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Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Telefónica Deutschland Q2 H1 2023 Results Conference Call. . Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to [Indiscernible]. Please go ahead.
Thank you operator. Good morning and thank you for joining us today. On behalf of our management team it is my pleasure to welcome you to the Q2 2023 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 gurantees 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, the presentation is also available 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 Q&A session. Markus, without any further due over to you please.
Thank you Christian [Ph]. Good morning ladies and gentlemen, also from my side a very warm welcome to our Q2 2023 results call, and thank you for taking the time to join us. We are delighted to present another strong set of results. Telefónica Deutschland is making excellent progress across it’s three strategic priorities to be the best Telefónica Deutschland. Let me remind you about the key building blocks of our strategy. First on Network. The focus is on network modernization and densification in cities and rural areas to further improve the customer experience. Growth on back of the sustained very good network quality, we continue our growth path across all segments by focusing on value over volume.
Third, transformation. As part of our continued transformation process, we are accelerating digitalization across our business units to enhance our company agility. Telefónica is also leading more-for-more initiatives in the market and is extending its ESG leadership by executing its ambitious ESG agenda.
Let me now highlight our strong half-year results evidencing our on-going market momentum. On revenues, we grew 6.2% year-over-year, underpinned by accelerated mobile service revenue momentum and combined with the successful launch of the company's more-for-more automobile portfolio and 5G mass market enablement.
On OIBDA, posted strong 2.2% growth, supported by further improved mobile service revenue quality. CapEx to sales stood at normalized levels of 12%, achieving the full year target of around 90% 5G pop coverage already at half year. Overall, our business model is robust and we continue our growth path.
My next slide highlights our latest network achievements. We have made excellent progress with our network modernization and achieved the initially by year-end targeted 5G pop coverage of around 90% already at half year. We are well on track to have a nationwide green 5G network of high quality, latest by 2025. This is an essential part of the backbone for German's digitalization and economic growth.
Given the continuously growing market demand for mobile data, the focus for the second half will be on further capacity increases to boost customer experience on our excellent network-intensified areas.
On the following slide, we provide an update of our market-leading more-for-more initiatives across the respective portfolios. Our successfully launched more-for-more new automobile tariff portfolio is a key driver of our growth strategy, reflecting the widely acknowledged improvements of our product, service and network quality, as well as the extended ESG leadership.
On the right-hand side of the slide, you see the deep penetration of our more-for-more initiatives across our brand portfolio, while for example Blau, AY YILDIZ and Ortel launched already in first quarter of the year. Tchibo and ALDI TALK swiftly followed in the second quarter. We also just recently made 5G available for the mass market and the prepaid brands. Our portfolios offer an excellent customer experience with faster speeds and higher data packages.
For example, the latest Connect test award for the ethnic brands AY YILDIZ and Ortel and Lebara have a very good rating for customers to stay connected with family and friends in the non-EU zone. We remain focused on capturing high-value pools to drive profitable growth across the entire sales funnel.
On my final slide, I am delighted to share with you that we are narrowing our current full-year 2020 free outlook to the upper range for revenues and OIBDA on the back of strong half-year results and continued momentum. Telefónica Deutschland expects a healthy pricing environment for both the premium and the discount segment in mobile and fixed. The well-received automobile portfolio is the main growth driver for our more-for-more pricing strategy. It stands for continuous investments in the successful improvement of our product, service and network quality, as well as our ESG leadership.
We continue to manage the inflationary environment well with our core business, consistently delivering sustained and profitable growth. Hence, we are narrowing our full-year 2023 outlook to the upper range of low single-digit percentage growth for both revenues and OIBDA.
CapEx to sales ratio is unchanged at around 14% with our current run rate being lower. Markus, now over to take you to lead us through the Q2 results in more detail.
Thank you, Markus. Good morning, ladies and gentlemen. Also welcome from me and we are happy that you joined our conference call. It's now again my pleasure to discuss Telefónica Deutschland’s strong quarterly results in more detail with you.
We achieved sustained top-line growth in Q2 2023 with all underlying revenue lines growing and MSR growth even accelerating year-over-year. Sales posted a robust growth of 4.4% year-over-year to €2,091 [Ph] million in Q2 2023. This is driven by the accelerated mobile service revenue momentum. Here we see that trend continued its growth path and is up 4.3% year-over-year to €1,463 million. This is fueled by the continued strong own brand mobile service revenue momentum and a solid contribution from our partners. In combination, this is more than offsetting the negative impact from the MTR glide path.
Handset sales grew 6.1% year-over-year to €419 million. With high value smartphones remaining popular while we see the overall customer demand for O2 myHandy contracts somewhat softened post record sales in Q4 2022 and Q1 2023.
Fixed revenues improved by 2.1% year-over-year to €206 million with fixed retail broadband revenues recording even stronger growth of 4.5% year-over-year in Q2.
My next slide shows Telefónica Deutschland also achieved good commercial traction again in the second quarter of 2023. Mobile postpaid delivered 302k of net ads. This is driven by the continued high O2 rent appeal and a solid contribution of our partner brands.
Churn rates remained at low levels and the O2 contract churn stood at a low rate of 0.8% in Q2 2023 reflecting the commercial success based on the high network and service quality in combination with a strong O2 brand.
O2 postpaid ARPU maintained its upward trend and is posting 1% year-over-year growth in Q2 2023. This is reflecting the customer demand for high value tariffs while we see partly offsetting effects from the reduction of the MTRs. The underlying O2 postpaid ARPU growth was even stronger at 1.6% year-over-year.
In fixed broadband the net additions were 22k. This is reflecting the higher customer demand of our technology agnostic O2 MyHome tariff portfolio. Also in fixed, churn improved by 0.3% point year-over-year to 0.8% in Q2 2023. The fixed broadband ARPU continued to grow as a result of the increasing share of high value customers in the base and is up 1.3% year-over-year to €25.50 in Q2 2023.
Let's move to OIBDA and free cash flow year-to-date on my next slide. OIBDA posted strong growth of 2.7% year-over-year to €646 million. This is driven by the improved MSR quality based on the continued own brand momentum partly offset by the anticipated increase in OpEx.
OIBDA margin contracted minus 0.5% points year-over-year to 13.9% mainly as a result of the growth of broadly margin neutral hardware revenues. With regards to the Q2 cost development it's worth highlighting the following. Total supplies were broadly flat year-over-year at €628 million in Q2 2023 with volume related higher hardware cost of sales offsetting the positive effects from the MTR cut. Connectivity related cost of sales accounted for 35% and hardware cost of sales for 62% of the supplies.
Personal expenses were up 9.9% year-over-year to €164 million in Q2 2023. This is reflecting the general salary increase as of September last year and the introduction of statutory minimum wages mainly in customer service as of October last year in combination with a slightly higher FTA eBase driven by insourcing of key capabilities to support the transformation and growth ambitions.
Other OpEx increased 9.2% year-over-year to €669 million in Q2 2023 reflecting the commercial activity in the quarter with the launch of the O2 more for more portfolio. The technology transformation as well as energy supplies in half year 1 2022, which we already secured before the energy price spikes. Commercial and non-commercial cost accounted for 65% and 31% of the other OpEx respectively.
Turning to year-to-date free cash flow on the right side of the slide. CapEx was lower minus 11.4% year-over-year and came up with €258 million in Q2 2023 with a normalized CapEx to sales ratio of 12.3%. Free cash flow amounted to €436 million year-to-date. Lease payments mainly driven by the annual pre-payments for antenna sites and lease lines mounted to €424 million year-to-date.
As a result, the free cash flow after lease shows the usual back and low bed loaded profile while turning positive already in the first half year 2023 at plus €12 million versus minus €22 million in the last year.
On my next slide, we provide some more free cash flow details. Operating cash flow rose by 11.8% year-over-year to €753 million. As a result of both strong operating and financial performance and CapEx normalization post the successful completion of the company's investment progress program.
Working capital movements were on a similar levels as in prior year with minus €291 million in half year 23. This is mainly driven by a decrease in CapEx payables of minus €183 million and other working capital movements of minus €107 million.
Increasing drivers of working capital movements were inventories which are up €50 million and pre-payments of €68 million. These payments amounted to €424 million in the first half year 2023.
As expected, the free cash flow after lease turned positive already in half year 1 at plus €12 million improving more than €30 million year-over-year. As a result, free cash flow after lease is well on track to more than cover the dividend. The constantly dated net financial debt increase to €3.6 billion following the company's dividend payment of €535 million in May 2023.
The leverage ratio of 1.4 times remains well below our self-defined upper limit of 2.5 times. Fitch rate Telefónica Deutschland with a BBB outlook and a stable outlook reflecting our strong balance sheet and the financial flexibility.
Before we kick off the Q&A, let me summarize the key points of today's presentation. Overall, we made excellent progress to build the best Telefónica Deutschland. We remained highly committed to drive free cash flow growth and long-term shareholder We are focusing on strategy execution to drive profitable growth by leading more for more across our mobile portfolio which supports our value over volume approach. While approaching 5G nationwide coverage, our high network and service quality supports a healthy customer growth as a key driver of our continued operational and financial momentum. We remain fully focused on our ambitious ESG roadmap to promote a sustainable digital future.
On the back of strong Half Year 1, 2023 results and continual momentum, we are narrowing our full year 2023 outlook to the upper range of low single digit percentage growth for both revenues and OIBDA. Now, as usual, we look forward to your questions. Operator, please go ahead with the Q&A.
[Operator Instructions] And the first question comes from the line of Matiro [Ph] Bila from Barclays. Please go ahead.
Thank you for the presentation. I had two questions please. The first with regard to the ARPU of O2 postpaid trajectory was in quarter-after-quarter that it has improved. So I wanted to know if you expect further improvements for the rest of the year and more generally if you could comment on the competitive environment.
And then I had a question about why way we've seen a lot of headlines about Huawei. We've seen a lot of headlines about potentially a situation where you would be asked to replace some of the equipment. Could you give us a little bit of color in terms of what is the latest on that front and what is the kind of exposure you have to that? Thank you.
Good morning, Matthew. Thank you for your questions. Yes, I think the more for more initiatives show that we are able to increase our ARPU in postpaid and also prepaid. And we clearly expect also a flow through in the coming quarters. On the second question, on the Chinese vendors, I think overall, we clearly are the opinion of we are in control of our infrastructure. And this is clearly also the key discussion that we currently have with the German government. You know that there's currently the investigation on the critical components going on. We expect further insights throughout the summer or more at the end of the summer, I would say, where we are currently. And the key argument once we are in full control of our infrastructure, we clearly were constructive with the government in order to prove. And we are set in the middle of the investigation. And whatever the government considers, we clearly expect that we will be able to manage it on a CapEx neutral way in case of potential restrictions with a long phase out plan that helps us to manage within the renewal cycle or from our perspective without any restrictions.
But as I said, we are currently in the middle of the process. We have a clear and strong argument that we are in full control of the infrastructure that we provide. And let's not forget, on the core network per se, we have anyhow chosen for a non-Chinese vendor in the last years. So there's anyhow no restrictions that we expect due to the decisions that we have taken in the past.
Thank you very much.
And the next question comes from Polo Tang from UBS. Please go ahead.
Morning. Thanks for taking the questions. I have two. The first one is really just about CapEx, because if I look at your current run rate for CapEx sales, it's low at 12%. I see you've reiterated your guidance for CapEx sales of 14% for the full year. But is there downside risk to this number? And how should we think about your normalized CapEx to sales for the business medium to longer term?
Second question is really just about spectrum and the BNR. Because the BNR advisory council recently gave an update post their quarterly meeting. What's your perspective in terms of their comments? And can you give us an update in terms of the process from here in terms of the 800 megahertz spectrum allocation? Thanks.
Good morning, Polo. Let me take your first question. Thank you for that one on the CapEx side. So we are, as always stated, after the investment for growth program with an accelerated CapEx over sales ratio back to normal levels. And we are now following the typical back-end loaded profile that we usually have. So we started relatively low into the year. And we expect that roughly around 14% is sustainable also for the long and midterm future that we can foresee. Of course, it also, as always, depends on the revenue development. And if we see further accelerations of the handset revenues, the growth that we have seen, for example, in Q1 or Q4 last year, we would, of course, not directly translate that into additional CapEx spends, to be very clear.
Good morning, Polo. On your second question, we expect a decision how to allocate the already used spectrum in Q1 2024. The extension scenario is still on the table as we speak. And from that, we have good arguments in order to push for that. So on that level decision will not be taken this year, what we understood. And the preferred extension scenario of the existing spectrum is still on the table, where we clearly volunteer, have a strong argument.
Thanks.
And the next question comes from the line of Keval Khiroya from Deutsche Bank. Please go ahead.
Thank you for taking the questions. And I have two, please. So firstly, can you talk about how OpEx will trend in H2 compared to H1? I presume you have some energy savings, but are there any other changes in OpEx trends we should be mindful of?
And secondly, you've previously said that if there is a 5G national agreement on the table for one and one, you would analyze it. Have there been any increased discussions on this topic and how keen would you be on an agreement? Presumably there are benefits if it locks in longer-term cash flows. Thank you.
Thank you, Kevin. Good morning. Let me take the first question with regards to OpEx's trends. First of all, I can confirm that we have easier comps on energy in the second half year, which is true. But also, what we have done is we have lined up a very tight cost management and a lot of efficiencies to be unfolding over time. To give you one, it's also related to energy. We have started also our consumption-saving program with artificial intelligence in our network to make sure that we do not use spare energy that we would not need to use.
And with that, we are going through every line item as usual in the organization. I think also positive to say is that we have been able already to show from Q1 to Q2 an accelerating trend from 1.7% EBITDA growth to 2.7% EBITDA growth. You see that our measures step-by-step are unfolding as we speak.
On your second question, as Data Telefónica Deutschland is offering 5G national roaming on a voluntary basis to interested parties, so our commitment stands.
Thank you.
And the next question comes from Yemi Falana from Goldman Sachs. Please go ahead.
Morning. Thanks for taking my questions. Just two for me. Firstly, just on the churn dynamics, it seems like churn is coming in relatively low. Could you maybe talk about some of the moving parts around that?
And secondly, just on competitive intensity, it seems like you are performing well in the market in spite of some of these front book price rises. So, could you maybe speak to how competitive intensity is trending? I know we are only relatively small way into the third quarter, but any color there would be appreciated. Thank you.
Thank you for your questions. I think on churn, we have clearly seen from last year's up and downs in churn due to the regular environment on the one-month termination period and the online termination button that we are all aware. We now really got back to the levels that we have seen in 2021, where we clearly push hard to get back to record churn levels with the 0.8 on a monthly basis. And this is clearly the path to continue to increase the ARPU and continue to further decrease our churn.
So, from that level, there are no special effects in our churn numbers. We are clearly working on further improvement on year-over-year churn, on mobile and fixed, by the way. Also on fixed, you have seen a similar churn level in Markus presentation.
On the competitive environment, what we clearly see is we have the normal seasonality of summer promotions that are currently out there from several players. We have group benefits like family plans and other topics in the market. But overall, I think it's a healthy and dynamic market with many promotions out there. But up to now, we clearly see that also the enablement of our prepaid more-for-more initiatives in the mass market clearly receive high take rates, especially the 5G offering that we saw with the prepaid enablement earlier this month.
And the next question comes from Viko Pilar from Credit Suisse. Please go ahead.
Hi, good morning and thank you for taking my questions. I have two on my side. So the first one would be if you could probably give a bit more clarity on how much the own brand and how much partners are contributing in this quarter, because you've been highlighting that it's just both, like it's coming from both sides. So it would be good if we can gain a bit more clarity there.
And also, given that the competitors are not following into this more-for-more strategy, is there any risk that you see going forward regarding this and any potential moves that you've seen probably from one-on-one or anything that could create some sort of disruption into this ARPU strategy? Thank you.
Good morning, Pilar. Let me take your first question. And here I can confirm that the trend is completely unchanged. As in previous quarters, the vast majority of our mobile service revenue growth comes from our major brand O2, and given the commercial tractions that we achieved and the decent performance. And we also have, again, a solid contribution from the partner brands, but I said majority, vast majority comes from our O2 brand.
On your second question what we clearly see is and with decreasing churn trends all over the market I think the available volume is limited value up is not limited. So we believe that our strategy is the right one.
Thank you very much
And the next question comes from Ulrich Rater [Ph] from Societe General. Please go ahead.
Yes, thank you very much. So my first question would be to Markus Rolle. So when you when you nudge it up the guidance that obviously reflects what you're seeing but is it is it meant to underpin consensus or potentially miss that upside to consensus as your investor relations team has collected revenue on EBITDA growth. I think around 3% wondering what your view is on that.
And then the second question would be sort of coming back on something you addressed earlier to the -- on the postpaid net ads you have said it's a slightly slower market. Could you just unravel the fact of slowing it down and whether you are thinking this is a temporary lull that is likely to sort of go back to prior activity or whether this is a more sustainable slowdown in the overall sort of churn pool in the market. Thank you.
Ulrich [Ph] let me take the first question. As we have confidence in our operational and financial performance we have yes decided to narrow the outlook to the upper range of low single-digit percentage so clearly this is representing our confidence for second half years performance that that we see. Currently, we are comfortable with where consensus is which sits already at the upper range of low percentage.
On your second question Ulrich, I think what we've seen is with the decreasing churn around the market also on the back already of the Q1 numbers there are less customers available in the market this year compared to last year where we had this inflationary effect driven by the regulation so that we had more terminations, higher churn and more customers available. So I think we now get more to a natural and this year clearly less customers available in the market than last year.
Absolutely, thank you very much for both.
And the next question comes from Georgia's Lerato your Kono from city. Please go ahead.
Yes good morning, and thank you for taking my questions. The first one is a follow-up on the postpaid ARPU trajectory. And I appreciate your comments around the new tires but perhaps if we look back in the last few years and not just for O2 but for other players, there have been attempts to improve ARPU, but not always visible. And this is the first time we're seeing proper acceleration in ARPU from your perspective, and I'm just wondering if you can give us some indications as to how quickly these moves you've done since the start of the year or more for more are contributing to that. And also I just wanted to check something around the accounting Markus from the perspective of when you have certain discounts for early months how you account for the whole duration of the contract. I'm curious if that is part of the contribution to this acceleration.
And then my second question is around other CapEx, you highlighted that you still expect CapEx to be in line with your previews, guidance and obviously revenues could be higher, but the absolute amount will be broadly in line despite the fact that you already reached your target for 5G, so just wanted to understand what other areas you are investing if there's IT investments you are doing that are taking up part of that funding or whether you expect to go beyond your initial targets? Thank you.
Thank You [Indiscernible]. On your first question, I think we've seen over the quarters are really a slow ARPU development into the growth area coming from 0.5 1% and let's not forget underlying excluding the MTI effect the ARPU growth would be 1.8% or to mobile postpaid. And the ARPU growth that we see this year has been mainly delivered last year with the high sell-off of the €30 tariff of the birthday promotion, so we clearly see now with an even higher more-for-more portfolio. We already work on the ARPU growth of the coming years with the contract extensions and the front book more-for-more initiative that we have done.
So let's see from our side we clearly see a good take rate, especially also with contract extensions. We see the upsell opportunity. And we do nearly the same amount of contract extensions as gross ad every year. So also that helps us to fuel further ARPU growth.
On the accounting, I would ask Markus to allocate them.
Let me take this. So of course, Georgios [Ph], we are following here the current IFRS rules that mean that we spread respective discounts through the initial period. So that means you do not have spikes in our ARPU development from discounts fading out or coming back. I think the main point has already been raised by Markus before. We are structurally improving the run rate of our ARPU through the transactions and that leads currently to excluding MTR and auto-ARPU increase of 1.6% which is a sustainable growth that we see and accelerating that of the previous quarters.
On the CapEx, what we clearly see structurally is we also invest into capacity investments and the further fibrillation of the backbone. So I think we made good progress here. So the coverage KPI is the one, but especially in the second half year we will significantly increase capacity again in cities in order to build and fuel the mobile data growth that we have seen and also continue with the fibrillation plan that we have.
If I could just follow up on the first question, I just wanted to clarify. The comment you made around the IFRS 15 accounting, Markus, am I right in interpreting this that you had perhaps more significant discounts a year ago, two years ago, which were still impacting the service revenue you are recognizing because you had to spread them over the duration of the contract? I don't know if that makes sense, but basically the customers were already paying the higher fee, but you had to recognize a lower ARPU because of the initial discount offer. Is that fair? Is that one of the things that is changing as people are renewing their contracts?
So no, Georges. So conceptually you are right, but from an actual perspective we didn't have much more discount level before. So we always had one promotion here, one promotion there that unfolds over time, but there is basically no structural change. So it's more that we steadily increase the quality of our customers with our value over volume approach.
Thank you. Very clear.
And the next question comes from David Wright from Bank of America. Please go ahead.
Hi guys. I hope you can hear me. Yes, I guess just on fixed line, you've hit another sort of 20,000 or so ads similar to last quarter. Is this step up a little bit more sustainable now, do we think? It feels like you've found a new level. You've obviously got the new cable offers working pretty well. And is it still cable where you're taking the majority of ads?
And then my second question is just throwing it out there a little, but we obviously have all of this TV regulation coming due in 2024, I think with the law change applicable from July onwards. Does this affect you, interest you in any way whatsoever as you obviously don't have direct exposure? But I'm just wondering, is there any indirect impact here that you guys could envisage? Thank you.
Thank you, David, for your questions. On the first one, yes, especially in the second quarter, we set very good cable momentum based on the cable wholesale deal that we have with Vodafone and Telekolombos. And on the back of that, we clearly want to grow our fixed end and create also two or three product customers, so bundle customers at the end.
And it worked out very well. So we clearly expect this trend to continue, especially also now adding fiber. So we launched the fiber resale of FTTH from Deutsche Telekom end of last year. And we also expect clearly now ramp up and take up rates also on the back of the fiber Deutsche Telekom is building on that.
On the second question, on TV, we clearly have an OTT TV product with OTT TV. And we also are in these houses because we could also sell cable broadband. So we are in a very good position also to make offers to customers if they would be interested. If they want to switch or unbundle the TV from their monthly rental contract or flat contract, and from that perspective we are in a very good position in order to see if customers would be attracted and go for a O2 TV product. So on that level it's clearly on the list for next year to see if in combination with the cable offers that we have we can also bundle it with our TV product.
Yes, interesting. Thank you very much.
And the next question comes from Joshua Mills from BNP Exane. Please go ahead.
Hi guys, thanks for taking the question. The first one was just on the development of your own type of roll-out and we go there I think there was in the course earlier in the year that there have been issues with securing the lines and actually doing the roll-out. So any update there will be much appreciated on how progress is going.
And then secondly if I can come back to the Huawei investigation and the debate here, without taking a view on whether or not there will be a request to remove Huawei I think your message in the past has been where that to be the case you would expect there to be some kind of compensation from the government. Now the latest Tangles Bluts [Ph] reports suggesting that internally the – both the government and the EC has ruled out providing any kind of compensation for operators which required to remove Huawei technology from their network as a case in UK for example.
So perhaps you can give us an update rather than a view on the process and the decision the government will make. But whether or not you think if they were to be a ban or a partial removal, you would be able to claim some kind of compensation. And if you do still believe that whether it's based on legal advice you've taken already or any precedence you can point to. Thanks.
Thanks Josh for your questions. On the first one, I think we made good progress. I think we are not publishing the [Indiscernible] numbers on behalf of Telefónica Deutschland as a minority shareholder. But as a customer of [Indiscernible] we will clearly see that we have really good take rates on the wholesale agreement as inter-customer of [Indiscernible] and this continues. So we already the mid-size five-digit customer numbers that signed up for five are provided by UGN glasses for the UGG to JVVVF Telefónica and Alliance.
And also on that level the company made very good progress this year after the start-up phase. We get more and more momentum. But we clearly also see that exactly we see over-built activities from other players in the market. So on that level speed is at the essence now so that we roll out fast and occupied areas where we have signed with the municipalities. And on that level we made really good progress this year.
On your second question. Well we asked the government before we rolled out 5G. Are there any concerns using Chinese vendors? And we got a clear letter from the Chancellor. There are no concerns. So I think we are in a very good position in case this would escalate further. And because we haven't done anything wrong as a company. We asked the government in 2019. Can we roll out with Chinese vendors especially in the RAN [Ph] network? And there have been no concerns.
So in that level let's see if we get to this point. As I said earlier we are calling in the process we are in control of our radio network. In core, we have chosen a different vendor route with a non-Chinese vendor. And if we would get to that level then clearly the one part would be to solve it over time so that we are as part of the normal renewal cycle. Or then we would have a discussion with the government. But as far as now I cannot see this escalation also just to be clear. That would be an immediate request to change anything without reimbursement is for us a scenario that we would not consider as realistic at this point in time.
And let's not forget we also have reimbursement rules with our vendors. So from that level as said whatever happens I think we are well protected. And we now need to follow the process and see what is the situation in Autumn.
Thanks. Cash conduction [Ph] or the comment you made there on the fiber, overbilled activities and other players. Can I ask if that from Deutsche Telecom? What I think there have been a lot of reports that they are targeting their fiber building areas where some outlets might be considering a build as well. Or are you actually seeing competition from other small outlets in the market?
No, it is not a route you just mentioned and I think it is a public discussion currently. Clearly, we see here also infrastructure competition on that level, especially not in the areas where we currently build, but this is a public debate currently, and this is why speed is of the essence.
Thanks.
And the next question comes from Usman from Berenberg. Please go ahead.
Hello. Thank you for the opportunity. I've got two questions, please. My first question was just a follow-up on Huawei, where you're specifically mentioning you have a reimbursement rule with the vendors. I just wanted to understand what this actually means in practice, please. I mean, for instance, does it mean that Huawei would recompense you if there's an adverse government ruling or something, or is it something else? Thank you.
And then the next question was just on the free cash flow. So you're maintaining your ambition to have free cash flow cover the dividend this year. That does imply quite a strong uplift in free cash flow in the second half of the year relative to the second half of last year, because if I look at the first half, excluding the CapEx movement, free cash flow is actually slightly lower than H1 of last year. So could you indicate what are the key drivers here for the uplift in the second half, and what your expectations are on handset factoring as a driver in the second half? Thank you.
Good morning, Usman. This is Markus speaking. As stated also before, I think the rules have not changed. We have agreed with our vendors, and in case there would be any change in the current legislation, we clearly have an understanding and also agreement signed that would put us in a position to reimburse the swapping.
And let me take the second question, Usman, with regards to the free cash flow development. First of all, we are very pleased with the free cash flow development that we have seen in half year one. We had the expected outflow of CapEx payables, and apart from that, we have usual movements in the working capital as we always see that, and we delivered already a year-over-year growth in the first half year. That gives us the confidence to have that positive trajectory of more than covering the dividend for the full year. We are following that route. You always have swing factors in the working capital that we have embedded into that route, and our confidence is unchanged. Just as a reminder, we have a structurally higher operational cash flow that we deliver, and apart from the working capital movements that you see, you would also expect a positive contribution, and that fuels our confidence.
Thank you.
And the next question comes from James Hutzer [Ph] from New Suite Research. Please go ahead.
Yes, good morning. Thank you very much for taking the questions. Also had two questions, please. So the first one is just coming back to the topic of your just overall net ads level on postpaid mobile. I mean, it seems like Vodafone has just reported a two-year low in its own churn levels within its own business. I mean, are you seeing structural reduction in the gross ads pool from what's happening at Vodafone, and maybe also from Deutsche Telekom that they're kind of giving up fewer customers at the moment? Interesting just to hear your thoughts on that as a factor in the market at the moment.
And secondly, we've also had Deutsche Telekom and Vodafone talk quite a bit about launching family plans on their mobile network. I don't believe -- I mean, I could be wrong on this, but I've heard you talk about this. Is this something that is part of your plans? I mean, how significant do you see family plans as an ongoing part of the German mobile market? Thank you.
Good morning, James. Yes, we confirm your observation. I think there's less customers available because churn rates have come down with us, but also with competition. And so the customer loyalty is increasing. I think that's a good thing from our perspective. And then so far, we clearly see that value-add measures in the customer base are the right thing to do in order to increase our ARPU and fuel mobile service revenue growth.
With regards to family plans, I think we give a discount on the second SIM card throughout. We haven't changed it. And clearly what we've seen is with that, we are also able to grow ARPU. What we currently see is with family plans, if you use them extensively, that the overall postpaid ARPU is really shrinking, and this is what we don't want. So we don't have plans to sell unlimited for €10 or something like that. This is clearly something we are not planning in order to drive value.
Markus, could I ask just on that latter point, I mean given that Vodafone and DT are pushing or trying to push family plans a little bit more, is that an area where you're seeing technical competition notwithstanding your broader point about broader customer loyalty?
It's difficult for us to judge on that. What we clearly see is without family plan, we have the same churn rate. So we are able to, and let's not forget, we have a lower B2B customer base. And B2B customers are from a tendency even more loyal. So if you just strip out the consumer churn and consumer loyalty, our loyalty on consumers is even higher.
Got it. Great. Thank you.
As there are no further questions at this point in time, I hand back to Markus Haas for closing comments.
Thank you for joining this morning's Q2 Telefónica Deutschland results call. We are very proud to have been able to continue the success story and the momentum that we've seen in the market up to now. By notching up our guidance, we clearly also show our confidence in the business and on the underlying trends, also until year end. And with a mobile service revenue growth of 4.3 and at a growth of 2.7 in the second quarter, we are well underway to deliver what we have promised. Thanks for joining.
Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.