. Can you hear me okay? .
Yes, we do.
I got a couple of questions. I wanted to come back to Andrew's question on energy and leasing, if that's okay. Excuse my ignorance. Can you just help me understand how these purchase power agreements work? And maybe give us a sense of the proportion of your energy needs that would be covered by these sort of long-term deals?
And I guess, in simple terms, if energy prices double between '21 and '22, how do you avoid that doubling if you're not hedged, if you haven't hedged much of your exposure at 2021 prices? How do you avoid that cost doubling in 2023 when those hedges expire? Is it because the purchase power agreements at a substantial discount to current prevalent prices and it's a large part of your energy needs.
So that would be really helpful. And then just coming back to the leasing question. If I look at consensus, I think consensus expects your lease costs to rise about 4% in 2023. I guess the simple question is if inflation stays where it is, -- do you think that's about the right level? Or would it need to go up if inflation stays at the current levels?
Steve, on your first question, I think how do PPAs work, I think, is in every other industry. There's nothing unique to our industry. So from that level, the more we bring to the party also on a long-term horizon and go together in wind parks with the partners and give commitments there. We can clearly neutralize on an average level, any impact from that level.
And clearly, the question is how much volume do you commit now, how much volume do you commit in the future. So I think there's full flexibility. And as said, we have access to extremely favorable terms. And that also help us to mitigate short-term impacts. And as I said, once we have signed a deal, we will clearly share with the market the key frameworks.
Markus, any sense of the proportion of your total energy that you can source in this way? I mean is it the majority of it? Is it in a small portion, that would be really helpful?
Well, it's a crystal ball question. I could allocate a lot. I'm not sure if this is wise now. So from that level, is from our perspective, we could cover significant parts. Significant parts we could lock in also for a longer horizon to take out any volatility. And this is now the question when and how. So we have choices, and I think that's good.
So let me take the second part of the question with regards to the leasing cost. As Markus has said that, so not the full lease amount that we are having is automatically exposed to leasing. So it's on demand very often and also not all components are included. And the development of the lease cost going further, of course, also depends on the number of build-to-suit built, then via the agreement that we clearly reflect also that will increase the run rate over time.
But it's also, of course, subject to us managing our portfolio, optimizing our portfolio, trying to further improve the deals. So there are many elements that we have to take into account. But the assumption that you do not see a full inflationary cost flow through that the market takes is the right one.
Ladies and gentlemen, in the interest of time, we can only take one final question. The final question is coming from the line of David Wright from Bank of America.
Just I think you renegotiated your cable terms with Vodafone quite recently. I just wanted to understand those contracts. In the event that, that network migrates to fiber with any kind of overbuild. Do you have automatic rights to -- an option to break essentially to move those customers away? Or do you get automatically piggyback into the new fiber network. And are you getting any sort of sense from the likes of Vodafone or even Tele Columbus that they're looking to secure higher volumes in wholesale as they move into fiber build?
Thanks, David, for your question. I think any fiber deployment needs scale. So we currently have covered the cable infrastructure and while the plans of Vodafone are currently not finalized and published to the market, we are very confident that any scale that we bring to the party on the cable network would also be highly welcomed on a potential fiber network.
Okay. And do you have the right to choose customers, like could -- when they overbuild fiber, do you have the right then go back to the market and tender wholesale? Or do you automatically move on to their fiber network?
Yes. I think the deal was based on remedies and it's now translated into more commercial relationship to really push the business and bring volume on Vodafone's cable network. That's the intention from that level. We have signed a cable deal. So far, FTTH was not part of the negotiations because the overbuild plans and the deployment plans are not concrete. We do not know, where, how and in which speed it will be built. And we also need to analyze if there are -- if these are complementary plans or are these cannibalizing plans to other fiber deployments in the market who might be faster.
So I think on that level, we have the full flexibility. But I'm sure the scale we bring to the table is highly welcome for everybody who wants to deploy fiber because it's at the end of scale game. So still, we have flexibility in case fiber would be deployed to decide where we want to put customers especially in urban areas, where we do not build [indiscernible].
I'll now turn back to Markus Haas for any closing comments. Please go ahead, sir.
Thank you. We really highly welcome your interest in our Q2 call. You have seen that the momentum continues on Telefónica Deutschland, and we have been able to extend our OIBDA guidance. We're extremely confident on the back of the first insights we saw from Q3 to continue the success story of profitable growth going forward and clearly finalize and overdeliver on our investment for growth program.
Finally, compared to the figures and midterm guidance we gave end of 2019. So from that level, we have full momentum in a healthy market, and we clearly see opportunities coming on the more-for-more program that we are going to start already this year.
Thank you for your interest, and we keep in touch. Thank you. Bye-bye.