Tele Columbus AG (TC1) Earnings Call Transcript & Summary

Good day, and welcome to the Tele Columbus AG's Q2 Results 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Leo Bayer. Please go ahead, sir.

Thanks, Keith, for the introduction. Good morning, ladies and gentlemen. It is my pleasure to welcome you in the name of Tele Columbus management team to our today's conference call following the release of our second quarter and half year results for fiscal year 2020, which ended on 30th of June 2020. This call is limited to 60 minutes. In case of any follow-up questions, Manuel and myself are happily available to discuss. I'm here today with Daniel Ritz, Chief Executive Officer; and Eike Walters, 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 happily appreciate if you were to leave the conference. Press representatives are welcome to call my colleague, Sebastian Artymiak, 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 my pleasure to hand over to you, Daniel. The floor is yours.

Thank you, Leo. Good morning, and a warm welcome also from my side to the Q2 conference call. On the agenda, I'll kick it off with key messages, followed by operational update and KPIs. I will then hand over to Eike for financial performance, and I'll be back for outlook on our 2020 guidance and strategy update. So I'm happy to report another solid quarter in terms of operational, financial and strategic performance and development. On operations, so far, we see no negative impact due to COVID-19, which is very good. The fifth consecutive quarter of positive Internet net adds has happened. And we also see positive development on Internet & Telephony quarterly net adds sequentially and year-over-year. TV trends remain challenging. However, we see quarterly net adds improving seasonally as we have guided at the Q1 call back in May. Lastly on operations, we're happy to report that we have been ranked #2 in the recent connect test on fixed-line broadband customer service, which we believe is a good testimony to the progress that we're making also in this regard. On financial performance, we are confirming our 2020 guidance pro forma strategic review one-off costs, which I'll comment on a bit more later on. Our Q2 core revenues are slightly down year-over-year by 1%. However, B2B continues to grow nicely, double-digit at 14% year-on-year. Our reported EBITDA is up 13% year-on-year in Q2 and Q2 CapEx is flat year-on-year, and is on track to meet the 2020 guidance in this regard. Last year, as I'm sure you have seen, we have thankfully and successfully found a RCF replacement, followed by favorable rating agency actions. On strategic development we have today announcing our Fiber Champion strategy, which we have defined over the course of the last couple of weeks and months with the 3 interconnected pillars that I already showed to you a glimpse of at Q1. There will be more detail on this later on in the presentation. We are working with advisers on a long-term financing structure to delever and create a sustainable capital structure, fund our growth plan and fiber rollout, and there will be a comprehensive funding update in this regards to the market in Q4 of this year. Now turning to operational update and KPIs. As already mentioned, solid growth in IP net adds. As you can see in Q2 of this year, we delivered 4,000 positive Internet net adds, the fifth consecutive quarter of positive IP net adds. So we're definitely moving in the right direction. There's also an improvement sequentially and compared to Q2 last year. On telephony, I think this is probably the positive surprise that we've seen positive net adds, good momentum in Q2. And I would argue that the pandemic shows that fixed-line telephony does indeed remain relevant, which is a good thing for us. When we look at the quarterly gross add mix, it continues to improve. Actually, we've seen an acceleration of this trend in Q2, probably to some extent, also due to COVID-19. There's a very significant increase in demand for higher bandwidth. Now 65% plus of our gross adds are coming at 200 megabits and more. This compares to about 30% of these speed tiers in our base, so more than double in the share of gross adds. And about 80% of our new customers opt for 24-month tariffs, which means that the higher bandwidth overcompensates the discount that we are providing. Now turning to TV trends, which indeed do remain challenging. As you can see in Q2, we lost 17,000 CATV RGUs and this is seasonally better than Q1, which, as I mentioned last time, is always the worst because that's where the hit with the main -- the bulk of the housing association churn, so sequential improvement, but still, obviously, not something to be proud of. This is a fact of life, linear TV customer base continues to erode slowly. On premium TV RGUS, unfortunately, the trend continues. There is negative trend. And as I mentioned last time, this is clearly due to our -- due to the fact that our product offering is not competitive. This is something that we're well aware of and that we need to fix and will fix as part of our strategy going forward. On ARPU, you don't see much change. Sequential development, slightly up. And also year-over-year development slightly up in Internet & Telephony RGU. This is partially driven by the improving gross out mix that you saw on Slide 7. But again, mind you, 65% higher speed tiers in gross adds versus 30% in the base. So this takes time until it filter through to the blended ARPU that we show here across the base. On TV, at least, we see more or less stable ARPU development. So this is predominantly a volume topic and not an ARPU topic on TV. Now here, we turn to our well-known slide on Net Promoter Score, which improves further that we're very happy about this. As you and I can see, we are positive -- in positive territory for overall PŸUR NPS across all touch points, customer service and also field service, where we see a significant positive development. And as already mentioned, we're happy to report that this is also externally recognized that we're ranked #2 among 6 ISPs by the recent connect test, and we're even ahead of the winner of this test on waiting time and availability. So things are moving in the right direction. Lastly, on PŸUR business, we see continued double-digit growth year-over-year, plus 14%. Also sequentially, revenues are up compared to Q1 by 9%. And we also see an uptick on the contribution margin. So contribution margin has improved again in Q2 of 2020 compared to Q1 of this year. We see still a healthy demand for B2B services despite COVID-19, and we're looking forward to further growth coming from our B2B segment in the quarters to come. With this, I'll hand over to Eike on financial performance.

Thank you, Daniel, and good morning also from my side. On this page, we provide you the overview of the revenue development and the underlying trends per category. So as said, the TV business remains practically challenging while IP and B2B segments continue to grow. The revenue decrease is largely explained with the ramp down of construction work. This is in line with our expectations and previous communications since the infrastructure project in Plön will end this year. The core revenues are slightly down by 0.8% from EUR 117.4 million in Q2 2019 to EUR 116.4 million in Q2 2020. Daniel said already that the RGU losses in cable TV were less than in Q1, but of course, accumulated losses have a negative impact on our revenues and amount to EUR 2.9 million less than last year. We see continuous positive momentum in IP and phone revenues. They increase by almost EUR 1 million compared to last year and also sequentially, an improvement by EUR 500,000, and this is driven by positive net adds and ARPU increase as well. And lastly, another strong quarter of B2B revenues with an increase of 14 percent points versus Q2 2019. The numbers are so far in line with our expectations, but the TV segment is something we watch, of course, very carefully. Coming to the bottom line and the encouraging trend of our reported EBITDA. So we saw remarkable development of plus 13% compared to Q2 2019. As said, headwinds in revenues were overcompensated by cost reductions in which the direct costs are directly linked to the low-margin construction revenues and equally down as the revenues came down. The major contributor to the increase in Q2 2020 stems again from fewer nonrecurring expenses of EUR 4.2 million, which are directly cash effective. The nonrecurring items amount year-to-date to EUR 5.3 million and already includes some costs for the strategic revenue we started a couple of weeks ago. But even with this cost, the full amount is still less than 1/3 of H1 2019 of the nonrec. So higher own work capitalized is because we put more installation and construction work internally to our subsidiary, RFC and reduce the external orders. So we just switched the working power and the operations on our network to our internal subsidiary. Overall, we managed the cost very closely. You can see just almost green bars there due to the uncertainty of the impact of COVID-19. With this, our Q2 EBITDA is in line with our expectations to reach our full year 2020 guidance. So the financial results reported profit is up by more than EUR 4 million year-on-year. And you see positive impact from EBITDA of EUR 6.6 million in total, while several noncash effects compensate themselves. Depreciation and amortization is EUR 8.7 million higher than last year and the reason for that is not operationally driven since the comparative base in H1 2019 is too low due retroperspective adjustment of activated construction work in Q3 2019. So 2020, depreciation is all in line with our expectations, it just began as a comparative basis of 2019. The decrease in other financial result is mainly due to a value adjustment of embedded derivatives. And lastly, the tax effect is driven by several effects. So we manage the tech optimization like the internal entity mergers become effective in 2020. That's something we announced already last year, and now they became effective. Then we had adjustments on the deferred taxes. And last but not least, the comparable quarter Q2 2019 includes accruals for the tax audit and result in high comparative base. So coming to the CapEx. Due to COVID-19, we were very conscious with our CapEx spendings. And there, against backdrop of the uncertainty of the pandemic, we postponed some investments into the second half of the year. So the CapEx is in line with Q2 2019 and Q1 2020, but slightly below our budget. However, it's not material and we can accelerate once we want to. The majority of our investments are again in customer projects and the network infrastructure. 40% of our investments in Q2 were directly network-related. Maybe in this regard, some of you noted the news that we put our fiber ring in Brandenburg in operation recently. This is a good example of our investment strategy to build and run a high quality network. Then own work capitalized is higher because of the aforementioned switch from external installation partners to our 100% subsidiary, RFC. This internal people are doing installations on our network and can also categorize as network investment. With that, let's move to the slide with the leverage and liquidity table, which is the last one of my section. By end of June, we had a cash position of EUR 60 million available, so EUR 50 million of the existing RCF and EUR 10 million cash on hand. This is very stable since the beginning of 2020. By beginning of August, we had almost EUR 80 million cash available, and it's very, very good development. The table on this page show you the debt structure by the end of Q2. By beginning of September, it will look slightly different because of the refinancing of the existing RCF. I think most of you noted our publication on the August 7 where we announced that the replacement of this credit facility. We have entered into a binding commitment regarding an additional term loan of EUR 40 million as well as a new RCF of EUR 10 million provided by Goldman Sachs and ING. Each facility will have a 2-year tenor with a margin of EURIBOR plus 500 basis points. For us as a company, it was important to avoid any rating downgrade given the upcoming maturity of our existing RCF in January 2021. We aligned closely with all 3 rating agencies in the last couple of weeks in the process and always kept them well informed about the status quo. In the end, this leads to the desired outcome of achieving a refinancing without any negative rating section. By end of August, the current RCF will be a canceled and the proceeds of the new term loan will remain on balance sheet in order to write liquidity cash. Given that the existing RCF was undrawn per 30th of June and remained undrawn per August, there is no need for any repayment. So I'm very glad that we were able to overcome the short-term liquidity concerns of the rating agencies and now hand over to Daniel and the strategy update.

Thank you, Eike. So turning to Page 19. As already mentioned in the highlights at the beginning, we are confirming, based on our Q2 results and half year results, our full year 2020 guidance pro forma strategic review one-off costs. On Page 20, this is the chart which I already shared with you at Q1 to give you a glimpse. So just by way of reminder, and then I'll go into more detail on each of the 3 pillars here on our Fiber Champion strategy. First pillar, the significant brownfield fiber to the building and home overbuild opportunity in our 2-way upgraded footprint. We have a very attractive unitary cost to connect. Second pillar, the penetration upside, which today, our IP penetration stands only at slightly more than 20%. We see a significant opportunity to grow that IP penetration in our footprint and monetize the fiber investments through both improved retail operations and our open access strategy. And lastly, the long-term customer relationships. We don't use -- we don't do all of this in the wide open, but rather within the context of our many concession agreements that run for 8 to 10 years on average, and we expect to be able to create a natural lock-in with a superior access infrastructure and ISP choice for tenants, which should be a good selling argument towards our housing association customers. Now let's look a bit more detail into each of those pillars. First pillar on the fiber opportunity. You can see here the map of Germany, and you can see based on a recent study by the Ministry for Traffic and Digital Infrastructure, the fiber to the building and home coverage by federal state. As you can see here, it's really only Hamburg that stands out with a significant penetration and on average, we're around 10%, but the low end, we have many in the single-digit percentage points of penetration. On the right-hand side, you can see mapped against this list, the share of our own Tele Columbus 2-way upgraded homes connected by federal states. And you can see 2 things. One, it's fairly concentrated. About 80% of that footprint is within 5 federal states. And of these 5 federal states, they're all at 14% or -- and in most cases, actually significantly lower fiber to the building or home penetration today. So there's a significant market opportunity in our footprint. And I remind you that given that we focus on our existing footprint, there's actually also no overlap with other fiber initiatives that are ongoing as we speak. So then we've done some very detailed bottom-up work based on geospatial data across our city footprint, we've classed our cities into what we call big cities and value cities predominantly. They are also legacy cities, but let's focus on the ones that matter. Big cities, the name says it all. These are the big ones. Here, we have given the example of Berlin. And here, our goal is to secure our current positioning with the fiber optic upgrade in our footprint. And the overbuild and upgrade will take place opportunistically along the contract waterfall to make sure that we align contract extension to the actual investment decision. There will be more on contract waterfall later in the presentation. Then there are, in our view, very interesting, what we call value cities, these are medium-sized cities within our footprint where we will give you the example of Bitterfeld-Wolfen, a city in Saxony-Anhalt, and there are many of these mid-sized cities. And they're also much less focused by the competition. So here, we have, in many instances, a significant part of the city already covered with our infrastructure. In the case of Bitterfeld-Wolfen, you can see 16,000 households out of 20,000. And here, our intention is really through the overbuild to come up with almost a local infrastructure monopoly. And we will also look left and right when we deploy fiber trunks to see whether we can slightly expand our footprint to adjacent homes and capture also potential for B2B business. So here, we see a significant synergy also with our B2B segment. Now what are we aiming for? We here show you some high level numbers. Be assured that behind all of this is a very detailed business plan, which management has developed, therefore it's a management plan. Our ambition is that in the long run, and this is 10 years plus, that we will cover or connect 75% of our 2-way upgraded homes connected footprint to fiber to the building and home. In the midterm, over the next 5 to 6 years, that percentage will rise to around 40% of our footprint. Now on the right-hand side of the chart, you see some proof points on the claims that we've made at the beginning about attractive unitary cost to connect. These are actual real-life fiber to the building overbuilt projects that we have delivered. They're quite sizable, as you can see in terms of housing units between 10,000 and 15,000. And as you can see here, we have an average unitary cost to connect of an average around EUR 427, the spread is between EUR 275 and EUR 503. So this is a very attractive unitary cost to connect, which lends itself well to attractive returns on investment subject to achieving the desired IP penetration. Second pillar, IP penetration. So there's a penetration upside from opening our network to other ISPs to drive volume. The open access strategy was previously announced. So this is nothing new. We've just expanded on it. The basics here are that we will voluntarily relinquish the exclusivity in-house, which has been awarded to us through the concession agreement or provide access to other ISPs without infrastructure, enable them to market Internet services and only Internet services to households in our footprint. We believe that with the oncoming fiber overbuild, the superior infrastructure that we're going to construct will act as a pull factor for ISPs to become whole buyers in our network. And these, of course, are all secured through long-term contracts with fees that are paid by the wholesale taker to Tele Columbus. The benefits that we expect from this open access strategy are manyfold. One, from a tenant point of view and housing association point of view, freedom of choice should be an upside because we're very happy if they take PŸUR. But if they prefer someone else, so be it, because eventually, we win for infrastructure wins. We believe that the reduced incentive to roll out competing fiber infrastructure has already won. And we believe that we'll be in a position to leverage in marketing the sales capabilities of other ISPs to increase network utilization. As I mentioned before, we win if our infrastructure wins. And the additional revenues will be used to refinance the planned fiber investments. So here, again, what is our ambition baked into the plan. Today, as you can see on the far left, IP penetration, Internet penetration in our footprint is around 80%. That is expected to grow over the next 10-plus years to 90%, so there's still some market growth. Today, our retail penetration, because today is only retail and no wholesale yet, is around 20%, slightly more. And the other 60% is with the competing infrastructure, so the twisted pair of copper. And our ambition is, over the mid- to long term, to drive up this through a combination of retail to some extent, wholesale mostly to 65% in our footprint, again, 10 years plus. So the 65% may look ambitious and definitely is an ambition. But when we look around in terms of benchmarks, elsewhere in Europe, it is actually quite achievable over a 10-year-plus period. On the right-hand side, you can see some examples of IP penetrations that we have achieved in newbuilds, red and blue overbuild projects. This is retail-only, mind you, there's no wholesale yet. So in retail -- in newbuild projects, we have achieved penetration between 40% and 85%, which is quite sizable even against competition that also -- have deployed fiber there. And in the overbuild projects, we've seen some uplift, not that much yet. This is predominantly because we have deployed fiber to the building, but due to capital restriction, not yet DOCSIS 3.1, which means the differentiated product experience that comes from the combination of fiber to the building and DOCSIS 3.1 is not there yet. But nevertheless, in the last couple of months, we've already seen an IP penetration uplift of 2 points, and there's more to come. Now the last -- the third pillar are our long-term customer relationships with the housing association. This is a very loyal customer base, if you treat them properly and well. Their main concern, of course, or in particular is to satisfy tenants. So efficient infrastructure, attractive part of the good customer service lead to very long-term relationships. Many of them that we've had have existed for over 20 years. So we believe there are some significant barriers to entry for other competitors that would potentially want to break into our footprint. As you are aware, these are 8- to 10-year contracts. And once we have the concession, no other cable competitor has access to the building for the duration of the contract. And therefore, the only other alternative infrastructure there is, is the twisted pair of copper, which puts us in a good position for very targeted precision marketing, especially at the time of upgrade. Here another proof point on the -- on housing association. You see a schematic of our contract waterfall. 3.3 million homes connected total, of which 2.4 million are 2-way upgraded, as mentioned. And you can see, over the years, how many housing units are coming up for renewal. So it's fairly, evenly distributed, and there's also a significant part of these housing units are within contracts without expiry date or automatic renewal. And on the right-hand side of the chart, you see an observative press release which we put out in March of this year, an example of a housing association that through the contract extension discussions we've had, which we have won or which has been awarded to us, has asked us to overbuild more than 7,000 households with fiber to the building. So this is just one data point, and there are many others to demonstrate that there is a significant demand from housing associations to get fiber to the building and eventually to the home. So all of this sums up as follows: on the current stances, our fiber champion strategy is defined. What I've shown you here is just a couple of high-level slides to give you a glimpse of what we have in mind. There's obviously, as I mentioned, a very detailed strategy and business plan behind it. As Eike told you, we have secured the financing for the current business. And as we've shown to you today, the operational development, the KPIs are progressing in the right direction. With this, we are now very much focused on the long-term financing structure. We have hired advisers to work with us on this in order to delever and create a sustainable capital structure and fund the growth plan and fiber rollout, and we're in the process of evaluating multiple funding options. And we will come back with a comprehensive funding update in Q4 2020. If you ask the question, why we haven't provided a precise date. It's very simple. The strategy is something you define internally, so you can have it under control. Long-term financing structural options depend also on others. So this is a process that's ongoing. We're working hard on it, and we will come back, as I said, in Q4 2020. This concludes our presentation, and I'll hand it back now to the operator for Q&A.

[Operator Instructions] And we'll now take our first question from Christian Fangmann from HSBC.

I have actually 2 strategic questions and then more an op question. We have potentially a change in the utility bill in Germany, at least the first -- also the first draft implies that leading company will acquire the utility bill, cable privilege could actually fall away. One of your pillars is actually -- or new pillars is based on a long-lasting housing association contracts. So what's your take on the current debate in the likelihood that this will actually fall away, this -- let's say, cable privilege? And secondly, you mentioned open access as really one pillar to drive penetration. I mean, so far, you only have, I think, my understanding, a wholesale contract with Telefónica Deutschland. Is there more interest from others? Can you give us an update on how you see these kind of things developing in terms of open access going forward? And the last question is actually on your ARPU Internet & Telephony, which is up nicely. My question would be, and you mentioned that gross adds and better mix is driving some of that ARPU uplift year-over-year. But how much is actually the fixed-line telephony usage driving this as well, which is probably a bit more short-term one-off rather than really structurally sustainable?

Yes, Christian. Thank you, Daniel here. So on your first question, yes, of course, we're very much aware of the situation. So look, first, on what the status is and then how we view this in the context source of our strategy. So yes, indeed, this has been proposed by one ministry, and it's now among other ministries for review. And there's quite a lot of criticism already out there by several other ministries. So this is definitely not going to sail through easily. That's one observation. Secondly, let's be clear, even if this privilege was to be discontinued, there would still be concession agreement. So don't confuse the one or the other. Even then there will be concession agreements, however, there will be no more bulk TV contracts, but rather, there would be single or individual contracts. But the concession agreement would still stay. So therefore, the third pillar of our strategy remains. I think that's a very important observation. Now even if this were to happen, I'm not going to speculate on the likelihood that what I'm saying is it's not a slam dunk. But even if this were to happen, one, there would be grandfathering rights for existing concession agreements of 5 years until the year-end of 2025. So that provides ample time to work on what needs to be worked on. And secondly, we have, as you've seen, quite a significant contract waterfall ahead of us. And so we would work hard then to prolong existing agreements before the cut-off date at the end of this year. But again, the main message here is, even if this were to fall, the third pillar remains. So then on your second question on open access, it is correct what you have stated that we have a signed contract with Telefónica Deutschland, which is under implementation. We are in discussions with other parties at various stages of development, but I hope you understand that we're not at liberty to disclose who we are talking to and where we are in the process because these discussions are, by definition, private and confidential. Maybe what I actually can say as a model assumption in the penetrations that we have shown you, we have assumed that in addition to the Telefónica Deutschland one, we would get 2 additional national operators to join our network. That's a model assumption, but that's as much as I can say on this topic for the moment.

Yes. And I will take the first question, Christian, and thank you. So this is, from our perspective, really a minor impact. And if you follow the ARPU development over the last quarters, you can see that by the end of 2018, the ARPU for Internet & Telephony was below EUR 24. So this is a steady trend, slowly but steady. And now in Q2 2020, there is maybe a minor impact, but not a huge one. So from our perspective, it's really bandwidth driven.

And our next question comes from Titus Krahn from Barclays.

And just 2 quick ones from my side. The first one on your fiber rollout plans. You talked in your presentation about opportunistic overbuild in big cities. How do you decide which housing associations to overbuild? And also, you're indicating that you might expand your footprint in adjacent homes. Can you give any indication around how big that potential brownfield opportunity is? And the second question is on the rollout costs of your fiber builds. And in your presentation, you've provided a very helpful overview of CapEx incurred for your recent projects. Could you please elaborate on what are the main driving factors behind the differences in cost between the different projects? And how do the rollout costs differ between your big cities and value cities? And looking forward, is the recent average you reported a good indicator of costs for those households you're planning to connect in the mid- and long-term?

Titus. Daniel here. Thank you for your question. So first on the fiber rollout, which housing associations -- look, so in the big cities where we have the larger concession agreements, we would obviously want to link the decision to roll out fiber to prolongation of the housing association contract. So then the word opportunistic means we would -- we look at our contract waterfall and say, I don't know, in the city Leipzig for instance, let's just take one example. What are the main upcoming renewals of significantly sized concession agreements we would approach the housing association, obviously, way ahead of time and say, look, this is what we have in mind, right? This is our value proposition to you. This is what we would do for you. Can we, in return, agree for an extension of the concession agreement terms which are mutually acceptable? And we are under the assumption that, obviously, not everyone will take this, but many will take it because it's a good value proposition, which is a very differentiated one also, which today no one else is offering. So that's what we mean follow the contract waterfall. So we would not just build and then hope for the best, right? Now this is slightly different in smaller cities. Because there, the cost of building, if the total buildout costs would not that be significant, so we'll probably do this more based on buildout economics and they -- once we're already there, and we buildout one housing association, while they're added, also let's do the other one, which is sitting right next door even though we haven't maybe extended the contract yet because it's up for renewal only maybe 3 or 4 years from now. But that's then a trade-off decision to be made, certainty on investment versus cost of buildout. Now on the question -- the second question you asked about footprint expansion. Look, so this is predominantly focused on our existing footprint. I think that's a message that I want to say loud and clear. There's always an upside of trying to steal concession agreements from other operators, but that's not our primary focus because we believe that driving IP penetration in our existing footprint is a very significant opportunity. Having said that, in some of these -- or in some of these value cities, where we today have, let's say, 90% coverage, we would, as I said, look left and right when we put in a fiber track and see what else lies along the way, but that's the icing on the cake and not the cake. One can obviously decide, at some stage, to go more aggressive and to go beyond the existing footprint, but let's first focus on what lies ahead of us and which is obvious. Now on the rollout cost, which you asked. So this is, I think, a good proxy for fiber to the building. Right? If you go fiber to the home, you would have to add to that, obviously, the cost of in-house cabling. And this would increase the unitary cost to some extent. Now what is included in these costs that we show you for fiber to the building and where it comes the difference, the spread. What is included is civil works, so digging for fiber trunks, the fiber to the building nodes and the optical equipment, both in head ends and the discrete cabinet. And the main difference, of course, is the civil works. We assume around EUR 110 per meter of digging as an average cost. And the more you have to dig, the more expensive you get. Now if you ask the question, why are unitary costs actually reasonable compared to maybe some other fiber initiatives that are out there, it stems really from our dense urban multi-dwelling unit footprint where we have more capillarity already in our existing network. I hope that answers your questions.

Our next question comes from Heike Pauls from Commerzbank.

I hope you're well. I have a few questions, please. First, about your mandate to sort out the funding of your Fiber Champion strategy. Can you confirm it's an investment bank? The press basically said it's Bank of America. And what exactly is the scope? How far along are we, for example, our management meetings being scheduled already? Second question is, when will you set the date for this year's AGM? And the third question is, is it correct that any rights issue on your end would require a majority of 75% or vote of 75% rather than a simple majority given that currently no resolutions are in place?

Yes. Thank you for your questions. Look, so as we've said, we have mandated advisers. You can safely assume that includes an investment bank, amongst others. At this stage, we don't think it's -- when you used to confirm or deny any names, just assumes it's an investment bank. Look, so the scope, as I said before, and this continues to apply, we are evaluating multiple options to inject the required capital to, one, deleverage; and two, fund the growth plan that we have in mind. That's as much as I can say for this for now. And how far along are we -- look, if we want to comment, I'm committed with an update, actually a conclusion in Q4. You can safely assume that we're in the midst of things, but we prefer to talk about this when we have something to say, which is not now. The date for the AGM is in the making. And again, we will communicate that when the time is right. And rights issue -- let's just be clear. I'll happily answer the question, but that does not mean that the rights issue is on the cards. This is one of multiple options, as I've mentioned, and there, the answer to your question is simple majority.

Our next question comes from Wolfgang Specht from Bankhaus Lampe.

Some additional ones from my side. First, on the TV subs. Can you give us an idea where the churn is going to here? Is it other contracts going to waterfall, to other cable operators, or is it landlords starting the business with cable TV on their own? And then second question regarding one-offs. What can we expect from one-offs in the second half? It would be good to get an idea of the delta to your guidance this year? And the third one on financing. You're talking about sustainable financing structure. In what regard would you measure this? Simple EBITDA leverage or do you have categories here?

Yes, Wolfgang, Daniel here. I'll take the first one and then Eike will answer the following question. Look, so on the TV churn, let's start with here, TV. The 17,000, what I can give you as an additional information, of the 17,000 in Q2, 10,000 are individual contracts and 7,000 bulk, right? So 7,000 bulk related to concession agreements that have gone. 10,000, so more than half is individual. Now look, we don't know where they go. But my guess is, especially on the individual side, people probably say, I no longer need this linear TV so I'll get something else. There are many alternatives out there. It could be IPTV on the twisted pair of copper, it could be OTT TV. I think the reality is that linear TV is a slowly eroding product line. There's not that much you can actually do about it. You can contain -- try to contain the impact, but this is not a growth area for sure. And then on premium TV, we know the reasons why, right? This is not a market issue, this is a product issue on our side, which we know how to fix, but that's a funding question and therefore, relates to what I've been talking about in the part of my strategy update. But there also, the assumption would be that they change to an IPTV or to OTT TV product.

Yes. Wolfgang, may I'll take the second and then first question. And you asked for outlook for nonrecs in H2. This is something we will not guide for. And what we can say is that we are over the nonrecurring items from integrations and from the past, and then, of course, in such a strategic project, and if you have mandates, for example, an investment bank, a part of the nonrecs are success-based. So that means it's not appropriate to give a clear guidance for nonrecurring for H2 so far. But I can assure you that we are very cautious with our costs and managing them very closely. But as far -- as more far you come then it's -- most higher will increase the cost because there's more work needs to be done. Your question regarding the -- what you find the sustainable financing structure, of course, it's a part of the EBITDA net debt ratio. Of course, this is 1 piece, but second piece, of course, the maturity of the financing vehicles, then the cost of the vehicles. And lastly, you need -- from our aim, we would like to have decent cash on hand to rollout our plans and to be in a situation which is very comfortable and not always very close to covenant or something which might afraid some market participants.

And then maybe in addition to that, you kept the wording for free cash flow breakeven in Q4? Is that right?

No, we haven't changed it. So we said at the beginning of the year in our guidance without obviously guiding for that, that we will be cash flow positive. And that's what we'd like to stick to right now.

And our next question comes from Simon Bentlage from Hauck & Aufhäuser.

My first question regards to the fiber rollout. Based on the assumptions you gave us in your update, I would assume this to cost some EUR 300 million to EUR 400 million over the next 5 years. So I'm just trying to understand, is this CapEx that will add on to your current CapEx envelope? Or is this sort of partly already included? So maybe you can just shed a bit of light on how the CapEx is seen to develop throughout the next 5 years. And then the second question is basically more on the investment case behind the fiber rollout. You mentioned attractive return on investment. Maybe you can also give us a bit more color here on what exactly you are looking at there in terms of returns and also maybe what kind of ARPUs you are expecting from your fiber, yes, potential customers or contracts then going forward? Yes. And then my last question would be a bit more technical, and in regards to the new RCF. Is the covenant that -- as far as I know, we're linked to the old RCF. Are they the same in your new structure? Or did they -- have there happened any changes with the refinancing, basically?

Simon, Dan here. Thank you for your question. Look, on the fiber rollout and on the CapEx, let me give you some pointers, right? So -- and you can see the ambition that we have stated in terms of them connecting 75% of our homes connected to fiber, be it fiber to the building or home over the next 10-plus years. And that's given you the information that, for fiber to the building, on average, the unitary cost to connect is roughly EUR 430 based on previous examples or previous projects that obviously will differ depending on how much digging you have to do. For fiber to the home, you have to add some additional cost for the in-house cabling. That's on the deployment CapEx. Then in addition to that, we'll require CapEx for the layer 2 satellite head ends and for backbone upgrades, you need to provide -- you need to add capacity CapEx because there's no point in just deploying fiber, but then if you are successful in IP penetration, which we aim for, then not delivering the speeds that has been priced. So that will have to be added, plus also some revamp of service platforms. I mentioned are premium TV platform. So therefore, I think the CapEx numbers that you have in mind are maybe a bit on the low side. But you can do your own math, right? And some of that CapEx is already in there today. But obviously, the deployment CapEx will be on top because we're adding to the footprint, right, significantly. But again, mind you, that's a 10-year-plus project. So that's, I think, as much as I can say on CapEx. Now on the investment case, ROI and on ARPU, look, it obviously depends a lot on assumptions. But I think the first thing I would say is, don't expect ARPU uplift simply from the fact that you provide fiber because pricing for broadband in this market is by speed tiers and not by infrastructure. But obviously, an assumption that we have baked into our plan, and that's actually supported by the evidence that we already see in our gross adds over the last couple of quarters is that more and more customers, retail and also wholesale, once this kicks in, will opt for higher speed tiers. And therefore, we expect to see an ARPU uplift overtime even without increasing prices. And I think on the ROI, I mean, rather than giving you a precise number, let's see how we think about this. You have the unitary cost to connect. You have the SAC. You can then add in your own ARPU assumptions based on what I just told you. You can apply a certain churn rate, which will obviously be lower once the infrastructure is better than it is today. And then I think you get to -- on a per customer ROIs which are actually, in our view, quite attractive. But the spread is obviously material. So therefore, I would prefer if we do your own math. And then a technical question. Yes, Eike?

I will take the technical question, Simon. It's very similar to the existing covenants we have and the hurdle of covenants will remain at 6.5%.

[Operator Instructions] We'll now take our next question from Yemi Falana from Goldman Sachs.

Congratulations, Daniel, on another strong quarter. Two questions from me. Firstly, from a strategic perspective, you've set out a clear plan on how you need to drive value in your network infrastructure. While you continue to consider multiple funding options, is it fair to assume that you'd want to be a majority owner of this infrastructure going forward? And secondly, on the unit cost of fiber rollout, you've hopefully set out kind of some case studies on the cost to roll out fiber building for some of your multiple dwelling units. What does the kind of delta or the difference in the FTTB versus FTTH cost profile look like on average across those cities? Any kind of color on that in-house cabling and those other costs would be super helpful?

Yes. Daniel here. Thanks, Yemi. First of all, thank you for your nice words. Appreciate it. Yes. So on your first question, yes, your assumption is correct. We view -- and I think it's self-evident from what we have outlined, we view the network, the current one and especially the future one, as an integral part of our strategy. And therefore, most definitely, we aim to have majority control over this asset because it is integral to what we have in mind here strategically. On your second question about the FTTH versus FTTB. Look, so it also -- it all depends on how many floors you have to cover, what the status of the in-building is if you have to do something on the in-house duct, et cetera, but you should pretty assume, you can add to the numbers we've shown you for FTTB EUR 200 to EUR 300 on a unitary basis for the in-house cabling. That's probably a reasonably safe assumption.

Our next question comes from Antonio Barranco from BlackRock.

I guess a couple of questions on the long-term funding and the time line that you have given. I guess, when I first read the press release, I thought you meant quarter 4 earnings announcement. But from your words, you mean quarter 4 calendar time? That's the first question. And the second question, when you think about your funding options, to what extent it's important, the cheaper cost of capital or there are other considerations?

Antonio, thank you very much. No, it's actually the latter. So we're talking here about calendar quarter #4. So technically, from 1st of October until 31st of December, we'll give the comprehensive funding update to the market, yes? So the announcement of the funding update will not come only in March next year with the announcement of our full year results. And maybe the second question on how we view the cost of capital at this point in time, this obviously plays part of our overall view that we take on how to form and how to create the long-term capital structure, but we would like to refrain from any more details at this point in time.

It appears we have no further questions at this time. I would like to hand the call back to our speakers today for any additional or closing remarks.

Yes. Thank you. So thanks, everyone, for listening to our Q2 presentation and for your many questions. Appreciate it. So again, in summary, I would say, operationally we're moving in the right direction. TV remains challenging. That's a fact of life. But the other business segments develop as per expectations. Also operationally, otherwise, in terms of NPS and a few other parameters, we're making progress in the right direction. As indicated earlier, no miracles, this is just a lot of hard work that we'll continue to do. And then on the strategy, we believe that we have outlined a fairly clear and ambitious strategy. We are busy working with advisers on funding options to then eventually deliver this strategy. And our promise and commitment is to update the market with the conclusion of this during Q4. Thank you very much, and looking forward to speaking to you soon.

This concludes today's call. Thank you for your participation. You may now disconnect.