Statement of the Board of Management on business development in 2018

Bonn, February 12, 2019

We closed another successful year with strong results. In 2018, we once again met our most important corporate targets and set a course for the future. Net revenue increased by 0.9 percent to EUR 75.7 billion – in organic terms, i.e., adjusted in particular for the negative currency translation effects in the reporting year, net revenue grew by as much as 3.1 percent. The U.S. business continued to record strong growth, but Europe also put in a very positive business performance, and we can certainly rely on our home market in Germany. This development is the result of the great response we are seeing from customers, in particular in mobile communications and broadband business – in Germany and Europe also in the success of our convergent product range. In addition to consumer and business customer services, these products remain the focus of our strategy. The acquisitions of UPC Austria and Tele2 Netherlands further improved our position in Europe, especially with regard to the convergent product offering. We want to further develop our good position in the U.S. business by means of the agreed business combination of T-Mobile US and Sprint.

Adjusted EBITDA grew by 5 percent to EUR 23.3 billion, mainly on account of the strong development of operations driven by revenue growth and a further improvement in cost efficiency – it was not only the United States, but also Germany and in particular Europe that bolstered the earnings trend. Free cash flow (before dividend payments and spectrum investment) totaled EUR 6.2 billion; this represents year-on-year growth of around 13.7 percent.

Profit from operations (EBIT) decreased by EUR 1.4 billion in the reporting year to EUR 8.0 billion, due to an increase in special factors in connection with staff-related measures and to the positive special factors which had increased EBIT in the prior year as a result of the reversal of impairment losses previously recognized for spectrum licenses at T-Mobile US, as well as of the sale of Strato and Scout24 AG. We also recorded higher depreciation and amortization compared with 2017 as a result of the high level of investment in building and expanding our mobile networks and fixed-network infrastructure, as well as for the forward-looking migration to IP as part of our integrated network strategy.

Net profit decreased by EUR 1.4 billion to EUR 2.1 billion. The positive trend in loss from financial activities was offset by an increase in the tax burden compared with the prior year. The prior-year burden was significantly reduced by the reduction in the U.S. federal tax rate, which resulted in a non-cash deferred tax benefit at T-Mobile US. ROCE decreased year-on-year due largely to the higher net special factors compared with the prior year.

Net debt increased from EUR 50.8 billion to EUR 55.4 billion, primarily due to the acquisition of UPC Austria, our share buy-back programs, and the ongoing high level of capital expenditure for network build-out and modernization in the United States, Germany, and Europe. Currency translation effects also had a negative impact.

We presented our revised strategy and the financial outlook at our Capital Markets Day in May 2018. Our forecast for growth through to 2021 remains at the same high level we anticipated at our Capital Markets Day in 2015. There is a reliable dividend policy for our shareholders, which is subject to approval by the relevant bodies and the fulfillment of other legal requirements. For the 2018 financial year, we will propose a dividend of EUR 0.70 per dividend-bearing share, which will also serve as a baseline for the dividend going forward. Starting from the 2019 financial year, the dividend is to reflect relative growth in earnings per share with a lower limit fixed at EUR 0.50 per dividend-bearing share.

The trends in the industry, in particular on the European telecommunications markets, remain challenging, e.g., rising competition and strict regulatory requirements. The market for information and communications technologies, however, continues to grow. In order to succeed in the future, we continue to invest heavily in the key to our success: our network infrastructure. In 2018, we made investments (before spectrum) of EUR 12.2 billion. In the fixed network, our focus was on investments in fiber-optic roll-out, IPTV, and the continued migration to an IP-based network. In mobile communications, we invested in LTE, increased network coverage, and upgraded capacity to meet increasing demand for high-speed data transmission rates. Including spectrum payments, this figure was EUR 12.5 billion. Despite this high level of investment, our rating remained solid through 2018, and we had unrestricted access to the capital market at all times.

Against this backdrop, we are reasserting our commitment to the strategic goal of being the leading European telecommunications provider. With this goal in mind, in 2018 we continued to focus intently on delivering state-of-the-art networks, products, and services that give our customers simple, convenient access to the digital world. This keeps us in a good position to remain the driving force in our markets behind the creation of a modern and competitive digital future.