Combined Management Report

Telefónica Deutschland Group at a glance

TELEFÓNICA DEUTSCHLAND GROUP AT A GLANCE

Financial Overview

1 January to 31 December
(in EUR million)20182017% Change
Revenues 7,3207,2960.3
Revenues (excl. regulatory effects 2018) 7,3647,2960.9
Mobile service revenues5,2675,287(0.4)
Mobile service revenues (excl. regulatory effects 2018)5,3105,2870.4
Operating income before depreciation and amortisation (OIBDA), adjusted for exceptional effects¹ (excl. regulatory effects 2018) 1,9381,8405.3
OIBDA adjusted for exceptional effects (excl. regulatory effects 2018)26.3%25.2%1.1%-p.
Operating income before depreciation and amortisation (OIBDA), adjusted for exceptional effects¹1,8841,8402.4
OIBDA margin, adjusted for exceptional effects25.7%25.2%0.5%-p.
Operating income before depreciation and amortisation (OIBDA) 1,7971,7850.7
OIBDA margin24.6%24.5%0.1%-p.
Operating income (190)(84)125.2
Profit/(loss) for the period (230)(381)(39.5)
Basic earnings per share (in EUR)²(0.08)(0.13)(39.5)
Total CapEx³(966)(950)1.7
thereof CapEx⁴(958)(932)2.8
thereof additions from capitalised finance leases(8)(18)(55.5)
Investment ratio (CapEx/Sales ratio)⁵13.213.01.4
Operating cash flow (OIBDA-CapEx)⁶839853(1.7)
Free cash flow pre dividends and payments for spectrum⁷7336807.8
Total accesses as of 31 December (in thousands) 47,08947,604(1.1)
Mobile accesses (in thousands)42,81943,155(0.8)
thereof M2M accesses (in thousands)1,1881,02715.7
Mobile accesses (in thousands) according to calculation customary to the market⁸45,25645,918(1.4)
Net adds in mobile prepaid business (in thousands)(1,338)(1,903)(29.7)
Net adds in mobile postpaid business (in thousands)1,00273735.9
Postpaid share (%) 52.0%49.3%2.7%-p.
Total ARPU (in EUR) 10.09.73.1
Postpaid churn excl. M2M (%) 1.6%1.6%0.0%-p.
Non-SMS data over total data revenues (%)85.4%80.8%4.6%-p.
As of 31 December
20182017% Change
Net financial debt⁹1,1291,0646.1
Debt ratio¹⁰0.6x0.6x8.5
Number of employees8,8689,281(4.4)
Basic information on the group

BASIC INFORMATION ON THE GROUP

This report combines the Group Management Report of the Telefónica Deutschland Group, consisting of Telefónica Deutschland Holding AG (also referred to as Telefónica Deutschland or Company) and its consolidated subsidiaries and joint ventures (together referred to as the Telefónica Deutschland Group or the Group), and the Management Report of Telefónica Deutschland Holding AG.

Telefónica Deutschland Holding AG is a stock corporation (AG) under German law with its registered office in Munich, Germany.

Telefónica Deutschland Holding AG is the parent company of the Telefónica Deutschland Group. It is included in the Consolidated Financial Statements of the ultimate parent company, Telefónica, S.A., Madrid, Spain (Telefónica, S.A.; its group: the Telefónica, S.A. Group). The direct parent company of the Telefónica Deutschland Group is Telefónica Germany Holdings Limited, a wholly owned subsidiary of O2 (Europe) Limited, Slough, United Kingdom (O2 (Europe) Limited), and an indirect subsidiary of Telefónica, S.A.

The financial year is the calendar year (1 January to 31 December).
 

Business Activity

 

With 47.1 million customer accesses as of 31 December 2018, Telefónica Deutschland Group is one of the three leading integrated network operators in Germany. We offer mobile and fixed services for private and business customers as well as innovative digital products and services in the area of IoT (Internet of Things) Advanced Data Analytics. In addition, our numerous wholesale partners purchase extensive mobile communications services from us.

In the mobile sector, we serve the increasing demand for mobile services as a consequence of the digitalisation of ever more areas of life. We are the only telecommunications provider with mobile communications network of its own that concentrates exclusively on Germany – Europe’s most attractive mobile communications market. With a total of 42.8 million mobile accesses as of 31 December 2018, we are a leading provider in this market. We have a direct customer relationship with more than 80% of our mobile customers. In addition, we have already acquired 4.3 million fixed-line customers for our telephony and high-speed internet products. We are a part of Telefónica, S.A. Group, one of the biggest telecommunications companies in the world.
  
Our brands: Covering all market areas & customer needs
A key success factor of our marketing and sales approach is our consistent and focused multi-brand strategy. We offer private and business customers a wide range of high-quality mobile services and fixed line products with our core brand, O2. Large international businesses are addressed through the Telefónica brand.

We rely on complementing sales channels in order to serve the various customer needs to the best of our ability. Our sales landscape includes both direct sales channels including our own shops, a countrywide network of independently operated franchise and premium partner shops, online and telesales, as well as indirect sales channels such as partnerships and co-operations with retailers via physical and online channels.
  

With our secondary and partner brands and through our wholesale channels, we reach further large groups of customers that we do not target with our O2 brand. In addition, by means of joint activities and strategic partnerships, we offer further mobile services brands. These include, for example, TCHIBO mobile or ALDI TALK, in cooperation with MEDIONmobile. Our multi- brand approach enables us to address the whole spectrum of customers with tailored product offerings, sales and marketing, thereby increasing our potential revenue.
  
Mobile service is the main revenue stream
In 2018, at EUR 5,267 million, mobile services were the most important revenue stream for the Telefónica Deutschland Group (72% of total volume). In this area, we offer private and business customers mobile voice and data services both on a contractual basis (postpaid) and in the prepaid segment.

The basis for this is our state-of-the-art mobile communications network. By the end of 2018, we had largely completed the merger of the O2 and E-Plus networks, which will allow our customers to benefit from the strength of the new joint network. The combined UMTS/LTE coverage for mobile internet is approximately 95%. The Telefónica Deutschland Group has also consistently continued the expansion of its LTE network. As of the end of December 2018, the Company achieved a Germany-wide LTE coverage rate of 88%. We thus provide a high-quality network experience particularly in urban and suburban areas.

We are also in an excellent position with respect to our spectrum portfolio. Telefónica Deutschland has access to 315.5 MHz of spectrum with a good balance between frequencies providing coverage (low frequencies) and those providing capacity (high frequencies). Compared with our competitors, we are in an excellent position to drive future network developments.
 

Hardware business: State-of-the-art products and financing offers
We use many channels to distribute a wide variety of terminal devices to our customers. Via our O2 My Handy programme, customers can, for example, buy any device in O2’s offering – regardless of their mobile phone contract, whether mobile phone, tablet or smart watch – immediately or pay in 24 monthly instalments. For the customer, this approach offers more flexibility and more transparency with regard to the costs of the mobile phone or mobile phone contract. Our customers can choose from a wide variety of mobile phones, including the latest premium devices, take advantage of attractive payment terms and replace their device at the end of the 24-month term of a mobile contract. We also supply our wholesale partners with hardware to some extent and support them as needed in the sales and marketing of the hardware to their customers.

Our most important suppliers for mobile phones are the manufacturers Samsung, Apple, Huawei and Sony, where we focus in particular on the sale of LTE-enabled smartphones. As a result, the number of customers with LTE-enabled devices and LTE tariffs grew by 7 percentage points compared to 31 December 2017 to around 44%2 of our customer base. We cover the growing demand from our secondary brand customers for more mobile data services with a wide range of affordable smartphones.
 
 
Innovative products and digital services open up additional business potential
In order to make our smartphone offerings even more attractive to our customers, we offer additional products such as insurance benefits and virus protection. Additional digital services, such as video and music streaming, a gaming flat rate for mobile devices, an online fitness studio or our award-winning O2 Banking, provide our customers with additional added value.

We are also driving forward the digital growth areas of Advanced Data Analytics (ADA) and IoT. For example, we offer companies and public institutions new insights in areas such as transport, retail and advertising, which we create in the field of advanced data analytics. We also offer private and business customers IoT solutions to open up the connected world of the Internet of Things.
 
Fixed-line business: Full service offers based on future-proof infrastructure
We offer nationwide fixed services to complement our mobile services. The offer is based on our strategic partnership with Telekom Deutschland GmbH. It grants us long-term access to future-proof next-generation fixed-line infrastructure, and currently provides a total of more than 32 million households in Germany  with high-speed VDSL internet access. In addition, Telefónica Deutschland Group benefits from all Deutsche Telekom’s future network improvements such as an increase in VDSL coverage and higher speeds based on new technologies like fiber-optic. With   these advantages, Telefónica Deutschland Group is in an excellent position to provide full service fixed-line offerings to both residential and business customers.
 

Our market areas


We are strengthening the market position of O2, our core brand. We aim to gain further high-quality customers in the private and business customer segments. In addition, Telefónica Deutschland Group is the leading wholesale provider in Germany. We offer our wholesale partners access to our infrastructure and to our services.
 
Private customers: Offering mobile freedom in the digital world
The O2 brand is a market leader in the consumer postpaid market as measured by accesses in Germany. We honour this trust and endeavour to offer our clients mobile freedom in the digital world. As a pioneer in the German market, our strategic focus is on the sale of data-centric mobile communications contracts to smartphone users, such as our O2 Free tariff portfolio. O2 Free has become even more attractive with the introduction in June 2018 of the tariff components Connect (up to 10 SIM cards for any mobile device included in the mobile phone contract) and Boost (double data volume for an extra charge of EUR 5). Since August 2018, we have been offering our customers unlimited data volume at a competitive price with O2 Free Unlimited.

The large data packages in the O2 Free tariffs offer customers an impressive price/performance ratio. This way we fuel the growing use of mobile data services. Since our customers are also increasingly using LTE-enabled devices that further promote data use, we are able to boost revenues per customer. We are also seeing rising interest in smartphones and the use of mobile data in the prepaid area. In July 2018, we therefore introduced our completely revised O2 my Prepaid tariff portfolio, which addresses smartphone users in particular.

Our new O2 my Home tariff portfolio launched in October 2018 is another firm step towards positioning O2 as a brand offering freedom in the DSL area. This enables us to offer residential customers speeds of up to 100 Mbit/s within their own homes. Since August 2018, we have also been offering O2 my All in One, a tariff that combines unlimited mobile communications with a fully-fledged fixed-network connection including a telephony and internet flat rate at a competitive price/performance ratio.

The Blau brand is the second O2 brand clearly defined for price-conscious private customers, offering this customer segment a mobile communications portfolio reduced to the essentials and transparent communication. In the summer of 2018, the new Blue tariff portfolio was introduced, which lives up to this customer promise and offers mobile freedom at an attractive price/ performance ratio.
 
Wholesale partners: Cementing market leadership
Our partner business is an important pillar of our multi-brand approach. We offer our partners a wide portfolio of options, which is based on a scalable business model with a variety of value creation levels that we can offer potential partners who wish to enter the German mobile communications market.

Our largest partners from the reseller and service provider include MEDIONmobile (ALDI TALK), 1&1 Drillisch, mobilcom/debitel and cable providers. We also address ethnic target groups with brands such as AY YILDIZ or Ortel Mobile. As part of the merger with E-Plus, we have committed to selling 20% of our mobile network capacity via mobile bitstream access (MBA) to Drillisch Online AG (formerly: MS Mobile Service GmbH), which now belongs to the 1&1 Drillisch Group. Drillisch also has an option to increase the network capacity to a total capacity of up to 30%.
  
Business customers: Focus on small and medium-sized enterprises (SMEs)
We serve SMEs and Small Offices/Home Offices (SoHo) via our core brand O2, for example with the innovative product portfolio O2 Free Business and the product O2 Business Fusion. O2  Business Fusion is a comprehensive offering consisting of mobile communications, internet and fixed-line telephony, in which the customer receives everything needed for communication at work or on the move in a combined product, and at an impressive price/performance ratio. With O2 Unite, we also offer a pooling rate model for corporate customers that is unique in the German market.

Within the business customer market area we also offer machine-to-machine-communication (M2M) and managed connectivity services. We intend to further expand this business area in the future. The focus of our product Telefónica IoT Connect, for example, is not only on the pure transmission of data, but also on intelligent networking and the control of connectivity, enabling a broad spectrum of new services that can be flexibly adapted to the requirements and needs of customers.
  
New business: Internet of Things and Advanced Data Analytics
The Telefónica Deutschland Group focuses on driving innovation forward in the area of data analytics and IoT. We are tapping the major economic, social and ecological potentials of the Internet of Things and the field of advanced data analytics. We are currently developing new business models in these fields and, in the process of doing so, we make use of both agile methods as well as the Telefónica Deutschland Group’s strengths.

We will open up the growth area of the Internet of Things (IoT) for all market segments that we already serve with our core business. We intend to take a leading role in the area of Consumer IoT.
  

Management System

 

The Telefónica Deutschland Group is managed by the members of the Management Board.

The Management Board runs the business of the Telefónica Deutschland Group and reports to the Supervisory Board. Supervisory Board participates in the Management Board transactions requiring consent (e.g. for the adoption of the annual budget, for changes to the corporate structure or the principles of the corporate strategy). Together with the Supervisory Board, the Management Board issues the invitation to the Annual Shareholders’ Meeting.

In the eight-person Management Board, all operational and strategic decisions for successfully managing the Company in the individual business divisions are taken in weekly meetings. This comprises of the specification and adoption of the strategy across all operational divisions, the consistent and uniform operationalisation of the strategy, the management of operational performance, the assurance of cross-functional coordination and cooperation, assurance of the achievement of budgetary targets, definition and implementation of measures for performance improvement and the functional risk management for the respective area of responsibility.

Our aim is to increase the value of our company for the benefit of our shareholders. We are also firmly convinced that the satisfaction of customers and employees makes a major contribution to achieving this value growth.

The management of the Telefónica Deutschland Group has introduced a comprehensive internal management system for the control of the Group, which primarily comprises the following components:

  • Process for strategic goal setting
  • Integrated budgeting and planning system
  • Financial and non-financial performance indicators
  • Monthly reporting to Management Board and Supervisory Board
  • Ongoing opportunity and risk management
  • Leadership by target agreements at all levels of the organisation
     

Strategic objectives are reviewed and redefined annually


As part of the annual planning process, the Management Board of Telefónica Deutschland reviews the corporate strategy with the support of the Strategy division. We develop long-term strategic goals for the positioning of the company on the German market as well as strategy plan, including financial planning for the next three years as part of this process. Detailed budget planning for the next financial year is then prepared on the basis of the agreed multi- annual goals. The short-term priorities are defined at the same time. Decisions are based on current market and competitor analyses as well as market forecasts, which are compared with the corporate vision and the long-term strategic goals.

This systematic approach serves as the basis for identifying both growth opportunities and risks and as the source of our corporate strategy and investment decisions. The corporate strategy is then translated into concrete strategies for the different organisational units. At this level, the opportunities relevant to the respective organisational unit are prioritised in the operational implementation of the strategy.

Our vision is to become the Mobile Customer and Digital Champion in Germany by 2022. To achieve this, our first strategic priority is to strengthen the fundamental foundations of our business: an excellent customer service, stable IT systems, a powerful organisation and an appropriate regulatory framework. The second priority is to improve the customer experience in the digital age. This starts with providing a better, faster and more powerful network and a compelling range of products and services tailored to the customer’s everyday digital life. To this end, we have also launched our “Digital4Growth” transformation program, with which we aim to achieve EUR ~600 million in gross OIBDA effects by 2022. “Digital4Growth” is designed to generate further growth and make the company faster, simpler and better.

Our third priority is to develop growth potential in our core business and new business areas, combined with the positive development of our profitability. The company will press ahead with data monetisation and expects to increase sales to market levels in the medium term. Telefónica Germany Group intends to use the digital transformation to further improve margins and at the same time keep its investments (CapEx) stable in the medium term. Based on a conservative financing profile and supported by a solid free cash flow, the company will continue to offer its shareholders attractive returns.
 

Management system includes financial and non-financial indicators


We have established key performance indicators (KPIs) for the management of our strategic and operating goals. Financial and non-financial performance indicators are a component of the management system of the Telefónica Deutschland Group and reflect the interests of our various stakeholders.

The following monitoring parameters were of particular significance for our company’s value-oriented monitoring and evaluation starting in financial year 2018:
 

Revenues
The development of revenues is a key indicator of the success of our company. Revenues depict the total value of our operational activity and are therefore a crucial indicator of the success of our products’ and services’ sales on the market. In order to improve comparability with previous years, we have adjusted this figure to reflect the regulatory effects of the year under review.

They are essentially based on mobile service revenues (base fees, the fees levied on customers for voice, short message and mobile data services, as well as access and interconnection charges paid by other service providers for the use of our network). Furthermore, our revenues are generated by sales of mobile service hardware as well as landline services (base fees, user fees levied on customers as well as access and interconnection charges).

In addition, revenues are created increasingly by selling additional products and services; examples include the ‘Internet of things’ in the digital markets of the future, ‘Advanced Data Analytics’ and ‘cloud computing’.
  
Operating result adjusted for exceptional effects
The OIBDA corresponds to the operating income before amortisation of intangible assets and depreciation on property, plant and equipment. On the basis of the OIBDA, we measure the profitability of our operating activities. This analysis provides a comprehensive view of our expense and revenue structure. As exceptional effects make comparability with previous years difficult, we use the OIBDA adjusted for exceptional effects for a transparent presentation. These non-recurring effects have a direct impact on the result of operations and follow, for example, from a changed composition of the Group, from sales of businesses, acquisition-related consultancy fees, restructuring expenses or non-operational transactions. For better comparability, we also adjust for impacts on the prior year’s operating income that result directly from a transaction completed in the course of the previous year and thus are not fully included in the comparison year. However, as other companies may use a different basis of calculation for OIBDA, it is possible that our representation is not comparable with other companies.
  
Investment ratio (CapEx/Sales ratio)
For the Telefonica Deutschland Group, the investment ratio (CapEx/ Sales ratio) essentially serves to secure our future business activities and reflects the percentage share of investments in revenue. Capital expenditure (CapEx) consists of the additions to property, plant and equipment and other intangible assets. The investments in property, plant and equipment are primarily to expand the coverage and capacity of our network (particularly for LTE and UMTS) as well as product development. Investments in mobile frequency licences and mergers are not included in CapEx. Following the introduction of IFRS 16, additions from capitalised right-of-use assets continue not to be part of the investments underlying the calculation.
 
Other financial and non-financial performance indicators
Alongside our fundamental financial internal key performance indicators, other financial and non-financial indicators are also monitored.


Mobile service revenues
The development of mobile service revenues is a key indicator of the success of our company. Mobile service revenues are largely generated by base fees and the fees levied for voice, short message and mobile data services, as well as the revenue from services contracts. Alongside roaming revenues, mobile service revenues include access and interconnection fees paid by other service providers for calls and SMS delivered via our network. A central revenue driver for sustainable development is the mobile data business and the monetisation of data usage.

Free cash flow
The internal monitoring parameter of free cash flow pre dividends and payments for spectrum is defined as the sum of the cash flows from operating activities and investing activities. Free cash flow implicitly provides information about the change in working capital. Working capital management is thus an essential element of the managing of free cash flow in the relevant reporting period.

As a performance indicator, free cash flow describes the change in financial liquidity from operational inflows and outflows of funds as well as all investment-related inflows and outflows that were made for the maintenance or expansion of the business. The figure provides information about the change in the company’s available financial funds, which enable us to make investments in growth or to pay dividends or service debt, for example.

Net leverage ratio
The net leverage ratio is defined as the quotient of the net financial debt and the operating result before depreciation and amortisation (OIBDA) adjusted for exceptional effects for the last twelve months. Net financial debt includes short- and long-term interest-bearing assets and interest-bearing financial liabilities and cash and cash equivalents.

The net leverage ratio compares the net debt level with an operational success parameter (OIBDA adjusted for exceptional effects) and provides management with information about the company’s debt reduction ability. We are actively monitoring the capital structure with the objective of keeping the net leverage ratio at or below 1.0x in the medium term (target level).

As part of its dividend policy, Telefónica Deutschland has also decided to refrain from paying dividends by distributing capital or capital reserves in cash or buying back shares if the net leverage ratio materially and consistently exceeds the target leverage of 1.0x. In view of the impact of the implementation of IFRS 16 as of 1 January 2019, and to ensure appropriate financial flexibility with respect to the forthcoming spectrum auction and 5G investment, we will review and probably increase the targeted level during the 2019 financial year. As part of the adjustment, we intend to maintain our investment grade BBB rating from Fitch.

Mobile net adds in mobile communications business
New customers in the period less those customers leaving the company are designated as net additional customers (“net adds”). A positive number of net adds leads to a growing customer base. A distinction is made between contractual customers (postpaid) and customers without a contractual commitment (prepaid). The number of net adds is influenced by various factors: More new customers can be won with a highly attractive product portfolio and a high level of customer satisfaction among existing customers leads to a lower churn rate. One of the goals of this performance indicator is to allow the evaluation of customer acquisition and retention measures.

Customer satisfaction
Customer satisfaction is among the most important priorities of our business. Accordingly, we continually strive for a better positioning of our brands in order to attract private, partner and business customers for our products. Our objective is to serve the most satisfied customers on the German telecommunications market with the most popular brands. This means that we always strive to create customer-oriented offers and provide outstanding services across all our customer interfaces. We are confident that high customer satisfaction values reduce termination rates and increase recommendation rates. In order to measure customer satisfaction we are using the Net Promoter Score (NPS) and the Customer Satisfaction Index (CSI) as the key performance indicators.

Employee satisfaction
The success of Telefónica Deutschland Group is largely based on the commitment and professional qualifications of the company’s employees. Only with them can the digital transformation of the company and thus sustainable economic success be achieved. Our employees have made our company what it is today. In order to evaluate the commitment of our employees and the general working climate, we conduct an annual online, anonymous and voluntary survey among all employees of the Telefónica Deutschland Group on employee satisfaction. The results we obtain are communicated and intensively discussed in workshops at all management levels. The aim of this is to allow the organisation and the individual areas to develop and improve continuously.
  

Budgeting and planning system defines specific targets


The integrated planning system is based on strategic and operating goals. With respect to the most important performance indicators, the Management Board of Telefónica Deutschland sets internal objectives for the Group. To define a three-year plan, the anticipated market development as well as internal expectations with regard to progress in the areas of growth and efficiency evolution are discussed once a year. The first year of planning is depicted on a monthly basis in order to establish a detailed budget. For controlling reasons, the budget is updated twice a year. Alongside the results that have already been achieved and which are analysed as part of monthly reporting, current market developments and the additional opportunities or risks that are known at the relevant point in time are taken into account in the update. This prognosis is then used to introduce operational improvements and take advantage of new opportunities presenting themselves to the Group.
  

2 Basierend auf Mobilfunkanschlüssen exklusive M2M-Anschlüsse

Economic report of the group

ECONOMIC REPORT OF THE GROUP

Overall Economic and Industry Conditions


Solid economic development in Germany
The German economy continues to grow. However, the economy is being dampened by a difficult foreign trade environment and temporary exceptional effects in the automotive industry. According to initial calculations by the Federal Statistical Office, the price-adjusted gross domestic product (GDP) in 2018 will be 1.5% higher than in the previous year. This means that the German economy  has grown for the ninth consecutive year. German economic growth has lost some of its momentum, but in 2018 was still above the average of +1.2% for the last ten years. The growth drivers in 2018 were consumption and investment: Both private consumer spending (+1.0%) and government spending (+1.1%) were higher than in the previous year. The labour market continues to develop positively and in 2018 the number of people in employment reached a new high. On average, in 2018 44.8 million employed persons contributed to the economy in Germany.
  
Trends on the German telecommunications market indicate growth potential
The telecommunications industry is a major trailblazer for digitalisation, a process that is advancing and changing the world. Various trends are visible in the telecommunications market:

Today‘s consumers are mobile. They want to be online anytime, anywhere. The smart phone has developed from a pure communications device into a universal mobile companion and the control centre of mobile life. According to a survey by the industry association Bitkom, 57 million German citizens aged 14 or older used a smartphone in 2018. The smartphone is also paving the way for new technologies such as augmented and virtual reality, as well as voice control. Voice control is conquering living rooms in the form of stationary digital voice assistants such as Amazon Echo and Google Home. According to the industry association Bitkom, every eighth German citizen over the age of 18 uses an intelligent loudspeaker with a digital voice assistant.

The trend towards connectable products is continuing. This is supported by the introduction of eSIM as the key to the Internet of Things. More and more manufacturers are bringing eSIM-enabled smartphones and wearables onto the market. At the same time, the per capita number of connected mobile devices is increasing. The boundaries between consumer electronics, information and communication services and even traditional household appliances, such as refrigerators or coffee machines, are increasingly disappearing as a result of control via smartphones or digital voice assistants.

The television market is also undergoing fundamental changes in Germany that also affect the telecommunications industry. Linear television is becoming increasingly less interesting for many people, even if it remains the most widespread form of television. On the other hand, video streaming has become an integral part of media consumption: Watching video clips, series and films on demand is already part of everyday media life for many people in Germany. This is reflected in rising user numbers and growing willingness to pay of the customers.

In addition to connecting people, the intelligent connection of things via the internet (IoT) offers numerous application and growth opportunities, such as Industry 4.0, connected cars, smart health, smart energy and smart cities. Another trend is the analysis of large quantities of data, which is facilitating new insights as well as new business models.
 
Demand for mobile data services and increased competition drives market development
With 116.4 million customers (SIM cards) at the end of September 2018, the German mobile telecommunications market is the largest in the EU. The notional mobile penetration rate was 141%, i.e. each German citizen had an average of 1.4 mobile SIM cards. The customer growth from January to September 2018 was attributable primarily to the more valuable postpaid sector. Overall, postpaid customers accounted for 55.9% of total connections as of the end of September 2018. This share was 53.9% at the end of September 2017.

The mobile market continued to develop dynamically in 2018, but rationally, with a clear focus of providers on profitable growth, increased data usage by customers and the monetisation of tariffs with large data volumes.

The steadily growing demand for more data-intensive internet services has led to a further increase in mobile data usage. According to analyst estimates, average data consumption per mobile customer rose from 1.2 GB in 2017 to 1.9 GB in 2018. This corresponds to an increase of around 60 percent.

Source: Company Data, Analysys Mason, Bundesbank, Bitkom, VATM, BMWi, Federal Statistical Office, PwC, Statista

The German mobile telecommunications market is an established market
Following the merger of the Telefónica Deutschland Group with the E-Plus Group, the German mobile telecommunications market consists of three network operators and several service providers and mobile virtual network operators (MVNOs). At the end of September 2018, the Telefónica Deutschland Group held a market share of 37.0% with 43.0 million mobile customers (according to calculation customary to the market3: 45.4 million).
 

German fixed-line market characterised by strong competition
Intense competition also still prevails on the German market for fixed-line broadband services. The number of connections increased by around 3% year-on-year; the customer base is therefore estimated to have grown to 34.3 million by the end of 2018. The growth is mainly driven by cable and VDSL connections, which is in turn based on changed customer behaviour and the increased demand for high speeds. At the end of 2018, more than 33% of fixed line customers used connections of at least 50 Mbit/s; at the end of 2017 this was still at 28%. The increased customer demand for more bandwidth is also reflected in the data volume generated per broadband connection and month. According to VATM, this increased by 8% in 2018 to an average of 90 GB per connection.

Source: Analysys Mason, Bundesnetzagentur, VATM
  

Regulatory Influences on the Telefónica Deutschland Group

 

As a provider of telecommunications services and an operator of telecommunications networks, the Telefónica Deutschland Group is required to meet certain regulatory requirements. As such, it is subject to supervision by the Bundesnetzagentur (BNetzA – German Federal Network Agency).

The key regulatory events affecting the Telefónica Deutschland Group in the year under review are discussed below.
  
Frequencies
BNetzA is continuing the process to provide new frequencies in the 2 GHz and 3.6 GHz ranges
As a result of its frequency requirements assessment begun at the end of 2017 and following public consultation on corresponding drafts at the beginning of 2018, the BNetzA published Presidential Chamber Decisions I and II on 14 May 2018. According to these decisions, the frequencies in the 2 GHz and 3.4 to 3.7 GHz ranges identified for nationwide provision will be allocated by auction and, at 2 GHz, the frequencies expiring at the end of 2020 and the end of 2025 will be allocated jointly. At the spectrum ranging from 3.7 to 3.8 GHz is excluded from the auction and is to be allocated in an application procedure. The Telefónica Deutschland Group filed an action against the decisions in due time and instituted summary proceedings to establish the suspensive effect of the action. In the summary proceedings, the Administrative Court of Cologne rejected the application for provisional legal protection as unfounded in its decision of 21 December 2018; in the parallel proceedings, a first instance decision is expected during 2019.

Following an oral hearing on 13 July 2018 and the public consultation procedure on corresponding drafts in which Telefónica Deutschland Group participated which began at the end of September 2018, the BNetzA published the final Presidential Chamber Decisions III and IV on the frequency usage regulations and the auction rules on 26 November 2018. The decisions provide for far-reaching coverage obligations for households and transport routes including railways, federal motorways, federal highways and state roads as well as seaports and waterways. In some cases, the supply by other mobile network operators is to be credited. A transmission rate of 100 Mbit/s is prescribed for households, federal motorways, federal highways and railways with heavy passenger traffic, and 50 Mbit/s for other traffic routes. A maximum latency of 10ms is specified for federal motorways and federal highways. In addition, the regulations call for the building of 500 base stations for rural areas and 1,000 base stations for 5G applications. Different coverage obligations apply to new entrants. In addition, frequency allocation holders are obliged to negotiate with suitable service providers regarding the shared use of radio capacities, with suitable interested parties regarding the local or regional provision of spectrum at 3.6 GHz and with other nationwide allocation holders regarding roaming and infrastructure sharing. Applications for admission to the auction could be submitted in writing until 25 January 2019. The auction is scheduled to begin in the first quarter of 2019. In December 2018, Telefónica Deutschland Group filed an action against Presidential Chamber Decisions III and IV in due time.

Parallel to the award procedure, the BNetzA is preparing an application procedure for frequency allocations in the 3.7 to 3.8 GHz range and has consulted a draft on which Telefónica Deutschland Group submitted its comments by 28 September 2018. Local allocations are planned for some of the frequencies, primarily with a view to applications for industry 4.0. In addition, reciprocal rights of co-use between nationwide and local allocations as well as the demand-oriented supply of 5G are planned. The holders of national assignments are to be required to share the use of the capacities and services for the provision of as diverse business models as possible without discrimination.

For the frequency range above 24 GHz, the BNetzA is also initially preparing an application procedure for 26 GHz. To this end, in 2018 the BNetzA developed initial considerations which are to serve as a basis for the development of allocation regulations and on which the Telefónica Deutschland Group submitted its comments by 19 October 2018.

The application procedures are to be further developed in 2019 and finalised in good time before the start of the auction.

Local roaming
The government coalition is considering initiating a legislative process to introduce an enabling basis for local roaming in the near future, or the corresponding regulations in the current 5th TKG Amendment Act. These powers of authorisation are intended to allow BNetzA to order significant gaps in local roaming in locally delimitable areas to be filled. These orders would be directed at mobile network operators, which would compete with each other. The legislative process is not expected to be completed before March 2019. The Telefónica Deutschland Group considers this legislative proposal to be an unnecessary and disproportionate intervention in the competitive mobile telephony market.

Overall mobile communications concept 2019
In a resolution dated 26 November 2018, the BNetzA Advisory Council determined that it would like to develop an overall concept for the expansion of mobile communications networks in Germany by mid-2019 together with the BNetzA, the German federal government, the Bundestag and the federal states. The aim of this concept is to develop a path for the further development of mobile radio networks in rural areas. From the perspective of the Telefónica Deutschland Group, it cannot be expedient to develop such a concept without the participation of the market. The Telefónica Deutschland Group will therefore play an active role in the political process.
 
Telecommunications market
EU revises legal framework for telecommunications (telecoms review)
The European Parliament adopted the EU Code of Conduct for Electronic Communications on 16 November 2018 and the European Council gave its approval on 4 December 2018. The EU Code provides for a fundamental revision of the rules for the telecommunications industry. The core aspects include extending the regulatory targets to include “encouraging investment in very high-capacity networks” and considerations on the regulation of OTT services. The proposal also contains regulations on frequency usage, investment-friendly access regulation and the future institutional framework. The Code sets the right course, but also contains ambiguities, especially with regard to the future structure of access regulation. The final EU regulations entered into force on 20 December 2018 and still have to be transposed into national law. In Germany, the legislator plans to draft a corresponding amendment to the Telecommunications Act in 2019.

Discontinuation of data retention by BNetzA
In 2017, BNetzA published a notification according to which it will refrain from issuing ordinances and taking other measures to enforce the retention obligations in respect of all companies required to do so until the lawfulness of the retention obligations had been legally clarified. For this reason, Telefónica Deutschland Group temporarily discontinued the retention in 2017. The legally binding clarification of the legality of the storage obligation also continued in 2018.
 
Access and compensation regulation
Roaming-like-at-home
In 2017, the Federation of German Consumer Organisations (Verbraucherzentrale Bundesverband e.V. – VZBV) issued a warning to Telefónica Germany GmbH & Co. OHG with regard to individual aspects of the implementation of Roam-like-at-home. As the implementation was in line with the specifications of BNetzA, the warning was not agreed to. The VZBV therefore filed an action. A court decision is expected in the first half of 2019.

EU regulates price caps for intra-EU calls and SMS as of May 2019
By way of an amendment to the Roaming Regulation that came into force in December 2018, charges for calls and SMS from Germany to other EU countries will be capped with effect from 15 May 2019. A maximum charge of 19 EUR cents per minute may then be levied for calls and 6 EUR cents per SMS (net in each case) for SMS messages. This change has a direct effect in all EU member states and does not require a national legal transposition act.

MTR and FTR
The mobile termination fees (MTR) approved by the BNetzA in its decision of 6 March 2017 were further reduced as planned from 1 December 2018 from 1.07 EUR cents per minute to 0.95 EUR cents per minute. This fee is effective until 30 November 2019. Approval procedures for the MTRs valid from 1 December 2019 will be carried out in 2019.

The fixed termination rates (FTR) of 0.1 EUR cents per minute expired at the end of December 2018. The Telefónica Deutschland Group has submitted a new fee application to BNetzA for the subsequent period. A provisional retroactive decision is expected at the beginning of 2019. It is expected that charges will continue to be set symmetrically for all regulated fixed network operators in the future. The FTRs of Telekom Deutschland GmbH serve as a reference benchmark for all the other fixed line operators.

BNetzA Consultation and market investigation on fibre-optic infrastructures continues
The investigations initiated by the BNetzA in 2017 on “Issues of price regulation for FttH/B-based wholesale products with a view to the roll-out of high-performance fibre-optic infrastructures” as well as on the need for regulation and the existence of significant market power on markets 3a (= market for wholesale access provided locally at a fixed location) and 3b (= market for wholesale mass market products provided centrally at a fixed location) continued in 2018. The core issues of these investigations were the questions of the regulatory support for an accelerated roll-out of fibre-optic networks based on charges and the allocation of FttH/B-based wholesale products to the nationwide access market, which also includes copper-based and cable connections. Initial decisions are expected to be made in the second quarter of 2019 at the earliest.

Introduction of a regulated wholesale product “Super Vectoring” by Telekom
In August 2018, Telekom Deutschland GmbH expanded its product offering as part of the regulated wholesale service “Bitstream Access” through “Super Vectoring” connections. This significantly increases the possible bandwidth of VDSL connections compared to today (from max. 100 Mbit/s to up to 250 Mbit/s). Super Vectoring is not available nationwide, but Telekom is continuously upgrading its network infrastructure. The prices offered by Telekom for super vectoring were reviewed by the BNetzA and considered competitive. An improvement in Telefónica Deutschland Group’s competitive position in the fixed line market is expected due to Super Vectoring as competitiveness versus cable network operators and FTTB/H providers can be improved.
   

Overview of the Financial Year 2018

 

In 2018, the German mobile communications market environment remained dynamic yet rational across segments, with a clear focus on profitable growth on the back of increased customer data usage and the monetisation of tariffs with large data volumes. In order to support and promote this, we have relaunched the O2 Free portfolio and the Blue portfolio for more price-sensitive customers. In addition, we have expanded our portfolio by various Unlimited tariffs for retail and business customers. We continue to focus on offering mobile freedom to our customers. The new O2 Free tariffs – with the Double-Data Boost option and the unique O2 Connect option for up to 10 devices – support our ARPU-up strategy and help us counteract legacy base effects, OTT effects and the ongoing negative regulatory effects on mobile service revenue.

By the end of financial year 2018, we had largely completed network integration and the network test results confirm the positive impact. Telefónica Deutschland Group network, for example, achieved a clear improvement in the Chip test and the Connect network test. Parallel to finalising the network integration, we pushed ahead with the nationwide expansion of LTE and added additional LTE elements in almost all cities in Germany. In addition to expanding LTE along important transport infrastructure, we also connected further communities in sparsely populated areas to our network. Overall, we thus added more than 6,700 LTE stations to our network in 2018.

The successful finalisation of network integration and the resulting significant improvement in our network quality is an important milestone on our way to becoming the “Mobile Customer and Digital Champion”. Building on these achievements, we will continue to expand and optimise our mobile network while further improving customer experience. In addition to expanding LTE, which also includes improving network coverage along important transport routes such as motorways and ICE lines.

As of the end of December 2018, Telefónica Deutschland Group’s customer accesses amounted to 47.1 million, a decrease of 1.1% compared to the same period of the previous year. The number of mobile accesses was 42.8 million4 at the end of the year, a decrease of 0.8% compared to the previous year. This was in particular due to the decline in the customer base in the mobile prepaid segment as a result of changes in the regulatory environment (legitimation check and European roaming regulation) and the pre- and postpaid market trend.

The mobile postpaid business continued to show a positive trend with 1,002 thousand net additions in the 2018 financial year. The contribution of the partner business remained solid in a rational market environment and contributed 60% to gross additions in the 2018 financial year. Telefónica Deutschland Group maintained its primary focus on customer retention and the development of its existing customer base. By the end of December 2018, the prepaid customer base decreased by 1,338 thousand net disconnections and amounted to 20.5 million connections, a minus of 6.1% compared to 31 December 2017. The churn rate in the postpaid segment was stable at 1.6% in the 2018 financial year. The churn rate in the O2 postpaid consumer business remained low and improved by 0.1 percentage points year-on-year to 1.4% in the 2018 financial year.

Revenue was EUR 7,320 million, an increase of 0.3% year-on-year (EUR 7,290 million, a decrease of 0.1% year-on-year based on IAS 18). Adjusted for negative regulatory effects totalling EUR 44 million, revenue in financial year 2018 amounted to EUR 7,364 million, an increase of 0.9% year-on-year (EUR 7,334 million, an increase of 0.5% year-on-year based on IAS 18). The positive effects from the marketing of the O2 Free Portfolio were partially offset by the ongoing headwind of OTT trends and shifts within the customer base.

OIBDA was EUR 1,797 million, compared to EUR 1,785 million in the previous year, an increase of 0.7%. As per IAS 18 reporting, OIBDA was EUR 1,762 million, a decrease of 1.3%. Adjusted for exceptional effects5 and excluding regulatory effects in 2018, OIBDA amounted to EUR 1,938 million in 2018, an increase of 5.3% (EUR 1,903 million, an increase of 3.4% based on IAS 18) compared to EUR 1,840 million in 2017. The exceptional effects amounted to EUR 87 million and were mainly related to network consolidation. Usage elasticity effects in connection with the European roaming legislation were the main driver of the negative regulatory effects in the amount of EUR 54 million. Additional savings from OIBDA-relevant integration activities totalled to approximately EUR 100 million in 2018. The good progress of network consolidation enabled us to bring forward savings of EUR ~20 million from 2019 to the reporting year. As a result, the OIBDA margin adjusted for exceptional effects2 and excluding regulatory effects rose by 1.1 percentage points year-on-year to 26.3% (by 0.7 percentage points year-on-year to 25.9% as per IAS 18 reporting) in financial year 2018.

As expected, capital expenditure (Total CapEx) in the financial year 2018 rose by EUR 16 million year-on-year to EUR 966 million due to the massive network consolidation efforts and the simultaneous LTE expansion, with additional synergies of around EUR 50 million being realised.
 
T 01 OVERVIEW OF FINANCIAL YEAR 2018
Referenzwert 2017 (in Millionen EUR)Original Outlook 2018⁶ (year-on-year in %)Updated Outlook 2018⁶ ⁷ (year-on-year in %)
2018 financial year
(year-on-year in %)
Evaluation
Revenue 7,296Broadly stable (excluding negative regulatory effects of EUR 30-50 million)Broadly stable (excluding negative regulatory effects of EUR 30-50 million)+0.5%
Based on IAS 18
As expected
Operating income before depreciation and amortisation (OIBDA), adjusted for exceptional effects1,840Broadly stable to slightly positive (excluding negative regulatory effects of EUR 40-60 million)Slightly positive (excluding negative regulatory effects of EUR 40-60 million)+3.4%
Based on IAS 18
As expected
Investment ratio13%Approx. 12-13%Approx. 12-13%13.20%As expected
Dividends0.26 EUR/share
As approved by the Annual General Meeting on 17 May
2018
Annual dividend
growth for 3 consecutive years
(2016-2018)
Annual dividend
growth for 3 consecutive years
(2016-2018)
Dividend proposal of EUR 0.27 per share to the Annual General Meeting in
May 2019
As expected
Business development is further detailed in the following sections.

Results of Operations

T 02 CONSOLIDATED INCOME STATEMENT
1 January to 31 December
(in EUR million)20182017Change% change
Revenues7,3207,296240.3
Other income1771591711.0
Operating expenses(5,700)(5,670)(29)0.5
Supplies(2,459)(2,396)(64)2.7
Personnel expenses(610)(642)32(5.0)
Impairment losses in accordance with IFRS 9¹(79)(73)(5)7.3
Other expenses(2,552)(2,560)8(0.3)
Operating income before depreciation and amortisation (OIBDA)1,7971,785120.7
OIBDA margin24.6%24.5%0.1%-p.
Depreciation and amortisation(1,987)(1,869)(118)6.3
Operating income(190)(84)(106)>100
Financial result(42)(34)(9)26.0
Profit/(loss) before tax(233)(118)(114)97.0
Income tax3(262)265(>100)
Profit/(loss) for the period(230)(381)150(39.5)
T 03 REVENUE BREAKDOWN
1 January to 31 December
(in EUR million)20182017Change% change
Mobile business6,5396,4151251.9
Mobile service revenues5,2675,287(20)(0.4)
Handset revenues1,2721,12814412.8
Fixed line/DSL business revenues767862(95)(11.0)
Other revenues1319(6)(30.1)
Revenues7,3207,296240.3

Increase in revenue
Revenues increased in the course of the financial year 2018 due to strong revenue growth in the handset business. As a result, the decrease in Fixed line/DSL business revenues due to a lower DSL customer base and the decommissioning of the ULL infrastructure of the wholesale business, as well as lower mobile service revenues due to regulatory effects related to the European Roaming Legislation (>ANNUAL REPORT 2018, REGULATORY INFLUENCES) were offset. Excluding the regulatory effects of EUR 44 million, revenues were 0.9% higher than prior year level.
 
Mobile service revenues slightly declining
The revenue decline in an ongoing challenging and competitive German market environment reflected regulatory effects, sustained OTT trends, and the ongoing legacy base rotation. Excluding the regulatory effects mainly from the EU roaming legislation, mobile service revenues were higher than prior year level. Telefónica Deutschland Group still operates in a dynamic competitive environment in which the above-mentioned revenue effects continued to have opposite effects to the benefits from the successful marketing of the O2 Free portfolio to new and existing customers. The good development of our partner brands contributed to the continuous postpaid customer base growth. Thereby the greater availability of 4G products in this market segment was a key factor. Consequently, our mobile postpaid customer base increased by 1,002 thousand net adds to 22.3 million in financial year 2018 (2017: increase of 737 thousand), which led to an increase of the postpaid share of total mobile customers by 2.7 percentage points to 52.0% year-on-year. Despite a low price level in our partner business and the impact of regulatory effects, the average revenue per user (ARPU) could be increased to EUR 10.0 in comparison to the previous year (2017: EUR 9.7). Moreover, the increase in LTE network coverage is progressing continuously. Demand for data services (e.g. mobile internet, service applications and other data content) remained on the rise, boosted by the growing number of LTE-enabled mobile phones combined with the increased usage of mobile audio and video applications. We achieved a monetisation of the mobile data business with our O2 Free portfolio and our focus on larger data packages in the market. The percentage share of non-SMS data revenues in data revenues rose by 4.6 percentage points year-on-year to 85.4%.
 
Increase in handset revenues
Handset revenues are generally subject to general fluctuation, as they depend on the launch of new mobile devices. Due to improved demand for mobile devices in financial year 2018, the handset sales– including to mobile service partners – increased year-on-year.
 
Decline in fixed-line/ DSL business revenues
In the course of the decommissioning of the ULL infrastructure, the wholesale customer migration was also finalised in the financial year 2018. The associated revenue decline contributed to a reduction in fixed-line revenue. On the contrary fixed retail revenue once more benefited from rising demand for VDSL as well as from a largely stable customer base compared to previous year, resulting in a slowdown of the revenue decrease.
 
Increase in operating expenses
Higher hardware cost of sales relating to the higher demand for handsets outweighed savings from integration-related measures and a market strategy focusing on value over volume, thus operating expenses increased year-on-year. Operating expenses in financial year 2018 include restructuring costs of EUR 84 million, mainly related to network consolidation.
 
Increase in supplies
Cost for supplies in the financial year 2018 were higher than in the previous year period. Hardware cost of sales increased year-on-year in accordance to the strong demand for handsets, while connectivity-related cost of sales declined as higher wholesale costs for outbound roaming were balanced by lower voice termination costs.
 

Lower personnel expenses
Personnel expenses were mainly affected by the finalisation of the employee restructuring programme in the reporting period. Restructuring expenses amounted to EUR 19 million in the financial year 2018 compared to EUR 44 million in the financial year 2017.
 
Slight decrease in other expenses
The savings from integration initiatives were partially compensated by higher commercial investments into positioning and marketing of the O2 Free portfolio in a dynamic but rational market environment. The other expenses included restructuring costs of EUR 66 million in the financial year 2018 (2017: EUR 38 million).
 
OIBDA growth reflecting successful synergy capture as well as market invest and regulatory effects
Both, OIBDA as well as OIBDA excluding exceptional effects increased year-on-year. Contributed by additional cost and revenue related synergy effects of approximately EUR 100 million. The exceptional effects amounted to EUR 87 million and were mainly related to the network consolidation. Negative regulatory effects amounted to EUR 54 million mainly on the back of higher wholesale costs in connection with European roaming legislation.
  
Increase in depreciation and amortisation
The increase is the result of the ongoing consolidation of the mobile communications network and the associated shortening of the useful lives of individual assets.

Operating income down
This development is due in particular to the year-on-year increase of EUR 118 million in depreciation and amortisation.

Decline in the financial result
Due to the increase in financial expenses, which are mainly attributable to the refinancing of the maturing bond and the raising of another registered bond and the promissory note loan, the financial result deteriorated year-on-year.
 
Income tax
The Telefónica Deutschland Group did not record any positive taxable income in 2018 and will hence not pay any current income taxes, as in previous period. The tax income of EUR 3 million in the financial year therefore relates primarily to changes in deferred taxes. In the previous period, deferred taxes resulted in an expense of EUR 262 million.
 

Financial Position

 

Principles and goals of financial management

 

Risk control and a central management are the fundamental principles of financial management at the Telefónica Deutschland Group. The goal of financial management is to continually ensure sufficient financial liquidity and stability. Risk controls are used in order to anticipate potential risks and counteract them using corresponding measures. At present, there are no circumstances which would indicate that Telefónica Deutschland Group cannot meet its financial obligations.

One key performance indicator in this respect is the net leverage ratio (>MANAGEMENT SYSTEM).
 

Finance

 

Borrowed capital is procured using credit facilities and capital market instruments.

Placement of a syndicated loan
On 22 March 2016, the Telefónica Deutschland Group signed a syndicated loan facility of EUR 750 million, which had not been utilised as of 31 December 2018. It serves general business purposes and has an original term of five years. The term of this syndicated loan facility was extended by one year until March 2023 for the last time in February 2018.
  
Financing agreement with European Investment Bank (EIB)
On 13 June 2016, the Telefónica Deutschland Group signed its first financial agreement with the EIB, which amounted to EUR 450 million. The facility is intended to finance the consolidation, modernisation and expansion of the Telefónica Deutschland Group’s mobile network after the acquisition of the E-Plus Group and was fully utilised as of 31 December 2018. The funds provided by the EIB have terms of up to eight years.
  
Promissory notes and registered bonds
On 13 March 2015, the Telefónica Deutschland Group completed an initial placement of promissory notes and registered bonds with different maturities up to 2032 and a total volume of EUR 300 million. In February 2018, further promissory notes were issued in various tranches and a registered bond with a total volume of EUR 250 million with various maturities up to 2033 was issued.
 
Bond liabilities
In February 2014, O2 Telefónica Deutschland Finanzierungs GmbH placed a bond with a nominal amount of EUR 500 million and a term of seven years. In July 2018, this was followed by another bond with a nominal amount of EUR 600 million and a term of seven years. The issuer transferred the net proceeds on the issue of the bond to its shareholder Telefónica Germany GmbH & Co. OHG as a loan. Both of the bonds are guaranteed by Telefónica Deutschland. The details are as follows:
  
T 04 NOMINAL AMOUNT
Nominal amount (in EUR million)Term fromuntilCoupon p.a.
50010/02/201410/02/20212.375%
60005/07/201805/07/20251.75%
Intercompany loan
On 31 July 2017, Telefónica Deutschland Group entered into a EUR 500 million bilateral revolving line of credit with the financing company of the Telefónica S.A. Group, Telfisa Global B.V. which had not been utilised as of 31 December 2018. The line of credit serves general business purposes and has a term until 31 July 2019.
 
Unused credit facilities provide financial flexibility
The Group’s financial flexibility remains secure reasoned to the availability of unused credit facilities totalling EUR 2,014 million. This comprises bilateral revolving credit facilities with various banks to the value of EUR 710 million with a remaining term of more than one year, the unutilised syndicated loan facility of EUR 750 million, available overdraft facilities from Telfisa Global B.V. of EUR 54 million, and the unutilised credit facility with Telfisa Global B.V. of EUR 500 million.
 
Telefónica Deutschland Group continues to benefit from Telefónica, S.A. Group cash pooling
The Telefónica Deutschland Group will continue to participate in the liquidity management system of the Telefónica, S.A. Group. Agreements have been made with Telfisa Global B.V. for deposits and liquidity management. The liquidity of the entire Telefónica, S.A. Group is centralised by means of these agreements. This allows us to benefit from the economies of scale of the entire Telefónica, S.A. Group. The cash pool means that the Group continues to have access to short-term overdraft facilities up to a maximum of EUR 54 million. Telefónica, S.A. has guaranteed the performance of Telfisa Global B.V.’s obligations arising from the cash pooling agreements.
 
Working capital strengthened by silent factoring
We have entered into factoring agreements with various credit institutions regarding the sale of receivables in order to strengthen our working capital. This mainly relates to factoring transactions for instalment receivables with a total net cash effect of EUR 629 million in financial year 2018. The sold receivables were fully derecognised at the time of sale, with the exception of continuing involvement. Further information on silent factoring can be found in the Notes to the Consolidated Financial Statements for the year ended 31 December 2018 (› NOTE 4.4 TRADE AND OTHER RECEIVABLES).
 
Financial efficiency and payment flexibility due to extension of payment periods
In order to obtain greater financial efficiency and cash flexibility, the Telefónica Deutschland Group has entered into agreements with certain commercial suppliers, agreements were concluded to extend payment periods. The industry-standard payment terms were not exceeded, so that a reclassification is not required, and the payments are shown within trade payables.
   

Financial analysis


Net financial debt inter-alia increased due to dividend payments
Table 5 shows the composition of net financial debt – i.e. the net amount of interest-bearing financial liabilities less any cash and cash equivalents and interest-bearing financial assets.

Net financial debt as of 31 December 2018 increased year-on-year by EUR 65 million to EUR 1,129 million, resulting in a net leverage ratio6 for the year under review of 0.6x.

The increase in net financial debt in the 2018 financial year was primarily influenced by the dividend pay-out for financial year 2017 (EUR 773 million) as well as the free cash flow before dividend and spectrum payments of EUR 733 million.

The graphic below illustrates the performance of net financial debt in the 2018 financial year.
 

T 05 DEVELOPMENT OF CONSOLIDATED FINANCIAL DEBT
As of 31 December
(in EUR million)20182017Change% change
A Liquidity75158716428.0
B Current financial assets⁽¹⁾18217752.8
C Current financial debt⁽²⁾145635(490)(77.2)
D=C-A-B Current net financial debt(788)(129)(659)>100
E Non-current financial assets⁽¹⁾87751215.6
F Non-current financial debt⁽²⁾2,0041,26873658.1
G=F-E Non-current net financial debt1,9171,19372460.7
H=D+G Net financial debt⁽³⁾1,1291,064656.1
Off-balance sheet obligations
The operating lease obligations decreased by EUR 200 million to EUR 2,579 million, especially due to the decrease in future obligations for leased lines. The purchase obligations and other contractual obligations increased by EUR 335 million to EUR 2,538 million, especially due to an increase in hardware commitments. Further information can be found in the Notes to the Consolidated Financial Statements for the year ended 31 December 2018 (> NOTE 18. OPERATING LEASES, PURCHASE AND OTHER CONTRACTUAL OBLIGATIONS).

Liquidity analysis

 
T 06 CONSOLIDATED STATEMENT OF CASH FLOWS
1 January to 31 December
(in EUR million)20182017
Cash and cash equivalents at the beginning of the period587613
Cash flow from operating activities1,6901,702
Cash flow from investing activities(957)(1,022)
Cash flow from financing activities(569)(706)
Net increase (decrease) in cash and cash equivalents164(26)
Cash and cash equivalents at the end of the period751587
Consolidated Statement of Cash Flows
The following is an analysis of the cash flow development of the Telefónica Deutschland Group in the financial years 2018 and 2017.

Cash flows from operating activities close to previous year
This development is primarily due to the change in working capital, which amounted to EUR -58 million in the reporting period and to EUR -26 million in the 2017 financial year. The decline in working capital was mainly driven by the build-up of inventories. The increase in trade payables had a counteracting effect.
  
Change in cash flows from investing activities driven by lower cash outflows
Cash outflows of EUR 982 million were EUR 88 million below those of the previous year. This was mainly due to a decline of EUR 59 million in investments in property, plant and equipment and intangible assets.

Cash inflows of EUR 25 million were EUR 23 million below those of the previous year, which were influenced by the sale of intangible assets.

Change in cash flow from financing activities influenced by various transactions
Cash outflows increased by EUR 398 million to EUR 3,095 million and are mainly attributable to the repayment of the EUR 600 million bond due in the reporting year. This was offset by the payment of EUR 111 million made in the previous year to offset the payment obligation from the mobile frequency auction.

Cash inflows from the assumption of interest-bearing debt increased by EUR 535 million year-on-year to EUR 2,526 million, primarily due to the placement of a new bond in the amount of EUR 600 million.
  
Increase in cash and cash equivalents
As a result of the cash inflows/(outflows) described above, cash and cash equivalents increased EUR 164 million year-on-year and amounted to EUR 751 million on 31 December 2018 (31 December 2017: EUR 587 million).
 
T 07 CALCULATION OF CASH FLOW AND OIBDA MINUS CAPEX
1 January to 31 December
(in EUR million)20182017Change% change
OIBDA 1,7971,785120.7
- CapEx(958)(932)(26)2.8
= Operating cash flow (OpCF) 839853(14)(1.7)
+/- Other non-cash expenses/income(15)(15)(>100)
+/- Change in working capital(79)(132)53(40.2)
+/- Gains/(Losses) from sale of assets(0)(30)29(98.3)
+/- Proceeds from the change in consolidation scope2121>100
+/- Proceeds from sale of property, plant and equipment, and other effects031(30)(98.4)
+ Net interest payments(33)(27)(7)25.4
+/- Proceeds from/payments for financial assets114(12)(89.4)
= Free cash flow pre dividends and payments for spectrum (1) as well as pre acquisition of companies, net of cash acquired734709253.5
- Acquisition of companies, net of cash acquired (1)(29)29(98.0)
= Free cash flow pre dividends and payments for spectrum ⁽¹⁾733680537.8
- Payouts for spectrum (111)111(100.0)
- Dividends paid(773)(744)(30)4.0
= Free cash flow after dividends and spectrum payments(40)(175)135(77.0)

Net Assets

T 08 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As of 31 December
(in EUR million)20182017Change % Change
Goodwill and other intangible assets6,6877,445(759)(10.2)
Property, plant and equipment3,7934,041(248)(6.1)
Trade and other receivables1,3711,334372.8
Deferred tax assets2041624226.0
Other financial assets111111(0)(0.4)
Other non-financial assets61931530496.6
Inventories261105156>100
Cash and cash equivalents75158716428.0
Total assets = Total equity and liabilities13,79614,100(304)(2.2)
Interest-bearing debt2,1491,90524412.8
Provisions 714741(28)(3.7)
Trade and other payables2,4382,2421968.7
Other non-financial liabilities39132(93)(70.6)
Deferred income712782(70)(8.9)
Deferred tax liabilities1771176>100
Equity7,5698,297(728)(8.8)
Decrease in intangible assets due in particular to amortisation
The year-on-year decline of EUR 1,029 million was due to the planned amortisation of intangible assets with a limited useful life. This was partially offset by the additions to intangible assets of EUR 269 million. These were related primarily to investments in software.
  
Decrease in property, plant and equipment particularly due to depreciation
The development compared to the previous year of EUR 959 million is mainly due to planned depreciation. In contrast, additions in the financial year 2018 amounted to EUR 697 million.
 
Investment ratio (CapEx/sales ratio) almost unchanged
The investment ratio was 13.2% in 2018 compared to 13.0% in the same period in 2017. Telefónica Deutschland Group primarily continued to invest in the consolidation of the network as well as in the further expansion of the LTE network.
 
Deferred tax assets
Deferred tax assets increased due to the separately reported increase in deferred tax liabilities, which allow a corresponding proportionate recognition of deferred tax assets (>DEFERRED TAX LIABILITIES).
  
Increase in other non-financial assets
The increase of EUR 429 million resulted from the first-time application of IFRS 15. The decrease in tax receivables of EUR 78 million and the decrease in advance payments, mainly due to the shortening of the terms of underlying contracts and the regular use of accruals and deferrals over several years, had the opposite effect.
  
Inventories of mobile devices increase
The reason for this was the increase in inventories for sales activities for new devices on the market.

Increase in cash and cash equivalents
The development is due to multiple effects (>FINANCIAL POSITION).

Interest-bearing debt up on previous year
This increase resulted in particular from the taking out of promissory note loans and registered bonds in the amount of EUR 250 million. In addition, the bond due in the reporting year in the amount of EUR 600 million was refinanced.
  
Provisions almost the same as previous year
The change is mainly attributable to the decline in decommissioning and asset retirement obligations of EUR 30 million and the decrease in restructuring obligations due to consumption of EUR 17 million. In contrast, other provisions of EUR 12 million and pension provisions, which were EUR 6 million higher, developed in the opposite direction.

Increase in trade and other payables
Among other things, this development is attributable to the build-up of inventories at the end of the year.

Decrease in deferred income
The decrease was essentially a result of the utilisation of the 2017 year-end voucher sales and the continued decline in accruals from activation fees.
 
Deferred tax liabilities
In connection with the first-time application of IFRS 15, deferred tax liabilities were increased by EUR 134 million with no effect on income. In addition, tax-reducing temporary differences, including additional amortisation for tax purposes and longer amortisation periods for tax purposes in connection with intangible assets, were realised as planned.
  
Equity declines
The changes to equity mainly result from the dividend payment dated 23 May 2018 in the amount of EUR 773 million, from the effects of the initial application of IFRS 15 and IFRS 9 recognised directly in equity in the amount of EUR 274 million, and from the result for the period of EUR -230 million. Further effects captured in equity relate to EUR -4 million in share-based remuneration and EUR 5 million for the revaluation of post-employment benefits as well as related deferred taxes.
  

3 Starting in the 2017 financial year, Telefónica Deutschland Group introduced an additional method of counting the number of mobile accesses. This method takes market practices into account, among other things, when determining the time frame for inactive customers.

4 From the 2017 financial year, Telefónica Deutschland Group introduced a supplementary methodology for counting mobile accesses. This method takes market practices into account, among other things, when determining the time frame for inactive customers. According to the new counting method, we had more than 45.3 million mobile accesses as of the end of December 2018.

5 Exceptional effects in the financial year 2018 included restructuring expenses of EUR 84 million and consultancy costs related to M&A-transactions amounting to EUR 2 million; the regulatory effects amounted to EUR 54 million in the year under review.

6 The debt ratio is defined as net financial debt divided by the OIBDA adjusted for exceptional effects for the last twelve months
 

Employees

EMPLOYEES

The success of Telefónica Deutschland Group is largely based on the commitment and professional qualifications of the company’s employees. Only with them can the digital transformation of the company and thus sustainable economic success be achieved.

It is our task to empower our own organisation for this transformation and to make our employees actors in this change. Because digital transformation is not a purely technical challenge, but above all a challenge for our structures, processes and working methods.

After completing the structural integration of the Telefónica Deutschland Group and the E-Plus Group and the associated restructuring program in 2017, we can now start the transformation with full force. We laid the first foundations for this in 2018 by focusing on learning, cooperation and new ways of working, participation and leadership development as part of our human resources strategy. The overriding goal of the Telefónica Deutschland Group is to position itself both internally and externally as an attractive employer against the background of this transformation.

We support our employees with comprehensive offers such as flexible working hours and the opportunity to work from home. This enables us to balance professional and private life, also before and during parental leave and when they return to work afterwards. In addition we provide a comprehensive range of services in cooperation with external partners. Hence, we support our employees in the search for the right childcare, for care options for relatives, broker for private tuition or household help. These initiatives are aimed at increasing our employees’ satisfaction and further developing their loyalty.
 
Continued development of our employees
An important goal in 2018 was the further development of the skills of our employees, because only then can we grow as a whole. We constantly need new skills in order to shape digital change ourselves, stay one step ahead of the competition and remain attractive on the labour market. To this end, we promote continuous and self-directed learning in analogue and digital form. This enables employees to integrate learning into their everyday working lives and into their self-image and develop continuously in line with the situation.

In the reporting year, the Telefónica Deutschland Group invested a total of EUR 7.6 million (2017: EUR 6.3 million) in the training and further education of its employees.
 
Employee satisfaction and employer attractiveness
In order to evaluate the commitment of our employees and the general working climate, we conduct an annual online, anonymous and voluntary survey on employee satisfaction among all employees of the Telefónica Deutschland Group. The results we obtain are communicated and intensively discussed in workshops at all management levels. The aim of this is to allow the organisation and the individual areas to develop and improve continuously.

Our attractiveness as an employer in the market is reflected in the number of external candidates with 10,057 job applications for 1,300 jobs advertised – a rate of 7.7 applications per published job advert. In the past year we made 857 external hires reflecting our hiring needs. (2017: 1,405 external hires).
  
Number of employees
In the reporting year, the Telefónica Deutschland Group had 8,990 employees (2017: 9,405 employees) based on an average calculation of the number of employees at the end of each quarter in 2018.

As at the reporting date of 31 December 2018, 8,868 staff (2017:9,281 staff) were employed by our company. The staff turnover rate was 14.1% (2017:17.4%).
 
Subsequent events

SUBSEQUENT EVENTS


With regard to business transactions of particular importance that occurred after the end of the reporting year, reference is made to >NOTE 20, SUBSEQUENT EVENTS.
 
Report on risks and opportunities

REPORT ON RISKS AND OPPORTUNITIES

The Telefónica Deutschland Group anticipates opportunities that are important for achieving our strategic goals. To take advantage of these opportunities, however, the company also has to take certain risks. Our risk management is designed to recognise these risks at an early stage and actively mitigate them.
  

Risk Management and Risk Reporting

 

Fundamental risk management principles


In the course of our business activities, we are confronted with various business, operational, financial and other (global) risks. We provide our services on the basis of the organisational, strategic and financial decisions made and precautions taken by us.

Every business activity involves risks that can prejudice the process of goal-setting and goal fulfilment. These risks arise from the uncertainty of future events – often due to insufficient information – and can result in objectives being missed. If risks are not recognised and dealt with, they can endanger the successful development of the company. In order to respond appropriately to this fact, the company’s management has introduced a risk management process. This is intended to guarantee timely and complete transparency with regard to new risks or changes to existing risks.

Risk management is a component of the decision-making processes within the Telefónica Deutschland Group. The procedure ensures that risk evaluations are taken into account in decision-making and measures to minimise and deal with risks are taken at an early stage. This is based on the evaluation, communication and management of risks by the company’s managers. A lower limit for the recognition of risks is generally not set. The risk management department compiles the company’s Risk Register, which also covers the subsidiaries. As part of the creation of the Risk Register, it is ensured that risks of a similar type or of cumulative effect are aggregated and thus provided for overall consideration. In addition, this bottom-up approach, i.e. the identification of risks by the operating units, is complemented by a top-down approach in order to ensure a cross-business risk perspective. The purpose of the top-down approach is to ensure that risks that can only be identified at the highest management level or on the basis of a group-wide consideration, are discussed with the operationally responsible units. This is intended to enable full classification and integrated management as well as the evaluation of relevance for future reporting. Risk management is in continuous contact with all areas of the company and our risk coordinators in order to continuously pursue and evaluate risks and their management and development. Responsible employees are trained individually in order to ensure a uniform, structured process of risk identification and evaluation. In addition, fundamental training is available to all employees in order to raise their general awareness of risk management.

Risks are evaluated with regard to their impact on our business goals from an operational and financial point of view. The Risk Register is supported by a database that contains all identified risks, their status, the measures already taken and defined action plans.

In a formal forward-looking process, the Risk Register of Telefónica Deutschland Group is subject of regular reporting to the Management Board. The Supervisory Board (Audit Committee) is regularly informed about risks and their development.

Opportunities are not recorded in the risk management system.
   
Risk evaluation
The following section illustrates the identified risks that can substantially impact our financial situation, our competitiveness or our ability to realise our objectives. They are presented in line with the net principle, i.e. risks are described and evaluated net of the risk mitigation measures performed.

To identify the risks illustrated in the following with material influence on business development, we use a 5×5 matrix as a starting point, within which the potential level of impact and the relevant likelihood of occurrence are each divided into five categories:
  

Based on the combination of the potential level of impact and the estimated likelihood of occurrence, the individual risks are divided into three categories (significant, moderate and minor risks). All risks with a very high potential level of impact are seen as significant for the company; this does not take into account the estimated likelihood of occurrence. With a growing likelihood of occurrence, risks with a high or medium potential level of impact also fall into this category. Risks with a very low potential impact   are assessed as minor risk, regardless of the estimated likelihood of occurrence.

Minor risks are not included in the reporting to the Management Board and therefore are not included in the risk summary in the following section. Such risks are identified, documented and administered by the relevant management levels as part of the risk management process.

For internal use and reporting within the Group, risks are divided into business risks, operational risks, financial risks and other (global) risks. This division also forms the basis of this section of the report. The risks are presented in the relevant category in the order of their rating.

Our company can be influenced by other or additional risks of which we are presently unaware or that we do not consider significant based on the current state of knowledge. Moreover, the possibility cannot be precluded that risks currently evaluated as minor will change within the forecast period in such a way as to have a potentially greater effect than the risks currently evaluated as more material.
 

Risks

 

Business risks

 

Competitive markets and changing customer demands
We operate in markets characterised by a high level of competition and continuous technological developments. Our company faces increasing competition from alternative telecommunications service providers – among them cable operators, MVNOs and entertainment electronics companies – and also competes with alternative telecommunications services like OTT (over-the-top). There is the risk that our growth targets and planned revenues will not be reached. In order to prevail against these companies and developments, we must also continue to provide competitive services and successfully market our products in the future. In doing so, we systematically observe new customers’ needs, our competitors’ business activities, technological changes, and the general economic, political and social conditions and take them into account in our planning. We classify this risk as significant.
 
Market acceptance and technological transformation
In an environment characterised by major technological transformation, there is the risk that we will not be able to anticipate and implement technical requirements and customers’ requirements in time. False interpretations or incorrect decisions could harbour the risk of negatively influencing the acceptance of our products by customers and could lead to us not reaching our growth and earnings targets. We counter this moderate risk by monitoring our gross margin, churn rates and through extensive market research activities.
  
Regulatory environment
We operate in a strongly-regulated market environment. Decisions made by the regulatory authorities can directly and critically influence services, products and prices.
  
Licences and frequencies
Our licences and the licence usage rights granted to us are time-limited and depend on prior allocation. If we cannot extend or cannot newly obtain the licences and frequency usage rights necessary for our business or if the financial conditions for the use of these licenses and rights change significantly, this will lead to higher investment costs than planned. A potential change to the network expansion resulting from this could also have a negative impact on expected revenues. We classify this risk as significant.
 
Regulatory requirements in connection with the acquisition of the E-Plus Group
In approving the acquisition of the E-Plus Group, the European Commission obligated the Telefónica Deutschland Group to meet various requirements. This includes an obligation to provide frequencies, infrastructure and network capacities to a potential new mobile network operator in exchange for payment. There were no new market participants in the 2015 frequency auction and the Group has not been otherwise called upon to meet this requirement to date. To meet another requirement of the European Commission, we entered into extensive agreements with the Drillisch Group on the provision of network capacities and services. An extensive project was launched to ensure strict compliance with the contracts concluded and hence prevent the possibility of significant fines. We classify this risk as moderate.
   
Regulatory influences on our transmission power
The electromagnetic compatibility of transmitters could be subject to new regulations due to potential, as yet unproven, health risks. In this case, if the requirements regarding maximum permitted transmission power were changed this would negatively affect the performance and expansion of our mobile network. We classify this risk as moderate.

In order to guard against the stated regulatory risks, the Telefónica Deutschland Group maintains close communications with the decision makers on a national and international level. This allows us to introduce our interests and views to the decision-making process in good time. Moreover, we review and use legal protective mechanisms against decisions of the regulatory authorities in order to actively foster positive changes for us.
 
Other regulatory influences
Our business activity is subject to significant influences and requirements by regulatory authorities. Any deviations in the interpretation of these requirements may result in fines and therefore have a negative effect on our financial position or reputation.

The regulatory authorities could take additional measures at any time in order to curtail tariffs and fixed or mobile telecommunications termination rates even more. They could similarly oblige us to grant third parties access to our networks at reduced prices. There is a moderate risk that measures by regulatory authorities could negatively affect our business activity as well as our financial and earnings position.
 
Insurance
Considering the existing opportunities and evaluating financial efficiency, the Telefónica Deutschland Group counters risks by concluding comprehensive insurance contracts. In particular, this substantially reduces risks that might arise from the operation of the technical infrastructure as well as from potential violations of the copyrights or patent rights. Despite this, unforeseen events could, inter alia, result in financial losses if our insurance protection or our provisions should prove to be insufficient. As part of the management of our insurance cover, a regular review takes place in order to achieve the best possible and most economical cover. We classify this risk as moderate.
  

Operational risks

 

Reliability of our services
Attracting and retaining customers
The success of our business depends on our ability to attract new customers and retain existing customers. In an environment characterised by continuous further development of products, services and tariffs, we must also keep an eye on the performance of our network and that of our competitors. If our offers are not accepted on the market, we would be behind our competitors in acquiring new customers. We counter this significant risk by intensively monitoring and evaluating customer satisfaction and by extensively monitoring our network elements.
  
Damage caused by cyberattacks
Cyberattacks on our network or our IT systems that are not detected or averted in good time could lead to disruptions or damage that could also affect our services and thus result in lost revenue and customer dissatisfaction. The availability and confidentiality of data that we process may be impacted by these attacks. In addition to reputational losses, legal consequences would also be possible, and we could be fined. We counter this risk on the one hand by analysing and reducing weaknesses and focusing on an early warning system, and on the other hand we are constantly improving our systems for rectifying faults and establishing increased risk awareness among our employees with regard to cyberattacks. We classify this risk as moderate.
 
Technical faults
Lasting or repeated disturbances or damages to our mobile telecommunications or fixed networks and in our technical facilities and systems could have a negative influence on customer satisfaction and result in a loss of customers or revenue losses. We implement extensive monitoring of our network elements and systems here, too. In addition, insurable risks are covered by our insurance programme. Comprehensive crisis and emergency management should enable the company to continue its core business in the event of a disruption and then ensure the resumption of all business operations in order to achieve its corporate goals. Despite the continuous adjustment of the planned measures, the resumption of business operations could be delayed in the event of disruptions or failures. We consider this risk to be significant because even minor faults can result in substantial losses in sales.
 
Supply chain disruptions
As a mobile and fixed network operator and a provider of telecommunications services and products, we are dependent on a few main suppliers in the same way as other companies in the industry. These suppliers provide us with important products and services that are primarily related to the IT and network infrastructure and mobile devices. If these suppliers do not provide or are unable to provide their products and services as expected, this could jeopardise the operation and expansion of the network and the sale of telecommunications products, which in turn could adversely affect our company and earnings. The same applies if service providers to whom we award projects for reasons of efficiency do not perform the services in time or with the required quality. As part of our supplier management, we assess the quality of the services provided and any potential risks in this regard on a continuous basis. This allows us to identify weak points at an early stage and to counter them. We classify this risk as moderate.
 
Dependence on the majority shareholder Telefónica, S.A.
Use of trademark rights
The use of the core brand O2 in Germany is the subject of a licensing agreement with O2 Worldwide Ltd., a subsidiary of Telefónica S.A. The trademark rights are of major significance for our business activity. The loss of a brand in particular could have a negative impact on customer growth, and hence on our revenues. We classify this risk as significant, even if there are no indications of future disruptions to the contractual relationships.
  
Use of services
The Telefónica Deutschland Group still obtains material services and inputs from the Telefónica, S.A. Group to a significant extent. There are a range of contracts, particularly in the areas of financial management and IT services. If inputs from the Telefónica, S.A. Group are no longer provided, there is the moderate risk of not being able to procure them on the market, or not at the same favourable conditions. Likewise, there are no indications of future disruptions to these service relationships.
 
Legal risks
As part of its business activity, the Telefónica Deutschland Group is required to comply with a large number of laws. An infringement of legal provisions poses an intrinsic risk to the business activities, success and reputation of the company.
 
Data privacy regulations
In the course of our business activities, we also collect and handle customer data and other personal data. There is the risk of misuse or loss of these data. This could represent a breach of the relevant laws and provisions and result in fines, loss of reputation and the migration of customers, and hence the loss of revenues.

The completion of the project to implement the new requirements of the General Data Protection Regulation will reduce the probability of possible violations of the law and the potential damage that could result from fines, loss of reputation or revenue.

As a result, the risk will no longer be classified as significant; instead, it will now be classified as moderate.
  
Contractual relationships
Contractual penalties or claims could result from contracts with sales partners, suppliers and customers if we do not comply with our contractual or legal obligations or fail to meet agreed purchasing quantities, for example. We classify this risk as moderate.
 
Violation of customers’ rights
Our customer relationships and the contractual terms arising from these relationships are monitored by consumer protection agencies on a continuous basis. Interpretations differing from the company’s viewpoint may result in these agencies regarding them as a violation of customers’ rights and taking legal actions against us. There is the moderate risk that this could negatively affect our business result or our reputation.

In order to avoid legal risks, particularly from competition and data protection law, the Telefónica Deutschland Group has established a compliance management system. Components of this management system include the applicable business principles, a number of guidelines and ongoing employee training with regard to the main legal provisions and standards, in particular also the new basic data privacy regulation and the topic of information security. In supplement, legal risks are covered by insurance to the extent permitted. The Telefónica Deutschland Group also maintains an internal compliance and legal department, and enters into continuous contact with external law firms, authorities, associations and official groups.
 

Financial risks

 

Taxes
Like every company, we are subject to regular tax audits. These include an intrinsic risk that higher subsequent tax payments for prior tax periods may be imposed if the tax authorities have a divergent opinion about the interpretations and calculation principles that form the basis of our tax declaration. The acquisition of the E-Plus Group could also result in additional tax payments in this connection. Furthermore, changes in tax laws or in the interpretation of existing regulations by courts or tax authorities may also have an adverse effect on our business activities as well as on our financial position and results of operations. We counter this moderate risk by providing regular training to our employees, discussing matters with our external tax advisors, and taking part in expert discussions and working groups on a regular basis. We are thus able to identify changes regarding the interpretation of the tax laws at an early stage and can initiate respective measures.
 

Other (global) risks

 

There were no material other (global) risks at the end of the financial year.
   

Risk Management and Financial Instruments


General financial market risks
The Telefónica Deutschland Group is exposed to various financial market risks as part of its business activity. In the context of the above-mentioned risk management process, these risks are regarded as low. Should these financial market risks occur, they could have a negative effect on the net assets, financial position and results of operations of the Group and are therefore presented individually below.

The Telefónica Deutschland Group has developed guidelines for risk management processes and for the use of financial instruments including a clear separation of tasks with respect to financial activities, invoicing, financial reporting and associated controlling. Derivative financial instruments are used solely to manage interest rate and currency risks. The Telefónica Deutschland Group has developed guidelines derived from established standards for the evaluation of risks and monitoring with regard to the use of financial derivatives.
  
Market risk
Market risk is the risk that changes in market prices such as changes in exchange rates and interest rates will affect the value of financial instruments or the earnings of the Telefónica Deutschland Group.

Currency risk
The underlying currency of the financial reports of the Telefónica Deutschland Group is the euro. All financial statements of all subsidiaries of the Telefónica Deutschland Group are also prepared in euros; thus the Telefónica Deutschland Group is not subject to any translation risk.

The regional focus of the Telefónica Deutschland Group’s activities means that the transaction risk arising from the Group’s business relationships with its suppliers or business partners in countries with a different national currency than the euro is not material. Because the Telefónica Deutschland Group finances itself exclusively through internally generated cash in euros as well as euro-denominated equity and debt, there is also no exchange rate risk.

The effects before taxes on the Consolidated Income Statement and thus equity of a simultaneous, parallel increase (decrease) in the euro of 10% as against all foreign currencies in the financial years 2018 and 2017 would have been as follows:
  
T 09 CURRENCY RISK
1 January to 31 December
20182017
Risk position+/(-) 10 %Risk position+/(-) 10 %
(in EUR million)
USD(5.7)0.5/(0.6)(5.4)0.5/(0.5)
GBP1.0(0.1)/0.10.80.1/(0.1)
Because the Telefónica Deutschland Group did not use cash flow hedge accounting, the effects of the sensitivity analysis only affected the Consolidated Income Statement.

Interest rate risk
Interest rate risk is the risk that the fair value or future cash flow    of a financial instrument could fluctuate as a result of changes in market interest rates. The Group manages its interest rate risk by seeking to ensure it has a balanced portfolio of fixed-interest and variable-interest financing instruments. Where necessary, interest rate swaps are used in achieving this aim. Interest rate risks are managed as part of interest rate management.

The Telefónica Deutschland Group is exposed to interest rate risks arising from variable-rate loan agreements as borrower and from the variable-rate cash pooling accounts with Telfisa Global B.V. as well as in the form of opportunity costs in connection with the conclusion of fixed-rate debts, the interest rate of which may exceed market interest rates during the term. To reduce these opportunity costs, interest rate swaps in connection with the issue of a bond were concluded on a partial amount of the nominal value of the bond. Under this interest rate swap contract, the Telefónica Deutschland Group pays a variable interest rate on a nominal amount and receives a fixed interest rate on the same amount in return. The nominal amount of this interest rate swap is used to offset the effects of future changes in market interest rates on the fair value of the underlying fixed-rate financial debt from the bond issue (fair value hedge). Hedge accounting for these hedge relationships complies with IFRS 9.

The relationship between the hedge instrument and the underlying transaction as well as the goal and strategy of the hedge were documented at the inception of each hedge. A specific allocation of the hedging instrument to the corresponding liability was made. The existing hedge is continuously monitored for effectiveness. The hypothetical derivative method is used to measure effectiveness. Since there is always an economic relationship between the underlying and hedging transactions (same term or same payment dates, same hedged nominal volume, etc.), there are no significant inefficiencies. The only driver of possible ineffectiveness is the credit risk adjustment of the derivatives. These are low at the present time and are expected to remain so in the future and are therefore not recorded. For further information on hedging relationships, please refer to > 4.10 INTEREST-BEARING DEBT.

The effects before taxes on the Consolidated Income Statement of a change in the interest rates of variable interest-bearing financial instruments of +/-100 basis points as of the reporting dates 31 December 2018 and 2017 are shown below. There is no impact recognised directly in equity. This analysis assumes that all other variables remain unchanged.
 
T 10 INTEREST RATE RISK
1 January to 31 December
(in EUR million)20182017
+100bp42
-100bp24
Credit risk
Credit risk describes the risk of financial losses due to the inability of contractual partners to repay or service debts in accordance with the contract. The maximum default risk of the Telefónica Deutschland Group corresponds to the carrying amount of the financial assets.

The Telefónica Deutschland Group considers the management of the commercial credit risk to be critical in order to achieve its goals for sustainable growth of the business and the customer base in harmony with its risk management guidelines. Suitable processes have been established for the management and the monitoring of the credit risk. These include the ongoing monitoring of the expected risks and the level of default. Particular attention here is paid to the customers which could have significant effects on the Consolidated Financial Statements of Telefónica Deutschland Group. For these customers, credit management instruments such as credit insurance or collateral for limiting the default risk are used, depending on the business area and type of business relationship. To control credit risk, the Telefónica Deutschland Group regularly conducts an analysis of the maturity structure of trade receivables and recognises adjustments for expected credit defaults on receivables.
  
Liquidity risk
Liquidity risk encompasses the risk that the Telefónica Deutschland Group may be unable to sufficiently comply with its financial obligations. To safeguard liquidity, cash inflows and outflows are permanently monitored and centrally controlled on the basis of detailed financial planning. The Telefónica Deutschland Group works on its liquidity management closely with the Telefónica, S.A. Group and, in accordance with corporate policy, has concluded cash-pooling and deposit agreements with Telfisa Global B.V., Netherlands. In addition to operating liquidity, the opportunities arising on the financial markets are continuously examined with a view to ensuring the financial flexibility of the Telefónica Deutschland Group. As of 31 December 2018, Telefónica Deutschland Group had undrawn credit lines from short-term overdraft facilities and revolving credit facilities totalling EUR 2,014 million; as of 31 December 2017, these undrawn credit lines amounted to EUR 2,015 million.

Cash and cash equivalents amounted to EUR 751 million as of 31 December 2018 and to EUR 587 million as of 31 December 2017.

The following table shows the maturity profile of the financial liabilities of the Telefónica Deutschland Group on the basis of the contractual undiscounted payments (including interest):
  
T 11 MATURITIES OF FINANCIAL LIABILITIES
As of 31 December 2018Remaining term
(in EUR million)Total carrying amountGross cash outflow< 1 year1-5 years>5 years
Non-current interest-bearing debt2,0042,1521,169983
Non-current trade and other payables191919
Current interest-bearing debt145156156
Current trade and other payables2,4192,4192,419
Financial liabilities4,5874,7452,5751,188983
As of 31 December 2017Remaining term
(in EUR million)Total carrying amountGross cash outflow< 1 year1-5 year>5 year
Non-current interest-bearing debt1,2681,356954402
Non-current trade and other payables191919
Current interest-bearing debt637637637
Current trade and other payables2,2242,2242,224
Financial liabilities4,1474,2362,861973402

Opportunity Management

 

The consistent use of entrepreneurial opportunities with respect to future revenue and OIBDA potential, as well as their early and continuous identification, analysis and management, are significant tasks of the management of the Telefónica Deutschland Group.

The opportunities and growth potential identified in the strategic goal-setting process are prioritised as part of an annual planning process in close cooperation with the individual business areas and relevant strategic goals are derived from this. To measure the
implementation, concrete financial objectives in the form of financial and non-financial key performance indicators (KPIs) are defined at the level of the organisation units.

Opportunity management is a significant component of the entire process for strategic goal setting. It occurs both as part of budget creation for the coming twelve months as well as within long-term planning.

Opportunities are neither recognised in the risk register nor quantified.
  

Opportunities

 

High penetration of O2 Free with greater demand for mobile data and LTE
In the summer of 2018, we further increased the attractiveness of high-quality O2 Free tariffs by introducing the tariff components Connect (up to 10 SIM cards for any mobile device included in the mobile communications contract) and Boost (double data volume for a surcharge of EUR 5) and by launching O2 Free Unlimited, a tariff with unlimited data volume. If customer demand for the higher-value tariffs exceeds our expectations, our revenues and operating income could exceed our current forecast.

In addition, an increase in the use of mobile data by customers could further accelerate demand for high-quality O2  Free tariffs. A significant increase in demand for mobile data may result from several developments. The significant expansion of LTE networks in conjunction with a strong increase in the use of smartphones will enable more customers to use high data transfer rates. At the same time, more mobile services are emerging that are very data-intensive, such as music and video streaming. Both effects can lead to an increase in the average monthly data consumption per customer and thus further increase the demand for tariffs with a larger data volume. If these effects are more positive than forecast in our outlook, they could have a more positive impact on our revenues than expected.
  
Expansion of our LTE network
In 2019 we will progress further with the expansion of our LTE network. If our expansion of the LTE network proceeds more quickly due to more positive general conditions or if our customers respond to the better LTE network quality more positively than described in our outlook, our share of mobile data business could grow more strongly than predicted and thus our revenues and operating results could exceed our current forecast.
  
5G: Auction in 2019 and new business model
The future 5G mobile communications standard will open up completely new areas of application thanks to further increases in transmission speeds and lower latency times. This is particularly important for industrial applications, and the benefits for residential customers will become apparent somewhat later. 5G lays the foundation for new business models in areas such as autonomous driving, virtual reality and the Internet of Things. And thanks to greater efficiency in use, 5G also enables us to optimise our network in operation. The regular launch of 5G in Germany depends not only on the award procedure but also on the mass availability of system technology and devices. Experts do not expect a market launch before 2020. Telefónica Deutschland is already preparing intensively for this start by carrying out pilot projects and driving forward the connection of our network locations with fibre optic with increasing intensity. With 5G Fixed Wireless Access, for example, we are testing a promising, fast and cost-efficient technology that makes it possible to provide broadband access for people throughout the country and thus offers a good alternative to the expensive implementation of fibre optics.

The 5G frequency auction is expected to take place in the first quarter of 2019. We strive to secure the right spectrum to consistently expand our network for our customers and for our business success. If our position in the 5G spectrum improves beyond this, if we can expand the 5G network faster than planned, and if customer demand for 5G services is higher than expected, this could have a positive impact on our revenues and operating results.
 
Fixed line network in cooperation with Telekom Deutschland GmbH
Higher availability of high-speed VDSL connections due to a faster than planned roll-out by Telekom Deutschland GmbH or technical advances that increase the maximum transmission rate of this product to over 100 Mbit/s could lead to stronger than anticipated demand for our fixed-line products on the basis of our cooperation with Telekom. This would have a positive impact on our revenues and lead to us exceeding our forecast. Thanks to our cooperation we can also get involved with new technologies such as super vectoring which Telekom will increasingly implement in its network.
 
Digital innovation
In order to fully exploit our position on the German market for mobile telecommunications services and to monetise additional opportunities for growth, we have introduced innovative digital products and value added services in various areas such as communication services and financial services. We are also developing new digital market segments such as the Internet of Things (IoT) for all our customer groups.

Should the demand for our digital products and services develop better than currently expected, this could positively affect our revenues and operating results and lead to us exceeding our forecast.
 
Digitalisation of processes and use of artificial intelligence
We are moving ahead strongly with the digital transformation of our company and the associated process optimisation. This makes interaction with customers simpler and more intuitive, since customers can, for example, use intuitive self-care offers or identify and buy the desired product more quickly. We are also using digital transformation to reduce, simplify and automate our processes. Our overall goal is to create a consistent customer experience across all contact points.

We are also starting to use artificial intelligence to interact with customers. For example, we use the Telefónica S.A. Group‘s AURA voice assistant, which can answer a wide range of contract-related questions for our customers on Facebook.

If the digital transformation of our company can take place faster than expected and the customer response is even more positive than expected, this could lead to higher customer satisfaction, revenues and cost savings and thus increase our OIBDA.
  
Potential in the SME segment of the business customer market
Our planning focuses on the expansion of our still relatively small market share in the segment of small and medium-sized enterprises (SMEs). The size of this market segment makes it attractive for us,so that we expect to be able to win corresponding SME customers with lean, tailor-made mobile communications and fixed-network products and tap the resulting growth potential.

If our renewed product portfolio for business customers, with products such as O2 Free Business or O2 Business Fusion, meets the customer needs of small and medium-sized companies even better than expected, demand could be even higher than expected.
 
Membership of the Telefónica, S.A. Group
As part of one of the largest telecommunications corporations in the world, the Telefónica Deutschland Group benefits from economies of scale in the areas of purchasing, cooperation and the development of digital products. Should these economies of scale develop better than currently expected, this could positively affect our revenues and our earnings position and lead to us exceeding our forecast.

 

Summary of the Risks and Opportunities

 

Based on our assessment, the intensive competition on the German telecommunications market, the regulatory environment and the need to ensure reliable service pose our greatest risks. A new risk arises from the increasing general threat posed by cyberattacks. In addition to the elimination of the risk from lawsuits against the conditions resulting from the merger with E-Plus, we also see the largely completed network consolidation and the elimination of the associated risk as positive changes. There was also a significant reduction in the risk of breaches of data protection regulations.

In our estimation, the situation regarding the significant risks and opportunities for the Telefónica Deutschland Group has not changed substantially compared to the previous year, except for the items described above.

We have not identified any risks at this time that could threaten the ability of our company to continue as a going concern, either individually or in the aggregate.

In the coming financial year, we are confident that we will again be able to identify relevant risks at an early stage and take appropriate measures to counter them by continuing to implement the risk management approach applied to date.

We are confident that our corporate strategy will enable us to exploit the market opportunities that present themselves to us and to deploy the necessary resources. Considering our technologically high-value products, our position in the market, our digital innovative power, our committed employees, our stable financial position, the fact that we belong to one of the world‘s largest telecommunications companies and our structured processes for the early identification of risks and opportunities, we are confident that we will be able to successfully meet the challenges arising from these risks and opportunities in 2019.
  
Accounting-related internal control and risk management system

ACCOUNTING-RELATED INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM

related to the group accounting process


The following statements contain information in accordance with section 289 (4) HGB and section 315 (4) HGB.

The primary goal of our accounting-related internal control and risk management system is to ensure proper financial reporting in the sense of ensuring that the Consolidated Financial Statements comply with all relevant provisions.

The risk management system described in the chapter > REPORT ON RISKS AND OPPORTUNITIES also includes an accounting-related perspective with the aim of ensuring the reliability of financial reporting. In addition to the legal requirements of, for example, the German Stock Corporation Act (AktG) and the German Commercial Code (HGB), the ICS introduced by us also complies with the provisions of the US Sarbanes-Oxley Act (SOX). The obligation for the Telefónica Deutschland Group to fulfil these SOX requirements results from the registration of its majority shareholder, Telefónica, S.A., with the US SEC (Securities and Exchange Commission). In addition, the Telefónica Deutschland Group’s ICS complies with the global ICS control setup of Telefónica, S.A.

Establishing and effectively maintaining appropriate internal controls for financial reporting is the responsibility of the Management Board of Telefónica Deutschland and is performed taking company-specific requirements into account.

The conceptual framework for preparing the Consolidated Financial Statements primarily comprises the Group-wide uniform accounting guidelines and the chart of accounts. Both of these must be consistently applied by all the companies of the Telefónica Deutschland Group. New laws, accounting standards and other official pronouncements are analysed on an ongoing basis with regard to their relevance and effects on the proper preparation of the Consolidated Financial Statements. The changes resulting from this are taken into consideration by the Finance & Accounting department in our accounting policies and the chart of accounts.

The data basis for the preparation of the Consolidated Financial Statements consists of the financial statement information reported by Telefónica Deutschland, its subsidiaries and joint ventures, which in turn is based on the accounting entries recorded within the companies. The financial reporting of the individual companies is performed either by the Finance & Accounting department or in close cooperation with it. For certain topics requiring specialist knowledge, such as the valuation of pension obligations, we draw upon the support of external service providers. The Consolidated Financial Statements are prepared within our consolidation system on the basis of the reported financial statement information. The steps to be taken when preparing the Consolidated Financial Statements are subject to both manual and system-based controls at all levels.

Employees involved in the financial reporting process are already examined in terms of their professional suitability before they are hired, and are provided with regular training. The financial statement information must go through certain approval processes at every level. Critical task areas in the financial reporting process are divided appropriately in order to ensure the effective separation of duties, and the dual control principle generally applies. Further control mechanisms include target/performance comparisons and analyses of the composition of content and changes in individual items, both in the financial statement information reported by individual group companies and in the Consolidated Financial Statements. The accounting-related IT systems are used to control IT security, change management and IT operations in particular. For example, access authorisations are defined and established in order to ensure that accounting-related data is protected from unauthorised access, use and change.

The appropriateness and effectiveness of the ICS are assessed annually by the Management Board of Telefónica Deutschland. Our Internal Audit department continuously reviews compliance with guidelines, the reliability and functionality of our ICS and the appropriateness and effectiveness of our risk management system and reports on this to the Management Board of Telefónica Deutschland.

The Supervisory Board of Telefónica Deutschland is involved in the ICS in part via the Audit Committee in accordance with section 171 (1) AktG in conjunction with section 107 (3) AktG. In particular, the Audit Committee is responsible for monitoring the accounting process, the effectiveness of the ICS, the risk management and internal audit systems, and the audit of the financial statements. It also reviews the documents for the Annual Financial Statements of Telefónica Deutschland and the Consolidated Financial Statements and discusses the financial statements with the Management Board and the external auditor.

As part of its risk-oriented audit approach, the external auditor expresses an opinion on the effectiveness of the parts of the ICS that are relevant for financial accounting and reports to the Supervisory Board in the course of the discussion of the financial statements.

The Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. If required, e.g. for the purposes of the HGB Annual Financial Statements or for tax purposes, a reconciliation based on the relevant provisions is performed at account level. Accordingly, the correct preparation of the IFRS financial statement information also serves as an important basis for the Annual Financial Statements of Telefónica Deutschland Holding AG. For Telefónica Deutschland Holding AG and other Group companies reporting in accordance with HGB, the conceptual framework described above is supplemented by an HGB chart of accounts.

As the parent company of the Telefónica Deutschland Group, Telefónica Deutschland Holding AG is included in the aforementioned Group-wide accounting-related internal control system. As a matter of principle, the information presented above also applies to the HGB Annual Financial Statements of Telefónica Deutschland Holding AG and the other Group companies reporting in accordance with HGB.
  
Report on expected developments

REPORT ON EXPECTED DEVELOPMENTS

Economic Outlook

 

According to initial calculations by the Federal Statistical Office, the German economy grew by 1.5% in real terms in 2018 compared with the previous year. For 2019, however, economists expect a slowdown in the growth of the German economy, with gross domestic growth (GDP) of only 1.2%. Private consumption remains one of the drivers of the economy. This is primarily due to the continued positive development of the labour market and the increasing purchasing power of households.

The international environment and the planned withdrawal of the United Kingdom from the European Union (Brexit) continue to pose a risk to economic development in Europe and especially in Germany.

Source: GfK Konsumklima, Bundesbank, BMWi, Federal Statistics Office, Experts At Economic Research Institutions
 

T 12 GDP GROWTH 2017 – 2019
GERMANY (CALENDAR-ADJUSTED)
In %201720182019
Germany2.21.51.2

Market Expectations

 

Digitalisation and technologies such as artificial intelligence are increasingly shaping everyday life and bringing change to industries. A large number of trends will continue or gain in importance.

Smartphones will pave the way for new technologies such as augmented and virtual reality, as well as voice control. Voice control is conquering living rooms in the form of stationary digital voice assistants such as Amazon Echo and Google Home. The trend towards connectable products is continuing. This is supported by the introduction of eSIM as the key to the Internet of Things. More and more manufacturers are bringing eSIM-enabled smartphones and wearables onto the market. At the same time, the per capita number of connected mobile devices is increasing. The boundaries between consumer electronics, information and communication services and even traditional household appliances are increasingly disappearing as a result of control via smartphones or digital voice assistants.

The intelligent connection of things via the internet (IoT), numerous application and growth opportunities, such as Industry 4.0, connected cars, smart health, smart energy and smart cities offer additional growth opportunities. Another ongoing trend is the analysis of large quantities of data, which is facilitating new insights as well as new business models.

The market for data consumption is characterised by a steadily growing demand for internet services, such as the use of internet videos across all end devices, but also games and the new applications already mentioned. As a result, the demand for larger data volumes and higher transmission speeds is also increasing. This means that   the monetisation of mobile data business will remain a strong focus of telecommunications providers. Analysts expect average data usage per mobile customer to rise to just under 3 GB per month in 2019. This represents an increase of over 50% compared to 2018.

Source: Ovum, Analysys Mason, Bitkom, BMWi, PwC
 

Financial Outlook 20199 and Mid-term expectations

 

In 2019, Telefónica Deutschland Group will continue to build on its operational and financial achievements of the financial year 2018, which were in line with our expectations. Based on IAS 18 accounting standards, total operating revenue came in flat at +0.5% year-on- year excluding a significant headwind from regulation in the amount of EUR 44 million (-0.1% year-on-year including the negative regulatory effects). OIBDA (based on IAS 18) adjusted for exceptional effects grew slightly at +3.4% year-on-year excluding regulatory effects of EUR 54 million (+0.4% year-on-year including these effects), benefitting from the delivery of approx. EUR 100 million of revenue and OIBDA-relevant synergies. In total, we have now reached EUR 820 million (>90%) of the total synergy target of cumulated Operating Cash Flow savings of EUR 900 million in 2019. Our final integration project, the consolidation of our networks, is now completed and marks a major milestone on our way to becoming Germany’s “Mobile Customer and Digital Champion”. Furthermore, Telefónica Deutschland Group invested EUR 966 million in CapEx10 with a C/S ratio of 13.2% in 2018, also in line with our guidance of 12-13% of C/S for the financial year 2018.

The German mobile market remained rational, yet dynamic across segments throughout 2018 with a strong focus on profitable growth by stimulating customer data usage and ‘mobile freedom’ to maintain a fair market share. Telefónica Deutschland Group successfully relaunched its O2 Free and Blau portfolios. The new O2 Free tariffs – with the double-data Boost option and the unique O2 Connect option for up to 10 devices – support our ARPU-up strategy and help us counteract ongoing legacy base management topics and OTT effects. On the partner side, we continued to leverage our existing partnerships.

In 2019, Telefónica Deutschland Group will continue to pursue our successful multi-brand and multi-channel strategy. We expect pricing in the premium and discount segments to remain stable in 2019 as per the current market environment. Postpaid will remain the strongest value-generator for our business. Prepaid will also remain an important pillar of our operational and financial performance; however, we expect the current trend of lower customer demand in this segment to prevail as a result of the introduction of legitimisation checks, accelerating the pre- to postpaid migration trend in the market.

Regulatory changes are expected to remain major headwinds for the financial performance in 2019. Revenue will be affected by the negative effects of the termination rate cut for mobile voice minutes from EURc 1.07 to EURc 0.95 as of 1 December 2018 and the new regulation for intra-EU calls/SMS, now capped at EUR 0.19 per minute/EUR 0.06 per SMS, as of 15 May 2019. We will also continue to see minor effects from roam-like-home, as customers are still actively switching away from legacy roaming packages. In total, we expect the negative regulatory impact on total revenue to amount to approx. EUR 60-70 million in 2019. Similarly, OIBDA performance will reflect the negative usage elasticity effects from the roam-like-home regulation, the before-mentioned intra-EU calls/SMS and, to a lesser extent, termination rate effects. In total, we expect the negative regulatory impact on OIBDA to amount to approx. EUR 40-50 million.

For 2019 we expect total revenue to remain broadly stable year-on-year, excluding the above-mentioned negative regulatory effects of approx. EUR 60-70 million. Handset revenue continue to depend on market dynamics as well as the launch cycles and availability of new device generations. In the fixed business, the wholesale customer migration as a prerequisite for the decommissioning of our ULL broadband access infrastructure is now completed and we expect returns to normalise over time, as we market fixed broadband and converged products based on our wholesale access to competitors’ networks. In the mid-term, we expect to grow our revenues with the market, capturing market share in Internet-of-Things (IoT). Our own customers are our biggest asset and we are looking to reward and develop them, while serving many more customers based on our successful multi-channel, multi-brand approach. Our assumptions are based on a sustained rational competitive environment as well as stable economic conditions.

With all integration activities completed by 2018 year-end, we reiterate our cumulated total synergy target of approx. EUR 900 million Operating Cash Flow synergies in 2019 with intra-year incremental savings of approx. EUR 40 million at OIBDA level. These are mainly roll-over effects from network consolidation. At CapEx level we expect additional in-year savings of approx. EUR 40 million as a result of the roll-out of one LTE network.

2019 will also mark the first year of Telefónica Deutschland Group’s four-year transformation programme Digital4Growth, which we launched at our Capital Markets Day in February 2018. It has a clear focus on customer experience in the digital age. We are striving for continued profitable growth by capturing additional revenue growth opportunities in our core business, while also pushing into new business areas such as those arising from e-SIM capabilities, Advanced Data Analytics (ADA) or the Internet-of-Things (IoT). We also target efficiency gains from the further automation and digitalisation of processes, thus becoming ‘simpler, faster and better’. We reiterate our transformation plan of capturing an additional EUR 600 million of gross OIBDA between 2019 & 2022, including growth and efficiency gains. In the first year we foresee an additional EUR 40 million gross gains at OIBDA level, with a significant gradual ramp up in subsequent years.

Against this background, we expect OIBDA adjusted for exceptional effects in 2019 to be broadly stable to slightly positive year-on- year, excluding the afore-mentioned negative regulatory effects of EUR 40-50 million. We thus expect the before-mentioned integration and transformation savings to largely balance our continued market investment. We expect handsets margins to continue to be broadly neutral.

The assumption around market investments are based on an expectation of a rational outcome to the upcoming spectrum auction that is expected to start at the end of Q1 2019 and a continuation of the current rational market environment with continued exponential data growth. In 2018, we have seen a significant stabilisation and quality improvements in our network as a result of our consolidation and ongoing LTE roll-out efforts. Building on these achievements, we are moving ahead with the expansion and optimisation of our mobile network, thus continually improving customer experience. We intend to add further ~10,000 LTE sites (~30,000 LTE cells) in 2019.

In addition, as part of our 4-year transformation programme, we will be investing in our omni-channel capabilities and the end-to-end digitalisation and the harmonisation of our process landscape, e.g. via robotics. The investment needs for our digital transformation are front-end loaded. As a result, we expect C/S to come to approx. 13-14% for the financial year 2019; in the mid-term we expect a stable CapEx envelope of approx. EUR 1 billion. These figures include investment needs for back- and fronthaul for 4G and backhaul only for 5G based on the current regulatory framework.

Since the IPO and throughout the integration of Telefónica Deutschland Group and E-Plus Group, we have maintained a strong balance sheet and a conservative leverage11 target of at or below 1.0x. This has been reflected in a solid investment grade rating from Fitch and sustained access to capital markets. Over the course of the financial year 2019 we will review our self-defined leverage target for two reasons: Firstly, we will reflect the technical changes triggered by the introduction of the IFRS 16 accounting standard. We expect the implementation of IFRS 16 to have significant effects on margins, the balance sheet and leverage. Secondly, we envisage a move to an increased target leverage, allowing us to utilise our full financial flexibility with regards to the upcoming 5G investments whilst maintaining our BBB investment grade rating from Fitch.

We maintain strong confidence in our ability to generate Free Cash Flow growth in the mid-term on the back of solid momentum in the operating business and further support from the Digital4Growth programme. As such, we continue to target a high dividend pay-out ratio in relation to Free Cash Flow. For the financial year 2018 we reiterate our dividend proposal of EUR 0.27 per share to the Annual General Meeting in May 2019.
  
T 13 FINANCIAL OUTLOOK 2019¹² AND MID-TERM EXPECTATIONS
Actual 2018Outlook 2019Mid-term outlook
RevenueEUR 7,320 millionBroadly stable y-o-y (excl. negative regulatory effects of EUR 60-70 million)Growth in line with German market
OIBDA adjusted for exceptional effects¹³EUR 1,884 millionBroadly stable to slightly positive y-o-y (excl. negative regulatory effects of EUR 40-50 million)Ongoing margin improvement
CapEx/ Sales ratio13.20%Approx. 13-14%Keeping CapEx stable at approx. EUR 1 billion
DividendEUR 0.27/share Proposal for FY 2018 to next AGMHigh pay-out ratio over FCF

9 The effects from the implementation of IFRS 16 as of 1 January 2019 are not reflected in the financial outlook.

10 Of which EUR 8 million additions from capitalised financing leases.

11 Leverage is defined as net financial debt divided by the OIBDA of the last twelve months before exceptional effects.

Other disclosures

OTHER DISCLOSURES

Report on Relations with Affiliated Companies

 

In the period from 1 January to 31 December 2018, Telefónica Deutschland Holding AG was a directly dependent company of Telefónica Germany Holdings Limited, Slough, United Kingdom, within the meaning of section 312 AktG. In addition, Telefónica Deutschland Holding AG was an indirectly dependent company of O2 (Europe) Limited, Slough, United Kingdom and of Telefónica, S.A., Madrid, Spain, within the meaning of section 312 AktG. There is neither a domination agreement nor a profit and loss transfer agreement between Telefónica Deutschland Group and the aforementioned companies.

Accordingly, the Management Board of Telefónica Deutschland Holding AG has prepared a report on relations with affiliated companies in accordance with section 312 (1) AktG. This report includes the following final declaration:

“Our company has, with regard to the legal transactions listed in the dependency report for the reporting period, and based on the circumstances which were known to us at the time at which the legal transactions were carried out, received adequate compensation for each legal transaction. It has not been disadvantaged as a result of measures being taken or refrained from during the reporting period.”
 

Remuneration Report

 

The remuneration report describes the structure and design of the remuneration for the Management Board and Supervisory Board of Telefónica Deutschland Holding AG. Furthermore, the remuneration of each member of the Management Board and Supervisory Board is disclosed for the 2018 financial year and reported according to integral parts.

The report complies with the requirements of the German Commercial Code (HGB) and the recommendations of the German Corporate Governance Code (GCGC), taking into account German Accounting Standard No. 17 (DRS 17) and International Financial Reporting Standards (IFRS).
  

Remuneration of members of the Management Board

 

There were no changes in the composition of the Management Board in 2018. Management Board member Markus Haas was reappointed as a member of the company’s Management Board and appointed as the new Chief Executive Officer (CEO) of Telefónica Deutschland Holding AG with effect from 1 January 2017 until the end of 31 December 2019 by a resolution of the Supervisory Board dated 11 December 2016. With a resolution of the Supervisory Board dated 20 July 2017, the Management Board members, Markus Rolle, Wolfgang Metze, Alfons Lösing, Guido Eidmann, Valentina Daiber and Nicole Gerhardt were appointed as Management Board members of the company with effect from 1 August 2017 until the end of
31 July 2020 and the Management Board member, Cayetano Carbajo Martín, with effect from 1 August 2017 until the end of 31 December 2018. The appointment of Management Board member Cayetano Carbajo Martín was extended by resolution of the Supervisory Board of 24 October 2018 by one year until the end of 31 December 2019. The employment contracts were concluded for the respective term of their appointment.
  
Structure and components of the remuneration of the Management Board
The total remuneration of the Management Board members consists of a fixed remuneration, fringe benefits, a one-year variable remuneration (Bonus I) and long-term remuneration components (Bonus II, Bonus III / PSP, PIP). In addition, the members of the Management Board receive pension commitments.

The fixed, non-performance-related remuneration components (fixed remuneration and fringe benefits) accounted for 57% of total remuneration in 2018. The variable, performance-related remuneration components accounted for 43%. Of this, 34% is attributable to the one-year variable remuneration and 9% to components with a long-term incentive effect.
  
Fixed remuneration and fringe benefits
The fixed component comprises the annual fixed salary, which is paid in twelve equal monthly instalments, and the fringe benefits. The fringe benefits mainly comprise a company car, life and accident insurance, travel allowances, rent allowances, reimbursement of social security costs, committee fees and expat bonuses. Not all Management Board members receive all of these fringe benefits.
 
 
One-year variable remuneration
The one-year variable remuneration component is an annual cash bonus (Bonus I). Bonus I is calculated using the formula target bonus multiplied by the business performance. The target bonus is equivalent to a set percentage of the annual fixed salary. The business performance factor can have a minimum value of 0% and a maximum value of 125%. The members of the Management Board can therefore receive a maximum payment of 125% of the respective target bonus (CAP).

The business performance factor consists of two components: The first component is based on the success of Telefónica Deutschland Holding AG (Telefónica Deutschland component) and has a weighting of 70%. The second component is based on the success of Telefónica, S.A. (Telefónica, S.A. component) and has a weighting of 30%.

The parameters for the calculation of the Telefónica Deutschland component, their weighting and the respective target achievements are set by the Supervisory Board on an annual basis. Besides the financial targets, targets directly and indirectly in connection with customer satisfaction were agreed for 2018. If the minimum percentage of the respective target value set annually by the Supervisory Board is not achieved, the value for the company performance factor is 0% (knock-out). If the target is reached, the factor is 100%. If the target value is exceeded, the factor increases up to an upper limit, which for 2018 is 140% for one financial target and 125% for all other targets. Intermediate values of target achievement are not linearly interpolated, but calculated according to a payout curve set by the Supervisory Board. The payout curve assigns a corresponding company’s performance factor (in %) to the percentage of the target value actually achieved for each parameter determined annually by the Supervisory Board. In order to create an increased incentive for the simultaneous achievement of all annual targets, the Supervisory Board has decided for 2018 that those factors below 120% will be increased to 120% if all targets are achieved. The sum of the weighted company performance factors determines the Telefónica Deutschland component.

The Telefónica, S.A. component is set by the Supervisory Board at its due discretion. This discretionary decision is guided by the business performance of Telefónica, S.A. in the respective year.
  
Components with a long-term incentive effect
The multi-year variable remuneration of the members of the Management Board consists of several components. All members of the Management Board participate in the Deferred Bonus Plan (Bonus II) of Telefónica Deutschland Holding AG.

The CEO is also generally entitled to participate in a long-term variable remuneration plan of Telefónica, S.A. These are the “Performance & Investment Plan” (PIP) and its successor plan, the “Performance Share Plan” (PSP). The Supervisory Board has approved participation in the Performance Share Plan (PSP) for 2018.

For the other Management Board members, however, it has been agreed as Bonus III that the Supervisory Board will decide annually whether they will receive an additional allocation from the Deferred Bonus Plan (Bonus II) or an allocation from a long-term variable remuneration plan of Telefónica, S.A. or an allocation from another long-term variable remuneration plan to be approved by the Supervisory Board of the company. The grant value corresponds to a certain portion of the annual fixed salary. For 2018, the Supervisory Board approved an allocation from the current long-term variable remuneration plan of Telefónica, S.A., the Performance Share
Plan (PSP).
 
Deferred Bonus Plan (Bonus II): Bonus II is a deferred bonus. The members of the Management Board are promised an amount equal to a percentage of their annual fixed salary as a bonus. The Management Board member has the right to the full amount (CAP) after a period of three years if the total shareholder return of Telefónica Deutschland Holding AG is in the upper quartile of the total shareholder return of the peer group comprising the DAX 30 companies. Each Management Board member has the right to receive 50% of Bonus II if the total shareholder return of Telefónica Deutschland Holding AG corresponds to the median of the peer group. If the total shareholder return of Telefónica Deutschland Holding AG lies between the median and the upper quartile, Bonus II is calculated on a linear proportional basis. If the total shareholder return of Telefónica Deutschland Holding AG lies below the median, there is no entitlement to payments.

In 2018, the grant value equals 80% of the annual fixed salary for the CEO and 33% for each of the other Management Board members. Participation in Bonus II for the period from 2015 to 2018 did not result in any payment.
  
Performance & Investment Plan (PIP): The Performance & Investment Plan was approved by the Annual General Meeting of Telefónica, S.A. on 30 May 2014 and consists of three allocation cycles starting on 1 October 2014, 1 October 2015 and 1 October 2016. The term is three years in each case. There are two versions, namely the version applicable to members of the ExComm of Telefónica, S.A., Markus Haas, and the version for senior management; the difference between the two versions is that members of the ExComm of Telefónica, S.A. – as described in greater detail below – may be allocated 125% of the performance shares awarded.

In accordance with the PIP, members of the Management Board are, with the approval of the Supervisory Board, allocated a certain number of performance shares as an award. The number of performance shares is calculated by dividing an amount corresponding to a certain proportion of the annual fixed salary of the relevant Management Board member by the average share price of Telefónica, S.A. (Core Award). After three years, the performance shares give the right to the acquisition of the corresponding number of Telefónica, S.A. shares (free of charge) providing that the beneficiary is still employed by a company of Telefónica, S.A. Group at the end of the time period and that the total shareholder return of Telefónica, S.A. over the three-year “vesting period” is at least equal to the median of the total shareholder return of a peer group of global telecommunication companies. 30% of the performance shares are awarded if Telefónica, S.A.’s total shareholder return corresponds to the median of these companies. The number of shares awarded increases to 100% if Telefónica, S.A.’s total shareholder return is in the upper quartile of the peer group. If Telefónica, S.A.’s total shareholder return is between the median and the upper quartile, the number of awarded shares is calculated on a linear proportional basis. If Telefónica, S.A.’s total shareholder return is below the median of the peer group, the entitlements are forfeited. Members of the ExComm of Telefónica, S.A. earn 125% if the total shareholder return of Telefónica, S.A. reaches at least the total shareholder return of the upper decile of the peer group. The members of the Management Board can therefore receive a maximum entitlement to 100% or 125% of the originally allocated performance shares in the form of real shares (CAP).

As an alternative to the Core Award, the PIP also provides for an Enhanced Award whereby the number of performance shares is increased by 25% in comparison with the Core Award. To be entitled to receive the Enhanced Award, a Management Board member must personally own a certain number of shares in Telefónica, S.A. (currently 25% of the Core Award). If the conditions for the Enhanced Award are met, the number of shares to be actually allocated is calculated on the basis of the Enhanced Award rather than the Core Award.

In 2018, no shares were earned by the members of the Management Board from the 2015 allocation cycle.
  
Performance Share Plan (PSP): The Performance Share Plan was approved by the Annual General Meeting of Telefónica, S.A. on 8 June 2018 and consists of three allocation cycles starting on 1 January 2018, 1 January 2019 and 1 January 2020. The term is three years in each case. At the beginning of the term, with the approval of the Supervisory Board, a certain number of performance shares are allocated to the members of the Management Board corresponding to a certain proportion of the annual fixed salary of the respective member of the Management Board. The number of shares actually earned at the end of the three-year term is calculated as the product of the number of allocated performance shares and a target achievement factor that depends on the fulfilment of certain performance conditions and can reach a minimum value of 0% and a maximum value of 100%. The members of the Management Board can therefore receive a maximum entitlement to 100% of the originally allocated performance shares in the form of real shares (CAP). For plan participants who are also members of the Executive Committee of Telefónica, S.A. (Markus Haas), a holding period of 12 months for at least 25% of the shares earned is provided for.

The target achievement factor for the 2018 allocation cycle consists of two components: The first component is based on the total shareholder return of Telefónica, S.A. (TSR target achievement factor) and has a weighting of 50%. The second component is based on the achievement of free cash flow targets (FCF target achievement factor) and also has a weighting of 50%.

The TSR target achievement factor depends on how the total shareholder return of Telefónica, S.A. has developed over the three years compared to the total shareholder return of selected global telecommunication companies: If Telefónica, S.A.’s total shareholder return is below the median of the peer group, the TSR target achievement factor is 0%. If the median is reached, the TSR target achievement factor is 30%. The TSR target achievement factor is increased by linear interpolation to up to 100% if the total shareholder return of Telefónica, S.A. reaches the upper quartile of the peer group.

The FCF target achievement factor corresponds to the average of annual target achievement factors, which can be between 0% and 100% depending on the achievement of annual targets for free cash flow. The respective annual targets for free cash flow and the associated target achievement curve are generally calculated annually by the Board of Directors of Telefónica, S.A.

All members of the Management Board received performance shares from the 2018 allocation cycle after approval by the Supervisory Board of the company.
 
Pension commitments
Markus Haas, Markus Rolle, Guido Eidmann, Valentina Daiber, Wolfgang Metze and Nicole Gerhardt participate in the company’s pension plan. Alfons Lösing receives a fixed contribution for a reinsured commitment from the Essener Verband (EV). The Management Board member Cayetano Carbajo Martín has no commitment regarding company-financed retirement pension from the company, but participates in the Spanish plan for Directors.

The Management Board members who participate  in  the company’s pension plan, will receive an annual financing contribution in the amount of 20% of the annual fixed salary, which is invested in a reinsured support fund. The Management Board members may choose between 6 specified  pension  packages, which hedge the risks of surviving dependants’ pension, work disability and old-age to varying degrees. Besides the statutory guaranteed interest, there is no further interest guarantee. The Management Board members have the option to choose between a one-off payment, a payment in 3 or 6 instalments or the drawing of a pension. Old-age pension or the payout is received by the Management Board member when they have reached the age limit and left the services of the company.

The Management Board member who is a member of the Essener Verband (EV), receives a fixed financing amount for the so-called BOLO (contribution-based benefit ordinance of the EV). There is a specific pensionable age. Furthermore, surviving dependants’ and work disability pension benefits are granted. The Management Board member also receives a pension from Benefit Ordinance B of the EV. Commitments are also provided for retirement, surviving dependants’ and work disability pensions. The benefits from the commitments, which are not covered by the pension insurance association, are insured within the scope of reinsurance policy.
  
Commitments in the event of premature termination of business activities
Early termination of the service agreement: In the event of premature termination of the employment contract without good cause, the Management Board contracts contain a clause within the meaning of section 4.2.3 of the GCGC that any payments to be made to the Management Board member, including fringe benefits, should not exceed the value of two years’ remuneration and the value of the remuneration for the remaining term of the Management Board member service agreement. This is to be based on the total remuneration for the past financial year and, if applicable, also on the expected total remuneration for the current financial year.
 
Change of Control In the event of a change of control, the Management Board member has the right to terminate the employment relationship extraordinarily with a notice period of three months to the end of the month and to resign from office as a Management Board member with this notice period. In this case, the company shall pay the Management Board member a one-time remuneration equal to a fixed annual salary and the last annual cash bonus received (Bonus I), but not exceeding the remuneration that would have been payable up to the end of the employment contract.
  
Death benefit: In the event of the death of a member of the Management Board during the term of the employment contract, such member’s widow/widower and children, provided they are under the age of 27, shall be entitled as joint creditors to the continued payment in full of such member’s annual fixed salary. Such payment shall be received for the month in which death occurred and the following six months. Such payment shall not exceed the term of the contract.
 
Other remuneration components
Discretionary bonus:
The Supervisory Board is authorised, at its discretion, to award members of the Management Board a discretionary bonus, which may not exceed 100% of their annual fixed salaries, for extraordinary merits that are not already rewarded by the regular remuneration and which cause a material economic advantage for the company. As in previous years, the Supervisory Board did not grant any discretionary bonus to members of the Management Board in 2018.
 
D&O insurance: The company has taken out D&O insurance (Directors & Officers Liability Insurance) for the benefit of the members of the Management Board with a deductible of 10% of the loss up to one and a half times the annual fixed salary of the respective Management Board member.
 
Collateral/loans/guarantees: The Telefónica Deutschland Group has not currently granted the members of its Management Board any security or loans and have not assumed any guarantees for them.
 
Post-contractual non-competition covenant: A non-competition covenant and/or post-contractual non-competition covenant has been agreed with the members of the Management Board. During the term of the post-contractual non-competition covenant, members of the Management Board will receive a compensation equal to 50% of the most recently received contractual remuneration. The company shall be entitled to waive compliance at any time.
 
Return of company property: Members of the Management Board must immediately return all objects in their possession due to the company, including company cars, upon termination of their employment relationship as well as in the event of dismissals.
  
Management Board remuneration in accordance with HGB
The members of the Management Board received the following compensation in 2018:
 
T 14 MANAGEMENT BOARD REMUNERATION 2018
Non-performance-related componentsPerformance-related componentsComponents with a long-term incentive effect
Multi-year share remuneration¹⁾
2018Fixed remunerationFringe benefitsTOTALOne-year variable remunerationMulti-year cash remunerationNumber²⁾Fair ValueTOTAL: Components with a long- term incentive effectTotal remuneration
Markus Haas700,00016,616716,616594,02027,570145,979145,9791,456,615
Markus Rolle400,00018,602418,602243,59912,99868,82068,820731,021
Wolfgang Metze400,00017,496417,496243,59912,99868,82068,820729,914
Alfons Lösing400,00061,193461,193243,59912,99868,82068,820773,611
Cayetano Carbajo Martín300,000225,099³⁾525,099192,2159,74851,61651,616768,929
Nicole Gerhardt300,00018,550318,550182,6999,74851,61651,616552,865
Valentina Daiber300,00016,538316,538182,6999,74851,61651,616550,853
Guido Eidmann300,00064,607364,607182,6999,74851,61651,616598,922
Disclosure of Management Board remuneration
Management Board remuneration is reported both on the basis of the requirements of the German Commercial Code (HGB) and in accordance with the recommendations of the German Corporate Governance Code (GCGC). This results in deviation for individual remuneration components and total remuneration.

In accordance with the GCGC, the presentations follow the recommended model tables 1 and 2, which show the total remuneration of the remuneration components granted and received for the year under review. The overview of the benefits granted also shows the minimum and maximum achievable values. In contrast to the table about granted benefits, the table about received benefits does not show the target values granted for the short-term and
long-term variable remuneration components, but instead the values actually received for 2018.
  
The following remuneration was paid to the members of the Management Board who were active in 2017:
 
T 15 MANAGEMENT BOARD REMUNERATION 2017
Non-performance-related componentsPerformance-related componentsComponents with a long-term incentive effect
Multi-year share remuneration¹⁾
2017Fixed remunerationFringe benefitsTOTALOne-year variable remunerationMulti-year cash remunerationNumberFair ValueTOTAL: Components with a long-term incentive effectTotal remuneration²⁾
Markus Haas700,00018,236718,236642,1501,360,386
Markus Rolle166,6675,003171,670108,333280,003
Wolfgang Metze166,6675,943172,610108,333280,943
Alfons Lösing166,66722,336189,003108,333297,336
Cayetano Carbajo Martín125,00066,108191,10881,250272,358
Nicole Gerhardt125,0004,787129,78781,250211,037
Valentina Daiber125,0005,555130,55581,250211,805
Guido Eidmann125,00025,114150,11481,250231,364
Rachel Empey (until 31 July 2017)350,000159,535509,535228,992738,527
T 16 PENSION COMMITMENTS AND OTHER BENEFITS
Service cost according to IFRSService cost according to HGB¹⁾Project unit credit value of the pension benefit commitment according to IFRSProject unit credit value of the pension benefit commitment according to HGB
20182017201820172018201720182017
Markus Haas142,30866,131250,26365,502860,277602,284622,074358,646
Markus Rolle37,57417,82868,57331,985481,681472,009311,446234,265
Wolfgang Metze37,86922,53110,39845,87715,94533,30010,398
Alfons Lösing97,93480,937206,453372,8772,352,6892,368,4721,793,8621,531,102
Cayetano Carbajo Martín86,80458,55086,89858,8781,1088471,093819
Nicole Gerhardt1968,44917913,4292,16310,6832,159
Valentina Daiber39,61921,15457,90924,551194,831135,610145,24484,243
Guido Eidmann26,73623,64636,2089,56792,09247,56972,71635,228
Rachel Empey (until 31 July 2017)(362)
T 17 MANAGEMENT BOARD REMUNERATION IN ACCORDANCE WITH GERMAN CORPORATE GOVERNANCE CODE (BENEFITS GRANTED AND INFLOWS)
Markus Haas Chief Executive Officer (CEO) Since: 1 January 2017Markus Rolle Chief Financial Officer Since: 1 August 2017Wolfgang Metze Chief Consumer Officer Since: 1 August 2017
Benefits granted201720182018 (min) 2018 (max)201720182018 (min) 2018 (max)201720182018 (min) 2018 (max)
Fixed remuneration700,000700,000700,000700,000166,667400,000400,000400,000166,667400,000400,000400,000
Fringe benefits18,23616,61616,61616,6165,00318,60218,60218,6025,94317,49617,49617,496
Total718,236716,616716,616716,616171,669418,602418,602418,602172,609417,496417,496417,496
One-year variable remuneration700,000700,000875,000108,333260,000325,000108,333260,000325,000
Multi-year variable remuneration700,001705,979n.a.109,000200,820n.a.119,167200,820n.a.
Bonus II (2017-2020)700,001109,000119,167
PIP / Bonus III (2017-2020)
Bonus II (2018-2021) 560,000560,000132,000132,000132,000132,000
PSP / Bonus III (2018 - 2020)¹⁾145,979n.a.68,820n.a.68,820n.a.
Total2,118,2372,122,595716,616n.a.389,003879,422418,602n.a.400,110878,316417,496n.a.
Pension expenses66,131142,308142,308142,30817,82837,57437,57437,57437,86937,86937,869
Total remuneration2,184,3682,264,903858,924n.a.406,831916,996456,176n.a.400,110916,185455,365n.a.
Alfons Lösing Chief Partner and Business Officer
Since: 1 August 2017

Cayetano Carbajo Martín Chief Technology Officer Since: 1 August 2017
Nicole Gerhardt Chief Human Resources Officer
Since: 1 August 2017
Benefits granted201720182018 (min) 2018 (max)201720182018 (min) 2018 (max)201720182018 (min) 2018 (max)
Fixed remuneration166,667400,000400,000400,000125,000300,000300,000300,000125,000300,000300,000300,000
Fringe benefits22,33661,19361,19361,19366,108225,099225,099225,0994,78718,55018,55018,550
Total189,002461,193461,193461,193191,108525,099525,099525,099129,787318,550318,550318,550
One-year variable remuneration108,333260,000325,00081,250195,000243,75081,250195,000243,750
Multi-year variable remuneration130,000200,820n.a.97,500150,616n.a.82,500150,616n.a.
Bonus II (2017-2020)130,00097,50082,500
PIP / Bonus III (2017-2020)
Bonus II (2018-2021) 132,000132,00099,00099,00099,00099,000
PSP / Bonus III (2018 - 2020)¹⁾68,820n.a.51,616n.a.51,616n.a.
Total427,336922,012461,193n.a.369,858870,714525,099n.a.293,537664,166318,550n.a.
Pension expenses80,93797,93497,93497,93458,55086,80486,80486,804196196196
Total remuneration508,2731,019,946559,127n.a.428,408957,519611,903n.a.293,537664,362318,746n.a.
Valentina Daiber Chief Officer for Legal and Corporate Affairs
Since: 1 August 2017
Guido Eidmann Chief Information Officer Since: 1 August 2017Rachel Empey Chief Financial Officer Until: 31 July 2017
Benefits granted201720182018
(min)
2018
(max)
201720182018
(min)
2018
(max)
201720182018
(min)
2018
(max)
Fixed remuneration125,000300,000300,000300,000125,000300,000300,000300,000350,000
Fringe benefits5,55516,53816,53816,53825,11464,60764,60764,607159,535
Total130,555316,538316,538316,538150,114364,607364,607364,607509,535
One-year variable remuneration81,250195,000243,75081,250195,000243,750280,000
Multi-year variable remuneration97,500150,616n.a.97,500150,616n.a.
Bonus II (2017-2020)97,50097,500
PIP / Bonus III (2017-2020)
Bonus II (2018-2021)99,00099,00099,00099,000
PSP / Bonus III (2018 - 2020)¹⁾51,616n.a.51,616n.a.
Total309,305662,154316,538n.a.328,864710,223364,607n.a.789,535
Pension expenses21,15439,61939,61939,61923,64626,73626,73626,736
Total remuneration330,459701,773356,157n.a.352,510736,959391,343n.a.789,535
Markus Haas Chief Executive Officer (CEO) Since: 1 January 2017Markus Rolle Chief Financial Officer Since: 1 August 2017Wolfgang Metze Chief Consumer Officer Since: 1 August 2017
Benefits received201820172018201720182017
Fixed remuneration700,000700,000400,000166,667400,000166,667
Fringe benefits16,61618,23618,6025,00317,4965,943
Total716,616718,236418,602171,669417,496172,609
One-year variable remuneration¹⁾717,500594,020266,50091,932266,50091,932
Multi-year variable remuneration
Bonus II (2014-2017)
PIP / Bonus III (2014-2017)
Bonus II (2015-2018)
PIP / Bonus III
(2015-2018)
Other
Total1,434,1161,312,256685,102263,601683,996264,541
Pension expenses142,30866,13137,57417,82837,869
Total remuneration1,576,4241,378,387722,676281,429721,865264,541
Alfons Lösing Chief Partner and Business Officer Since: 1 August 2017Cayetano Carbajo Martín Chief Technology Officer Since: 1 August 2017Nicole Gerhardt Chief Human Resources Officer Since: 1 August 2017
Benefits received201820172018201720182017
Fixed remuneration400,000166,667300,000125,000300,000125,000
Fringe benefits61,19322,336225,09966,10818,5504,787
Total461,193189,002525,099191,108318,550129,787
One-year variable remuneration¹⁾266,50091,932199,87568,949199,87568,949
Multi-year variable remuneration
Bonus II (2014-2017)
PIP / Bonus III (2014-2017)
Bonus II (2015-2018)
PIP / Bonus III
(2015-2018)
Other
Total727,693280,934724,974260,057518,425198,736
Pension expenses97,93480,93786,80458,550196
Total remuneration825,627361,871811,778318,607518,621198,736
Valentina Daiber Chief Officer for Legal and Corporate Affairs Since: 1 August 2017Guido Eidmann Chief Information Officer Since: 1 August 2017Rachel Empey Chief Financial Officer Until: 31 July 2017
Benefits received201820172018201720182017
Fixed remuneration300,000125,000300,000125,000350,000
Fringe benefits16,5385,55564,60725,114159,535
Total316,538130,555364,607150,114509,535
One-year variable remuneration¹⁾199,87568,949199,87568,949280,000²⁾
Multi-year variable remuneration
Bonus II (2014-2017)
PIP / Bonus III (2014-2017)
Bonus II (2015-2018)
PIP / Bonus III
(2015-2018)
Other
Total516,413199,504564,482219,063789,535
Pension expenses39,61921,15426,73623,646
Total remuneration556,032220,658591,218242,709789,535

Remuneration of members of the Supervisory Board

 

The members of the Supervisory Board receive fixed remuneration of EUR 20 thousand annually in accordance with the articles of association, payable at the end of the financial year. The Chairperson of the Supervisory Board receives EUR 80 thousand and the Deputy Chairperson of the Supervisory Board receives EUR 40 thousand. The Chairperson of the Audit Committee receives an additional EUR 50 thousand if the Chairperson of the Supervisory Board or the Deputy Chairperson does not hold the chair in this committee. Supervisory Board members who hold office in the Supervisory Board or the position of Chairperson of the Supervisory Board or Chairperson of a Committee only for a certain part of the financial year receive proportionate remuneration on a pro rata temporis basis. In addition to the remuneration, the company reimburses the members of the Supervisory Board for the expenses arising in the fulfilment of their duties as Supervisory Board members as well as any value-added tax on their remuneration and their expenses.

Four members of the Supervisory Board and one former member of the Supervisory Board who have an executive function in one of the Telefónica, S.A. Group companies waived their remuneration for their current term of office up to an amount of EUR 2,000 per year.

Outside of the aforementioned activities of the Supervisory Board and the committees, no services, in particular no consulting or mediation services, were provided.
  
NameMember of the Supervisory BoardRemuneration (in EUR) 2018Remuneration (in EUR) 2017
Eva Castillo Sanz*since 5 October 2012 to 25 May 201826,84980,000
Laura Abasolo García de Baquedano**since 12 May 20152,0002,000
Angel Vilá Boixfrom 18 September 2012 to 4 October 20172,000
María García-Legaz Poncesince 7 June 20182,000
Patricia Cobian Gonzálezsince 18 September 20122,0002,000
Michael Hoffmannsince 5 October 201270,00070,000
Enrique Medina Malofrom 18 September 2012 to 24 July 20182,0002,000
Pablo de Carvajal Gonzalezsince 25 July 20182,000
Sally Anne Ashfordsince 18 September 201420,00020,000
Peter Erskinesince 19 May 201620,00020,000
Julio Linares Lópezsince 16 October 201720,0004,219
Christoph Braun***since 1 July 201638,57540,000
Thomas Pfeilsince 3 June 201320,00020,000
Dr. Jan-Erik Waltersince 3 June 201320,00020,000
Marcus Thurandfrom 3 June 2013 to 17 May 20187,50720,000
Martin Butzsince 17 May 201812,548
Christoph Heilfrom 3 June 2013 to 17 May 20187,50720,000
Sandra Hofmannsince 17 May 201812,548
Claudia Webersince 3 June 201320,00020,000
Joachim Rieger****since 31 October 201424,50024,500
Jürgen Thierfelder****since 31 October 201423,16824,500

 

The members of the Supervisory Board received remuneration for their activities on the Supervisory Board of Telefónica Deutschland Holding AG of EUR 346 thousand in 2018 and EUR 382 thousand in 2017.

As of 31 December 2018, the Telefónica Deutschland Group has not granted the members of its Supervisory Board any securities or loans, and has not assumed any guarantees on their behalf.
  

Separate combined non-financial report

 

Telefónica Deutschland will publish a separate, non-financial, combined report which contains the information for both Telefónica Deutschland Group and Telefónica Deutschland, at the following website address: www.telefonica.de/nfe. This non-financial report in accordance with section 315 (5) HGB in conjunction with section 289b HGB is part of this combined management report.

Disclosures

in accordance with section 315a and section 289a HGB

  

Composition of subscribed capital
The registered share capital of Telefónica Deutschland Holding AG amounts to EUR 2,974,554,993, which is consistent with the prior year. The share capital is divided into 2,974,554,993 no-par value registered shares, each with a proportionate interest in the share capital of EUR 1.00 (“shares”). The registered share capital is fully paid. As of 31 December 2018 and at the time this Management Report was prepared, Telefónica Deutschland Holding AG did not hold any of its own shares. In accordance with section 6 (2) of the articles of association, the shareholders do not have the right to securitise shares. Each no par value share grants one vote at the Annual General Meeting. The shares are in general freely transferable.
 
Voting restrictions and restrictions on the transferability of shares
There are no general limitations on voting rights. We are not aware of any contractual agreements with Telefónica Deutschland Holding AG or other agreements about limitations on voting rights or the transferability of shares. In addition to the statutory provisions on insider trading and the prohibition on trading in accordance with the Market Abuse Regulation, the Company informs the relevant parties about “silent periods” of 30 days prior to the publication of financial data with corresponding recommendations to refrain from trading in this period. Other than this, there are no internal governance provisions providing for restrictions on the purchase and sale of shares by Management Board members or employees.
 
Participation in the share capital of more than 10% of the voting rights
As of 31 December 2018, Telefónica Germany Holdings Limited, Slough, United Kingdom, holds approximately 69.2% of the shares of Telefónica Deutschland Holding AG and the same amount of voting rights. Both O2 (Europe) Limited, Slough, United Kingdom, and Telefónica, S.A., Madrid, Spain, indirectly hold more than 69.2% of the shares in Telefónica Deutschland via Telefónica Germany Holdings Limited. Other than this, we were not informed of any participation in the share capital of Telefónica Deutschland of more than 10% of the voting rights and we are not aware of any such participations.
 
Shares with special rights
There are no shares with special rights, and in particular no shares with rights that grant control.

Control of voting rights when employees hold stakes in the share capital
Just like all other shareholders, employees who hold shares in Telefónica Deutschland exercise their control rights directly in accordance with the statutory provisions and the articles of association.

Appointment and dismissal of Management Board members
Pursuant to section 7 of the articles of association and section 84 AktG, the Supervisory Board determines the number of members of the Management Board and is responsible for their appointment and dismissal as well as for the appointment of the Chair of the Management Board (Chief Executive Officer, CEO). Deputy members of the Management Board may be appointed.

As of 31 December 2018, the Management Board of Telefónica Deutschland Holding AG consisted of eight members.

Management Board members are appointed by the Supervisory Board for a term of no more than five years. They can be re-appointed and their term can be extended provided one period of office does not exceed a period of five years. The Supervisory Board may dismiss a Management Board member in the event of good cause, such as a gross breach of duties or if the Annual General Meeting adopts a no-confidence resolution in relation to the respective Management Board member. Other reasons for dismissal – such as mutual termination – remain unaffected. Telefónica Deutschland is subject to the provisions of the German Co-Determination Act (Mitbestimmungsgesetz – MitbestG).

Pursuant to section 31 MitbestG, a majority of two-thirds of the votes of Supervisory Board members is required for the appointment and dismissal of Management Board members. If this majority is not reached in the first round of voting by the Supervisory Board, the appointment or dismissal may occur on the recommendation of the Mediation Committee, which is to be formed in accordance with section 27 (3) MitbestG, in a further round of voting with a simple majority of the votes of the Supervisory Board members.

If the mandatory majority is still not achieved, a third round of voting must take place which again requires a simple majority; for this round of voting, however, the Chair of the Supervisory Board has two votes. If a required Management Board member is missing, the Munich Local Court must appoint the member on application by a party concerned pursuant to section 85 (1) AktG in urgent cases.
 
Changes to the articles of association
In accordance with section 179 (1) sentence 1 AktG, any change to the articles of association of Telefónica Deutschland Holding AG requires a resolution of the Annual General Meeting. In accordance with section 27 of the articles of association together with section 179 (2) sentence 2 AktG, resolutions of the Annual General Meeting of Telefónica Deutschland regarding changes to the articles of association are passed with a simple majority of the votes cast and a simple majority of the share capital represented at the passing of the resolution. If the law requires a higher majority of votes or capital, this majority must be applied. In connection with changes that only affect the wording of the articles of association, the Supervisory Board is entitled to make changes in accordance with section 179 (1) sentence 2 AktG in conjunction with section 17 (3) of the articles of association.
 
Authorisation of the Management Board to issue shares
The powers of the Management Board are governed by sections 76 et seqq. AktG in conjunction with sections 8 et seqq. of the articles of association. In particular, the Management Board runs the company and represents it in and out of court.

The authorisation of the Management Board to issue shares is governed by section 4 of the articles of association in conjunction with the statutory provisions. As of 31 December 2018, the following authorisations of the Management Board for the issuing of shares exist:
  
Authorised capital
As of 31 December 2018, the Management Board is authorised, with the approval of the Supervisory Board, to increase the share capital of the company in the period until 18 May 2021, on one or more occasions, by a total of EUR 1,487,277,496 by issuing up to 1,487,277,496 new no-par value shares in exchange for cash and/or non-cash contributions (Authorised Capital 2016/I). The authorisation stipulates that shareholder subscription rights can, in certain cases, be completely or partially excluded (section 4 (3) of the articles of association). This was resolved by the Shareholders’ Meeting on 19 May 2016, which at the same time cancelled the existing Authorised Capital 2012/I.
 
Conditional capital
For the purpose of the issue of registered no-par value shares to the holders or creditors of bonds, the share capital of the company is conditionally increased by up to EUR 558,472,700 by issuing 558,472,700 new registered no-par value shares (Conditional Capital 2014/l).
 
Authorisation of the Management Board to buy back shares
The authorisation of the Management Board to buy back own shares is governed by section 57 (1) sentence 2 and sections 71 et seqq. AktG.

The Shareholders’ Meeting on 19 May 2016 cancelled the existing authorisation to buy back own shares dated 5 October 2012 and resolved a new authorisation in accordance with section 71 (1) 8 AktG to buy back own shares of up to a total of 10% of the share capital on the resolution date or, if lower, on the date on which the authorisation is exercised.
 
Change of control/compensation agreements
Telefónica Deutschland Holding AG’s significant agreements containing a change-of-control clause relate to financing.

In the event of a change of control, the rating of Telefónica Deutschland or of the outstanding non-current liabilities within the Group will be examined with regard to capital market liabilities. In the event of a deterioration in the rating as contractually defined, the contracts grant O2 Telefónica Deutschland Finanzierung GmbH as the issuer the option to terminate the financing early at a redemption amount of 101% of the nominal amount plus accrued interest.
Otherwise, the interest rate will be increased by 1.25% p.a. until maturity or by 3.0% p.a. for the bond issued on 5 July 2018.

A small number of other contracts grant the contracting partners the right of termination in the event of a change of control in accordance with normal practice; this would result in an obligation to fulfil all outstanding obligations.

The service contracts of the Management Board members of Telefónica Deutschland Holding AG grant the right to terminate these contracts in the event of a takeover offer by a third party with three months’ notice to the end of the month; however, this termination must occur within six months of a change of control. In this case, the relevant Management Board member is entitled to a one-off compensation to the value of one fixed annual salary plus the last annual bonus received. However, the compensation may not exceed the remuneration that would have been payable by the end of the contract.
   
Business development of Telefónica Deutschland Holding AG

BUSINESS DEVELOPMENT OF TELEFÓNICA DEUTSCHLAND HOLDING AG

The annual financial statements of Telefónica Deutschland Holding AG were prepared in accordance with the German Commercial Code (HGB).

Telefónica Deutschland acts as a holding company and as a service provider, it is responsible for the management and strategic orientation of the Telefónica Deutschland Group and its operating activities. As such, its opportunities and risks, and the outlook for the coming financial year are the same as for the Telefónica Deutschland Group. As at 31 December 2018, Telefónica Deutschland has no employees.
 

Results of Operations

 

Telefónica Deutschland generates its revenues from compensation for services, which it provides for its subsidiaries.

In fiscal year 2018 the charging on of the respective costs resulted in revenues in the amount of EUR 10 million.

The revenue development for the 2018 financial year is below that of the previous year’s forecast due to a lower cost base and the associated lower costs charged on in the reporting year.

Revenue and expenses decreased compared to the previous year and resulted in an annual net loss in the amount of around EUR 2 million, which was at the same level as the previous year.

The prior year forecasted break-even was achieved.
  
Revenues below previous year’s level
In the financial year, revenues of EUR 10 million (2017: EUR 15 million) were generated. The revenues were essentially comprised of charging on the costs for the remuneration of Management Board members, as well as additional administration costs, which are assumed by Telefónica Germany GmbH & Co. OHG in accordance with compensation agreements for management services. Furthermore, invoiced management services are included in the amount of EUR 240 thousand, which Telefónica Deutschland Holding AG provides for Telefónica Germany GmbH & Co. OHG and Telefónica Germany Management GmbH.
 
Personnel expenses above previous year’s level
Personnel expenses primarily includes the remuneration of the Management Board including social expenses and amounted to EUR 8 million during the financial year (2017: EUR 6 million). The year-on-year increase is mainly due to the change in the composition of the Management Board in financial year 2017.
 
Other operating expenses below the previous year’s level
At EUR 4 million, other operating expenses are significantly below the previous year‘s level. They essentially include legal and consulting expenses from external service providers. The change compared to the previous year mainly results from lower external consulting services in financial year 2018.
 
Net loss for the year at the previous year’s level
As in 2017, in 2018 the Company generated a net loss for the year of around EUR 2 million.
 
 
T 18 INCOME STATEMENT
1 January to 31 December
(in EUR million)20182017Change% change
Revenues1015(5)(34.9)
Other income01(0)(55.0)
Operating expenses(12)(18)6(32.8)
Personnel expenses(8)(6)(1)19.6
Other expenses(4)(11)7(64.5)
Operating income(1)(2)0(20.5)
Financial result00(0)>100.0
Profit/(loss) before tax(2)(2)0(9.2)
Income tax000>100.0
Profit/(loss) after tax(2)(2)0(9.8)
Other current taxes(0)(0)(100.0)
Profit/(loss) for the period(2)(2)07.4

Financial Position and Net Assets

 

Principles and goals of financial management
As a service provider, Telefónica Deutschland Holding AG is responsible for the management of the Telefónica Deutschland Group and its operating business activities. It mainly finances itself with equity and generates an operating cash flow from charging on these management services to Telefónica Germany GmbH & Co. OHG and Telefónica Germany Management GmbH. Furthermore, Telefónica Deutschland Holding AG is integrated into the Group-wide financial management of the Telefónica Deutschland Group and is therefore able to fulfil its payment obligations at all times.

In this respect, the further remarks apply from the Financial situation of the Group section.
 
Bond for corporate financing
In November 2013 and February 2014, O2 Telefónica Deutschland Finanzierungs GmbH issued two bonds with a nominal value of EUR 600 million and EUR 500 million and a term of five and seven years. The bond due in 2018 was repaid as scheduled in November 2018.

In July 2018, O2 Telefónica Deutschland Finanzierungs GmbH placed a seven-year bond with a volume of EUR 600 million. The bond served to refinance the bond due and repaid in November 2018 and for general business purposes.

The nominal amount of the loan was made available to Telefónica Germany GmbH & Co. OHG by means of a loan.

Within the scope of the Group-wide financial management of the Telefónica Deutschland Group, Telefónica Deutschland Holding AG guarantees the punctual payment of interest, principal and any other additional amounts which are payable under the bond.
 
Investment projects
There are currently no extensive investments planned at the level of Telefónica Deutschland Holding AG.

Financial assets almost at the previous year’s level Financial assets in the amount of EUR 9,340 million (2017: EUR 10,113 million) were comprised of the shares in Telefónica Germany GmbH & Co. OHG, Munich. On the basis of a shareholders’ resolution dated 3 May 2018, a withdrawal totalling EUR 773 million took place in the financial year from Telefónica Deutschland, in accordance with section 4 (3) of the articles of association, this led to a corresponding reduction of the investment book value.

The book value of the shares in Telefónica Germany Management GmbH, Munich were unchanged in comparison to the previous period at EUR 10 million.
 
Decline of receivables from affiliated companies
The decline in receivables from affiliated companies resulted mainly from the decrease in receivables from Telefónica Germany GmbH & Co. OHG, Munich, of EUR 3 million.

Slight decline in provisions
The decline in other provisions from EUR 7 million in 2017 to EUR 5 million at the end of the reporting period mainly results from increased provisions for outstanding invoices for consulting services. At EUR 3 million, pension provisions are slightly above the previous year’s level.

Liabilities slightly below previous year‘s level
Trade payables, liabilities to affiliated companies and other liabilities were slightly below those of the previous year at EUR 2 million. This is mainly due to lower trade payables and lower tax liabilities. This is offset by increased liabilities to affiliated companies.
  
Decline in equity
In financial year 2018 equity decreased by EUR 775 million or 7.7% to EUR 9,349 million (2017: EUR 10,125 million). The changes in equity mainly resulted from the dividend payment decided on 17 May 2018 in the amount of EUR 773 million and from the result for the period of EUR -2 million.

In financial year 2018, a capital increase from company funds, a subsequent ordinary capital reduction in the same amount, the re- capitalisation of Conditional Capital 2014/I and related amendments to the Articles of Association were resolved. The capital measure was implemented in order to enable efficient equity management in line with capital market requirements and to provide the conditions for a flexible dividend policy. As a result, the tied capital reserve of EUR 4,535,097,828.00 was converted into a free capital reserve (Section 272 (2) No. 4 of the HGB [Handelsgesetzbuch; German Commercial Code]). The capital measure was entered in the commercial register on 4 June 2018.
 
T 19 STATEMENT OF FINANCIAL POSITION
As of 31 December
(in EUR million)20182017Change% change
Fixed assets
Financial assets
Shares in affiliated companies9,35010,124(773)(7.6)
Current assets
Receivables from affiliated companies912(3)(23.1)
Other assets and miscellaneous assets01(0)(64.9)
Total assets9,36010,136(777)(7.7)
Equity9,34910,125(775)(7.7)
Provisions89(1)(11.7)
Liabilities23(0)(11.7)
Total equity and liabilities9,36010,136(777)(7.7)

Employees

  

As in 2017, Telefónica Deutschland Holding AG had no employees in financial year 2018.
 

Subsequent Events

 

With regard to business transactions of particular importance that occurred after the end of the reporting year, reference is made to >NOTES, SUBSEQUENT EVENTS IN THE 2018 ANNUAL FINANCIAL STATEMENTS OF TELEFÓNICA DEUTSCHLAND HOLDING AG.
  

Risks and opportunities

 

The business development of Telefónica Deutschland Holding AG is basically subject to the same risks and opportunities as those of the Telefónica Deutschland Group. Telefónica Deutschland Holding AG basically participates in the risks of its subsidiaries and participating investments in the proportion of its respective ownership interest.

For further information > RISK AND OPPORTUNITIES MANAGEMENT.

Telefónica Deutschland Holding AG, as the parent company of the Telefónica Deutschland Group, is integrated in the Group-wide risk management system. For further information > RISK MANAGEMENT AND RISK REPORTING.

The required description of the internal control system in accordance with section 289 (5) HGB for Telefónica Deutschland Holding AG is given in > INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM BASED ON THE CONSOLIDATED FINANCIAL REPORTING PROCESS.
 

Outlook 2019

 

Telefónica Deutschland Holding AG functions as a management and holding company. The long-term future development is therefore crucially based on the development of the operating companies of the Telefónica Deutschland Group, particularly Telefónica Germany GmbH & Co. OHG. With regard to the financial and market development, as well as the expected development of important key figures at the Telefónica Deutschland Group level, we refer to the > FORECAST REPORT.

In view of the existing contracts in relation to the remuneration of management services, we expect the revenues of Telefónica Deutschland Holding AG to be slightly below the level of financial year 2018. For the 2019 financial year, Telefónica Deutschland Holding AG expects a result in a similar amount to 2018.
  
Management declaration

MANAGEMENT DECLARATION

The Company has published this declaration, which also contains the declaration of compliance pursuant to section 161 AktG, section 76 (4) and section 111 (5) AktG, and the statements on the diversity concept for the Supervisory Board and Management Board on its website (www.telefonica.de/management- declaration-2018) and in the Corporate overnance/Compliance Statement of the annual report. This management declaration in accordance with section 315d HGB in conjunction with section 289f HGB forms part of this combined management report.

 
Munich, 15 February 2019

Telefónica Deutschland Holding AG

The Management Board
  
Markus Haas
Markus Rolle
Valentina Daiber
Guido Eidmann
Nicole Gerhardt
Alfons Lösing
Cayetano Carbajo Martín
Wolfgang Metze