Telefonica Deutschland Holding AG
XETRA:O2D
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Ladies and gentlemen, thank you for standing by. I'm Hailey, your Chorus Call operator. Welcome, and thank you for joining the Telefónica Deutschland Holding AG Q4 Preliminary Results 2019 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mrs. Veronika Bunk-Sanderson. Please go ahead.
Thank you, operator. Good morning, everybody, and welcome to Telefónica Deutschland's Q4 and Full Year 2019 Preliminary Results Conference Call. Before proceeding with the presentation, we would like to inform you that the financial information contained in this document has been prepared under International Financial Reporting Standards. If not indicated otherwise, all financial information provided in this presentation is based on IFRS 16 accounting standards. Where relevant for guidance purposes, we also provide you with financial information under IAS 17 accounting standards. As usual, this presentation may contain announcements that constitute forward-looking statements, which are not guarantees for future performance and involve risks and uncertainties. Also, certain results may differ materially from those in the forward-looking statements as a result of a variety of factors. We invite you to read the complete disclaimer included in the first page of this presentation, which you will also find on our website in the IR section. Here with me today, we have our Chief Executive Officer, Markus Haas; and our Chief Financial Officer, Markus Rolle, who will take you through the presentation. Markus, please go ahead.
Good morning, ladies and gentlemen. I'm proud to present to you another set of very strong operational and financial results for the full year 2019. I would like to share with you where we stand today and talk about our strategic priorities in the era of 5G. Telefónica Deutschland is looking back on almost 25 years of constant acceleration, during which we have built a strong track record in Germany, in particular with the O2 brand and our O2 network. On the back of acquisitions and integration, we have not only built economies of scale in the last 10 years but also laid the foundation for the biggest owned mobile customer base in Germany. Even more importantly, we have achieved a breakthrough in network quality in 2019. We've been rated good for the first time in our history in the major free German network tests including Connect. These significant quality improvements in the past 2 years directly benefit O2 customers. As we speak, Telefónica Deutschland is stronger than ever. As the 5G era is coming into view, we want to grow. As outlined during our December management strategy update, we envisage growth from 2020 and beyond in the following areas: we want to grow mobile market share in the rural areas while reinforcing our strong position in urban; we want to capture the opportunities arising from smart bundling of fixed and mobile products; and finally, we will successfully address the B2B market now that our network quality is catching up with competition. 2019 was a financial and operational turnaround year of Telefónica Deutschland on all fronts. On revenues, mobile and finally, fixed in Q4, network quality, churn, innovation, momentum, we are stronger than ever. We have solid underlying trends, they are sustainable, especially on mobile service revenue. Before we look ahead, let's have a common look back to 2019, which has been a very strong year for the company in order to make progress to become the Mobile Customer & Digital Champion. As customers continue to adopt to LTE with large data bundles, data traffic continues to grow. In 2019, we have transported the unbelievable number of 1 billion of gigabyte of data on our mobile network. We've also seen a tremendous operational success. In postpaid, we have delivered the best network performance since the merger and sustained demand for the O2 portfolio and a solid contribution from the partner business. Customer loyalty continues to improve as [ tax ] on our O2 network is steadily improving. As a result, we have again improved our annualized churn rate on the O2 brand and, thus, are further overachieving our self-defined target. In fact, the customer lifetime on the O2 plan has improved to 6 years in 2019. At the same time, [ tax ] continues to support our ARPU-up strategy. Own brand ARPU grew almost 1% year-on-year despite significant regulatory headwinds. As a result, financial performance in 2019 followed the sustained commercial momentum we have shown throughout the year, and we have met guidance across all metrics. Underlying revenue grew 1.9% year-on-year mainly driven by the turnaround in mobile service revenue, which we have achieved already in Q2 last year and impressively confirmed in the second half year of 2019. Also, handset sales continued to be strong across the year in the fixed business. We also finally broke the 0 line in the final quarter of 2019. Thus, we have been able to grow underlying OIBDA by 1% year-on-year despite continued market transformation investments to maintain the momentum in the market. And finally, our investment envelope with a CapEx-to-sales ratio of 14.1% reflects our continued progress in network rollout and network enhancement. As a result, Telefónica Deutschland is in excellent shape for the next chapter of its history. On the next slide, you can see the trends quarter-by-quarter. After the turnaround in Q2 of mobile service revenue, performance was even stronger in the second half of the year mainly driven by the sustained success of our O2 Free tariffs. Profitability continued to accelerate to the end of the year despite significant market transformation invest across the year, benefiting from revenue flow-through as well as from the remaining integration synergies and transformation benefits. We finally completed our integration program as planned, hitting our EUR 900 million free cash flow synergy target after 5 years, as always promised and finally delivered after hard work. Our investment profile has been increasing slightly as we push ahead with our LTE expansion and are preparing for the start of the 5G rollout into the 5 biggest cities across Germany. As outlined in December, we firmly believe that this investment is the best way in order to seize the revenue opportunity that the German market now offers. This is one of the reasons we also recently launched a new speed-tiered portfolio, which I will explain to you in a minute. Before this, let us turn to financial guidance on Slide #6. First of all, we are proud to say that we have met our financial guidance for the full year 2019, and this is now for 8 years in a row after we have done the successful IPO of Telefónica Deutschland. We deliver what we promise. Underlying revenue was up 1.9% year-on-year, and thus, we are very well in line with our guidance range. Underlying OIBDA grew by 1% year-over-year as well, in line with our expectations. CapEx-to-sales ratio, as already mentioned, 14.1% is also in line with assumptions and investment into our business. In 2020 and beyond, we aim to accelerate our growth profile, leveraging a smart investment profile as we have presented to you in our strategy update in December last year. Our 2020 guidance is well in line with our midterm ambitions we have outlined to you. We expect to deliver. Revenue trends should continue to be strong and come in flat to slightly positive year-over-year, including regulatory effects and with tailwinds from the O2 Free portfolio and long-term partnerships in mobile, a continued solid demand for handsets and stable fixed revenue. And OIBDA should come in broadly stable to slightly positive, so similar year-on-year guidance as for last year, but this time, it's including the regulatory effects. And finally, CapEx-to-sales ratio is expected to be already at the announced 17% to 18% for 2020. Markus will lead you more in detail later in the financial section. Coming back to the O2 Free story. On Slide 7, let me now turn the focus on the contribution of these strong results with a continuous ARPU up-driving strategy. As we speak, we are regaining, redefining mobile communications in the digital age and are again at the forefront of innovation in the German market. As the first mobile network operator in Germany, we have taken the step to launch a speed-tiered unlimited portfolio under the O2 brand. The 3 new tariffs offer the right speed for every customer need, beginners, normally -- normal users or power users. We have the right speed for everyone. The speed-tiered unlimited portfolio will help us to further pursue our successful ARPU up- with a stringent focus on data monetization. For customers preferring a classic volume-based offer, the existing O2 Free portfolio will still be available and will benefit from double data volumes at unchanged price levels, whilst other benefits and promotions have been discontinued to also strengthen ARPU. Since 2017, when we introduced large data bundles in the German market, the EUR 30 price point has been our hero price point, and we continue to see this as the most attractive offer in the classical portfolio. Only the high offer -- high-value tariff, from EUR 40 and above, will be 5G-ready, enabling us also to monetize this new technology with ARPUs coming in at EUR 40. The new O2 Free unlimited and the updated volume-based tariffs are thus underpinning our vision to become Germany's Mobile Customer & Digital Champion and to accelerate our momentum in the market. On the next page. The foundation for the success of our portfolios in the market is our strong network. Let me thus explain once more our network expansion plans over the next few years. Post the 2019 auction, we have maintained a very rich and competitive portfolio of spectrum licenses, both in low bands for coverage as well as higher frequencies for capacity to support our continued efforts to fulfill the coverage obligations set by the German regulator and to further equalize network quality to competition. On the back of a smart investment profile, we will refarm spectrum actively to be more efficient and use 4G and 5G in the spectrum bands. We are seeing data traffic to increasingly move from 3G to 4G, and thus, we are planning to switch off our 3G network by the end of 2022 with no major impact on our customers. And then we can also refarm the 2.1 gigahertz spectrum for LTE and 4G capacity. In addition, we will build about 10,000 LTE elements in 2020 to expand our coverage to rural areas and to support our business strategy of growth in rural.Our focused 5G rollout will basically follow a mainstream approach on the back of mainly 3.6 gigahertz and 700 megahertz spectrum. We will start the expansion of our 5G network from next year onwards with the target to roll out 5G to the top 5 cities already this year. The cities are Berlin, Hamburg, Munich, Cologne and Frankfurt, as already announced in December. By the end of 2021, we will continue with the rollout to the top 30 cities in Germany. By having signed a deal with Deutsche Telekom and Vodafone for a joint approach to close the white spots in Germany, we will take the lion's share of sharing benefits especially in the white spots. Together with Deutsche Telekom and Vodafone, we would need to build 2,000 towers and get access in total to another 4,000 and vice versa. On top, we continue to see untapped potential in the German market from additional infrastructure-sharing deal such as the envisaged potential of sale of passive infrastructure of our rooftop sites in 2020 or deep passive and active sharing opportunities in urban and gray spots. In the meantime, we push ahead with making our network fit for the future and align the foundation for successful future growth. Let me finalize our key priorities for the next decade. We will be leveraging smart investments into our mobile network to further improve quality and, at the same time, fulfill our coverage obligations. In fixed, we will deliver our wholesale access via VDSL, cable and fixed wireless access, which will enhance our bundling capabilities. We can, thus, bundle mobile and mobile as well as mobile and fixed in a technology-agnostic fashion for our customers, which will enable us to make strong progress in churn reduction beyond the target we have set ourselves. Moreover, the investment into 5G will present a strong basis for fixed mobile substitution, which we expect to be a future driver of revenue and profitability. In summary, we invest to develop our business model and to be able to offer our shareholders an attractive shareholder remuneration also in the medium term. As already announced in December 2019, we intend to suggest a dividend of EUR 0.17 per share for the financial year 2019 to our AGM in May and see this amount as a floor during the investment period. With this, I would like to hand over to Markus Rolle to lead you through the details of Telefónica Deutschland's operational and financial performance in 2019 and our outlook 2020. Over to you, Markus.
Thank you, Markus, and also a warm welcome from me. Ladies and gentlemen, I'm very excited to present to you a strong set of Q4 and full year results in more details now. Let us go straight into the numbers. Starting with our top line performance on Slide 11. Excluding regulatory effect of EUR 20 million, mainly driven by the MTR cut and the new EU regulation for international accords within EU regions, underlying revenue increased by plus 1.2% year-over-year due to a good traction in our consumer business. We are firmly in line with our expected revenue performance of broadly stable year-over-year for 2019. The MSR reflected the sustained traction of the own retail business and a solid partner performance in Q4 and grew 2.1% year-over-year, excluding regulatory effects; and even more important, was up 0.8% in reported terms. Handset revenue showed continued solid demand and are, as expected, facing tough comps in Q4 year-over-year at minus 2.9% but are also up for the full year 5.8% year-over-year. Fixed line revenues maintained their upward trend and increased to plus 2% year-over-year driven by higher retail customer base and strong demand for VDSL. Retail DSL in Q4 was also up 2.3% year-over-year. Taking a closer look to our trading performance on Slide 12. In Q4, we have seen another strong trading quarter with plus 456,000 net adds in mobile postpaid driven by the sustained demand for our O2 Free portfolio and a solid partner business. O2 postpaid churn remained at low levels of minus 1.2% in Q4, and the annualized churn rate improved to minus 15.5% in the 12-month period. Our own brand postpaid ARPU shows visible positive contribution of the O2 Free portfolio, posting at 0.4% year-over-year. Prepaid comes with net disconnections of minus 236,000 in Q4 following the normal seasonality patterns, while, again, our prepaid ARPU is posting a plus 2.9% year-over-year growth. In fixed retail, we show solid net adds driven by the VDSL performance, including our super-vectoring offers. VDSL delivered 33 net adds -- 33,000 net adds in Q4, and now more than 75% of our 2.2 million fixed retail base is already on VDSL. Fixed retail ARPU trends are broadly stable Q-over-Q, while year-over-year, the higher share of bundles in the base continue to weigh. With regards to the partner performance on the next page. Partner business contributed 60% of gross adds driven primarily by the MBA MVNO, including related customer migrations to our network as well as the expansion of further partnerships. As a result, partner revenue growth was in line with the expectations, and we continue to see future growth opportunities in partner business on the back of growing data usage. Let's have a closer look to our OIBDA performance in the 12 months on Slide 14. Market invest remains the major driver of our OIBDA performance also in Q4 to generate our future growth. Before the implementation of IFRS 16, OIBDA, excluding restructuring costs of EUR 23 million mainly related with the follow-up activities in network and regulatory effects of EUR 38 million driven by the usage elasticity effects from the roam-like-home regulation and intra-EU calls since May 2019, grew 1% year-over-year to EUR 1.903 billion with a broadly stable margin of 25.5%. We comfortably met our full year guidance of broadly stable to slightly positive. Within the cost lines as per IFRS 16. Supplies declined minus 3.5% year-over-year. With positive effects from the implementation of IFRS 16, cost for leased lines are now right-of-use assets and as lower connectivity-related cost of sales compensated for higher hardware cost of sales. Personnel expenses adjusted for restructuring were down minus 0.6% year-over-year primarily on the back of a lower FTE base versus the prior year. Other OpEx benefited from the introduction of IFRS 16 and decreased minus 10% year-over-year excluding restructuring of EUR 19 million. Commercial costs and noncommercial costs made up 70% and 26%, respectively. Under IFRS 16 accounting standards, underlying OIBDA margin expanded to 31.6%, and underlying OIBDA grew by 24.9% to EUR 2.353 billion. In reported terms, under IFRS 16, we came to EUR 2.292 billion with a margin expansion to 31%. The synergy case with a total of EUR 900 million operational cash flow savings is now fully delivered as we realized the final rollover effect. So the integration for us is a done deal. Gross benefits from the Digital4Growth program gave further support to our OIBDA in 2019. We reiterate the total cost case included in our mid-term guidance we have given with a gradual ramp-up of savings over time. In total, we comfortably hit our annual savings target of EUR 80 million from remaining synergies and transformation benefits in 2019. Moving to free cash flow and net debt on Slide 15. Free cash flow in 2019 clearly reflects the implementation of IFRS 16 as lease payments in the amount of EUR 476 million are now capitalized as right-of-use assets. Free cash flow after lease and pre-dividend and spectrum payments, that was EUR 547 million and reflects our investment envelope which is almost EUR 90 million higher than in 2018 as well as different year-over-year dynamics in working capital. Working capital movements and adjustments were negative in the amount of minus EUR 148 million mainly driven by the user topics such as increase in CapEx payables of EUR 79 million, prepayment in the amount of minus EUR 55 million for incidental lease costs, low-value and short-term leases, rent for mobile site and other prepayments. A reduction in restructuring position of minus EUR 38 million as well as other working capital movements in the amount of minus EUR 135 million, which includes silent factoring transactions for handset receivables with a gross amount of EUR 677 million, outweighed by other working capital movements such as a reduction in trade and other payables as well as other provisions. In contrast to prior years, working capital dynamics were also affected by prepayment for wholesale contracts and a reduction of inventories. Including the dividend payment of EUR 803 million net debt under IAS 17 came to EUR 1.450 billion as of year-end, and the leverage was 0.9x. Under IFRS 16, net financial debt came to EUR 3.860 billion, and the leverage ratio was 1.7x and is well in line with our revised self-defined target of at or below 2.5x. We continue to see significant financial flexibility and headroom with regards to our BBB rating by Fitch. Now let us turn to the financial guidance on Slide #16. As outlined before, we have comfortably delivered our 2019 guidance based on IAS 17, and Telefónica Deutschland is in a very strong position as we are embarking on our journey to accelerate our growth profile in the upcoming years. Our 2-year investment project we presented to you in December has a focus on pushing 4G coverage into rural areas and the early 5G rollout into urban and is a clear necessity to continue to grow our revenue lines. As a reminder, we are aiming to grow revenue with a minimum of cumulated 5% between 2020 and 2022 by addressing these 3 revenue pools: first, grow mobile market share in rural areas and reinforce our strong position in urban; second, smart bundling of fixed and mobile products and fixed mobile substitution to deliver technology-agnostic product for our customers; and thirdly, seizing the B2B market opportunity, in particular, in the SME segment. By our own estimations, these revenue opportunities will help us to grow slightly ahead of markets while continuously striving for ongoing margin improvement supported by transformation and additional gross margin from the additional revenue streams. In 2020, we will continue to build on our achievements from the past, in particular, on the economies of scale from the merger and the enhanced quality of our consolidated network. We will continue to pursue the path of digital transformation with our program Digital4Growth, which we have launched in 2019 and which benefits from revenue and transformation gains which we have considered in our guidance. While regulation will remain a headwind for our financial performance, the relevance of regulatory effect in 2020 is relatively small, EUR 20 million to EUR 30 million at revenue and less than EUR 10 million on OIBDA level. As a result, we have decided to guide 2020 including these effects. We expect to deliver flat to slightly positive revenue year-over-year with tailwinds from the O2 Free portfolio and long-term partnerships in mobile, a continued solid demand for handset and a stable fixed business. OIBDA should come in broadly stable to slightly positive including the mentioned regulatory effects and compared to the EUR 2.353 billion 2019 adjusted OIBDA under IFRS 16. In line with the midterm guidance, our CapEx-over-sales ratio is expected to be at 17% to 18%. Let me sum up today's presentation. We saw a very strong trading performance in 2019 driven by the high demand for O2 Free, which has enabled us to keep the revenue momentum high with further support from data usage KPIs, which continue to be very strong and also drove customer demand for tariffs and handsets. OIBDA performance reflects the continued market invest to drive future growth as well as the promised integration and transformation savings. The free cash flow dynamics remain strong while reflecting higher investments into our network rollout. The leverage was well in line with our self-defined target of at or below 2.5x under IFRS 16. Our solid balance sheet, the liquidity position and our ability to generate free cash flow, support our dividend commitment of EUR 0.17 for the full year 2019. With this, I would like to finish today's presentation and hand back to the operator to start the Q&A. Thank you very much.
[Operator Instructions] And the first question comes from the line of Joshua Mills of Exane.
Just a couple from me. The first is just your view on the recently announced Vodafone-DT network sharing plan. I know that this shouldn't impact your midterm CapEx guidance, which is always on a stand-alone basis. But longer term, do you think this restricts your opportunity to do network sharing with either of those parties? The second question would just be for an update on the Huawei situation in Germany. We've seen BT in the U.K. talk about GBP 0.5 billion cost to take out equipment. How are the German government looking at this while your discussion is saying and if you were to have to take Huawei out of the network, how much would that cost you? And then maybe just one final one. You talked about new partnerships on the partner revenue side. Can you specify who those partnerships are with, is it Freenet? Are there other players? Just great to get a bit of detail on that.
Markus Haas speaking. On your first question, first of all, as announced, the lion's share of network sharing benefits in the coming years will come from the white spot agreement because we need to build the 6,000 towers. And if I only need to build 2,000 and get access to another 4,000, I think this trilateral sharing that has been agreed, I think, covers, in the short term, the lion's share of sharing benefits where we will completely benefit from.On the announcement you mentioned, I think this is a nonexclusive deal that covers 2,000 sites, less than 10% of the total site portfolio every party has. As said, it's nonexclusive. Especially to our plans to accelerate rollout, we see a still a significant savings in network sharing, and we are still in talks with parties in order to benefit from network sharing in the midterm. Short-term benefits covered by the trilateral agreement, midterm potential still on the table. On the question on the Chinese vendor. From our perspective, we are currently not pursuing additional efforts on our side. I think any decision needs to be taken, and in Germany, currently, you know the situation that Germany is currently in a position where no specific ban is planned. But even in case with the normal renewal cycle, we would expect that would be absorbed and covered by our normal CapEx guidance. On new partnerships, from that perspective, I think we strengthen our existing partnerships, especially in the branded retail area with Aldi and these partners. We also reinforced our partnership with Freenet. And there are no imminent additional new partnerships currently on the road.
Just, sorry, one follow-up. So have you any kind of internal estimates you could share with us about the cost of taking Huawei out of the core network, if that were to be a request made by the German government?
As said, this is currently -- we are currently in an RFQ process of a new core network anyhow, so this is part of the normal renewal cycle. So we, as said, and with or without a ban, we do not expect additional costs if any renewal cycle would be in a reasonable period, in case there would be a ban and currently, we cannot foresee that. So in so far, we would not see any additional cost for Germany.
The next question is from Polo Tang of UBS.
Three quick questions. The first one is, can you maybe just talk about what caused the quarter-on-quarter slowdown in mobile service revenues in Q4? So you obviously moved from plus 1.6% to plus 0.8% after regulatory effects. And how confident are you that the service revenue trends can improve from here? The second question is really just about your mobile tariffs. So you obviously introduced new unlimited tariffs at the start of February. And at the same time, you removed the 6-month free promotion. So has removal of the 6-month free promotion impacted net adds growth? And are you seeing any notable changes in terms of the gross adds mix moving away from the O2 Free M tariff to the new unlimited tariffs? And the third question is really just on broadband. Can you maybe just talk through what you're seeing in terms of competitive dynamics in the broadband market? So you obviously saw a slowdown in terms of broadband net adds in Q4. So was there any particular driver behind this? And have you seen any impact from Vodafone pushing 1 gigabit per second broadband speeds in Q4?
This is Markus Rolle speaking. With regards to the revenue trends, so from our perspective, we have delivered a very good year from bringing our mobile service revenue from second quarter on into positive territory. From a Q-over-Q perspective, we saw slightly tougher comps now in Q4. And from Q-over-Q perspective, also slightly softer visitor roaming that changed the growth rate a little bit. But I think the most important thing is that our underlying commercial trends with our own retail portfolio are intact. The KPIs show that we have strong net adds, that we have encouraging churn results, our ARPU-up strategy works, and we see visible effects also in our own retail ARPU, as I've shown you, which is up, reported 0.4% year-over-year. The new portfolio, that's what you have asked for is, of course, at very early days to give you a judgment on that one. But of course, we have launched that in order to give further support to the revenue trajectory that we have shown. And we are confident that with that element, we are doing the next important step to reach our minimum 5% guidance of revenues over the next 10 years. Of course, we are confident to see that, we cannot give you any details about the effects. The takeout of the promotion is not seen negatively from the market because we are offering an attractive network portfolio, so to say. So that is the only things that I can state at these early days about the new portfolio.
On fixed broadband and normal year-end steering, there's full momentum in our fixed offers, and we continue or expect also growth and also positive trading for 2020.
The next question is from Andrew Lee of Goldman Sachs.
I just had a follow-up to Josh's question, that starts on the network sharing agreements that were signed last week and some comments from Vodafone on their Q3 call. So you mentioned earlier on that you see network sharing opportunities in both -- in urban areas, both active and passive. Vodafone were highlighting on their recent call, they think that's really complicated, given the diverse ownership of rooftop sites and the EMF restrictions. So I just wondered why you're more positive on this opportunity. And any color you can give to help us understand why the Vodafone and DT announcement last week isn't really a ceiling for the amount of network sharing that can be done in Germany would be very helpful.
Thank you for your question. As I said, it covers only less than 10% of the total site portfolio. We also envisage that significant more sites would need to be built, especially in order to deeply deploy 5G in the next 10 years. And as we said, especially in suburban areas, in parts of urban areas and also in the gray spots, there is still a lot of sharing opportunities. And as said, this is a very small sharing deal that has been announced due to the overall potential because, as said, it only covers less than 10% of the sites everybody has.And in the short-term opportunity, I think, white spot is the most reasonable one. And we see sharing opportunities also in other parts of Europe. And from our perspective, especially once deploying 5G in suburban areas or in smaller cities, we still see a lot of opportunities. We analyze these opportunities very carefully. As said, nonexclusive deals has been announced. And in so far, a lot of the potential still lies on the table.
The next question comes from the line of Georgios Ierodiaconou of Citi.
First one is around an update on your own growth profile process, something, obviously, you discussed in previous quarters. If you don't mind giving us any indications whether with the visibility you have now on network sharing potential, whether the process can go ahead. And any color on what you plan to do with proceeds given the leverage situation you're in will be very useful.And then just a question more around the top line acceleration, which you mentioned for the midterm. And obviously, the guidance you gave, I appreciate it's for total revenues, which include a lot of volatile parts of -- to it. But can you give us an indication of how you are seeing the MSR performance in 2020? Any headwinds or tailwinds around international calling? Regulation obviously you've already highlighted. Any pluses or minuses we should be aware of will be very useful.And then just finally, just a clarification around the deadline for Drillisch to activate the MNO remedy. I just wanted to make sure that the timetable hasn't changed, and we're still due to have an answer on that by the end of the first quarter.
On your rooftop question, on the first part, I think we are well underway with the process. The perimeter has been defined and we are now finalizing the valuation. So overall, and as announced in September, we are well underway in order to seize the opportunity for Telefónica Deutschland. And in case sharing opportunities would apply, we clearly also would -- or include the necessary flexibility and also to, in the future, benefit from sharing opportunities. So this is clearly on the table. And from that perspective, we are fully in process and well underway. On the proceeds, CFO will take over.
Well, maybe it's a bit early state to share already the proceeds because we have not finalized the deal, but I can state already, right now, that it would give us even more financial flexibility to the strong balance sheet we already have as we speak. And of course, we will then carefully look into the opportunities that come along with that. And as soon as we have something to announce on that one, we would also let you know. With regards to the MSR performance, I think we discussed already many of the important topics. We see sustained trends with regards to the net add performance in retail driven by encouraging churn rates. So our churn down, ARPU up strategy works as we speak. And we are doing the next steps in order to support the growth trajectory here. Of course, we are now 3 quarters in positive territory, and our target is to remain on the positive trajectory that we see. With regards to potential headwinds, as you were mentioning before, it is right that we see limited regulatory effects in 2020. MTR effects kicking in relatively linear, as expected, moderate cut. And we see a slight front-loading of the EU regulation, so the international call regulation because that was effective from 15th of May of last year and will annualize from this moment on. So we will have a front-end loaded profile of the smaller regulatory effects going forward. And with that, I hand over back to Markus.
Yes. I think we are still in negotiations on the remedy with Drillisch, of course. And once something can be announced, we will certainly do so.
Can I just clarify, I think in the last call, you mentioned that the decision had to be made before the end of the first quarter. Is that still the case? Or is there any flexibility to extend the negotiations beyond March?
Well, I think the remedy clearly foresees not an endless negotiation because that would not cover with our understanding of the remedies. And I think from that perspective, we are still in a final stage, I would say, from these time lines. And so let's see. I think we have another 6 weeks to go before the quarter is over. And as said, if there's something to announce, we will definitely do immediately.
The next question comes from the line of Ulrich Rathe of Jefferies.
I have several. And the first one is an easy one. On the guidance language, that's obviously sort of subject to interpretation. Would you be willing to comment how you look at current market consensus vis-à-vis your guidance? Would you argue that current market expectations are in line with guidance or that you're guiding ahead or below? The second one is on the network-sharing opportunities that you highlight where you sort of see additional potential. Would this be just with the existing network operators? Or do you also see opportunities for network sharing with the new entrant? The third one is on the arbitration proceedings. Do you have any news on progress there or I think there's talk about a potential legal challenge. What are the news from your point of view on the sort of price arbitration? And my last question, if I may, is on the coverage obligations. There was sort of this understanding that you fell somewhat short of the regulatory obligations this coverage by year-end. How is the regulator reacting to this? Have you received any indications of sort of remedies that the regulator might impose?
Markus Haas speaking. Let's start with the last one, and then, of course, step by step. On the last one, I think we're all in very constructive talks with the regulator. I think you know that the measurement has been changed during this period. And from that perspective, we have all the resources in order to fulfill the rollout obligations, we need building permissions. And I think it's a joint alignment and support that we need also from the government to fulfill that. So from that perspective, there's a constructive dialogue. We are confident to achieve this sooner or later by the end of the year, and we do not expect remedies. On the network sharing question that you raised, I think network sharing has the -- if you have assets and you have the same spectrum assets, clearly, it makes much more sense because if you have a plan with a nationwide network, and then you go to suburban and then middle-urban and however you define the areas, we would clearly pursue the benefits of network sharing more seamlessly existing over network operators and especially the trilateral agreement, also Drillisch was invited, and then so far has not committed to join this trilateral sharing agreement. So I think if you have joint rollout obligations, and this is the case for the existing MNOs, any network sharing clearly delivers more benefits and more value, especially in the midterm. So in so far, that would be clearly the preferred option. On mobile service revenue, Markus?
So I think, first of all, it's the first time that we give a guidance that contains growth, including also the regulatory effect. And our guidance range that we have given is in line with the current consensus, which is currently roughly in the midpoint of the guidance range that we have given. And there's not much more to say about that topic.
Finally, on arbitration, I think nothing to update you. I think the process is set up. We are still very confident that Drillisch operates on extremely competitive terms that has been finally confirmed by this price review one. Everybody could challenge decisions, of course. But we feel very, very confident on this one. And so -- and so far, there's no further update from our side.
[Operator Instructions] The next question comes from the line of Mathieu Robilliard of Barclays.
I had 2 questions. First, in terms of the MSR trend looking to the Q4. So as was pointed out earlier, there was a slight slowdown. But obviously, still a good performance. I note, however, that in the meantime, the share of the partners has increased. And I understand you don't give detailed numbers about the retail trajectory, but I was wondering if you could give a little bit of color in terms of how the retail MSR have done in Q4 compared to Q3 because I think Q3 was kind of a turnaround. I just wanted to understand if that was still the trajectory.And then second, in terms of the free cash flow. Looking at 2019, typically, tend to neutralize some of the negative working capital with factoring. It doesn't seem to have been the case or at least much less in 2019. I was wondering if you had changed your view about how to use factoring and how much are you going to revert back to that kind of strategy of neutralizing working capital requirements.
I think, first of all, we are very pleased with the MSR development that we have seen because if you compare also the competition, we have gained market share from an overall market perspective. And as we have already discussed, our retail trends are intact. All the KPIs that we have shown you show a positive trajectory. Churn is down to minus 1.2%. Year-over-year, full year churn is also at very positive levels. And also, the reported retail ARPU goes up. We are also satisfied with the mix that we gained on the acquisition side. And although I cannot give you any detailed number, I can tell you that we are very pleased also from a Q-over-Q perspective with the retail trends that we have seen. With regards to free cash flow development, of course, there are always, yes, certain topics around prepayment for wholesale contracts, et cetera, in -- which work in both directions that are factored into the working capital changes. Also, of course, the use of factoring to a certain extent. I cannot tell you that we have changed our policy in general. We are pleased with the development that we have seen from an operational perspective. And of course, the additional CapEx spend is also reflected in our free cash flow trajectory.
The next question is from Frederic Boulan of Bank of America.
First of all, to come back on the previous question from Mathieu on the working cap. So if you could discuss the elements behind the working cap drag of EUR 148 million, I think, in 2019, how much was the silent factoring? You mentioned on the call, [ the distributable ] numbers. And what were the negative offsetting factors? And then if you could share a little bit for us any outlook you have for the coming years on this item.And then secondly, on the CapEx. So you mentioned, I think, 10,000 LTE points in 2020. So can you share with us on many sites are now equipped with LTE at the end of '19? What's the expectation for the next 2 years? And then maybe if you can do the same exercise on 5G? And my underlying question is, you guide for a big step-up in CapEx in 2020 and 2021 with then a pretty sharp reduction in 2022 and I'm struggling to understand the shape of that CapEx. So do you expect to be completely or very largely done with 5G upgrade by 2021? Or you're just going to have a lot of capacity in your CapEx to continue to do 5G with the end of the LTE rollout?
So let me take your first question with regards to the working capital movements. Of course, we are still using the instrument of silent factoring transaction for our handset receivables in order to synchronize the incomes on the revenue side from a customer perspective, and also the cash out more. In total, this gross amount to EUR 677 million. But of course, we are here dependent on the number of transactions. And if you have steady handsets transactions from one year to the other, you have, of course, also a similar net balance from an overall perspective.On top of that, we had some other movements. Of course, the CapEx payables increased by EUR 79 million, whereas the prepayments for incidental lease costs and others decreased by EUR 55 million, restructuring provisions by EUR 38 million. And on top of that, we had some, yes, special topics from a year-over-year comparison around the prepayment for wholesale contracts in both directions. And of course, just as a reminder, we've had a very high inventory by the end of last year driven by the effects that there was the potential ban of Apple handsets in the market, which didn't come through, which also throughout -- through 2019 now accordingly.
On the CapEx question and the rollout strategy. I think it's clearly now that this year and next year, we build the ultimate coverage layer. And in the following years, especially for the industry obligation until 2024, this trilateral sharing is so important because I only need to build them, on physical sites, the 2,000 towers in '22 and '23 and '24 and get access to 6,000. This is why the sharing agreement is really, really valuable and allows us, with the CapEx guidance that we have given, to deliver our rollout obligations and, at the same time, to deliver superb 4G, 5G coverage. We equip, as I said, with the 700 band, especially in rural areas with 5G, and the 4G, the 800 and the 900. So then overall, we releverage our full coverage spectrum in order to deploy this.But what is more cost intensively is now clearly upgrading all existing sites with 4G, where we are very well underway. So more than 15,000 sites are already equipped with the 4G and will be continued way up. This happens this year and next year, basically. And in parallel, we built a coverage layer outside the trilateral sharing agreement, plus the 5G investments in city, where in cities we rely on existing sites, so this is not so expensive in case you would need to build completely new sites. So overall, this is the full package. So we have a full plan and, especially with the CapEx envelope we have guided and the trilateral sharing that helps us a lot in order to deliver what we promised with the existing CapEx guidance for this year, next year and the year after.
If I may, on the first question, on working cap. So in your other working cap movement, was minus EUR 135 million in '19. So if I exclude the EUR 677 million silent factoring benefit, that means you had another EUR 812 million negative. I'm just trying to understand what that is.
So as said, this is always the case, you have an inflow in that -- via that silent factoring, but you also have the outflows. Maybe we can follow that up with IR after the call in more details. We will guide you through the details then after the call.
Okay. And going forward, should we expect that rule to balance each other going -- or there's a reason for this to be structurally slightly negative?
In principle, our target is always to have neutral working capital movements because they are more the result of the business activities that we are doing and not a target in itself.
The next question is from Christian Fangmann of HSBC.
A couple of questions have been answered, but my question is on the own-branded ARPU, which was up, I think, 0.9% in '19. So that's clearly a good development there. What's your expectation for 2020, just really specifically on your own retail ARPU? Can you -- do you think that you can increase that from here, so substantially above the 1%? So I would be interested in that. And then I have another question on a potential regulatory change around the contract length. The Ministry of Consumer Protection is suggesting that the maximum postpaid contract length can only be around 12 months at maximum. So what would that mean if it comes? And what's the time line there, when it would come into effect? So an update on that one would be helpful as well.
Yes, Christian. We are very pleased with our own-brand ARPU development that we have seen. But if you look into the moving parts, of course, our clear strategy is an ARPU-up strategy. And we will do everything in order to support also that strength further with our own retail business. As we have discussed that already before, we are very successfully already in the upselling path for new customers, while the legacy effects of the network integration, the service topics we had, et cetera, in the retention are gradually phasing out. And of course, we have introduced a new portfolio to support exactly that trajectory going forward. So clearly, the ARPU-up strategy that we have announced back in 2018 is intact and will be pursued further.
On your second question. Overall, this regulatory change I think is unnecessary because we've prepaid in the market and free duration of postpaid contracts with and without. But even if it would come, I think we've already anticipated this and already launched last year, O2 You, where you can seamlessly decide which contract length you will have also on postpaid.
In the interest of time, we only take one final question. The IR team will follow up with all remaining questions. Keval Khiroya from Deutsche Bank.
I just had a question on commercial costs. Can you give us a view -- I understand it's market-dependent, but can you tell us how you're thinking about commercial costs in 2020, bearing in mind it also looks like the O2 net adds momentum continues to improve, how that commercial cost should compare to 2019?
Well, that, of course, Keval, always depends on the market circumstances that we are in. We are currently seeing, again, a dynamic but rational market environment, and we are pleased with the successes that we can reach with the current commercial cost levels. And from that perspective, of course, depending on the market in the next quarters, we are expecting a continuation of that trend.
At this time, no more questions will be taken. I turn the conference back over to Veronika for closing comments.
Thank you, operator. Thank you, everyone, for dialing into our Q4 and full year 2019 results conference call. For any open questions, please don't hesitate to contact the IR team. And in the meantime, I wish you a happy day. Goodbye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.