Telefonica Deutschland Holding AG
XETRA:O2D
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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Telefonica Deutschland Q3 2022 Results Conference Call. [Operator Instructions]
Now I would like to turn the conference over to Mr. Christian Kern. Please go ahead.
Thank you, Stuart, and good morning, and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to the Q3 '22 results call of Telefonica 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, the presentation is also available on our IR website. With me today are Telefonica 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, please.
Thank you, Christian. Good morning, ladies and gentlemen, and a warm welcome to our Q3 2022 results call. Thank you for taking the time to join us. Today, we are delighted to report another strong set of results. The focused execution of our strategy is the main driver of our commercial and financial success. We are gaining market share with more than 32% of mobile service revenues as of half year. We are the clear #2 in the German market. This is a positive trend we are confident to build while our business model is proving resilient despite the significant increase in inflation due to the war in the Ukraine.
So far, we have managed the impacts of the inflationary environment well. Fueled by the strong 9-month performance, Telefonica Deutschland is upgrading its full year 2022 outlook for the second time this year. We are now targeting full year 2022 revenue and OIBDA growth of low mid-single-digit percentage growth.
We have entered the final quarter of our successful 3-year investment for growth program and are making excellent progress across all our targets. Here are just a few key highlights. On mobile growth, we are consistently winning market share in mobile service revenues driven by our profitable growth quarter-after-quarter. Germany is a rational yet dynamic mobile market and we anticipate this to remain the case. On B2B, on our targeted SME segment, we are driving client momentum and are gaining share. We are offering our customers not only sophisticated solutions for their telecom's needs, but also savings potential.
On smart bundling, we are focused on driving our household penetrations as well as increasing convergence. As a result, we are growing the share of our customer base benefiting from more than one of our services. On ESG, we are focusing on the delivery of our ambitious responsible business plan 2025 and are well recognized for our ESG achievements. The widely acknowledged network quality improvement and sustainability road map are the foundation for Telefonica Deutschland more for more pricing strategy.
On the back of the ongoing strong mobile data demand, we have already successfully launched our first pricing initiatives in the market. We are considering further more for more price adjustments for new tariffs across our whole portfolio and segments over the coming quarters. High customer satisfaction and low churn rates are much appreciated, reflections of our overall achievements supported by our O2 can-do spirit.
On my next slide, reflect our strong KPIs for the 9-month period. Markus Rolle will discuss our Q3 performance in more detail in the second part of our presentation. Mobile postpaid net additions were close to EUR 1 million, leveraging the high O2 brand appeal in the market. O2 postpaid churn being broadly stable at 1% in combination with strong NPS for the O2 brand are reflecting high customer satisfaction with our services.
With regards to our financial performance, revenues are up close to 6% year-over-year. OIBDA growth is almost 5% year-over-year driven by profitable top line growth and CapEx to sales at 14.9% comes with excellent progress in our 5G rollout. Overall, our strong 9 months results are driven by our sustained commercial traction and financial performance.
Moving on to the next slide. We are focused on capturing future growth opportunities across the entire sales funnel by leveraging our increased O2 brand and O2 product awareness. Customers do not only value us as game changer with O2 can-do spirit, but also highly appreciate the widely acknowledged network quality improvements.
For quite a few years, we have offered our customers more and better services at a similar value for price proposition while simultaneously investing into our network and ESG leadership. Already in 2020, we achieved network parity since we have continued densifying our network, added coverage and doubled available network speeds. As part of driving growth through our more for more pricing strategy, we have successfully launched first pricing initiatives in the market.
For example, the O2 Grow tariff Croma has ended and the innovative tariff is positioned at the well-received price point of EUR 35 per month since early October. Also recently, the O2 My Home tariff portfolio has been expanded by 500 megabit per second cable offer and the 1 gigabit second cable promotion has been withdrawn. As mentioned, we are planning further more for more price adjustments for the new tariffs across our portfolios and segments over the coming quarters.
The next slide shows our latest network successes. As a result of our focused execution in the investment for growth program, we have made excellent progress with the network modernization and 5G rollout. We are well on track to complete the swap, the entire core network to Ericsson technology by year-end. 5G pop coverage has now reached around 75%, already overachieved the year-end target due to rollout efficiencies within an unchanged CapEx envelope.
The O2 network is well-established as clear #2 in Germany in the latest smartphone magazines 2022 mobile network test. For the first 9 months, Telefonica Deutschland achieved as one of the only 2 German mobile network, the top rating outstanding. With Telefonica Deutschland approaching the end of its 3-year investment for growth program, we are confident to maintain the high quality of the O2 network with normalized CapEx to sales levels.
In this context, it is worth noting the just reported Q3 marks the CapEx peak for the final program year. Overall, these latest network quality improvements not only further increased NPS across Telefonica Deutschland's brand portfolio, but also allow us to enhance further our energy efficiency. Hence, we have launched a 3-year energy savings program with a target run rate of around 20% of gross energy savings by 2026. The program incorporates key building blocks such as AI supported networks standby, 3 cooling initiatives for network elements and switch to single-run technology.
Turning to the next slide. Telefonica Deutschland continues to shape sustainable digitalization and transformation of future economy and society through focused execution of its responsible business plan 2025. We are delivering on our climate protection targets and are well on track to reduce CO2 emissions by 90%. At the same time, we are neutralizing residual emissions latest by 2025. We recently signed a 10-year PPA at favorable prices, secured 30% to 40% of our annual electricity demand and decrease our dependency on market volatility. The PPA ensures direct sourcing of green energy from a green offshore wind park starting in 2025, further improving our green energy quality.
Overall management's ambitions remains to limit full year 2020 free energy costs with the goal to remain broadly stable year-over-year. We are well underway in our energy negotiations supported by the latest market developments on regulatory measures, price cash efficiency measures.
We made very good progress on our energy cost supply for 2023. Besides the efficiency methods that will allow a stable consumption year-over-year, we also entered into short and long-term supply negotiations and deals. The long anticipated German government decision from yesterday to capture price per megawatt hour at EUR 130 for 70% of last year's consumption will allow us to keep our total energy cost at broadly stable levels between 2022 and 2023. To put the regulation into context, the EUR 130 price point is approximately 20% below the average price paid in 2022. We expect on that basis the finalization of additional already negotiated supply deals for 2023 and 2024 in the coming weeks.
Also, the company takes concrete measures to be CO2-neutral along the entire value chain by 2040. In addition, Telefonica is even more focused on its social responsibilities by helping society to stay connected in these challenging times, dominated by war in the Ukraine and economic as well as political uncertainties.
Telefonica Deutschland has been one of the first European MNOs responding to a request for support by the Ukraine Ministry of Digital Transformation. We donated a mix of new and refurbished hardware network components that can be used without restrictions for the expansion and repair of several thousand mobile sites in Ukraine. Among our social programs, we have launched a digital guide for kids. As a result of our combined ESG initiatives, we are well recognized with top ratings by leading ESG rating agencies, including Sustainalytics and EcoVadis.
Before handing over to Markus Rolle to take you through our strong Q3 performance in more detail, we'd like to share with you on my final slide some more color with regards to full year 2022 outlook upgrade.
Similar to the updated outlook at half year, sustained and good business momentum is also the key factor supporting today's outlook upgrade. Our strong first 9 months performance was mainly driven by the ongoing strength of the core business, building on high O2 brand appeal, including strong customer demand for an innovative O2 Grow tariff, network parity and ESG leadership.
In this context, we upgrade our full year 2022 outlook for both revenues and OIBDA to low mid-single-digit percentage growth. Besides absorbing other inflationary headwinds, the outlook upgrade includes anticipated energy costs of up to around EUR 210 million already in October. Energy prices at the spot markets dropped significantly on the back of improved supply situation across Europe.
The assumptions of our regulatory headwinds are unchanged. We announced the outlook upgrade 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 developments of the COVID-19 pandemic as well as the war in Ukraine.
Markus, now over to you to take us through our Q3 results in more detail.
Thank you, Markus. Ladies and gentlemen, good morning also from me. It's my pleasure to discuss now in more details another quarter of strong commercial traction and sustained financial performance of Telefonica Deutschland.
Revenues continued to show strong growth in Q3. They were up 6% year-over-year to almost EUR 2.1 billion. This is driven by the sustained MSR growth momentum and a record Q3 for handset sales. MSR maintained their growth path, posting 3.7% year-over-year growth to EUR 1.47 billion. MTRs remained the expected year-over-year headwind to the MSR growth and roaming was broadly stable year-over-year as travel patterns over the summer were somewhat more geared towards EU international destinations.
MSR growth momentum was mainly driven by the ongoing strong O2 brand appeal in the market that resulted in strong commercial traction, in particular, high customer demand for our successful tariff innovation O2 Grow. Handsets recorded a record Q3 on continued strong demand for high-value 5G-enabled devices and also a good device availability. Handset revenues grew 18.9% year-over-year to EUR 403 million with a broadly neutral margin contribution.
Fixed revenues were up 0.5% year-over-year to EUR 204 million, driven by the growth of the fixed retail broadband business, which is posting 1.6% year-over-year growth in Q3 2022. This is reflecting the steadily growing share of the high-value customers in the best.
My next slide shows Telefonica Deutschland's sustained commercial traction. Our mobile postpaid business continued its growth momentum in Q3, leveraging the high O2 brand appeal in the market and the success of our tariff innovation O2 Grow as the driver of the gross adds. The contribution from partner brands was again solid. As a result, net additions totaled to 304,000 in Q3 2022. Churn in the O2 brand remained at low rate of 1.2%, with a slight year-over-year increase driven by the anticipated temporary higher churn due to the second wave in the back of the EECC introduction, namely the churn button that is expected to normalize towards the year-end.
We continue to see strong ARPU uplift from the first SIM gross adds, while MSR growth is also supported by second and third since, which naturally contribute lower ARPUs. The O2 postpaid ARPU was down minus 1.3% year-over-year, mainly reflecting a combination of the accelerated MDR life path and our continued focus on customer loyalty, including retention and bundle benefits for second SIM cards and friends and family offers. The underlying O2 postpaid ARPU ex-MTR was also marginally down due to the before mentioned year-over-year trends in international roaming. Worth to keep in mind that roaming in Q3 last year had already recovered to close to pre-pandemic levels.
Fixed broadband registered 19,000 of net additions in Q3 2022 driven by the popular cable tariffs within our technology-agnostic O2 My Home portfolio. Also fixed churn was marginally up to 1.1% as a result of the EECC implementation, mainly affecting legacy DSL portfolio. Fixed ARPU developed well in Q3 2022 and was up 1.5% year-over-year to EUR 25.10. This is giving clear evidence of the improving customer base mix towards high-value customers.
Let's move to the financial performance on my next slide. OIBDA expanded by 4.7% year-over-year to EUR 642 million in Q3 on back of the continued focus on profitable growth. Our own brand momentum is again the key driver of the improved operational leverage in mobile, combined with further efficiency gains and some roaming support.
OIBDA margin was marginally down to 30.8%, mainly reflecting the extraordinary growth of the broadly margin-neutral hardware revenues. Within the cost line, it's worth to mention that supplies were up 4.7% year-over-year as the volume driven higher hardware cost of sales more than offset the positive effects from the MTR cut. Personnel expenses were slightly higher year-over-year, plus 2.5% year-over-year, reflecting the full year '21, '22 salary revenues partly compensated by year-over-year lower FTE base.
Other OpEx increased by 11.2% year-over-year, reflecting the higher energy cost, the technology transformation and the commercial activity in the quarter. This, of course, includes also the relaunch of our O2 Can-do claim to further enhance the O2 brand appeals in the German market.
On the right side of the slide, we show our free cash flow with its typical annual seasonality. Free cash flow amounted to EUR 710 million year-to-date, with working capital effects from the annual prepayment unwinding and that resulted in a positive free cash flow after lease of EUR 190 million compared to EUR 170 million clean of the Telxius in the prior year.
Let me discuss the free cash flow in more detail on my next slide. Our business model is proving resilient. We are managing the inflationary environment well and we are on track to a strong free cash flow generation with our usual backend loaded free cash flow after lease profile.
Now being in the final quarter of our successful 3 years investment for growth program, we continue to report broadly stable operational cash flow trends. Year-to-date, underlying operational free cash flow, excluding last year's interest transaction was flattish year-over-year at EUR 965 million despite the fact that we saw in Q3 the peak of this investment in this quarter, which is usually a Q4 feature. Year-to-date, underlying free cash flow after lease was higher by EUR 20 million year-over-year at EUR 190 million despite the well-flagged additional lease costs from our recent infrastructure transaction.
Also this year, we expect our free cash flow after lease to follow the typical backend-loaded profile. Overall, working capital movements of minus EUR 239 million year-to-date have improved versus prior year's level of minus EUR 258 million. Operational working capital movements have improved compared to last year, only showing a small consumption of minus EUR 33 million, mainly driven by prepayments.
As in half year 1 2022, the strong reduction in CapEx payables was the main driver of working capital consumption, given the favorable payment terms agreed with our vendors as we execute our investment for growth program. Once we have reached steady state in CapEx post the completion of our investment program, the corresponding working capital changes will be neutral on an annual basis. Others of minus EUR 15 million is reflecting the nonworking capital-related cash out reflecting here the net interest payments as well as our equity contributions for UGG.
Finally, consolidated net financial debt amounted to around EUR 3.4 billion as of the 30th of September, which is flat year-over-year. Leverage ratio of 1.4x remains well below our self-defined upper limit of 2.5x. Reflecting our strong financial position, Fitch just reconfirmed our BBB credit rating with stable outlook. Given the rising interest environment, let me also reconfirm that Telefonica Deutschland has no short-term refinancing needs and all drawn facilities have been agreed at fixed rates. Hence, any potentially higher interest rate would only have an impact on the company over time.
Before we kick off the Q&A, I'd like to summarize the key points of today's presentation. As a management team, we are highly committed to the O2 can-do spirit and to deliver long-term shareholder value on the back of our strong set of the 9 months results. We see excellent progress of our network rollout and achieved 75% of 5G population coverage with an unchanged CapEx envelope based on rollout efficiencies.
Network is the foundation for delivering continued strong commercial momentum and further pursuing our revenue and OIBDA growing path. We are focused on both executing our more for more strategy and also the ESG road map. Hence, we are upgrading our full year 2022 outlook for both revenue and OIBDA to low mid-single-digit percentage growth.
Now we look forward to your questions. Operator, please go ahead and start the Q&A.
[Operator Instructions] The first question is from the line of Polo Tang from UBS.
I have 2. The first question is really just about the trajectory of mobile service revenues. So for Q3, how much of a benefit was the Lebara MVNO in the quarter? How much of an uplift was there from roaming? So I'm just trying to understand whether the 3.7% service revenue growth you saw in the quarter is a reasonable run rate going forward and where are the headwinds and tailwinds that we should think about on service revenues going forward? And the second question is really just about broadband. Can you maybe comment on how much traction you're getting with your 1 gigabit per second cable broadband offer? And can you remind us what your price point is?
Let me answer your first question on the mobile service revenues. Indeed, we have seen a very decent performance in our Q3 results. Let me reiterate the point that, again, O2 is by far the biggest growth driver of the mobile service revenue trends. And with regards to your questions, of course, Lebara contributed according to the migration that has been finalized in Q3.
But of course, the full run rate of a mid-double-digit to high-double-digit million amount is only expected in the next year once we see it completely unraveling. Roaming this quarter, as said in the call was, yes, pretty stable. We saw travel patterns slightly shifting towards the EU destinations, not so much abroad. This is the reason why it was pretty stable in this quarter.
So if you look into the different parts, you see a good reflection of the underlying run rate with our Q3 figures. Going further, we expect, of course, to continue the growth momentum with our O2 brand. We will also see the next steps in the MTR glide path as anticipated. But other than that, we expect a continuation of the trends that we were just discussing for Q3.
On your second question, Polo, our key growth driver for broadband in the third quarter was on the back of the cable infrastructure on the renewed wholesale conditions we had on cable, especially on the 1 Mbit product. And on that one, we were matching market competitive prices in the third quarter and is now have now taken out the promotions as part of the more for more strategy and included the 500 Mbit offer in the portfolio, but key growth driver of the very strong net add performance in fixed was on the back of the cable offer.
Next question is from the line of Joshua Mills from BNP Paribas Exane.
2 for me. The first one is just to get more of a detailed question on the bridge you were using to get the stable energy costs next year. So I guess if we assume that usage is stable and under the government proposals about 70% of your energy will be 20% cheaper in '23 than '22, you've still got 30% outstanding where based on the current forward pricing, electricity costs about twice as high as it sounds like you paid on average in 2022. So when I do the back of the envelope math on that, I think I'm getting something like a EUR 50 million or EUR 60 million headwind to overall energy costs.
So what are the offsetting factors in your bridge to get you to see those costs flat? Is it lower energy usage? Or is it things like the removal of surcharges related to the green energy subsidy, just hearing that walk through the bridge would be very helpful, I think, for all of us. And then the second question I had was just around the broader competitive environment in mobile. We've seen a few tariff changes in the end of Q2. Obviously, you're going to push this more for more strategy, but we did also see churn pick up this quarter. And it sounds like the Telecommunications Act has rolled over in terms of a negative into Q3 rather than just the first half of this year. So how should we think about firstly churn as we go into Q4 and then more broadly, what do you see in the market out there?
On your first question, I think the starting basis, the EUR 210 million that I mentioned for 2022. We do not expect that the regulation will go backwards into 2022. So we'll only apply on from January onwards, so the starting base for the broadly stable energy cost for 2023 is EUR 210 million. Yes, you're right, the EGG law that also helps a little bit next year and it helps us in the comparison. And as said, what we currently see is that the prices have significantly decreased over the last 3 months since August once we peaked.
And as said, with efficiency measures without the EGG law, that's a way now forever, as we all know, the regulation and also the current negotiation strategy that we have between short and long term, we are very confident and will underpin this also by finalizing the deals that are already negotiated in the coming weeks to have broadly stable energy costs for 2023 for Telefonica Deutschland.
On the competitive environment, what we have seen from our perspective is -- on the one side, the second wave of implementation of EGG. So it was this famous termination button. And as with the EECC last December, we saw a peak of cancellations. We also manage them from our perspective very well with the churn performance we published. But we also see now cancellation entries are going down again. So it's the same phasing that we have seen with the first wave of the implementation. So Q1 churn was stronger. Q2 strong churn was better. Now it's a little bit higher, but we also expect for Q4 a normalization of the positive churn trends that we have already seen in the second quarter after this last wave of the regulation has been implemented.
Great. And just on the EGG law, I think that's a EUR 25 million saving year-on-year in 2023. Is that about right for the bridge?
So we were basically paying back in 2021, roughly EUR 50 million, 5-0, Josh. And in 2022, we started paying and we paid roughly EUR 15 million still. And that is then also the additional potential that you have as a reduction for next year because next year, we will pay nothing, as Markus has stated, Josh.
Next question is from the line of Mathieu Robilliard from Barclays.
Yes. If I could follow up on energy and obviously, very positive news that your bill wouldn't be increasing in 2023. I don't know if you can answer to that, but do you have a sense as to how much consensus we're expecting as a headwind in energy costs in 2023 versus 2022? And then linked to the energy question. How does 2024, and I realize it's very far away when compared to 2023, do you already have a PPA deal for 2024? Or do you think maybe the benefits from the government could be extended? And then a very short one on free cash flow. It seems that so far, you haven't paid a lot of taxes on a cash basis. I was under the impression that the tax bill this year would be a bit higher than usual. But maybe you can give color on that?
On your first question, I think consensus on energy headwinds for 2023 hasn't finalized. We have seen different figures in the market. From our perspective, we clearly say broadly stable between '22 and '23 because we have now all parcel pieces together for 2023. We were always confident because the regulation was discussed for several months now and also with the combination of short and long-term PPAs, we got access to the favorable terms that we will now lock in.
And going forward for 2024, the regulation might be extended for 1 quarter until the end of March 2024, we will finally wait for that because that would give us another lever also to have broadly flat costs for 2024 or even a reduction. I think let's see how the situation goes. It's too early to conclude on 2024. But at least we would expect the same levels also especially with the efficiency measures that we want to reduce by 20% by 2026 compared to the 2021 levels. And we clearly also see a stabilization of the energy consumption on that level. So it's a little bit too early to get consensus for 2024.
But from today's perspective, the expansion of the regulation for 1 quarter, we would at least also see broadly stable costs for 2024 or maybe we see upside. But it's too early to conclude on that. There's too much uncertainty on 2024, and we might see upside.
Let me take the free cash flow question. So indeed, we are following the normal seasonality of free cash flow. And if you compare the first 9 months, you can see that we had a quite decent free cash flow performance also compared to previous year despite the fact that we had the CapEx payable outflow as anticipated from the CapEx peak in last year. Indeed, there have not been initiated any major tax payment in this year up to now. But if the authorities ask us we have to pay immediately. That's also, I think, widely anticipated in the consensus and the reason why we feel comfortable with the consensus level out.
Next question is from the line of Mr. James Ratzer from New Street Research.
More thoughts around the trends on the postpaid own brand ARPU that you've seen that's slipped a little bit this quarter compared to last. I mean if we get some better opening comparables in future quarters and some of the price actions that you've talked about, should we see this as a bottom on the postpaid ARPU trends and that could improve from here? Just be interesting to get your thoughts around the own brand post-pay ARPU momentum?
And then the second question I had, please, was regarding your white spot build-out and I believe you made the commitment at the end of 2019 to reach 6,000 white spot coverage sites. It'd be interesting to just get an update now on how many of those 6,000 you have rolled out to today and how we should expect the phasing of that and whether you can hit the end of or the end of 2024 deadline. I think you had to reach those 6,000 white spots.
James, let me take your postpaid own brand performance question. So indeed, we have been slightly softer this quarter on a comparable basis due to the fact that we had less rolling support than in the previous quarters. Why is that the case? And I said already before, we saw more traveling and gearing up towards you where you are in the regulated terms and not so much into the non-EU countries during the summer months of this year.
Of course, if that unwinds in the future, again, and we have more travels again into non-European countries that we might see, again, some tailwind -- some tailwind from that. On top of that, I would say that our underlying ARPU trends are fully intact. So we are still leveraging with the first SIM cards, the opportunity of the up-sell. So we are gaining higher value customers than our average customer base. Example is the O2 Grow tariff, which comes in at the EUR 30 price point and now onwards EUR 35 price point.
So we clearly see ourselves here on the up-sell part. And with regards to the future development of the ARPU as said, it's always the mix between the first SIM card, second and family and friends SIM cards that we penetrate, which come with slightly lower ARPUs. But on the other side, also with a very good value contribution. So for us, O2 will remain the main driver for the overall MSR development also in the future. And it's not so relevant if an ARPU is slightly down or slightly up in 1 quarter. For us, the overall MSR contribution is the main driver.
On your second question on the white spot sharing, there are 2 things. First of all, we currently see opportunities to maybe extend the white spot sharing from passive to active share from our perspective. So to use the great spot technology also in these areas. So we are in talks here to go ahead and also create joint synergies and also efficiencies, especially in energy going forward in these areas. And we currently see that we might not need the full 6,000 to cover these areas because with our normal rollout, we made significant progress in the last 12 months as well also as competitors roll out.
So we made progress. We will, next year, have more clarity on the concrete ramp-up plan. First, towers and sites have already been built, but we might see less need to build not 2,000. But you know it was a split of 6,000 divided by 3 operators, and we are currently processed to really see what is the most efficient rollout to cover the same area, but with less towers to be built. So overall, good progress, and we might also see further efficiency upside if we would extend the passive to the active.
How many of the 2,000 that you and then Telxius originally committed to have actually been built now?
Well, from our perspective, we gave a full bundle also of towers that we need for our own. So it was in total 2,400 that we put into the basket of the build to suit basket that has been agreed for American Tower. And this basket might be a little bit lower, but then we can fill them up with other sites and towers. So I think from that level, we have full flexibility here. But especially for the white spot sharing, we might need less towers than originally thought to cover the same area.
Got it. But then off that 2,400, sorry to ask about how many of those have actually been built so far today?
A few hundreds. So the minor part.
Next question is from the line of Pilar Vico from Credit Suisse.
I have 2 on my side. So the first one is around the net debt figure. It is a slowing down versus Q2 '22, despite benefiting to Lebara viral migration. How big of a tailwind Lebara is? We have expected probably sub migration to pick up. That means that ex-Lebara is slowing down. And the second one is around the current macro scenario. So we've been just walking through the energy moving parts. But if a short-term PPA agreement were about to be closed in full year '23, that means that the impact that we could expect will be lower than the one registered in full year '22 and probably also around the net debt figure, we know it's a low level, but how should we think about the interest cost in full this week?
With regards to your net add questions, so we discussed already the drivers. We saw a very good momentum on the gross add side. We saw slightly higher churn due to the second wave of the introduction of EECC and that resulted in that slightly north of 300,000 net adds. Lebara is not contributing to that net adds because Lebara is an full MVNO with an own registration and there were for full MVNOs, we so far do not count in our customer base. So it's not driving somewhat of an underlying slowdown that you were stipulating there. It's not accounted for in the net debt numbers.
And on the macro environment, I think overall, as you've seen, I think we had a very reasonable wage increase by 3.4% in 2022, plus a onetime payment. It still ways until 2023. We are not unionized as a company. So from that level, we clearly see also reasonable developments going forward because also here, the state aid helps our employees in order to bear the energy cost. So yesterday, it has also been decided that the December payment for gas will be reimbursed by the government completely.
And also in September, there was already a EUR 300 payment by the government to all working people in the country in order to compensate for the energy cost. So there's not the expectation of a full inflation compensation by company. So it's a mix to what companies can do. And this is our event, we agreed to 3.4%. And what the government is putting on top in order to compensate for the current energy rights that we have seen this year, but we clearly also see now prices going down. So on that level, we see the macro outlook also on a healthy level, although company-wide, we also expect a small recession next year.
So the -- if institute has said that it's a minus 0.3% on GDP growth for 2023 forecasted for Germany. But up to now, as we've seen with a very strong handset sales and with the strong demand for our services, mainly driven by mobile data growth. So far, we have been proven extremely resilient in the current macro environment?
Yes. And Pilar, there was a third question underlying. So I take that also with regards to interest rates. As said, we have changed our interest profile in fully fixed rates for all drawn facilities. We have no big refinancing needs before the expiry of our bond in 2025. So with that, we expect a rather stable interest developments also for the next year. And honestly, I do not have the crystal ball to currently give an indication about the interest rate that we would pay for a bond in 2025.
We will monitor up until then the market situation very carefully what are the best instruments, et cetera. And I'm sure that we will also be able to close a favorable financing needs. So interest rates will only hit us over time. And we are pretty advanced with our strategy and have everything grown in fixed rates.
Next question is from the line of Yemi Falana from Goldman Sachs.
A lot of focus rightly so has been on keeping energy costs contained, but perhaps I can shift the topic slightly. So firstly, what is your confidence level that we can see rising prices in the German mobile market next year? Seems like the positive commentary we were getting in recent quarters has died down slightly of late. So any color on that would be appreciated. Secondly, on the CapEx side, clearly, the third quarter is your CapEx peak. But given you guide on a CapEx to sales intensity, it does seem like absolute CapEx could trickle up from here. So any color you could give on why that ramps down or potential ramp downs and what's fading away into next year that gives us confidence on the underlying free cash flow development would be great?
Thank you for your question. On your first question, our confidence level is very high in order to continue our more for more strategy. I think we've done first move. We expect further announcement across portfolio for January 2023 for our mobile portfolio for all brands going in that direction based on better network quality, higher speeds and more data. So on that level, we clearly see a good opportunity to continue and accelerate the more for more strategy mobile in the German market.
Yes. And let me take your CapEx question. So year-to-date, we are, yes, at the upper end of the guided range between 14% and 15%. So 14.9% to be clear. And we expect as said that the peak quarter was this time preponed due to the good rollout activities that we have been able to improve our 5G network, and therefore, was in Q3 instead of Q4. For the next years, we go into a normalized CapEx levels again, and we have stipulated that to be around 14% CapEx over sales intensity. And we have no reasons to change our opinion to that one at this moment of time.
Mr. Falana, are you finished with your questions?
Yes, that's very clear.
Next question is from the line of Georgios Ierodiaconou from Citi.
I have a couple of follow-ups, please. The first is on energy cost more in the medium term. I just want to understand a bit what your options are. And you mentioned PPAs, updating us on some of the levels at which these PPAs are being negotiated. You mentioned around the average you paid in '22 was 20% higher than 130, which is the government price cut. Are the PPAs significantly lower than that?
I think in some other countries, they are be interested to understand that. And also, if you don't mind giving us an indication when PPAs will make the bulk of your energy hedging? Is it by 25%, 26% just to get an idea how long you could be at risk from volatility in the market? And then my second question is around the retail performance and the price increases have just been discussed. I mean, your KPIs are clearly still strong, but there's bet an increase in churn.
There's also a bit of a reduction in postpaid ARPU despite the new tariff plants being introduced. I be curious to hear from you how you think it's going in terms of the price increases or the tariff increases in terms of ARPU that you are implementing? And how long do you think it would take before we see tangible support in terms of the ARPU we are reporting?
I think the lion's share of the volume of PPAs will kick in later by 2025, a significant share. And the price points that we currently can see in Login also significantly below the regulated price that has been implemented. So from that level is good news for us because we're managing consumption and energy consumption and at the same time, having access to pure green energy on long-term PPAs that are significantly below again and brings us into an even more healthy situation. We are very confident.
On the second question on churn, as I said, we see churn going -- so the cancellation entries are already declining. So we had this peak on this termination button, it was obvious in the new thing is implemented, then there's a run. But overall, we see a good stabilization. And clearly, as I said, it's our target to reduce churn even further. So I think that the clear targets on postpaid trading, we are not worried.
We see so good income or we don't publish profits, but we can clearly see we were also benefiting from the churn situation. We do not expect that it is a Telefonica only development. We saw more churn in the market overall, but we're also gaining from a very strong intake in the third quarter to partly compensate. So on that level, we clearly see good momentum. So going forward on trading, we clearly expect stable levels. And let's not forget, and we have a combined postpaid net add number published is not only the O2 part in there. So from our side, we can clearly say we see churn going down again. And that makes maybe the full picture more visible.
Yes. And let me take the second part of the question, Georgios, with regards to the ARPU development. As stated, the driver for that slightly softer development was roaming in Q3 and not the underlying performance, which is fully intact. And here, we are prospectively following the more for more strategy across our whole portfolio. You have seen the first moves already, more to follow up.
And of course, on a transactional level, it will always take time until it flows through in the overall ARPU development, but we are pretty confident also on that development going further, especially for the first SIM cards, which are then comparable to the average ARPU on the second and third since give the usual discounts, as I said before also, but have also a very decent and good value contribution. So ARPU is not the only one to look at. It's more of the overall MSR development, and that is, from our perspective, also promising.
If I could ask a very quick follow-up is more on the time you're seeing before the price increases start to have an impact on your financials? And then if you, Markus, just to clarify, you mentioned much lower in terms of the PPAs, some of the specialized utility terminals have the German PPAs now at around EUR 90 per megawatt hour. Is that roughly the level we should be thinking about the kind of deals you are now negotiating? Or is there any major differences in that direction?
Yes, there are more benchmarks out there, but the ballpark is going in this direction, yes.
And with regards to the more for more strategy, of course, it will be a supporting element for the MSR growth starting in 2023 already and will, of course, completely unwind just with an annualization of the effects that we do and then also hopefully have the chance to continue on that road going further. So it will be our normal life, Georgios, to follow that more for more. It will start 2023, and then it will kick in over the next years.
Next question is from the line of Usman Ghazi from Berenberg.
I've got 2 questions, please. The first question was just on other expenses, which came in at EUR 671 million in Q3, we're up almost EUR 70 million and that there's a big step-up in this relative to Q2, for example. I know some of it might be energy, but I mean that's unlikely to account for all of the increase. And I know that the comp base was already high for this cost item. So can you indicate if this is narrowly just higher commercial spending in order to sustain the net adds momentum or is something else some-- is there another reason for the big step-up in Q3? That was the first question, please.
The second question, just coming to the CapEx payables point. So we saw -- obviously, we saw CapEx peak in Q3 last year. Then we've seen CapEx payables unwind this year and the cash flow. Now again, we've seen a CapEx peak in Q3 of 2022. So is it fair to assume that there will be another final round of CapEx payables unwind in FY '23?
Yes, Usman, let me take your question. First on other expenses. You mentioned already the mix. It's, of course, the energy cost, which is a driver, but also the nonrecurring investments into the transformation of our legacy systems and of course, also the commercial investments that we are doing. They are nonrecurring, and they always depend on the market opportunities that we see. For example, this quarter, we have taken the opportunity to relaunch our O2 can do claim in the market. And of course, that is also all fully reflected in that overall increase. With regards to CapEx payable unwinding in 2023. Yes, of course, the investment program will further unwind in 2023 also. But as said, we are expecting to increase the free cash flow in the next year further. And the intention is to have a full dividend coverage after the finalization of that investment program, which we do by the end of this year.
Next question is from the line of Steve Malcolm from Redburn.
A couple one is just on lease costs. I think consensus has the cash lease costs rising by about 3% next year. Obviously, German inflation is running way ahead of that. Can you just help us understand how the pricing works on that, when the resets are done and whether that 3% consensus rise is still realistic? And the second is just on spectrum and the current consultation on flipping the 900 and 800 expires and whether you think there's a sort of [indiscernible] a), give us a sort of timing -- an idea of timing when we could expect the results of that? And b), do you think there's a realistic route to -- for operators having some 900 spectrum, given that, I guess, DT would have to give up quite a bit to get there. Any thoughts on that would be interesting to hear.
Yes. Let me take the first question with regard to lease cost. So of course, we have the special situation that we still have the Telxius deal flowing into our lease cost. Here, we are developing in line with the expectations. And after the transaction is annualized, we expect the lease cost run rate roughly to be increased by EUR 90 million, which is also anticipated in the consensus figures that I have seen. With regards to inflation, there is -- it is a complex on the leasing side because it's not that obvious.
First of all, if you have components that are not at all exposed to lease, but you have also leasing components that could be and could be depends then on the individual contracts. Just as a reminder, we have 27,000 lease contracts out there, and they all have individual regulations. And most of them have no automatic lease compensation in that, but they need to be actively asked for.
So a moderate increase on the lease cost going further from an underlying perspective, I think it's a fair assumption to be taken. Let's take just also one thing into account. That's also anticipated of you guys is that we will see further lease cost increase from the so-called build-to-suit sites that Markus was discussing before, which will also gradually increase our lease envelope over time. But also that will not come as a chunk, but it will build up gradually over the next years with a fill-in of the white spots and the other activities that we are undergoing.
Okay. So is 3%, it sounds like -- is that maybe a little conservative for next year? Or can you comment on where you think that's likely to be in terms of the actual outcome?
We do not guide concretely on that percentage, but it's within the range that the model could give you.
On Spectrum, I think what we've seen in September was a concept paper where the regulator on the one side acknowledged that the 800 megahertz should not be auctioned. It should be extended for free for 8 years. I think that's a positive, that's good from our perspective. And we now go into the next iteration of our cornerstone paper. And then there will be a draft decision, and then there will be a final decision.
So we still expect a process of up to 6 months to 8 months in front of us. So the concept paper is not legally binding, nor has any. It was just a market test from our perspective where it looks like. But clearly, our arguments have been heard that low-band spectrum should be extended. I think that's the first good thing. On the other side, we still see room for improvement. Here, the question is, do we really need an auction at all. And from that perspective, while the 600 megahertz will be available later and new entrants rollout is delayed as we all learned in the last weeks, the availability of 600 megahertz spectrum might be sufficient in order to achieve all targets.
So we still believe that the extension of the whole portfolio of the 2025 ending spectrum would be the best solution and then making the 600 megahertz spectrum available to the whole market a little bit later in 2028. So from that level, let's see. But as I said, the key target for us was to see 800 extended. It was also in 2010. The spectrum that was more expensive than the other parts of the spectrum, they were extremely cheap in this 4-player auction in 2010, if you all remember. So on that level, this is clearly a positive part. But on the other side, let's really see we really need an auction from our perspective to achieve all targets. So we will analyze, we will submit our position, and then we will see the first cornerstone paper in the first quarter next year, and then we will see how this will go forward.
In the interest of time, the final question will be from the line of Adam Fox-Rumley from HSBC.
I just have one quick clarification, which was around the statement kind of in the cost of living area of discussion because in your commentary around postpaid ARPU, you talk about enhanced focus on customer loyalty, including retention and bundle benefits. I'm just wondering to what extent that was reflecting a need to kind of get better pricing to customers or to the market factor or whether that was reflecting kind of customer behavior that you're seeing? And then secondly, I don't think you do this, but I just wanted to check to see if you could provide any updates on the UGG business, the ramp-up in its network build?
Thank you for that question around the postpaid ARPU development. And indeed, we have no back book repricing problem. I can confirm that because I think that was the underlying question that you had. The opposite is the case. Also, our customer base really values the good network quality that we can provide the service, et cetera. And here, we are also following the clear upsell path. And if we, of course, in a retention moment, tell a second or third SIM card on top that somewhat dilutes the overall average ARPU of the customer, but it's giving us additional overall gross margin contribution, and that is the concept behind. So it's not that we have to ask or give customers additional discounts to maintain them within our base. That is something that we rather see as an upsell and cross-sell opportunity.
On the Ogaki, I think from our perspective, we do not publish official numbers for the Ogaki, but we see very good progress, especially in the homes passed development. And from that level, we are well on track also to share that we, as an anchor customer with O2 fiber take in the areas that are being deployed is very promising. It's already a 5-digit number of fiber customers that have been able to gain under the O2 Fiber brand. So on that level, we make very good progress with the Ogaki as a customer but also as a shareholder.
At this time, no further questions will be taken. Markus Haas, I would like to turn the call back over to you for closing remarks. Please go ahead.
Many thanks. You have seen that in busy times, we have been able to deliver superb results again quarter after quarter. Germany is a good markets to be in. We clearly see our investment for growth strategy is paying off. We are now in the last quarter of this 3-year program. We have over-delivered on the promises that we made 3 years ago. And from that level, we are really looking forward for a strong Q4 trading and will report full year numbers in February 2023.