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Edited Transcript of TC1.DE earnings conference call or presentation 29-Nov-19 9:00am GMT

Q3 2019 Tele Columbus AG Earnings Call

BERLIN Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Tele Columbus AG earnings conference call or presentation Friday, November 29, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eike Walters

Tele Columbus AG - CFO & Member of Management Board

* Leonhard Bayer

Tele Columbus AG - Senior Director of IR

* Timm Degenhardt

Tele Columbus AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* Julian Lilienthal

* Lars Dueser

Deutsche Bank AG, Research Division - Research Associate

* Simon Bentlage

Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst

* Wolfgang Specht

Bankhaus Lampe KG, Research Division - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of Tele Columbus AG regarding the presentation of the Q3 results 2019. At our customers' request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Leonhard Bayer, who will lead you through this conference. Please go ahead, sir.

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Leonhard Bayer, Tele Columbus AG - Senior Director of IR [2]

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Thanks, Angela, for the introduction. Good morning, ladies and gentlemen. It's my pleasure to welcome you in the name of Tele Columbus' management team to today's conference call following the release of our third quarter results for fiscal year 2019, which ended September 30. This call is limited to 60 minutes. In case of any follow-up questions after the call, Manuel and I are available to discuss. I'm here today with Timm Degenhardt, our Chief Executive Officer; and Eike Walters, our Chief Financial Officer.

Now I would like to remind you that if any lenders or rating agencies are on the call right now, that this is a public conference call in which only publicly available information will be discussed. I would therefore ask you to refrain from questions containing information not belonging to the public domain. This conference call is intended for capital market participants only and not for press representatives. If any journalists are on the line right now, we would highly appreciate if you were leaving the conference call now. Press representatives are welcome to call my colleague, Silke Bernhardt, to discuss any outstanding questions. In addition, I would like to draw your attention to the fact that everything we are saying on this conference call is under the EU-U. S. Privacy Shield reservation.

Having said that, it's now my pleasure to hand over to you, Timm. The floor is yours.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [3]

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Thank you, Leo, and welcome to all of you to our Q3 call.

Let's move to the agenda page. So what you can see here is that we've made a slight change on the agenda. We put together the operational assets and the KPIs also in the quest to make this call efficient and informative for you. I will be leading through that section. But before I do that, I will -- would like to give you some key messages overall. So overall, we're on track to reach our full year 2019 guidance with respect to all metrics. We see, and I will lead you through that, another strong quarter on operational improvements in all areas of the business. So we're actually quite pleased with that.

When it comes to our B2C business, we can see that the improvements that we are generating internally are also being recognized externally. We have really good results in the latest CHIP rankings. Also more detail about that later.

A strong quarter with regards to NPS, and we will be returning to organic growth. I will show you later regarding the IP net additions for the fourth quarter, which we can -- as an exception, I will share with you today.

B2B and housing industry, just for simplicity's sake, we have grouped them together here on the overview page. But of course, you remember that there are 2 separate and distinct entities. So on the B2B side, you know that we have a growing business.

This quarter, we were able to, finally, at last, open our data center in Leipzig newbuild data center, which is actually commercially very interesting and working well for us. We have won a tender, as we have also announced yesterday in the media, for the infrastructure build-out in Halle. Halle, like -- if you may remember, is in the core of our operations in the southeastern part of Germany, where we have very strong position.

Our housing industry is also progressing well. We continue to sign prolongations. And with the prolongations also FTTP upgrades to our networks, and that is also working as expected.

Separately, in terms of transformation, we continue to transform our organization to be ready for the challenges in the next coming years. We have taken a decision to open our networks to third parties, and we have signed an agreement with Telefónica, who will be coming onto our network soon. Internally, we're also transforming. We have, as you may remember, inherited quite a large number of legal entities. That brings quite a number of operational challenges, but also has the potential, let's say, for us to create some savings when we consolidate those entities. We have done so in the year 2019, we will have combined about 7 legal entities, and that will have also cash savings already for us this year but then also for the next years.

What we're also doing as we are focusing more and more on the details that are important to run the business, we are also focusing on unprofitable connections. You will see that we have canceled certain unprofitable connections in the third quarter. We took that decision because we think that, on the one hand, it makes economic sense to cancel those. And on the other hand, we clearly also want to create ourselves a better position for negotiating on third-party signal fees going forward.

Now if I look overall, we are progressing well. We need to consider that we hit the reset button about 18 months ago. So the time has not been so long, even though sometimes I can -- I -- we feel that it's quite a long time, even more so when we consider that most integration-related activities were only finalized at the end of 2018. So real operational improvement is probably even less than the 18 months. And also, when you consider that the new team has only been in place for around about a year. So I think there's, overall, good progress that we're making.

And on the next page, we've decided to also bring together some additional elements to give you an overall snapshot. What's been very important to the transformation and continues to be important to the transformation is that this return to a healthy business is made in a sustainable way. And in order to measure the sustainability of this turnaround, we look at NPS as a leading indicator, as you know. We have, by now, a very large database of surveys that we get back from our customers. So very, very high statistical significance. And what we've also decided with this conference call is to show you transparently the scale to the left-hand side when it comes to NPS. So later, I will go through more detail of that, but you can see that our starting point was highly negative. We will have made around about 40 points on overall touch point NPS improvement over the course of the period that you see here, and that is quite a significant improvement. We also believe that we can continue to improve on our leading indicator, and that we will be broadly in positive territory next year even though eventually the rate at which we improve NPS will actually need to slow down a bit.

Now why NPS? Well, of course, first and foremost, because it's a measure of our process quality, and hence, we can make better predictions around the overall business when we have very clear transparency on how well we're doing in each individual process. But secondly and importantly, our customers always come in groups. Our customers are always in MDU, so they talk to each other. And having, generally speaking, a high level of positive recommendation is important for our business model and will help us bring down churn and increase gross adds. Better quality will also lead to lower costs overall, hence, a sustainable improvement in our financials. And this is why we also believe that the improvements we will be driving will continue to be seen as a positive reported EBITDA growth, which is a measure which is important to us and dear to us because it's closer to cash than the normalized EBITDA.

Now if you have more quality in the business, lower cost base, because there is more quality, and you're able to get to growth in terms of your customer numbers, then you should have a nicely growing business in the future. And this is why these 3 things for us go together.

All right. Now moving to the operational update and the KPIs on Page 7. Now we started to show you the churn rate of our Homes Connected, because churn rate is one ingredient of stabilizing our Homes Connected overall base. But it's more than that. It's actually a measure of the trust of the housing industry in our business. And this is why we believe that showing that we continue to make good progress on that measure is very important. Our 2018 was better than 2017, and 2019 will be significantly better than 2018. So over -- year-over-year, we will have 26% lower. We have, so far, 26% lower churn rate.

Now how do we do that? In certain ways, it's actually quite simple because we need to focus on delivering service to the tenants of the housing industry. That is important. We need to have the right product, and we need to be reliable in our network build-out when it comes to actually delivering on our promise -- on our technological promise to the housing industry. And here, we've also made quite some significant progress in positioning ourselves as being the specialists in delivering FTTP, FTTH infrastructure to the housing industry business, which is a differentiating position in the German market.

Coming from the churn on the next page, you come to the Homes Connected. And here, as a consequence of what you've just seen on the churn, we are confirming our guidance of stable Homes Connected now -- and even considering the fact that we have reduced our Homes Connected by 16,000 in the third quarter because of the cancellation of the unprofitable connections.

Now just as a reminder, those were pure TV connections, they are not 2-way upgraded. So that doesn't impact our potential for IP sales, which is, of course, important not just for our own brands but also for other brands like the Telefónica brand that is coming onto our network. In addition, when it comes to continuously upgrading our network, we see that we make small but important steps in bringing our 2-way upgraded base up. We're close to 70% on that, which is, I think, quite a good result.

On the next page, we can see now the RGUs, and I think in the same way that a year ago, I wasn't so happy about the IP RGU development. I think we can all say that we're not so happy about the RGU development on the TV side. Certain things here are driven by market developments. So we do see that basic linear TV is, let's say, challenged from an overall market trend. But I still think that we can do quite a bit better in terms of managing our processes around how tenants move into the building and out of the building in order to make sure that we can keep up the RGU base as much as possible.

On top of that, in the third quarter, here, you see 2 adjustments. So 1 adjustment coming out of the cancellation of unprofitable Homes Connected. That is about 5,000 RGUs. And another one, which is basically, so to speak, data cleanup, where previously, 1 Homes Connected actually ended up having 2 TV RGUs. We actually thought that we had cleaned out most of that in the year 2018 when you remember we have the cleanup of our -- of the way that we count Homes Connected, but we found additional 5,000. So we have taken a step of cleaning them out with this quarter. Premium TV is -- as you can see, there is no clear trend yet. So clearly, something that we're not happy with and something that we will be focusing also in the future to improve.

Coming to the next page. You know that I'm a big fan of NPS. And here, we give you certain measures of NPS. Now when you look at the first one, that field service. Field service is essentially the interaction of a technician with the customer when we have to restore the operation of -- the technical operation of the line of the connection. Now that happens to every fixed line operator, that you actually have falls in your network and that you have to restore those. But it's a classical moment of truth where the customer has quite some understanding that things can go wrong. But when they do go wrong, they need to be fixed quickly and in the correct way. So this is why we focus on the field service process as one of the big drivers of satisfaction, and this is, of course, from an overall perspective, is helping us quite significantly in our NPS development. On this particular journey we've had since the beginning, Q1 2018, 55 points improvement. But when you look a little bit deeper, actually the lowest point in terms of field service technician NPS was in the fourth quarter of 2018, where we were close to minus 80. Minus 80 means that you have basically no promoter on this journey, and hence, the improvement of nearly 80 points, because we're at about 0 now, yes, is really substantial. It is sustainable because we have completely changed the process, and we are, let's say, have a very good control of that particular process.

The next critical one is customer service. Before you know that you have a fault in the line, you call our customer service. So that's the other one that we are putting a lot of focus on. You can also see strong and sustainable improvement. It's still not where we want to be. It's an NPS, a touch point on NPS, where we want to be broadly positive next year. Our sales, NPS touch points are already positive. They are supposed to be positive, that's clear. And, let's say, it's still some upside potential here that we can manage by better communicating with the customer through the journey, how to become a customer. And also here, I'm quite confident we have completely remodeled this process that we've gone into operation as of the fourth quarter 2019. And I do believe that on the new customer journey, we will see significant improvements also next year.

Now that's the view from a process perspective. If you now turn to the next page, you see that this is also being recognized externally. CHIP Magazine is widely read in Germany. It's an important one. You will see also the mobile operators referring to that. And let's say, the -- how do you call it, the little...

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [4]

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The award.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [5]

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The award. Everybody will be communicating on that. And what you can see here is that in service quality, we have won and also that we've been rated very good in the new customer hotline. You can see that, of course, we're putting a lot of emphasis in the same way we're putting emphasis in restoring service to our existing customers. We're putting emphasis in making sure that our new customers are -- get a great experience. And when you look now at the progression of the -- of our brand, PŸUR, for broadband, fixed line and fixed line providers, you can see that we came from the eighth rank and we are now #3, knowing that ahead of ourselves, that's just Telekom who have, of course, much bigger marketing spend and marketing power behind their brand as well as Congstar, which is a no-frills brand, and hence usually attracts customers that are more likely to give positive opinion.

What you can also say is that we have beaten by now, at least in this ranking, all the other cable operators as well as the local city carriers. And then also for the TV and VOD, I think we have reached a good level, also beating our cable competition, if you'd like to call it that way, being just behind the streaming services and Deutsche Telekom. So on both sides, I think very good results.

And I think the third measure in terms of quality that I'd like to give you. So coming from the external view now, also as a result of that, is that you can see on the next slide is that our customers calling with complaints or with issues is continually dropping. Now that's good news because as most of you might know, our first-level service is fully outsourced. So every call less also costs less. But importantly, we've also been able to shift transaction to digital channels. We have run about 20% of our transactions being fully digital by now. That means that they inherently have high-quality because less manual interaction in the process, more predictable outcomes of the process and higher quality, less errors. And the 20% is actually a good measure. Digital share and interaction is always a bit difficult to define. So we don't count, for example, IVR interactions in there. We do not count a customer checking their online bill into that one, but they are really logged interactions in our CRM tool that we've come up to 20%. So if you were to do it, let's say, in -- counting also the other types of transaction will probably be closer to 30%, and 30% is probably also at that point already industry-leading.

Now that results in customers generally being happier, housing industry being happier with us. And that results in, overall, our gross adds going up and our churn going down. We always want to have a turnaround to customer growth in the second half. I think, overall, in overall terms, we're probably a bit behind on that because I already wanted to have more growth in the third quarter. But what we can see now is that for the fourth quarter, we will have fully organic growth, both on IP as well as on Telephony. And I think that's a very good sign because the sustainability of the approach that I have shown to you in the previous pages should actually then point also to the fact that we can keep that up for the year 2020.

Coming to the next slide. Here, the question is, okay, so you can acquire customers. Can you acquire the right type of customers and do they come in with the right level of ARPU? Can you make this IP business grow overall? And what you can see here is that the percentage of customers coming in with high bandwidth products is growing, actually a bit more than we originally thought. So this is actually very important to us because it shows that in the longer term, we will be able to have a growing ARPU. You need to consider also that in the second quarter of 2019, we did a price increase, both into the base as well as for new customers. So we increased prices for new customers by 10%, and still you see a large shift to higher bandwidth. So what we believe is that we will be able, in a sustainable way, to grow our ARPU.

Now -- and just to explain a little bit here on the scale, the red ones. So the red section is 120 Mbit, the dark green one is 200 Mbit and the light green one is 400 Mbit. Of course, we will be rolling out gigabit in more cities than just Berlin throughout the course of 2020. And from that perspective, I do believe that we will have an ever-increasing share of new customers coming on to our network on those high tariffs.

And finally, on the last page of my section, what we see in terms of ARPU, the TV ARPU is, I would say, manageable at this point in time. So we were able to manage a bit the decline on the -- on that one. So we are 880, we believe, that was quite sustainable. But clearly, on the overall TV business, we have some headwinds. We need to manage that well. We need to improve the way we manage the TV business. And I think for the year 2020, that's also a clear priority overall.

When it comes to Internet and Telephony, you can see that the ARPU is stable in a sequential way from the second quarter to the third quarter, but we were able to increase our ARPU year-over-year by around about 2.5%. And you need to consider that we're doing that while still being quite aggressive in our marketing approach.

So over the course of the year, we have tested quite a bit on how to actually effectively run marketing and sales. What I can say is that the company is very effective in acquiring customers online and in telesales, both outbound and inbound. So essentially, very efficient channels. I think we have a bit more room to grow in our shop network as well as indirect sales. But what we've also been doing as we've been leading with the product in our sales approach because we know we have a strong product. And hence, we have been also discounting the first 6 months quite strongly.

Now when you look at that, you need to always consider that we increased the prices by 10% in the second quarter. And when you consider the overall discount that we're giving to our customers with our current promotional offers, you have, over the course of the 2-year contract, probably a 20% discount. So that is overall manageable, and we can keep including this effect on the ARPU at the [24 20]. But eventually, this ARPU will grow when the customers move out of the promotional period and into a normal price.

Now what we've also done is in the summer, we have swapped around, let's say -- or rather implemented 24-month contracts for our sales approach. So the very aggressive sticker prices are available on the 24-month contract. And we can see that a very large part of our new customers are coming on to the 24-month contracts. So this is between 70% and 80%. And of course, this is also helping us in the period that we are in to further manage and reduce our churn for IT customers.

So I hope that with that, we have been able to give you a bit of an overview of our operational progress. And with that, I would like to hand over to Eike for the financial update.

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [6]

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Thank you, Timm, and good morning also from my side. Coming to the financial performance and the revenues. On the next page, you see that our 9-month revenues are broadly stable on a year-on-year comparison. And we have a revenue decline in Q3 on a year-on-year comparison, mainly driven by TV and other sales. The TV revenues are down by EUR 3 million. This is explained by 44,000 fewer ads use as well as an ARPU decrease of roughly EUR 0.20, as explained by Timm. Nevertheless, the trend is positive since the quarterly sequential decline continues to slow down since Q2 2018. The EUR 2.8 million lower other sales year-on-year are mainly driven by a continuously declining contribution from construction work as project Plön is nearing successful end. Due to the finalization of the project in Plön, we are expecting a further strong decline in other sales next year, but I'll give you more detail on the next page. We have prepared the next page for that.

On B2B revenues, we are EUR 800,000 down on year-on-year comparison, and this is due to a project-related phasing effect. And however, we expect a strong Q4 given the ongoing positive market trends of which we are participating. The IP revenues are up by EUR 2 million year-to-date, which is driven by the Q3 performance and the result of several other effects.

First of all, we see ongoing improvement in our core business, new customers choose higher bandwidth, as explained by Timm, and then with that, higher ARPUs. We recognize the same trend within our existing customer base in terms of migrations. The positive effects of these trends, however, do not increase the ARPU by now, since we have a strong campaign with attractive promotional prices in place, but those effects will contribute to an ARPU increase over time. The same count for the price increase that we executed in May this year, which also contributes to sequentially higher revenues. Our retention measures are more and more successful and also contributes to stabilization of our customer base. Lastly, we had a positive effect of deferred broadband revenues in Q3, and this also helps us to achieve this increase.

As said, on the next page, I would like to give you more detail and the heads-up on our revenues. And this is a detailed breakdown to explain you better the underlying trends of the core revenues in our business. So core revenues in our business are TV, IP and phone, B2B and feed-in-fees and mobile as a product-related revenues. And on this page, we've separated the construction revenues from the other core revenues in the red box.

As you are aware, the construction business is, in our case, mostly related to 1 single build out project. It's a rollout of the -- in the area of Plön, Northern Germany, where the municipality commissioned us to build a fiber network. The deal structure is rather door opener for infrastructure products and profitable business in the first step. Hence, projects like Plön will remain an exception for us.

In the press release in July 2019, where we were referring to the upcoming finalization of the Plön project around year-end 2019. Now we can say that we will finalize by early 2020. In order to manage expectations today, we highlight already and very clear that for the full year 2020, we envision a double-digit million euro step down in construction revenues as a result of the project finalization in Plön. We were always very clear that the construction business is a low-margin business. And so there have been only very low impact on the bottom line when the project phase out.

As mentioned previously, construction work is not a core activity for Tele Columbus. So we are not reaching out actively for comparable projects to gain construction revenues. We'll only sign a similar contract if an effective infrastructure project is related to that. Having said that, I would like to focus on the core revenues, shown in light blue. On the right-hand side, the year-on-year comparison of total Q3 revenues saw a decline of 3.5 percentage, but the core business was doing better. The 9-month core revenues, which exclude construction work, are only down by around 1% year-on-year. Having the negative market trend in the TV business in mind, our B2B and IP revenues almost compensated the losses of the TV business, which is a very good news on that. Following the trend from 2017 onwards through the year 2019, the revenue decline of the core revenue slowed down continuously. The diversion between the 9 months and Q3 performance stems from the project phasing effects in the B2B business. So the further improvement of IP revenues will lead to overall revenue growth.

On the next page, we have our B2B business. As said already earlier, the B2B business excludes revenues where we were expecting to come in Q3, but will now come in Q4 so that the phasing effect are now (inaudible) on our side. While quarterly revenues are impacted by project-related phasing effects, our year-to-date performance is very satisfying with revenue growth in the double digits. The same accounts for our profitability in the segment, underlined by disproportionate contribution margin expansion of the first 9 months of 2019. We expect the B2B segment to continue to play an important role within the Tele Columbus group also leading into 2020 with market demand is unbroken. We should be able to increase the share of wallet of our customers, also supported by the commissioning of our new data center Leipzig, which is also something Timm explained already.

On the next page, we have our financial performance. And what we would like to highlight is the significant growth in reported EBITDA year-on-year. Excluding for the positive impact of IFRS 16 in Q3, the normalized EBITDA increased by 1.2 percentage points year-on-year to EUR 59.3 million. This represents another sequential increase in 2019. As indicated since the beginning of 2019, we managed to decrease the amount of non-rec further, resulting in a reduction of EUR 13 million year-on-year to EUR 21 million year-to-date or EUR 4.1 million in Q3. So another decrease there and a stable trend. This leads to an increase in reported EBITDA of more than 10% to EUR 55.2 million in Q3. Thereby, we are delivering on our promise to the market to have a tight grip on cost through more transparency and better control.

On the next page, we have a sequential overview of the EBITDA to underline the improving performance in 2019, the positive trend of normalized EBITDA and even more obviously for EBITDA reported. We always said that the reported EBITDA is the essence of the transformation as the best indicator to measure our improvement. We're happy to have achieved the highest level since the integration began in Q1 2017. The uplift of EUR 10 million reported EBITDA from Q1 2019 to Q3 2019 is an important part for the cash position of the company.

On the next page, we see a strong CapEx reduction year-to-date versus 2018. So the CapEx declined by around 20 percentage points year-on-year, and given the high comparable base as well as pent-up demand in 2018 for easing bandwidth capacity for the next -- last year. So we elaborated a lot of these issues in the last calls. And now, from our perspective, we are all right. We successfully managed the network issues that demand high investments and ended in a new phase now. We focus on profitable projects in order to find the right balance between growth and the financials. As highlighted in our Q2 call in August, we are progressing well on managing our CapEx spend. From today's point of view, we should finish 2019 on a lower level in terms of CapEx spend in 2018. So we -- the spend for 3 quarters year-to-date, roughly EUR 100 million. And the seasonality in CapEx is always given, so we expect a higher amount than in the previous quarters, but it will be on the lower end of 2018.

Coming to the financial performance. By the end of Q3, we draw the revolver with EUR 8 million. This means that we have available cash of more than EUR 50 million for Q3. So if we would adjust the one-offs in our cash flow of Q3, we were very close to breakeven. And mentioning the one-offs, we have 2 of them in Q3, one was a payment of pepcom-related tax arrears from 2017. And secondly, we have flagged already earlier that the purchase price of [Antec] which we acquired in Q1 2019 was only paid in July. So both (inaudible) at a mid- to high single-digit million EUR amount. And if you deduct this from the cash positioning from Q2 to Q3, you can see the evolution there and the good progress.

Timm touched already that the consolidation of the legal entities is progressing well. Year-to-date, we already consolidated 7 legal entities, bringing down the overall amount down to 53 of them, which is still a high number, but we have done the first step. With that, we have reduced the complexity and saved costs, for example, for annual audit fees, but also, this is more important right now is the taxes. While doing the consolidation, we also brought further subsidiaries under the profit transfer agreement to benefit from the losses carryforward of the group. For 2020, we expect a tangible positive cash tax effect from the consolidation of legal entities. With that, I would like to hand over to Timm again.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [7]

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Thank you, Eike. Yes. So let's come to the guidance page. We will -- we are confirming full year guidance on all metrics. I think on the homes connected, we'll be slightly better than broadly stable. I think on CapEx, as Eike had said, we will be lower than last year. So overall, I think we're in a good shape as we move into the year 2020.

With that, I think we're done in terms of the presentation. And I would like to hand over back to you, Leo, for Q&A.

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Leonhard Bayer, Tele Columbus AG - Senior Director of IR [8]

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Yes. Thank you very much. Angela, if you would like to invite the participants and open up the Q&A line, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we received is from Julian Lilienthal, CVC Credit.

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Julian Lilienthal, [2]

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I just wanted to ask if you could give a little bit more additional color on your Telefónica agreement? What's the expected trajectory there? Also how will you be reporting those revenues? And what's your strategy around avoiding any kind of cannibalization to your existing customer base.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [3]

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Thank you, Julian, and not entirely an unexpected question. So first and foremost, as you know, both parties have agreed an extensive nondisclosures. There's not so much information that I can give to you. What we can certainly say is that we will report those revenues as part of our B2B wholesale revenues. We already today have wholesale revenues, i.e., carrier revenues where we sell capacity to mobile operators. And we will very likely report on these revenues here. I think the second question is around the cannibalization effect. And here, of course, there is -- really the underlying and fundamental aspect is what is your current share, or your current penetration on the network. I think we've been very clear that our current share, our true current share is round about 20%. And then you need to see what is the growth potential on that network, and how much of that growth potential will be cannibalized by a wholesale party coming onto that network. Now with a very low penetration that we have, with the continued investment into the network, and the high bandwidth available to our customers on that network, we believe there is ample opportunity for both parties to grow. And that is essentially the core driver why we open up our network because we can monetize the investments that the company has made over the last years in a much better way if you have multiple brands on that network.

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Julian Lilienthal, [4]

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Okay, that makes sense. And just one brief one on the 2-way upgrade. Can you just remind me what the remaining time line there was, and a little bit the cost that you expect to reach your target? And what your target is? Is that 100% or 90%?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [5]

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Yes, thank you. So what -- we haven't guided for this number. And we have not made, let's say, communication around a target with regards to that. So what we do is, clearly, we are continuously looking at networks that we can -- where we can actually disconnect the foreign signal and upgrade it profitably to 2-way upgraded. So there's 1 activity that we continue to look at. I would say, however, that overall, the potential there is limited. So we're not going to go out and increase, let's say, this number from 70% of our network to much, much more. I think when you look at the growth that we have continuously in that area quarter-by-quarter, that is kind of a good measure for you to see how this will develop.

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Julian Lilienthal, [6]

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Okay, that's clear. And then just the last one. You mentioned the one-offs in Q3. You said there was tax arrear from pepcom, I think, was one of them. And the other one, I didn't catch. Can you just repeat that?

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [7]

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Another one is the purchase price we paid for an M&A acquisition we had in Q1 2019, but we had to pay in July this year.

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Operator [8]

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The next question is from Wolfgang Specht, Bhakhaus Lampe.

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Wolfgang Specht, Bankhaus Lampe KG, Research Division - Analyst [9]

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Two follow-ups from my side, one for Eike, one for Timm. Can you give us some more color on the D&A development. We saw a spike in Q3 versus the second quarter? Anything to mention here? And then on the development of signaling fees, also quarterly, quite a different figure to the previous ones. Is there anything special to mention? Or how are the mechanics of signaling fees over the whole year?

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [10]

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Okay. Thank you, Wolfgang. As suggested by you, I would just take the first question regarding the depreciation. So the increase is largely explained by the fact that over the first 6 months, depreciation for certain construction projects was booked in the general ledger, but not in the subledgers. So this was now corrected in the Q3. So this is more of a bookkeeping thing between the quarters. And yes, the onetime effect in Q3.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [11]

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Sorry. Can you just repeat the question around the signaling fees?

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Wolfgang Specht, Bankhaus Lampe KG, Research Division - Analyst [12]

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Yes. We also saw an uptick in Q3 on a quarterly basis. So is there also, let's say, some, let's say, booking effect during the year? Or how are the mechanics of signaling fees payments that you are doing?

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [13]

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No. There's no special effects because it's a very stable business there and no special effects in there.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [14]

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I mean, Mr. Wolfgang, if you look at the sequential development within 2019, that has been very stable. And I think we already highlighted in Q2 that there were some deviations in 2018. That's why you now see an increase year-on-year. But for 2019, sequentially, that has been stable, actually.

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Operator [15]

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The next question is from Simon Bentlage, Hauck & Aufhäuser.

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Simon Bentlage, Hauck & Aufhäuser Privatbankiers AG, Research Division - Analyst [16]

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The first one would be on your Internet subscriber growth. You mentioned that you're expecting 4,000 net adds in Q4. I'm wondering, is this sort of a seasonal pattern? Because if I look at 2018, you've also gained 3,000 customers in Q4. But then this declined again in Q1. So is this something that will carry through into Q1? And secondly, on this, is this driven mainly by churn management or also by strong gross add improvement? So this would basically be the first question. And the second one, maybe you can give us a little more guidance on what you expect with regards to CapEx, you said a significant -- it will be lower than last year. But last year, in Q4, you had EUR 35 million, I think. So are we going to see an increase in the last quarter there? Yes. And then maybe the last question would be with regards to your overall view on 2020? I think if you look at the midterm guidance, you're expecting mid-single-digit percentage growth for a normalized EBITDA. Is this something that will accelerate throughout the year? Or is this something we will already see maybe next year?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [17]

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Simon, I'm going to take your first and your last question, and the CapEx one, I'll leave to Eike to comment on. So net add development, Q4 2018 still had, as you always see in this famous footnote by now, a number of bulk Internet RGUs being recorded. So I can't help it. I have to record those. But I don't look at them as a true organic growth because the agreements with the Housing Association, where the customer has a right to then actually ask for the Internet subscription, but doesn't mean that he has an Internet subscription. Whereas, when we look at the fourth quarter 2019, this is fully organic. So these are all paying individual customers that are coming on stream. Is this sustainable? I believe it is. I've tried to kind of give you an overview of the overall progress the company is making on a number of dimensions. That actually speak towards the ability of the business to acquire and retain customers. What we do see is that both acquisition is up year-over-year and churn is down year-over-year, and the net result is, of course, a net add growth. Now I would say that both factors are more or less equal and -- but what we see more and more coming through is the effect of our retention activity because if you save a customer today, then you're retaining a customer who might have left you in 6 months time. So the actual net add improvement, from a retention activity at one point, is actually seen at a later point in the year, and this is what we see coming through now in the numbers. With regard to 2020, we're not guiding for 2020, of course. But I do believe that the business is just in a much, much healthy shape today. And that health is sustainable, and that will actually carry us into the next year.

Now we also have to say that we still continue to have headwinds in terms of CATV. So in the past, the growth in B2B and the growth in IP and telephony was not able to compensate, let's say, the headwinds coming from TV. And this is what the business needs to focus in the year 2020 to become a growth business, which this business should be. Of course, we then also have the addition of the wholesale agreement that we've already signed. And eventually, that will also have an impact. But when it comes to the 2020 and follow-on midterm guidance, I need to ask you to be patient and wait until the end of March next year when we will actually present that to you.

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [18]

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Yes. I'll take the second question, Simon. I said that from today's point of view, we should finish 2019 on a lower level in terms of CapEx spend than 2018 for the full year amount. So I think the first quarter of 2018 is not a good comparable base, but we will still focus of the EUR 159 million we spent in 2018. And then last quarter, we expect in CapEx which is, yes, will bring us to the number, which is lower than 2018. But from a quarterly perspective, is higher than the previous quarter.

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Operator [19]

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The next question is from Stefan Bayer

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Unidentified Analyst, [20]

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Stefan Bayer from (inaudible). Just a question regarding infrastructure. We've seen quite a number of infrastructure transaction in the industry involving partners taking a stake in networks and contributing, obviously, to finance future rollouts. Couldn't there be an opportunity for Tele Columbus to get it steady? And is it something that you are today considering?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [21]

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Yes. Thank you, Stefan. Also this one is not an entirely unexpected question, but thank you for asking it. We have a very clear view on that. We believe that there is a potential to accelerate the infrastructure buildout. We believe that Tele Columbus is extremely well positioned to do this efficiently. Why? Because instead of focusing on rural SDUs, meaning single-dwelling units, we have nearly all of our business in urban and suburban multi-dwelling businesses, and hence, our ability to upgrade these buildings to FTTP and FTTH is unparalleled in the German market. So from that perspective, we would be able to actually bring significant bandwidth and capacity to our customers. So we believe this is a good opportunity. We believe that there are recent valuations in the market, which point towards a very high enterprise valuation for such an entity. And we are, of course, monitoring and looking at all of the developments in the market with this regard. We do believe that we have an opportunity to play a part in that. And we're working very closely with our supervisory board on that topic.

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Operator [22]

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The next question is from Lars Dueser, Deutsche Bank.

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Lars Dueser, Deutsche Bank AG, Research Division - Research Associate [23]

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Just a follow-up and a clarification. In Q3, now again, I saw you reported basically net adds of 2,000, but again, purely driven by bulk RGUs. So on an underlying basis, there was no growth. But then if I understood correctly, you said in Q4, when you guide for 4,000, this is purely based on organic, hence, ex-bulk RGUs. Is that correct?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [24]

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Absolutely. And I pointed that out also in my -- when I presented it. We're probably 1 quarter behind in our original, let's say, ambition to return to organic growth already in the third quarter, but we're able to come good on that promise in the fourth quarter. And you're absolutely right. I know that you look at the footnote very closely, and we hope to be able to get rid of the bulk RGUs for good very soon. Yes.

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Lars Dueser, Deutsche Bank AG, Research Division - Research Associate [25]

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Yes. Yes, okay, understood. And then in general, if I look at year-to-date, yes, you have added now 5,000 of net adds on the IP side. But again, most of it bulk RGUs. What would you think is a feasible run rate for 2020? I remember you talked about this on the last call, and you commented a bit of what you think is sustainable net add figure for that business can be? And maybe you can also talk a bit about the journey to getting to that run rate?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [26]

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Yes. So look, now, this is not something that we will be guiding on the number of net adds, as you know. But I think when you look at the overall development and the momentum that we have in the business, you will see that this is becoming more and more robust. And also if you were to take the Q4 performance, I think this is not yet, let's say, the full potential that the business can actually generate. What we need to, of course, say, is that we are very efficient with our marketing spend. So we create a lot of that traction with online channels, telesales channels and so on and so forth. I do think that, overall, this could also be boosted by spending more money on marketing, but we have decided also in the third quarter to be very, let's say, razor sharp in our approach. So maybe this gives you an idea of how this could develop further. Now maybe the last point to add to that is that I do believe that this network can take a lot more new customers. And of course, this is also the reason why we signed the agreement with Telefónica. So to a certain extent, you need to kind of at least double the inorganic projection when you consider the fact that you have 2 brands on that network.

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Lars Dueser, Deutsche Bank AG, Research Division - Research Associate [27]

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Understood. Understood. Maybe another question for Eike. I saw that also in Q4 '18, if I remember correctly, there was a bit of a clean-up exercise going on in the working capital area. Is that something where we see a similar figure in Q4 this year? Or can you maybe just walk us through a bit what to expect from (inaudible) working capital in Q4, please?

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Eike Walters, Tele Columbus AG - CFO & Member of Management Board [28]

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So Lars, -- so from our perspective, we don't see any further cleanups for working capital in Q4 and upcoming quarters. And I think that Q4 will be a normal course of business over from working capital perspective. And what you have usually is that you'll get invoices by the end of the year from the construction companies, but they are always a bit late. It can be that invoices occur in Q4 2019, and the payments will be in Q1, but this is ordinary course of business.

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Lars Dueser, Deutsche Bank AG, Research Division - Research Associate [29]

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Understood. Understood. And then maybe the last question for today from my side. I remember the previous quarters on the call, you made -- not a hard guidance. Obviously, you don't hard -- you don't guide hard, but you talked about free cash flow expectations for 2020. And I remember that, I think, Timm, it was you saying that you expected around breakeven. That's at least the goal for the company. Is that something you still stick to? Or is there any change expected in that statement?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [30]

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No. We stick to that. And we will refine that statement by the time that we give guidance to you, but we're fully in that mood.

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Operator [31]

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And the next question is from Christophe Jean (inaudible)

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Unidentified Analyst, [32]

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Just, I guess, one question sort of from my side. I begin to hear a little bit more around sort of your long-term thinking around your wholesale strategy? I mean do you think that Telefónica will be the only wholesale partner? Or do you see scope to expand that? And then maybe sort of related to that, what's you're thinking around 5G? I mean do you think that could be sort of an opportunity on the wholesale business as well, i.e. do you think like some of the mobile operators could be interested in accessing your fiber network in order to realize their own rollout strategy?

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [33]

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Yes. So we've been careful actually to communicate that we have made a decision to open our network. But on the other hand, we're also clearly saying that we believe that with Telefónica, we have a good partner to actually start wholesaling. So what we want to make sure is that we redo a proper good implementation that we have a happy wholesale partner and that we fully understand all the technical implication that come with that. So from that perspective, I would expect us to focus on that priority while at the same time, we can always, and we will -- and we do talk with other parties in the market. So that is on the wholesale part. In 5G, we believe that this is an opportunity for us in the market. We will deliver backhaul to mobile operators. We are already in quite a number of discussions with operators about their needs for mobile backhaul. And we do see that, in particular, in the dense networks that we offer, we will be able to supply connectivity, i.e., fiber connectivity to that -- to the antennas. Most of the antennas, I mean, quite a lot of them will be existing, but they will need to be upgraded in terms of their -- the fiber connection in order to really get the benefit of 5G, but we will participate in that business, of course, and we will do that through our B2B business in order to further expand our current business with mobile operators.

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Leonhard Bayer, Tele Columbus AG - Senior Director of IR [34]

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Yes. Thank you very much for participating in today's call. And with that, if there are any further questions, please reach out to Manuel or me, and we are happy to discuss anything else that needs to be clarified. Otherwise, we wish you a nice weekend later on and looking forward to meet you and see you in the next couple of weeks. Thank you very much. Bye-bye.

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Timm Degenhardt, Tele Columbus AG - Chairman of the Management Board & CEO [35]

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Thanks, everyone.

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Operator [36]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.