Telefonica SA

Ladies and gentlemen, thank you for standing by and welcome to Telefonical's January to September 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'd like to ask a question, please press star 1 on your telephone keypad. If you should require assistance during this call, please press star 0. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguero, Global Director of Investor Relations. Please go ahead.

Good morning and welcome to Telefonical's conference call to discuss January-September 2020 Results. I'm Pablo Lidón, Head of Investor Relations. Before proceeding, let me mention that the financial information contained in this document related to the Third Quarter 2020 has been prepared under international financial reporting standards as adopted by the European Union. This financial information is un-audited. 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 forecast and estimates or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risks and uncertainties, including risks relating to the effect of the COVID-19 pandemic that would cause the financial 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 slides, please contact Telefónica's Investor Relations teams in Madrid or London. And now let me turn the call over to our Chief Operating Officer Ángel Vila.

Thank you, Pablo. Good morning and welcome to Telefónica's Third Quarter Results conference call. Today with me is Laura Basolo, our Chief Financial and Control Officer. As usual, we will first walk you through the slides and then we will be happy to take any questions you may have. Let me start with the main highlights of our Third Quarter Results. First, we had a very strong commercial activity in the quarter all across the board, with significantly improved trends versus Q2, including best fixed broadband net ads in Spain since the third quarter of 2018, record fiber to the home connections, the highest prepaid net ads in years in Brazil, and a historic low churn in Germany. Among our four core markets, Spain showed better trends at both ARPU, Revenue and OIPDA levels, with a remarkable commercial traction despite the competition noise. Germany outperformed its market once the quality network gap has been reduced. In the UK, we are progressing with regulatory approval for being the national connectivity champion, whilst in Brazil, where again we register multi-year record commercial activity, free cash flow grew double digit in euro terms, despite the currency depreciation. Second, we advanced on technological leadership in infrastructure and digitalization. As such, 5G is already live in our four core markets, and fiber has continued to expand. Third, we accelerated the carve-outs of high-growth tech vehicles. Another remarkable highlight, our free cash flow during the quarter was outstanding at 1.6 billion euros, plus 13% -on-year and 0.3 euros per share. In the January to September period, it totaled 2.8 billion euros, or 0.53 euros per share. Fifth, net debt continued to be reduced. Liquidity cation has surpassed the 22 billion euros mark, whilst net debt maturities now stand at just 1.9 billion euros for the 2020-2022 period. Finally, we are proposing to the next AGM the cancellation of .5% of treasury shares. Moving to slide 3, let me explain the progress we continued to make across our five strategic pillars in Q3. First, looking at our four core markets. In Spain, we launched 5G services with the aim of reaching 75% coverage nationwide by year-end. We also posted further recovery in commercial activity, with controlled churn and margin expansion and continued to demonstrate our Fiber leadership, with 795,000 new premises passed in Q3 to reach 24.4 million. In Germany, we signed an early extension of our agreement with Deutsche Telekom, including Fiber to the Home, and we launched 5G services in key cities. In the UK, we are progressing in the in-market conversion consolidation. Our auto virgin media joint venture formally requested your approval, and the £5.7 billion recapitalization process was completed. It is also worth highlighting the growth of the customer base in the UK across all segments of the business. In Brazil, we progressed with the joint offer for Oi, being now the preferred bidder. Meanwhile, we launched 5G in July, while maintaining our leadership in Fiber to the Home, increasing the number of homes passed in Q3 by 1.5 million to 14.6 million. Second, in Istamb, we filed for regulatory approval of the Costa Rica sale to LLA, and we continue to evaluate all available options for reducing our portfolio exposure in the region. Third, Telefonica, TX3 companies, Cybersecurity, Cloud and Big Data IoT are now established, integrated and fully operational. Two acquisitions have been made to build out our capabilities in the cyber arena, Govertis, a consultancy, and iHacklabs, a professional training business. Fourth, at Telefonica infra, today we have announced a JV with Allianz in Germany to develop Fiber in underserved areas, while we expanded Telcius Towers portfolio through the German deal. And fifth, we signed the MOU with Rakuten on OpenRAN, a next step in our journey towards a virtualized networks model. In addition, our new operational model continues to improve our agility, deliver benefits from digitalization and help us to identify further efficiencies, with OIPTA minus capex margin in Q3 expanding 0.7 percentage points year on year in organic terms. Moving to results, let me highlight that we are managing our business to mitigate COVID-19 impacts. On this slide, we can see revenue reconciliation between reported and organic year on year variations. From January to September, reported revenues declined by 10.7%, which translates into a .7% organic drop after stripping out .9% of Forex and 1% from changes in the consolidation perimeter and other effects. In our four core markets, the decline was limited to minus 2.5%, and the impact of COVID-19 was a drag of 3.9 percentage points year on year. During the third quarter, reported revenues declined by 12.1%. During the third quarter, reported revenues declined by 12.1%, which after excluding 8.1 percentage points from Forex and changes in the perimeter and other factors led to a decrease of 4.3 organically, improving from the minus 5.6 posted in Q2. COVID-19 dragged 4.9 percentage points year on year. Moreover, the decline in our four core markets is limited to minus .9% year on year. Looking at slide 5, we show OIPDA reconciliation. In the first nine months of 2020, reported OIPDA declined 15%. Forex impacted in 7 percentage points, while changes in the perimeter and others dragged 1.1 percentage points. As such, reducing the organic decline to 6.7%. This decline is limited to .1% in our four core markets, with a COVID-19 negative impact of 5.2 percentage points. In the third quarter, reported OIPDA decreased by 2.8%. Stripping out Forex negative impact of 13 percentage points and adjusting 18.5 percentage points of other impacts, mainly restructuring costs, booked in Q3-19, capital gains and impairments, we posted an organic decline of 8.3%, improving from the minus 10 posted in Q2. It is worth highlighting that the COVID-19 impacted growth by 6.8 percentage points year on year. And in our four core markets, the rate of decline in OIPDA was minus 3.3%. Moving to slide 6, we show the very strong cash flow generation, reflected in both OIPDA minus capex and free cash flow per share metrics. Our strong focus on profitability stands out with the 5.7 billion euros OIPDA minus capex generated in January to September 2020, significantly above the figure of the same period of 2019 including spectrum. OIPDA minus capex declined by .8% organically, but grew by .4% year on year in organic terms in our four core markets. Free cash flow per share increased to 0.3 euros in Q3, reaching 0.53 euros per share in the first nine months of the year, more than covering the 0.4 euros dividend to be paid in 2020. The result of all this is sequential growth in free cash flow to 1.6 billion euros in the quarter, plus .2% year on year, including mid to high teens growth in Brazil's free cash flow, even in euro terms. Our financial update for the quarter, sorry, on slide 7, clearly shows the significant impact of COVID-19 and currency depreciation on the reported figures. These impacts are detailed at the bottom of the slide, and we will explain them in more detail later on. OIPDA was also impacted by an impairment allocated to Argentina of 785 million euros and by restructuring costs in Q3-19, including 1.7 billion euros in Spain. Revenues reached 10.5 billion euros in Q3-20, and reported OIPDA decreased by 2.8%. Our continuing focus on cost and capex management enabled us to restrict the year on year decline in organic OIPDA minus capex to just .8% in Q3 at group level, while growing it significantly at .2% in our four core markets. Net income reached 671 million euros and surpassed the 2 billion euros for the nine months, 2020 on an underlying basis, resulting in EPS of 0.36 euros for the nine months on the same basis. Free cash flow expanded sequentially to 1.6 million euros and grew .2% year on year in Q3-2020, with free cash flow per share at 0.3 euros in the quarter. Net financial debt declined a further 525 million euros in Q3 to 36.7 billion euros, down 4% versus September 2019. Moving to the next slide, revenue performance improved sequentially year on year in Q3 by 1.4 percentage points led by both service and handset revenues and by ESPAM. Across our four core markets, the decline was limited to .9% in Q3. This accounted for a negative contribution from the UK, primarily as a result from roaming, handset release, delays, together with the increase in higher margin direct distribution impacting revenue recognition. Despite these short-term UK impacts, I would like to remark the better trends seen in Brazil and Spain and the strength in Germany. We are continuing to transform our revenue mix, with revenues from broadband and services beyond connectivity increasing by .0% year on year to 68% of total service revenue in the quarter. Meanwhile, Telefonica tech services delivered double-digit revenue growth year on year versus nine months 2019. On the next slide, we show also the improved trends in both OFDA and OFDA-CAPEX optimizing our cash flow generation. As such, OFDA improved quarter on quarter by 3.3 percentage points in Q3, led by Spain on the back of better content costs, Germany coming back to growth, and improvements in the UK and Brazil. OFDA-CAPEX posted a significantly improved trend, growing by .2% year on year in Q3 and .9% in Q2, driven by the performance in Germany, Brazil and the UK. This strong cash conversion is also shown in the OFDA-CAPEX margin, which expanded organically by .1% year on year in Q3, driven by an outstanding performance from Brazil, followed by the UK and Germany, and a flat-ish trend in Spain in the quarter. I would like to highlight, however, that Spain retains a benchmark OFDA-CAPEX margin of 29.7%. Moving to slide 10, our breakdown of the COVID-19 impacts by quarter and business line shows a clear improvement versus the second quarter. At the revenue level, this was due to better handset sales, supported by store reopenings across our different geographies. B2C continued to be pressured by discounts, promotion and challenging trading conditions in post-paid, along with some delays in closing new business. In B2B, discounts on renegotiations, project delays and lower demand from SMEs combined to deliver the negative impacts in. The quarter suffered significant impact on robbing. However, despite these negative impacts, we continue to implement significant cost containment measures, with lower commercial expenses, bad debt improving, among other initiatives. At the same time, the crisis has allowed us to improve customer engagement based on our network's reliability, with churn declining 0.3 and 0.1 percentage points year on year and quarter on quarter respectively. We have also accelerated digitalization, with sales via digital channels increasing 36% year on year in our four core markets in Q3. On top of all of this, demand for cloud and cyber services has increased significantly. As a result, on slide 11, we confirm our 2020 dividend of 0.4 euros per share, with a first tranche of 0.2 euros to be paid in December through voluntary script dividend and the second tranche in June 2021. Regarding treasury stock, the adoption of the corresponding corporate resolutions will be proposed to the AGM for the cancellation of the shares representing .5% of the share capital held as treasury stock. We maintain our 2020 outlook, confirming our guidance of slightly negative to flat year on year organic OEPA minus capex, as we continue to manage our cost base and operational flexibility without jeopardizing our investment priorities. Moreover, we will continue monitoring and adapting to COVID-19 related restrictions to mitigate their impacts on the business. I will now hand over to Laura to take you with more detail through the group results.