Telefonica Deutschland Holding AG
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Ladies and gentlemen, thank you for standing by. I am Stuart, your Chorus Call operator. Welcome, and thanks for joining the Telefonica Deutschland Q3 2021 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Christian Kern, Director of Investor Relations. Please go ahead.
Thank you, Stuart. 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 Q3 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 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 a number of factors. We invite you to read the full disclaimer on the first slide. Today's presentation is also available for you to download from our IR 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, without further ado, over to you please.
Thank you, Christian. Ladies and gentlemen, good morning, and welcome to Telefonica Deutschland's Q3 2021 results call. We have the pleasure of presenting to you another strong set of results. Executing our growth strategy based on 3 pillars, we have driven sustained, profitable growth during the first 9-months of 2021.On the back of the achieved strong operational and financial momentum, we are again upgrading our full year 2021 outlook for adjusted OIBDA to low mid-single-digit percentage growth, and CapEx to sales ratio is now expected to be below 17% to 18% as a result of more efficient CapEx spend.Now let me share with you the key highlights of the first 9-months of the year. Revenues increased by 3.7% year-on-year to EUR 5.71 billion, driven by an accelerating mobile service revenue growth. Adjusted OIBDA delivered continued growth of 6.3% year-on-year to EUR 1.77 billion, eliminating the support of the non-recurring special factors in Q2, underlying OIBDA growth remained a healthy 3.3% year-on-year.CapEx to sales came in at 14.2%, driving modernization and boosting coverage of our network. As expected, our investment for growth program is also back-end loaded in 2021. The strong traction of our O2 Free portfolio is also supported by a favorable channel mix. We are gaining market share with net customer additions of more than 1 million, reflecting strong on-trading momentum as well as solid growth in the partner business.O2 churn also improved further year-over-year to historic low levels of 0.9%, also supporting customer base growth. Overall, the strong KPI trends reflect our ongoing and well received marketing campaign promoting our high-quality mobile network. We celebrated the first year of Telefonica Deutschland's 5G network, providing our customers with top download speeds, guaranteeing a great customer experience.In the B2B business, we have gained further momentum over the last 3 months. We have won multiple corporate customers across different industries. Just to name a few, these contract wins include companies such as Helios clinics, HelloFresh and LANXESS.Our customer Product Solutions range from full private 5G campus solution to the recently launched attractive prepaid IoT tariff, which positions us well to drive further growth in B2B.With regards to our wholesale business, I am delighted to announce the extension of our wholesale portfolio by welcoming Lebara as our new long-term partner. Lebara will start operating as a full MVNO on our mobile network in the first half of 2022. All these business achievements go hand-in-hand with our ESG strategy and the corresponding Responsible Business Plan 2025, which I will come back to you on one of my next slides.Our next slide illustrates the good progress with our 5G network rollout. The rapid rollout of our state-of-the-art 5G network puts us well on track with our ambitious 5G expansion target of 30% coverage by year-end. Our energy-efficient 5G network with more than 3,300 antennas on 3.6 gigahertz is now available for our customers in more than a 100 cities. While we have achieved network equalization with our 3G and 4G -- sorry, with our 4G network expansion program last year, we have simultaneously implemented many network innovations to leverage the full potential of the 5G digitalization boost to our private and business customers. This has also been acknowledged by independent sources, such as Opensignal recently, recognizing our 5G network as the fastest 5G download speed.Another key benefit of the ongoing modernization of our radio equipment is the increasing energy efficiency with the new network equipment being around 90% more energy-efficient per-bit produced. The energy efficiency gains are enhanced by the accelerated switch off of our 3G network to redeploy these frequencies for 4G and 5G.Data demand continued to grow with O2 Free customers now on average consuming more than 11 gigabyte per month. At the same time, the overall network traffic continues to grow more than 50% year-over-year.On my next slide, I would like to revisit our overall mobile network strategy, leading to normalized CapEx to sales levels towards the end of our investment for growth program. Thanks to the focused execution, we are on track to reach our targeted mobile network grid. As presented at our last strategy update in January this year, we are targeting a grid of approximately 35,000 sites by 2025. Our technology team continues to boost network coverage by rolling out the 5G network as shown on my previous slide.Our existing passive and active sharing agreements are sufficient to achieve our targets for ongoing network densification and provide a mobile network rich, ensuring equalized network quality going forward. It is worth highlighting that Telefonica Deutschland's commitment to both the white spot sharing agreement as well to the mobile pact are covered by the existing build-to-suit program with ATC. Active infrastructure sharing as part of the gray spot sharing agreement further supports the network densification.As already mentioned, on my next slides, I will summarize significant progress with our ambitious ESG agenda. ESG has been fully integrated in our overall business strategy for many years. Executing Telefonica Deutschland's Responsible Business Plan 2025 is constantly driving forward our ESG strategy by focusing on its 3 key pillars: environment, by building a greener future, social, by helping society to size and governance, by leading by example.There's no doubt, digitalization and sustainability are already established cornerstones and will only gain an importance on the political agenda going forward. Although on the UN Climate Change Conference, COP26, currently taking place in Glasgow impressively demonstrates the urgency to address climate change as one of the most urgent global challenges.Only 1 year into our exciting journey of achieving net-zero carbon emissions by 2025, we have taken it even further. We are building a greener future by driving digital innovations to reduce our CO2 footprint. Central elements of our strategy are modern network technology in combination with smart energy management, our ambition is to increase power efficiency by more than 80% by 2025, including completion of 3G switch-off as soon as possible, further 4G expansion and rapid 5G Rollout.Bringing to market sustainable products, for example, the promotion of the new flip and fold as the world's first electronic waste [ microfactory ] 5G smartphone with a 5-year warranty as well as the O2 service to repair and recycle old mobiles are only 2 key initiatives to support circular economy solutions and deliver on Telefonica Deutschland's Responsible Business Plan 2025.On the social aspect, we are helping society to thrive by developing new ways of working and developing future skills for society and our employees. Our 5 bold moves are designed to align collaboration with the digital working world of tomorrow. Working Anywhere, Working Anytime, Outcome-based Leadership, Digital by Default and of course 70% Less Travel.With more than every second person in Germany using our mobile network, we have a huge responsibility to ensure respectful interaction in the digital mode. Therefore, we provide Germany-wide programs and initiatives that promote digital participation for young and elderly people dealing confidently with digital applications. Worth mentioning here our wake-up initiatives against cyberbullying and Debunking Fake News initiative for seniors. Of course, government is key and leading by example is our way.Telefonica Deutschland's Responsible Business Plan 2025 includes around 70 specific targets across all business segments areas allowing management to track progress. At the same time, we are supporting the United Nations Sustainable Development Goals by striving for digital, sustainable and connected future. We constantly strive to ensure an inclusive, ethical and fair business and leading ESG rating agencies are recognizing our sustainable ESG achievements.Before handing over to Markus Rolle, our CFO to discuss more details of our strong Q3 performance, let me briefly summarize our key achievements in this quarter. Focused execution of our growth strategy, driving sustained profitable growth in all business areas, we are well on track to execute our investment for growth program according to plan. On this background, we upgrade our full year 2021 outlook.Markus, over to you to highlight our strong Q3 performance in more detail.
Thank you, Markus. Ladies and gentlemen, also good morning and a warm welcome from me. Let me take you through our strong Q3 operational and financial performance in more detail. Our revenues grew on the back of the sustained operational and financial momentum and was up 5.1% year-over-year to EUR 1.967 million, which is mainly driven by the accelerating MSR trends.MSR growth came in at 4.4% year-over-year to EUR 1.421 billion, and this is mainly driven by the strong own brand performance with our O2 postpaid. ARPU continuing to grow and the solid partner performance with a contribution of 54% to the gross adds and with 29% to the postpaid MSR.The easing of the travel restrictions and the higher usage drove the further recovery of outbound roaming, which is outweighed by the MTR cut we had to undergo and both effects are largely netting out. Handset revenue grew 9% year-over-year to EUR 339 million as high-value handset remained popular and were supported by launch cycle. However, the global chipset situation might affect the availability going forward. Fixed revenues showed continued growth of 2.8% year-over-year to EUR 202 million and is mainly driven by VDSL customer base growth.Let us now take a closer look at the strong Q3 trading performance on my next slide. Mobile postpaid net additions increased by close to 60% year-over-year to 415,000, mainly driven by the sustained traction of the O2 Free portfolio, supported by our network quality campaigns and also the solid contribution from our partner brands. O2 brand postpaid churn continued to stay at low levels of around 1%, which is flat year-over-year, leveraging the equalized network quality.Our ARPU up strategy is paying off. Our O2 postpaid ARPU expanded growth to 0.9% year-over-year. For the fixed broadband business, let me highlight the net additions returned to growth with 2K supported by the re-opening of the O2 shops in June.Market, again, focused on high-speed fixed connectivity, including ongoing robust customer demand for fixed-mobile substitution products. The VDSL demand remained solid with plus 7K of net additions in Q3. Also on the fixed ARPU, we continued our growth path with 2.5% year-over-year to EUR 24.3, which is driven by the increased share of VDSL customers.Moving to the next page. Our OIBDA reached EUR 613 million, with sustained growth of 3% year-over-year in Q3. This is reflecting the revenue mix with accelerating MSR growth, including the higher inflow ARPUs we have seen. And also continued efficiency measures, such as constant review of the channel mix as well as optimizing and digitalizing of the customer service. These positive effects were partly offset by the planned back-end loaded phasing of low -- of marketing spend from the first quarter, the EU and non-EU roaming mix, including higher usage, especially in the EU and some flow-through from MTR cuts, plus some inflationary cost topics.The resulting OIBDA stood at 31.2% in Q3, which is down 0.6 percentage points year-over-year. Within the Q3 cost breakdown, let me highlight. Supplies were up 4.6% year-over-year with positive effects from the MTR cut, only partly compensating higher hardware cost of sales and usage-related higher cost of data roaming within the EU. Hardware cost of sales and connectivity-related cost of sales accounted for 54% of supplies in the 9-months 2021. The personnel expenses were lower, minus 13.6% year-over-year, mainly on the back of year-over-year lower restructuring expenses, minus EUR 1 million in this year, that was minus EUR 24 million in Q3 2020.The other OpEx expanded 7.7% year-over-year, reflecting the continued efficiency gains offset by the commercial activity within the planned phasing of the marketing spend as well as some inflationary cost pressure. Q3 commercial costs accounted for around 2/3 of other OpEx, broadly stable year-over-year on a 9-month basis.Moving to free cash flow and net financial debt trends on my next slide. Free cash flow amounted to EUR 1,180 million year-to-date, including the received proceeds of EUR 534 million, mainly from the transfer of the final tranche of 4,000 sites to Telxius. Working capital movements were negative with minus EUR 258 million for the first 9 months, 2021, mainly driven by a decrease in CapEx payables of EUR 154 million, an increase in pre-payment of EUR 34 million, net restructuring impact of plus EUR 5 million and other working capital movement of minus EUR 75 million, including the development of net receivables of plus EUR 21 million, for example, for factoring, which outweigh -- which was outweighed by other working capital movements, especially a decrease in trade and other payables of minus EUR 66 million.Lease payments, primarily for lease line and antenna sites increased to EUR 474 million. As a result, the free cash flow after lease increased to EUR 706 million in the first 9 months 2021, including the before-mentioned effects compared to EUR 266 million in the first 9 months of 2020. The consolidated financial debt amounted to EUR 3,380 million as of the September 30, 2021, including the full year 2020 dividend payment of EUR 535 million in May as well as an increase in lease liabilities of EUR 479 million, reflecting IFRS 16 accounting for the transfer of mobile sites, passive infrastructure to Telxius as well as for some regular contract renewals.The resulting leverage ratio of 1.4x 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 just reviewed by Fitch.With my last slide, let me summarize the key takeaways of today's Q3 results presentation. We achieved a strong traction of the O2 Free portfolio with overall excellent trading momentum. We delivered continued revenue growth, mainly driven by the accelerating MSR growth. We transferred the top-line growth into sustained EBITDA growth with improved ARPU and achieved efficiencies as well as very effective cost management. Our free cash flow after lease reflects the proceeds of the second tranche of the rooftop deal and is also supporting our solid balance sheet and strong liquidity position.Finally, we are upgrading our full year 2021 outlook, and we are now expecting OIBDA to grow low mid-single-digit percentage growth and CapEx to sales ratio to be below 17% to 18%.Now, we are really looking forward to your questions. Operator, please open the line for the Q&A. Thank you.
[Operator Instructions] First question is from Mathieu Robilliard from Barclays.
So the first one was about guidance. So you published very strong 9 months results. You did increase guidance, but the full year guidance suggests some slowdown in Q4 versus the 9 months. I realize that comps are much tougher. So I was wondering if it was just a reflection of that or a reflection of concerns on competitive environment or just you being prudent because there are still uncertainties in this economy? And the second question was about the wholesale contribution, which always comes back. But I guess, it's an important question. And I guess what I am trying to understand is whether the good performance of the service revenue is equally due to retail and wholesale or is wholesale actually pushing most of the growth?
Let me take your questions. So with regards to Q4, we again expect our operational momentum that we see to continue also into Q4, we see very solid underlying trends. However, of course, we have to take into account the general uncertainty. So we still think that the economy is very robust in Germany, but we still do not know how COVID develops, especially how it will develop further around roaming. And that is also taken into account for the fourth quarter expectations. And last but not least, we need to remain the flexibility, the flexibility to further invest into the market to follow our value over volume strategy. As always said, we think that we are operating in a dynamic and rational market environment, and we expect that to continue also in Q4. But we also to remain the flexibility to follow our value-based approach. With regards to your second question, we are very pleased with our own performance. I think that is worthwhile mentioning. We see that the trends on the MSR side are further accelerating. We see that the postpaid ARPU on O2 is further up 0.9%. We continue exactly our strategy with our own customer focus that we have seen. Next to that, we have also seen a solid wholesale performance. And I have mentioned to you also the figures, 54% of gross adds and 29% of postpaid MSR contribution, which is also in line with our expectations and following the trend of the previous quarters.
Next question is from Andrew Lee of Goldman Sachs.
I had 2 questions. Just the first question was on your Lebara contract. I wondered if you could give us just any sense as to the scale that is in terms of customer and revenue contribution? And just any thoughts you have around the risk of Lebara coming in on what presumably is a cheaper wholesale deal, what risk that poses to the retail market? The second question was just a follow-up on Mathieu's question on the Q4 EBITDA trends. I think there was a mention of MTR drags and also the promotional activity in Q4, which is seasonally higher. I wonder if you could talk about those impacts on your Q4 thinking as well?
Let me take your first question. I think we have been able to win Lebara based on equalized network quality, and it was an overall package of good infrastructure momentum that we have, especially in urban areas, where Lebara has most of its customers. And secondly, also on a fair and competitive deal. We do not expect the sorption of the market coming from this deal, I think, is a good and is a value and win-win deal from our perspective. On the numbers, we see the deal kicking in by mid of next year and ramping up in 2023 to the full potential is a solid revenue contributor. It's a significant part in our partner in wholesale P&L, but even more is also a very strong OIBDA contributor to the overall results of Telefonica Deutschland. So we see full swing by 2023 of the deal with ramping up effect already in 2022. And is -- from our perspective, we would call it as a midsized deal. It's not the biggest partner that we have, but it's one of our biggest partners that it could become. So it's a reasonable, sizable, significant wholesale deals in our portfolio.
Andrew, let me take the second question with regards to the details on MTR. Yes, indeed, there has been the accelerated MTR cut following the EU Delegated Act from EUR 0.78 one to EUR 0.7 by the 1st of July. That was already fully factored into our Q3 performance, and we expect that also to continue, of course, into Q4 because the next step down is foreseen then at the January 1st, 2022 to EUR 0.55 that follows the glide path of the EU. So this effect will be also seen in Q4. However, what we -- what I already laid out, we have compensated for that in the third quarter with a roaming effect, which was positive year-over-year. So basically equaling out both of these effects. With regards to activities. And of course, the Christmas quarter is always a very active quarter. Therefore, and we have suggested that already earlier, we have faced our marketing spends, not in the lockdown free period that we had in the first half year, but predominantly into the second half year already fully started in Q3 to promote our network campaign, and we expect that also to continue into Q4. Apart from that, we just see the normal promotional activity in the fourth quarter as we always see it in a Christmas quarter.
Next question is from the line of Georgios Ierodiaconou from Citi.
It's more based on margins. And I guess, very strong revenue performance today, but if we would look at the year-on-year margin progression, it is slightly down. And I appreciate this one-off commercial investments there. Is it possible perhaps to talk us through the nature of this commercial investment, whether it's something that will keep ramping up in the coming quarters or is that a temporary push in that respect? Secondly, whether you would still expect to see margin improvement in the coming years or whether stable margins will be what you are more or less aiming for. And within that, if you could perhaps comment on energy and other costs, I mean, we see a lot of drivers of inflation nowadays whether that at all changes your expectations for midterm margins?
Ye. Georgios, Hi. Let me start. Indeed, margins have been slightly down. But in order to better understand, you also have to look into the revenue mix. And as we had a very strong handset quarter with very low-margin business, of course, you have a different flow-through of this. I think more important for us is, and that brings us already also to the second question is that we see a clear flow-through of the underlying MSR trends into EBITDA. And this is the one we are focusing on also going further. And therefore, we also expect our margins to further improve in line with our midterm guidance that we have given to the market. All the other cost lines are in line with our expectations. In Q3, we have seen, of course, the seasonal roaming peak, especially focused on EU, which also caused additional cost. And we also saw, and we mentioned that before, the deferred marketing and commercial activities into Q3. Currently, we feel very comfortable with the level of investment. We expect that to continue also into Q4. But there is no further acceleration planned from our perspective. We will see in the next year -- more equalized picture, a more linear picture again. This year, we have seen the peak as we were suggesting that due to the lockdown in the second half year already. With regards to the inflationary question that you had, Georgios, indeed, yes, energy costs are somewhat increasing. But for us, energy cost is not the main driver of our OpEx. We have hedged also at least for the short to midterm with a lot of forward-looking pricing and all other inflationary drivers. We keep also more or less it under control. For example, on the personnel cost, we see now a salary increase of roughly 2%. That is the run rate that we have also seen in the previous years, and we expect also to continue on that level. We should all not get too nervous about the inflationary hike that we see. Currently, we are confident as a management that we can keep it within the boundaries that we have seen also in the previous quarters.
Next question is from the line of Polo Tang from UBS.
I have 2. The first one is really just coming back to Lebara and maybe some more clarification in terms of numbers. So my own estimate was that this contract is maybe around about 2 million subscribers and potentially EUR 50 million to EUR 100 million of annualized partner revenues. So do you see this match with your comments in terms of kind of what you have described or can you make any further comment? Second question is really about spectrum. Has there been any update in terms of the allocation of 800 megahertz spectrum and what do you see as the most likely outcome? And do you think there's a scenario with permanent roaming where one and one only builds to 25% to 50% of the country, the users, the Telefonica Deutsch network and the rest of the country is a realistic longer-term outcome?
Many thanks for your questions. On the first one, this is an exclusive deal we won in the ballpark that you were mentioning. I would also describe this as a significant contribution on revenue and OIBDA of cost. On your second question, we are still in the process. So we expect the regulator to conclude by mid of next year. There's an interim step of a cornerstone paper, but the current analysis of all the statements that have been handed in will be analyzed. I think it's worth to note that also the Cartel Office and the Monopoly Commission said that an interim extension of already allocated spectrum could be a good solution in order to push further rollout. If in the same time, a national roaming would be available for 1&1 Drillisch. So from that perspective, our contract that we signed with Drillisch has the possibility to be extended already by 2034, and we are clearly open to continue the national roaming also beyond 2025, of course, as we always said. So from that perspective, we now need to wait for the next formal steps. But overall, that spectrum extension is possible from our perspective. And we still are convinced that this is a possible outcome of this discussion, but we clearly need to wait for the formal next steps to come.
Next question is from the line of Ulrich Rathe from Jefferies.
Yes. So I would use my 2 questions. First, for the CapEx guidance cut. Is this related to delays or to overall higher efficiency to reach the targets that you want to reach or is it related to maybe the semi shortage that you mentioned in the context of the handsets? The second question is on market structure. Obviously, your momentum is -- operation and commercial momentum is very strong, but Germany is essentially a saturated market. And at least some of your successes is at the expense, in particular, Vodafone. How do you see that in the bigger picture? If you have a market like this and you sort of take share in the way that you do, that's a great success, speaks to your execution on the network quality, but it bears the risk of reprisals when the pain threshold is reached at competitors, especially if it's focused on one competitor, how do you see that risk in the market?
Let me take your first question. Indeed, as you were suggesting, the reduced CapEx is predominantly driven by efficiencies that we have in our CapEx spend and not so much driven by delays. Of course, you always have the operational challenges in every quarter, but we do not see anything particular happening currently. And we saw very good progress both in the completion of the 4G rollout and also in the 5G rollout, as Markus was mentioning before. And currently, we also do not see any shortage in supply with regards to the chipset topic, I mentioned for the handset. We have enough available on the stocks as we speak. But of course, we need to carefully monitor that into the next year with regards to further delivery of hardware components. But here, we have taken also an approach to try to secure what is needed for the next years.
And the second question Ulrich, what we see clearly in the market is that there are additional products that add up to the market size. So especially fixed-mobile substitution is part of our mobile reporting. As you are well aware, we also see IoT kicking in more and more. So from that perspective, the market is also growing beyond the traditional services that we have been seeing. Clearly, segmentation helps. And maybe a last point in the -- from our perspective, clearly, rationale and dynamic environment that we are in, and we have hold our price points. So we haven't done big price reductions for the success of the third quarter, but also the second quarter was clearly driven on superb network performance, a very good service and clearly also super churn performance that you have seen. So overall, we would not see that the market is heating up because, first, there is growth coming from additional products, especially in mobile. And secondly, segmentation from our perspective is a clear way forward in order to keep the market structure.
Next question is from the line of Keval Khiroya from Deutsche Bank.
I have got 2 questions, please. So firstly, on fixed, the broadband base did return to positive net adds. But obviously, the net adds are still quite low. So can you talk a bit more about the market backdrop and how we should think about those trends going forward? And then secondly, on roaming, could you just clarify how much of the non-EU roaming has now returned?
I think as outlined already in the last call. On fixed, Keval, I think we -- back to growth on revenue, of course, but also on physicals, we continue to ramp up on cable. We switched on Tele Columbus as an additional wholesale partner live in the third quarter. So step-by-step, we clearly believe that we can grow here. And let us not forget, we have a combined view on fixed. So with the fixed-mobile substitution product that we sell under our technology-agnostic portfolio, the actual fixed growth number, if you combine both, is a healthy and 5 digit number. So from that perspective, we are growing. And if a customer doesn't take the VDSL or the cable, but takes the FMS product, our profitability is, of course, higher. So with the test -- technology-agnostic approach and our 2 product customer strategies, as we call it smart bundling, is clearly helping us to increase the reach in the households. And this is a fixed pure numbers of pure technology defined number, but we see growth here, but in combination with the fixed-mobile substitution product, we clearly see a 5 digit net number that helps us to drive 2 products and more loyal customers.
Keval, let me take your roaming question. So indeed, what we have seen in the third quarter, there was a focus of the travels of the consumer customers into the EU. We saw some recovery in countries like Turkey, etcetera, also usage-based driven, but we are not back to full swing. And it can also not be, for example, there were still travel restrictions to the U.S. so no one could travel during Q3 to the U.S. It will now open also into Q4. And as we have always said, we expect that the non-EU roaming returns will increase back over times, but it will still take some time until we are back into full swing.
Next question is from the line of Jakob Bluestone from Credit Suisse.
I have got 2 questions, please. Firstly, Markus, if I can just pick up on a comment you made that you thought the market was not heating up in Germany. I was just hoping you could maybe provide a little bit more detail on what gives you that confidence. I mean, for example, Vodafone is offering 6 months for free for mobile tariffs. I think they have been running more days of promotions during Q3 than Q2. It sort of generally looked like promotional activity was fairly low during lockdown earlier in the year. So just sort of interested in what gives you the confidence that it's not heating up. Is it just that these are things that you would normally see this time of year anyway? And particularly, maybe if you can give a little bit of color on what are you seeing in the different tiers within the market in terms of competitive intensity? That's the first question. The second question is just on the Lebara agreement. How long does this contract actually last for so and how many years until the next re-negotiation?
Thank you, Jakob. Let me start with your first question. And what we clearly see, we always have had promotional activities. We had a year ago or 6 months for free -- Vodafone's also 6 months for free. So the rhythm of promotions that you see in the market, especially at year-end, I think there's nothing special. So I think it's important now that all sales channels are now operating for everybody. So shops online and all other indirect channels are completely again now live, and I think this is good news from our perspective. And if you look at our portfolio, we haven't changed our portfolio since more than 1.5 years, and not at all. So we implemented the speed tiered unlimited. And secondly, we have the big bundle portfolio that you are also aware. So from that perspective, we run this portfolio very streamlined for the market. And if you see at the top end also at the migration balances, they look rather balanced from our perspective. If we look at the M&P, some quarter, one gains more than the other. But overall, I think the market is strong enough and it's still a growing market. We [ second ] SIM cards with additional hardware, with new customers coming in. So I think from that perspective, and as said, is with -- and let us not forget, mobile data growth is still at 50%, again what I reported in my presentation. But from that perspective, everybody could benefit from a growing market. Germany is a growing mobile market. And from that perspective, as we see with additional products with the streamlined portfolio that you are all aware on and with mobile data group growth fueling additional demand and higher ARPU customers, a good chance to grow for everybody in this market. And the current promotional activities, there's nothing new in there. So if you recollect the last 5 years, and we have seen these promotions on/off several times from different market players. So there's nothing surprising from our perspective at this point in time. On the duration of Lebara, it's a long-term deal. So I think at least we go for the midterm cycle, and at least 4 and 1 year on top. So this from our perspective, is an exclusive midterm partnership that we established here. And as I said, looking forward to welcome to partner next year, by middle of next year on our network with full year effect in 2023 with revenue and more importantly, strong OIBDA contribution to our partnerships.
And if I could just ask a quick follow-up. Just on the Lebara deal. Do you expect it to be full run rate for all of 2023 or do you expect to reach full run rate during 2023?
During 2023, I think it depends how fast we get the migration kicked off. Clearly, there's no reason to delay from our perspective. So we will open the doors. But on that perspective, it also depends on executability from that perspective. But during 2023, we will get to a full run rate.
Next question is from the line of Joshua Mills from Exane.
Two questions from me. The first is on the balance that you are striking between reinvesting more OpEx savings into customer acquisition compared to your PAT willingness to pull back on CapEx. So at the moment, clearly, you have done a good job on improving our quality that's coming through in the commercial momentum. Why do you think now is the time to start to pull back on the CapEx? And are there any data points you can give us that give you reassurance that the network quality is starting to be really recognized by customers? And then the second point, on Slide 5, you have given a very useful overview of your network build plans for the next 5 years. But clearly, to get to 35,000 sites with the build-to-suit agreement, etcetera, your lease costs will be going up quite significantly. So I think they are up 10% year-to-date. Can you give us an idea of where we should expect cash leases to be in 2022 and possibly longer-term as well, if you are willing to do so?
I will take the first question, Josh. As you rightly said, I think on network build-out, and we have gained momentum. We are on equal level now. And we are also outperforming on 5G. And that clearly gives us the possibility to ramp up, as you rightly said, on Slide #5 to get to the 35,000 sites. And I think this is all included. So I think the major part that you have seen with the [ American Tower ] and the build-to-set site is already included here. So as part of the 35,000 package, and there's nothing on top. I think this is all included with the numbers that we have shared so far, and we are well underway to achieve that.
Let me take the question on the leases in more details. So indeed, we see that increase -- that expected increase in the leases from the Telxius/83m transaction, we are year-to-date up EUR 45 million. And that is the current portion of the expected EUR 90 million run rate increase that we see from that transaction. We have mentioned that also very clearly before. So we are in line with that expectations. And on top of that, over time, we will see, and we have also made that clear to the market already, a further increase of roughly EUR 40 million from the so-called build-to-suit sites, which are covering the white spot agreement and also the so-called mobile packs as laid out by Markus before. So in total, the rough number will increase over the next 4 years to by EUR 130 million run rate, that is something that we have announced earlier. And the current trading shows that we are in line with that expectation.
Next question is from the line of Ben Rickett from New Street Research.
Firstly, I just wanted to follow up on your experience of setting both VDSL and cable broadband line. So you have been selling those both at the same price for a few quarters now. So I was just interested if you had any insight on the relative -- do customers know the difference between these products? Do they have a preference for one or the other? And then what do you see in terms of the relative satisfaction metrics and fault rates and any insights there would be interesting. And then a second question, you have been targeting expanding or increasing your share of rural mobile subs for a while now. I am just wondering if you are making progress on that, particularly, improve your rural coverage?
Thank you, Ben, for your questions. On the first one, we clearly also benefit from a low fixed churn up to now. But clearly, that also has COVID effects on the one side. And on the other side, we do not see a major difference between cable and VDSL customer satisfaction at this point in time. We now sell the product life since February this year, now added another partner. And clearly see from the processes that we have built up that installing -- self-installation, all these things matter to customers. So it's not a process that is important. But from that perspective, we clearly see that we do not set a higher satisfaction or dissatisfaction of the product. And clearly, the bandwidth between 100 and 250 are still the key speeds that we are going to sell. So from that perspective, there's not a huge difference that we see up to now, but we clearly also continue to monitor the situation. On your second question, can you just remind me on the second one?
The rural coverage and cap again -- in the past, you said your -- majority of your subscribers are in the urban areas. I was just wondering if that sort of split of gross adds is now moving towards...
What we have achieved here is up to now, this absolute competitive coverage. This is also why we invested now into the nationwide marketing campaign, where we said the O2 network is fair good or very good in English terms. And we clearly see a gradual step-up of customer intake. So we see our rural market share is slowly growing. And but in line with the marketing campaign that we are currently carrying out and will continue to carry out in the fourth quarter, we clearly see step-by-step and gradually increase also of rural market share. Also in B2B, we also have custom intake on the business side. We should not forget, especially in this area and for these business customers who has nationwide sales activities and is very important. So it helps us also on the B2B side to be more competitive and to clearly win customers who in the past, we were not able to win. So I think it's a combination and step-by-step it will clearly increased our rural market share with customers living there or customers on the B2B side using the mobile network on a constant basis.
Next question is from the line of Steve Malcolm with Redburn.
I am going to ask through the first 2 very quickly, hopefully, and then a third. Just going back to Lebara. Could you just confirm, is Lebara a full MVNO? So so there's no SIM swap required. It's all basically their control as to how quickly they move customers over to your network. Secondly, on energy costs, can you just clarify exactly what proportion of your OpEx is down to energy and maybe how long that's hedged for? You said mid, short term, I get to know given energy prices have doubled, given what -- versus where you have hedged and at what that number is? And finally, just on distribution, it would be interesting to note just how you sort of see the evolution of distribution as we sort of come out of COVID. Now, stores are reopening. You mentioned, clearly, you have had a benefit in fixed line business by selling more, I guess, the perception that Deutsche Telecom was a big beneficiary of lockdown as customers kind of gravitate towards the incumbent. Are you seeing that unwind a little bit? And what's your sort of offline-online mix look like as we come out of COVID compared with where you were beforehand? And if there's have been any material changes there that would be very interesting.
Thank you, Steve. Let me take your first and your third question. On implementation costs, we do not expect major implementation costs, it's a full MVNO, as you rightly said. And from that perspective, is a neglectable cost that we would expect to bring Lebara live to our network. And your last question on Cooperate share online-offline. And what we clearly see is that we have improved online share and there's also a clear target to improve on that area step-by-step, and it's currently adding up. So we still see a very strong physical sales performance, especially after the shop reopening in direct and indirect, also in our franchise shops. So from that perspective, benefit that both channels or both distribution types are adding up and give us a great contribution with the overall net add performance that you have seen again with the Q3 numbers.
Let me take...
Could you sort of give any numbers in terms of the mix of your gross adds, you are seeing any material changes? I mean gross adds are doing great, but I mean, are you seeing a sort of permanent shift towards online even as stores reopen? Are you seeing a rapid recovery in offline, any greater sense as to what's actually going on in the distribution front would be really helpful.
The starting point was roughly 50-50, and it's not going more into online. It's not -- offline is still very important in order to also to gain high-value customers. And because we know the customer, you can sell a second or third product. So I think it's a different sales-type that we have. It's not just the volume that we see. So it will be misleading just to mention the first SIM volume that we gain because you have a different possibility to cross and upsell or sell different products to a customer who would -- what customer would online never buy. So it's both important. So it’s the revenue contribution of both sales channels is extremely important to us in that instance. So it's not just the number or physicals that we see, it's also the quality and clearly, the value that we gain through each channel because offline is a different competitor environment.
But do you think the return of offline is a sort of net benefit to you and Vodafone versus DT or is the sort of overall shape of the distribution market, really not changing and mix of adds and the operator is not changing very much?
Well, from today's perspective, we constantly monitor the situation, and we clearly have clear rules internally and on profitability on different shops and also our partners. So from that perspective, it's a constant monitoring. But up to now, we clearly would continue also next year with more or less the same footprint that we have because it's clearly a value -- it's a strong value contributor on both ends online to increase there. But on the other side, to use offline, as I just described.
Steve, let me take the second question, which is still open with regards to energy. Currently, our energy spend in percentage of total OpEx is the mid single digit amount. So -- and we have hedged it in -- if we talk mid-term into parts of 2022, but not the full year. But even if you take that into account from a percentage perspective, even it would -- if it could increase, it's not the main driver of our total OpEx development going further.
Final question for today is from the line of Adam Fox-Rumley from HSBC.
I just have 2 follow-up questions, please. Firstly, on the MVNO agreement. I wondered if you could talk a bit more about the way the MVNO market works in the sense of, was Lebara out in the market looking for a new partner or were you being more proactive on the back of more confidence to your network? And then secondly, on the CapEx and the change in the guidance today, you mentioned more efficient spend. And so I wondered if something has kind of surprised you positively or whether you were just being kind of more cautious at the half year results by not changing your guidance then because I wondered -- effectively, I am wondering if there are any implications -- follow-on implications for 2022 if you are benefiting from efficiencies in that year as well?
Adam on your first question, I think it a perfect match. So Lebara was in the process of renewing their relationship and their business model in Germany. And from that perspective, they started the pitch, and we were quite convinced Lebara had the balance of network quality. And at the same time, also of financials. And from that perspective, I think it was a perfect match, but it was a request by the partner in order to look for a new network operator.
Let me take the question on the CapEx spend. We indeed did not have the full visibility, for example, on all elements, like transport CapEx, etcetera, when we reiterated that point back in half year [ 2 ]. We have seen further efficiency improvements from renegotiating of contracts. And of course, we factored that into our expectations to be below the 17% to 18%. With regards to 2022, we do not deviate from our expectations. We are still expecting and normalizing of the CapEx ratios by the end of 2022. With regards to coming back from the investment program levels to the normal levels that we have seen also prior to the investment program.
Thank you. We are now at the end of our call. Just to remind you, I think we are pleased to report to you the strongest Q3, especially on revenue growth and customer intake, we have delivered at Telefonica Deutschland. The underlying business, but also the reported numbers for strong financial and commercial momentum and a sustained revenue and OIBDA growth and going forward, we have been able to upgrade our guidance. And finally, we are very happy to welcome you all in-person. Next Wednesday, we will be in London for analysts and investor talks, again, after this long period in-person and not hybrid. And we are looking forward to see you all healthy in-person next Wednesday in London. Thank you very much for joining.