Telefonica SA

And welcome to Telefónica Conference Call to discuss January-December 2019 results. I'm Pablo Girón, Head of Industrial Relations. Before proceeding, let me mention the financial information contained in this document related to the fourth quarter 2019 has been prepared under international financial reporting standards as adopted by the European Union. From the 1st of January 2019, we implemented IFRS 16. In organic terms, the effects of the accounting change to IFRS 16 are excluded in 2019. This financial information is an audit. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica group. These statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans Objectives and Expectations that make reference to different matters. All forward-looking statements involve risks and certainties and contingencies, many of which are beyond the company's control. We encourage you to review our publicly available disclosure documents filled with relevant securities market regulators. If you don't have a copy of the relevant pre-release and the slides, please contact Telefónica Investor Relations Team in Madrid or London. Now, let me turn the call over to our Chairman and Chief Executive Officer, Mr. José María López-Malleta.

Thank you, Pablo. Good morning and welcome to Telefónica's fourth quarter and full year conference call results. Today with me are Ángel Vila, Chief Operating Officer, and Laura Abasolo, Chief Finance and Control Officer, who will take us later through the main operating and financial highlights. During the Q&A session, you will have the opportunity to ask any questions you may have. 2019 has been a crucial year. I would like to start highlighting the action plan we announced last November, the new Telefonica. We are designing an ambitious, responsible and sustainable company full of opportunities within a changing world that requires foresight. But as we also said back in November, we leverage on a very strong starting position, which we feel is even stronger once we look back at 2019 performance. All our core markets are performing well. Spain has posted 10 straight quarters of revenue growth, an ideal return to growth, and we believe it is probably the most sustainable business model in the sector in Europe. Brazilian macro momentum is gaining speed, which helps the competitive environment to turn more rational, and our market share is higher than in the last few years. The UK continues to stand out, We are increasingly more efficient and benefit from legacy shutdowns and turning more and more evident. Digitalization savings exceeded 2019 target by 23% to more than 420 million euros. This comes along with an improved capital structure held by disposals and other decisions that help to improve return on capital employed, such as tower disposals or turning to lighter asset model in Mexico. And more should follow. Over the next few slides, I will go through the new Telefonica, and Laura and Angel will later review in detail 2019 performance. But I wanted to start my presentation today highlighting Telefonica's current strengths, and these are the foundations for what will come next. The new action plan will serve to accelerate the company transformation and is centered around three axes. First, prioritize the markets where we can be relevant and grow following a long-term sustainable model. Second, promote growth opportunities at the same time that we leverage the value of our infrastructure. Third, increase agility and improve efficiency. This new plan consists of five strategic decisions while maintaining our focus on long-term impact, value creation, and optimizing capital allocation, as you can see on slide three. First, prioritize Spain, Brazil, the UK, and Germany as key markets, where we can provide differential value to our customers and grow in a sustainable manner. Second, the operational spin-off of ISPAM. while evaluating our portfolio to maximize its value via growth, consolidation, and potential corporate operations. Third, the launch of Telefonica Tech to boost growth in areas with higher potential bringing the most advanced value proposition into the B2B segment, focusing on cybersecurity, IoT, and big data and cloud. Fourth, creation of Telefonica Infra to optimize the value of existing assets by crystallizing and Selective Monetization, and developed alternative models of infrastructure deployment to explore growth opportunities. Fifth, evolving the operating model to increase agility, speed, speed at execution, and maximize synergies between all Telefonica's units. On slide number four, we highlight our sustainable model based on three pillars. First, growth. Second, efficiency. And third, trust. Summary, responsible and sustainable growth. Slide 5 showed that sustainable long-term business strategy brings long-term shareholder value. For that purpose, we follow three long-term value generation requirements. First growth, inclusive and sustainable. Based in our ultra-broadband and digital services, key enables for the digital transition and climate change. Second, trust. With all our stakeholders, customers, suppliers, shareholders, the society as a whole, respecting human values, Fortune Magazine recognized us for the second consecutive year as Europe's most admired telco and the fourth most admired worldwide. Third efficiency, we have been recognized as one of the eight telcos all over the world to be a list in the CDP benchmark, and we have been pioneers in issuing green bonds. with the first green bond of the telco industry in 2019 and the first hybrid green bond in 2020. Across our footprint we represent 0.5% of GDP. We generate more than 1.1 million direct and indirect jobs and have a fiscal contribution to the public budget of 8.7 billion euros. This is why we are at the top of the list of the main ESG benchmarks such as Sustainalytics where we are first among our peers, MSCI with A rating, and we are part of the Bloomberg Gender Diversity Index for the third year in a row. On Flight 6, we are also committed to the United Nations Sustainable Development Goals. It is not a rhetorical commitment, but it is reflected on our daily job. We are the first fiber country in the OECD list. Digitalization is not only a key lever for social progress, It is also critical to decarbonize the global economy. We have been able in 2019 to avoid 3.2 million of TCO2 to the atmosphere for our customers. Our sustainable business model is based on transforming our networks with lower environmental impact. This reverts to great efficiencies which together with renewable energies place us as a benchmark in our sector. Thanks to this, the energy consumption per unit of data traffic has decreased significantly to 72% compared with 2015. In Europe and Brazil, 100% of the electricity in our operation is already renewable. We reduced by 50% in 2019 compared with 2015, reaching the goals we had set up for 2025. It is remarkable that we are one of the few telcos all over the world that are committed with a 1.5 degree Celsius scenario which has been validated by science-based target initiative. But our final goal is to create trust, capital with all of our stakeholders. And this is why we are committed with gender equality with 26% women in management positions and 30% in our board of directors. Turning to slide 7, you can see the consistent and solid growth track record. We have shown across all fronts during the last six years, highlighting revenues growing on average about 3% over the period and ODA at 2%. Sustainable business models, hence shareholder value, must be supported by growing free cash flows. We reached in 2019 the record high free cash flow since 2013 at almost 6 billion euros. This strong cash generation is the main driver of net debt reduction across the period And as Laura will explain later, We have not only reduced the net debt, we have also extended its life, reduced its cost, and granted fixed rates at current low levels for the long term, strengthening our capital structure. Moving to slide 8, we can see our growth profile and global reach. We offer our products and services to 344 million customers, and as you can see in main metrics, we posted growth Revenues, OFDA, OFDA-CAPEX, and Free Cash Flow. This was thanks to the efforts done during past years in company transformation and investments. On slide number 9, let me go over the main proof points achieved in 2019 regarding our business sustainability. During 2019, we drove a consistent commercial performance with ongoing strong momentum on high value accesses, 18% more in LTE accesses and 8% more in fiber and cable accesses. Our growth in strategic accesses supported the 4.3 average growth in revenue per access in organic terms versus 2018. Loyalty continues to be key for us and our group churn level remains stable year on year. Clear examples of improvement in customer lifetime are 8 years in mobile contract in the U.K., Six years in 023 in Germany and five years in convergence in Spain and in mobile contract in Brazil. Network leadership is as well key for an improved digital customer experience. Netromotor score finished the year in 21%, one percentage point year-on-year improvement. Moving to slide 10, all guidance metrics were achieved in 2019. and we surpassed the target revenue growth of 2% as we ended growing 3.2% in organic terms. OEDA grew 1.9% in line with the guided around 2% and CapEx 2 sales stood at 15% as target. We confirmed the 2019 dividend of 40 euro cents with the second tranche to be paid in June 2020, 20 euro cents. As you can see in the slide right hand side chart, Our dividend is more than covered with free cash flow per share of 1.15 euros and underlying EPS of 0.65 euros. Finally, our dividend yield stands at 6.4% with share price of the last Friday. I now hand over to Angel to go through detailed review of the business performance.

Thank you, José María. Turning to slide 11, the key financial highlights for 2019 are Revenues topped 48.4 billion euros, growing organically 3.2%. Underlying OFDA reached almost 17 billion euros. What reported OFDA was 15.1 billion euros, increasing organically 1.9%. Underlying net income and EPS reached 3.6 billion euros and 0.65 euros per share, respectively. Reached 5.9 billion euros up 20.6% versus 2018. Net debt decreased 8% versus December 2018 to 37.7 billion euros. And capex oversales stood at 15%. Turning to slide 12, we look in more detail to our financial performance. Reported figures have been affected by non-recurrent factors which Laura will explain later. During Q4, steady organic revenue growth continued, with all segments but ISPAM North in positive. As for the latter, as you know, we have recently announced a transformational new model in Mexico that will allow to reverse operating trend. Furthermore, and thanks to our investments in the past years, and our innovation efforts, it is worth to highlight that our revenue mix continues transforming. As such, 55% of our total revenues come from broadband and services beyond connectivity. Three percentage points more than a year ago, with digital services reaching 7.7 billion euros in the period January to December, up 17% versus 2018 in organic terms. Revenue performance comes along with efficiency savings that are increasingly visible. In fact, we have overachieved by 23% the digitalization efficiency savings target for 2019. This and other savings and overall execution on key drivers explain OFDA performance, growing organically 1.9% in the year. On slide 13, we can see that thanks to our investment in network and systems, we have closed 2019 with a strengthened leadership position in fiber to the home coverage and the largest ultra broadband footprint in Europe and Latin America with access to 128 million premises passed, of which 56 million are owned. In addition, we continued Signing network sharing agreements in the UK, Germany, Brazil and Mexico while switching off our legacy networks. Digital services continue to deliver strong revenue growth at close to 20% year-on-year in 2019 already delivering almost a billion of revenues with IoT in the lead growing at a 45% rate. Finally, 40 products based on artificial intelligence and big data have been deployed during the year on standardized capabilities, and services such as device recommender and personalized offers have been launched. Slide 14 shows the end-to-end digital transformation program acceleration, which allowed us to capture more than 420 million euros of savings in 2019. Largely above the target of more than 340 million. And additional to those captured in 2018. In sum, more than two-thirds of the 1 billion savings commitment under the three-year 2017-2020 program has already been completed. Digital sales increased by 28% year-on-year in 2019, with Agile improving the time-to-market and campaign effectiveness. Calls to contact centers were reduced by 13% versus 2018, and more than 1,500 robots were deployed in 2019 with a significant impact on both quality of service and efficiency. Moving to slide 15, we look at the B2B segment, one of Telefónica's superior growth drivers. The B2B segment, accounting for 26% of group revenues in the fourth quarter, is leveraged on our core digital offer to provide communication, cloud and security services to corporates enriched with owned and third-party value-added services. B2B digital services as the main growth engine delivered solid revenue growth of 26% year-on-year to 2.2 billion euros in 2019 mainly in cloud, IoT and security where we enjoy a distinctive profile. Moving to slide 16, we review the solid and sustainable performance of our Spanish operation. Telefónica España closed 2019 with a larger and better quality customer base. We have grown both our convergent customer base and ARPU, at a time most of our peers struggled. Our differential positioning supports the increased value of our customer base. As well as improved returns on investments, particularly in fiber. We have already passed more than 23 million premises with fiber to the home and uptake levels stood at 28% at the end of 2019, two percentage points above those of the previous year. As such, financials continue pointing in the right direction. Service revenues have grown for 10 straight quarters. and by 0.6% year-on-year in 2019, with OIPDA back to growth in organic terms at the end of the year. Within a competitive environment, our best-invested company continues to deliver benchmark margins and robust OIPDA minus CAPEX, 3.7 billion euros in 2019 in underlying terms at 27% operating cash flow margins. Moving to slide 17, Telefonica Deutschland is accelerating its commercial momentum and reported strong operational trends. The company continued growing its customer base by a combined 2% year-on-year and reduced mobile contract churn by 0.3 percentage points to 1.5%. The business has achieved a good rating across the main three network tests, evidencing a Thank you very much. Further enhancing the customer experience. Moving to slide 18, Telefonica UK posted a 14th consecutive quarter of year-over-year top-line growth. Once again, the company confirmed its market-leading position as the UK's favorite mobile network, with sector-leading customer loyalty at 1%. Full fiscal year 2019 revenues strongly grew by 3.8% and OEPA posted a solid growth of 2.3%. Overall, Telefonica UK has delivered strong and consistent outperformance over the last few years, reporting CAGR 17-19 of 4% for revenues and more than 20% for OEPA minus CAPEX. On slide 19, we review our Brazilian operation. Once again, Telefónica Brasil showed a stellar set of results in this quarter, backed by a more rational competitive environment within a macro environment that should gain further growth momentum in 2020. Within this framework, we have reinforced our mobile leadership, maintaining a solid year-on-year increase in revenues and accelerating both OFDA growth and margin expansion. Mobile market share reached 32.9% as of December 2019, the highest since 2006, supported by our differential assets, and we continue widening this quality gap through accelerating our capex efforts. Likewise, we remain focused on revamping the fixed business by accelerating fiber deployment and connections. Allowing fixed broadband output to increase by 10% year-on-year in Q4. Revenues rose by a remarkable 2% in 2019 thanks to the successful execution of our more-for-more strategy mobile, the higher rationalization in the market, and by high-growth fiber performance that more than offsets the legacy business performance and the negative impact of regulations. It is worth to highlight that fixed revenues have grown sequentially by 1% in Q4. This top-line growth, coupled with efficiencies and the ongoing digitalization process, allowed free cash flow to increase 19% year-on-year in 2019. Moving on to our ESPAM operations on slide 20, in ESPAM South, revenue and OTA showed a sustainable upward trend As a result of tariffs update in Argentina, the overall growth in contract and fiber accesses and the efficiencies achieved from simplification and digitalization process. All of these more than offset the tough competitive environment in the region. In the north region, we highlight the annual revenue growth seen in Mexico and Colombia in Q4 and the strong improvement at the OEGA level positively impacted by tower sales within are already announced intention to crystallize shareholder value from our infrastructure. It is also worth mentioning that we reached an agreement with AT&T during the quarter under which the latter will provide wholesale last mile wireless access to Telefónica México. The new operational model of Telefónica México allows a more efficient and sustainable use of resources and is expected to have an annual positive impact on free cash flow of around 230 million euros From Year 3 On slide 21, we review Telciu's solid results in 2019. Tower portfolios significantly increased, with 512 towers built and 1,157 towers acquired from Telefónica in Spain, Peru and Chile during the year. Including the agreed purchase of 1,900 towers from Telefónica in Brazil, Delcius portfolio will exceed 20,257 towers. Delcius closes 2019 with a tenancy ratio of 1.36 times, with third-party tenants having grown by 48% since its creation in 2016. Both revenues and ODA again posted sustained growth in 2019, and we are proud to show the consistent high single-digit outperformance Over the last few years, with CAGR 1719 surpassing 7% in revenues and OFDA. I now hand over to Laura to continue the review of the business performance.