Telefonica SA

Ladies and gentlemen, thank you for standing by and welcome to Telefonica's January to March 2020 results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If you should require any assistance during the call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Aguirre, Global Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefonica's conference call to discuss January, March 2020 results. I'm Pablo Aguirre, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first quarter 2020 has been prepared under international financial reporting standards as adopted by the European Union. This financial information is updated. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group. These statements may include financial or operating forecast and estimates or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risk and uncertainties, including risk relating to the effect of the COVID-19 pandemic. That would cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filled with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our chairman and chief executive officer, Mr. Jose Maria Alvarez-Vallete.

Thank you, Pablo. Good morning and welcome to Telefonica's first quarter conference call results. Today with me are Angel Villa, chief operating officer, and Laura Basolo, chief finance and control officer. During the Q&A session, we will take any questions you may have. I would like to start today's presentation by now highlighting the exciting announcement we are making today that will transform the telecoms landscape in the UK. Aligned with our strategy to focus on our core operations, we have agreed with Liberty Global to combine Telefonica UK and Virgin Media UK in a 50-50 joint venture that creates the leading integrated operator in the UK with complementary strengths in mobile, broadband, video, and B2B. Enterprise value of the JV is estimated at 38 billion pounds. The combined entity is larger, stronger, and more diversified with 11 billion pounds of revenues, 3.6 billion pounds of OTA, and 1.5 billion pounds of OTA minus CapEx pre-synergies. On a pro forma basis, it will have more than 46 million accesses, including 33 mobile, more than five million broadband, and four million pay TV. Liberty Global will make a cash payment to Telefonica of 2.5 billion pounds to equalize ownership in the JV. And in total, we expect to receive between 5.5 and 5.8 billion pounds of proceeds from the transaction post-dividend recap. We are again fostering in-market consolidation, convergence, combining -in-class infrastructure assets while unlocking significant value. We expect to deliver 6.25 billion pounds of synergies on a net present value basis after integration cost of 540 million pounds round rate. We are therefore creating significant value for Telefonica shareholders. The transaction is free cash flow accretive from year one and expected to reduce Telefonica's net debt by between 5.5 and 5.8 billion pounds. Accordingly, accredit positive move that improves our competitive positioning and business sustainability whilst reducing net debt at Telefonica. Slide three shows the transaction structure and key terms. Telefonica UK enterprise value has been set at 12.7 billion pounds or 7.8 times OEDA, and is contributed to the JV on a debt and cash-free basis. Considering BJ Media UK's enterprise value and after deducting its 11.3 billion pounds net debt, Liberty Global will make a cash payment to Telefonica of 2.5 billion pounds to equalize JV ownership. The JV will target a letters ratio of four, between four and five times, four to five times OEDA. We expect to raise new debt to reach this target leverage ratio and proceeds to be distributed equally between Telefonica and Liberty Global. Following completion of the transaction, neither Telefonica nor Liberty Global will consolidate the JV. Both companies will have equal governance rights in line with the 50-50 shareholding and have agreed to provide a suite of services to the JV post-completion. On slide four, we can see that we'll be turning into a stronger, larger, and more sustainable player. The combined entity will become the largest player in the market in terms of accesses with slightly lower revenues than the market's incumbent, though at a significantly higher operating margin, benchmark for the sector in the UK. Same for OEDA minus capex over revenues and cash conversion rates. So we are creating a stronger competitor with significant scale and financial strength to invest in the UK digital infrastructure and give millions of consumers, businesses, and public sector customers more choice and value. Among premium brands of O2 and BG Media and fully converged provides, the JV will provide more competition in the marketplace and choice for consumers as shown on slide five. The value proposition will be different as we have the following foundations. Customer-centric proposition, industry leader in net-promoting score and sector-leading loyalty. Fastest broadband with broadband speed up to one gigabit per second by 2021. Rich content offering, only UK operator offering Netflix, Amazon, and all sports. Leading technology, a -the-art platforms and product offering, and an attractive value proposition for wholesale. Wide MVNO offering ready to be a relevant wholesale player. And a complete portfolio of digital solution, Internet of Things with big data, cybersecurity, cloud, and advertising. On slide six, with 5G rolling out across O2's footprint and gigabit broadband soon available to all 15 million BG Media homes. There is no question that our coming together will accelerate the UK's digital future, being the national connectivity champion. We are going to be the unique infrastructure in Europe to seize new opportunities arising from fixed mobile convergence. And there is no network monetization to date. We are retaining ownership of both mobile and fixed infrastructure whilst being clear market leaders in ultra broadband, including both Fiber to the Premises and HTFC. On slide seven, we go into detail about identified synergies. As previously stated, as much as 80% of total identified synergies relates to OPEC and CAPEX with lower execution risk. As regards revenue synergies, we are being rather conservative. Same for other financial and fiscal potential synergies which we are not even considering. We have a proven track record in delivering when promising. Both parties have completed several acquisitions over the last few years, systematically over achieving initial targets, both in terms of total sizes and timings. We expect synergies run rate to be reached by 2026, though turning cash positive, including integration costs, as early as from 2023, with more than 75% of synergies materializing in the first 42 months. Moving to slide eight, I would like to again highlight the strategic fit of this transaction within the new Telefonica strategy we announced last November. With the purpose of generating shareholder value and creating relationship of trust, growth and efficiency, we needed to focus in our most important markets and the UK is and remains a core market to us. This transaction creates a leading and fully integrated champion in one of our four core markets. The significant value creation through synergies, secure superior next generation fixed infrastructure to drive customer experience, complementing Telefonica UK's mobile network. And we will be a stronger, more valuable and sustainable platform with high dividends to continue reducing Telefonica's net debt. All in all, partnering with Virgin Media UK is the most compelling alternative for Telefonica UK and the best strategic path forward. Slide nine explains governance, exit and timetable of the transaction. On governance and shareholders agreement, the JV board of directors will consist of eight members, four from each of Liberty Global and Telefonica and the post of chairman of the JV will be held for alternating 24 months periods by a Telefonica or Liberty Global appointed director. On exit, there are some windows after the third anniversary and after fifth. And finally, on timetable, closing will be expected for the fourth quarter of 2020, 2021 or first quarter of 2022, the latest after approval of the second phases European Commission and Competition Markets Authority CMA. Slide 10. To conclude on today's announcement and before moving on to rapidly review first quarter results and current environment, I would like to stress that we remain committed to our strategy. No matter current uncertain times, it is the long-term sustainability that drives our decisions. We believe this is the best and the only way to unlock value. We are creating a leading integrated player with significant cross-selling opportunities in the second largest European market, improving our market positioning, the group's profile and business sustainability. We are combining Telefonica UK's leading mobile operation and Virgin Media UK's extensive super fast broadband network to benefit consumer, businesses and the public sector through investment to accelerate digital infrastructure deployment and improving customer experience. Whilst doing so, we create significant value. Total OPEC, SCAPEX and revenue synergies with an estimated net present value of 6.25 billion pounds after integration costs with potential additional financial and fiscal synergies not being considered, creating substantial value creation for Telefonica shareholders. Today, we are changing the UK telecoms market landscape via fostering in-market consolidation in one of our core markets. We are as well fostering in-market consolidation in Brazil, all aimed at granting a more predictable future to our shareholders. Moving now to slide 11, it is worth highlighting our mission to make the world more human by connecting lives. It has turned even more evident than ever during this crisis. Connectivity has proven even more critical and thanks to the focus and investment in our infrastructure over the last year, over 90 billion euros since 2012, we have been able to warranty continuity of service. And this service has been key to society being able to stay connected and mitigate the impact of the crisis. Our networks have proven resilient, reliable and stable. Managing traffic peaks, as an example in Spain, the company has been able to cope with an increase in bandwidth demand of almost 40 percent, a growth of mobile data traffic of 50 percent and mobile voice of 25 percent in the first week of the confinement by COVID-19. It has enabled us to be in a position to use our capabilities to support public administrations and health institutions. We have at the same time secured the integrity of our operations, helping to maintain the supply chain. The COVID-19 outbreak has also demonstrated that our business model is sustainable and we are now more confident on its resilience. A resilient model built on digital transformation over recent year enable us to cope with increased demand for connectivity and remote working solution whilst also working with public bodies to keep society connected. We have responded to our stakeholders' need in a responsible manner. We needed to care about our employees and we promoted working from home for as much as 95 percent of our workforce. For our vendors, we have shortened payment terms whilst trying to cope them with some of their liquidity issues. We care as well about our customers showing flexibility with payments whilst increasing data allowances and offering faster speed and richer content offering. And above all, we needed to respond to our society needs, making all of our service and capabilities available to institutions. We feel that through these responses, we have as well taken care of our shareholders' showing responsibility. On slide 12, we go through a revision of potential COVID-19 impacts. Let me start by saying that this is uncharted territory. Extinction of lockdowns based on lifting of restrictions and economic impacts in each of the countries in which we operate are still to be seen. In any case, the resilient business model I referred to in my previous slides make us not immune, but much better protected than others. Of course, we will face negative revenue impacts. Overall, commercial activity has been stopped and both consumer and corporate customers are to suffer in one form or another. But whilst in the short term, we may see lower roaming, reduced prepaid recharges or SME customers navigating through difficult times. Long-term prospects remain, if any, intact. Demand for connectivity is on the rise. Need for speeding up digitalization in the corporate world has proven real and changes we see in consumer habits are here to stay. But even in the short term, we have levers to weather this storm. Yes, our top line will be negatively affected, as mentioned, to a lesser extent than for many other industries. These will nevertheless be more mute at the OED level as lockdowns as well bring down churn and overall commercial expenses. Not to mention prepaid B2B revenues or handset sales have lowered an average margin. We count with additional levers in the form of discretionary investment despite we remain focused on our growth opportunities. All in, we have enough tools to preserve free cash flow, which allow us to be better prepared for future opportunities. Moreover, delays in the spectrum option will occur like Spain, the UK and Brazil. Moving to the next slide, we rated it over 2022 guidance and 2020 dividend of 0.00 euros per share. Due to the significant changes in the guidance scenario and context and the current level of uncertainty, 2020 financial guidance is withdrawn. Nevertheless, we will closely monitor the evolution of our businesses and will manage CAPEX and OPEX accordingly to focus on OED minus CAPEX stability. In the current context, the outlook for 2020 OED and OED minus CAPEX is to be slightly negative to flat year on year. As for the midterm, 2022 guidance of revenue growth and two percentage points improvement in OED minus CAPEX over revenues is reiterated. To note that this crisis has accelerated the digitalization processes in all processes, increasing our relevance significantly. Confidence in our business model flexibility to weather current environment, coupled with a solid liquidity position and business resiliency allow us to confirm the announced 0.4 dividend for 2020. The payment of the second stretch of 2019 dividend, 0.2 euros per share to be paid in June and the first stretch of 2020 dividend, 0.2 euros per share to be paid in December will be voluntary script, giving more flexibility to both our financial position and our shareholders in this unprecedented situation. I now hand over to Angel to go through a detailed review of the business unit's performance. Thank