Deutsche Telekom AG (DTEGY.PK)

Q4 2011 Earnings Call

February 23, 2012 8:00 a.m. ET

Executives

Stephan Eger – Head of Investor Relations

René Obermann – Chairman & Chief Executive Officer

Timotheus Höttges – Chief Financial Officer

Philipp Humm – President & Chief Executive Officer, T-Mobile USA Inc.

Analysts

Mathieu Robilliard – Exane BNP Paribas

Simon H. Weeden – Citigroup Global Markets Ltd.

Frederic Boulan – Nomura International PLC

Ulrich Rathe – Jefferies International

Hannes Wittig – JPMorgan Securities Ltd.

Peter Kurt Nielsen – CA Cheuvreux Ltd.

Matthew Bloxham – Deutsche Bank

Robin Bienenstock – Sanford C. Bernstein & Co., LLC

Justin Funnell – Credit Suisse

Nick Delfas – Morgan Stanley

Paul Marsch – Berenberg Bank

Dominik Klarmann – HSBC

Andrew Parnis – UBS

Emmet Kelly – Bank of America Merrill Lynch

Presentation

Operator

Good afternoon, and welcome to Deutsche Telekom’s Conference Call. On our customer’s request, this conference will be recorded.

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Disclaimer, this presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel related measures. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom’s control.

Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations and our network upgrade and expansion initiatives. In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development.

Further, the economic downturn in our markets and changes in interest and currency exchange rates, may also have an impact on our business development and the availability of financing on favorable conditions. Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the Group and operating segment levels.

If these or other risks and uncertainties materialize or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.

In addition to figures prepared in accordance with IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, free cash flow, gross debt and net debt. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.

Now please listen to the statements of René Obermann and Timotheus Höttges, and Philipp Humm. Afterwards, you are welcome to ask your questions.

May I now hand you over to Mr. Stephan Eger.

Stephan Eger

Yeah, good afternoon and good morning to the listeners in the U.S. As always, we'll be presenting our quarterly results, as well as the full year results, with our CEO, René Obermann, and with our CFO, Tim Hoettges. We will be having an extra session today with Philipp Humm, CEO of T-Mobile US, with respect to the fourth quarter result of T-Mobile US, and also the way going forward in 2012. And after that, we, as usual, will be kicking in with Q&A, and as a starter, I would like you to restrict yourself to two questions per person. Having said that, I would like to hand over to René.

Re

né Obermann

Thanks, Stephan. Good afternoon, everyone. First of all, let me go straight into the results. First of all, we have delivered our full year targets with an EBITDA of €18.7 billion, and a free cash flow of €6.4 billion.

Important to notice, that this free cash flow figure does not include the cash element of the breakup fee received in December 2011. The reported net income of €0.6 billion is impacted by exceptional write-offs at T-Mobile US, and at the OTE Group. With our Save for Service program we overachieved our targets already earlier than planned with savings of €4.5 billion in 2010 and 2011.

As a result of achieving our guidance, the management and supervisory board will again propose a €0.70 dividend per share to the DT AGM in May, which is in line with our three year outlook on shareholder remuneration. The main highlights for the divisions were as follows.

In Germany, we defended our market leadership in Broadband and Mobile, delivered good growth momentum in important initiatives such as the VDSL, Entertain, and our contract customers, while our line losses declined by over 20% year–on–year. And thanks to €1.2 billion of cost savings, we stabilized our EBITDA year–on–year and we actually increased our margin to close to 40%.

In Europe, we faced a year of difficult economic conditions and tough regulation and competition. Nonetheless, we were able to show good growth rates in our TV and in our Broadband customer bases. Also in Europe, net cost savings of €0.7 billion helped us to improve our EBITDA margin by 50 basis points year-on-year.

Our T-Mobile US business suffered from a difficult year, with a pending deal on the one hand and a very difficult fourth quarter due to the iPhone 4S introduction with heavy promotions by three competitors. As a result, the revenue and contract customer development was not satisfying though the EBITDA very much was.

Philipp is going to update us later on the call on what will be the way going forward with our challenger strategy. Let me come back to our 2011 guidance for a second. Due to our pending US deal, we guided for our continued operations, i.e., excluding T Mobile US on EBITDA of around €14.9 billion, which we delivered.

For the entire Group, we guided for an EBITDA of around €19.1 billion, and we delivered €18.7 billion. But if we add back the €0.2 billion of currency losses in the year, we are 1% below the midpoint of our guidance. For the free cash flow, we had guided at least €6.5 million and we have delivered €6.4 billion impacted by the currency losses again of €0.1 billion. That means, to the point, €6.5 billion, comparing it like for like. It also means a payout ratio for our dividend of 47% and that differentiates us positively from some of our peers.

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