Telefonica SA

Good morning and welcome to Telefónica's conference call to discuss January-December 2020 results. I'm Pablo Girón, Head of Investment Relations. Before proceeding, let me mention that the financial information contained in this document related to the fourth quarter and full year 2020 has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unaudited. 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 forecasts and estimates or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risks and uncertainties, including risks related 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 Telefónica's Investors Relations team in Madrid or London. And now, let me turn the call over to our Chairman and Chief Executive Officer, Mr. José María Álvarez Vallete.

Thank you, Pablo. Good morning and welcome to Telefónica's fourth quarter and full year results conference call. With me today is Ángel Vila, Chief Operating Officer, and 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. I would like to start by highlighting the material progress against strategic objectives made along during the year. First, Across our four core markets, Spain, Germany, UK, and Brazil, we have improved our value proposition, increasing our premises pass with Fiverr to more than 25 million in Spain and 15 million in Brazil. In the UK, the combination of O2 and BG Media is progressing to plan, whilst in Brazil, our joint bid won the auction for OEMobile, which will further strengthen our market position when completed. The legal separation of ISPAM was successfully completed in the year. In parallel, we continue to optimize efficiencies, increasing profitability, and reducing our equity exposure. In addition, we have announced the launch of an independent and neutral fiber network vehicle in Chile. In Telefonica Tech, car valves are almost completed and fully functional. In the meantime, we continue to develop our digital capabilities and build our IoT and big data portfolio, aimed at range of vertical B2B markets and new cloud solutions in edge computing. We progressed as well at Telefónica Infra, where we continue to realize value. The sale of the Telsius Towers to American Towers for 7.7 billion implied a record multiple of 13.5 times pro forma OFDA after leases. And we reduced net financial debt by 4.6 billion euros. Additionally, we're in advanced negotiations with a major international financial investor for the construction and offer of a neutral independent fiber wholesale network in Brazil. and recently signed a partnership with Allianz for FTTH rollout in Germany. Finally, we continue to simplify our operating model, with 79% of processes being already digitalized, up 10 percentage points against last year. We also signed an MOU with leading European telcos to promote open RAN, with successful technical testing in the UK and Germany during Q4. Moving to slide two on our 2020 performance. We saw good momentum in the last quarter, with organic revenue and ODA trends accelerating across all segments. Customer engagement improved, with NPS in our four core markets increasing seven percentage points versus last year, and churn declining for the fourth consecutive quarter. Group ODA minus CAPEX returned to organic growth at 1.9%. year-on-year with margin improving by 0.7 percentage points. These reflected incremental cost efficiencies and digitalization that accelerated with digital sales growing 12 percentage points versus last year to reach 31% of total sales. As a result, organic OPEX was down 2.2% year-on-year in the fourth quarter of 2020. Of particular note, is the 2020 earnings per share, which stood at 0.24 euros and grew 54.3% year-on-year. As a result of prioritized investment in next-generation networks, we now reach 135 million premises passed with ultra-fast broadband. Free cash flow improves remarkably throughout the year. And we therefore continue to deleverage, reducing net financial debt by 2.5 billion euros to 35.2 billion at year-end. This will decrease further by the additional 9 billion euros derived from our recently announced inorganic transactions, an amount equivalent to 25% of our year-end net financial debt. Slide 3 shows out robust financial performance in a challenging year. In 2020, reported revenue declined 11% year-on-year, largely attributable to unfavorable forex trends, which accounted 6.5 percentage points of the decline, changes in the perimeter and others. OEDA declined 12.7% year-on-year on a reported basis, or 5.7% organically, excluding negative forex effects as well as changes to the perimeters and others. Free cash flow per share increased to 0.37 euros in the fourth quarter, reaching 0.88 euros per share in 2020. Worth highlighting is that free cash flow generated in the last five years amounts to 25 billion euros, with 2020 free cash flow being in line with the last five years average despite the challenges. This cash flow stability has been a major driver in bringing down our debt by 17 billion euros since June 2016. Our reported results summarize on slide four reflect the significant impact of COVID-19, which caused a decline in revenues and OEDA of 1.9 and 1 billion euros respectively in 2020. It also reflects Forex headwinds, which reduced revenues and OEDA by 3.1 and 1.2 billion euros respectively. Revenues reached 10.9 billion euros in the fourth quarter, declining 2% year-on-year in organic terms, while OEDA They stood at 3.7 billion euros, down 2.8% year-on-year in organic terms. We saw improving trends in our coal market throughout the year, with both revenues and OEDA declines narrowing. OEDA-less capex over revenues increased 0.7 percentage points versus the same quarter last year in organic terms, again showing increased operating leverage and capex savings, despite continued investment in high-priority areas. Underlying net income reached €1 billion in the fourth quarter, growing 4.9% in 2020 and surpassing the €3 billion mark. We delivered outstanding growth in free cash flow in the fourth quarter, which increased by double digits to almost €2 billion, lifting full-year free cash flow to almost €5 billion. Net financial debt continues to decline, reducing by 6.7% versus December 2019 to €35.2 billion. Turning to slide five, fourth quarter of 2020, year-on-year trends accelerated versus the previous quarter, with improvements seen in both revenues and OEDA across all segments of the business. The revenue decline narrowed by 2.2 percentage points versus the third quarter, while the OEDA decline narrowed by 5.4 percentage points. In addition, we maintain our long track record of efficiency gains, further increasing our organic OEFDA minus CAPEX margin by a fifth consecutive year on year, to 20.4% at the end of 2020. Slide 6 shows we delivered against our full year guidance of a slightly negative to flat organic OEFDA minus CAPEX, thanks to effective operational management to preserve cash. We are also confirming today the final dividend for the year of 0.4 euros per share, The first tranche of €0.2 per share was paid in December through a script dividend, with 67% of shareholders opting to receive new shares, further enhancing our financial flexibility. The second tranche, €0.2 per share, will be paid next June through voluntary script dividend. This dividend is more than covered with our strong free cash flow per share, which stood at €0.88 in 2020. Our capacity to deliver to society was challenged as never before in 2020. We were able to sustain our business performance by keeping our ESG performance at the center of our strategy, which is based on three pillars to help society thrive, build a greener future, and lead by example. For the first pillar, we continued our significant contribution to the countries in which we operate, 0.5% of GDP, as well as almost 1 million jobs. We also made significant tax contributions of 8.2 billion euros. And we kept delivering on our already ambitious environmental agenda, beating our targets and setting new ambitious ones aligned with the required urgencies of climate change. We reduced emissions by 61% while continuing to increase our use of renewable energy to 88% of our total usage and reduced energy consumption by 81% relative to executing network traffic thanks to our network transformation plans. We have also contributed more than ever to the decarbonization of the economy, thanks to the increase of digitalization during the COVID-19 crisis. The group has also delivered sustained improvement in other ESG metrics. Our customers and society in general valued our role and performance through the pandemic. And our reputation, measured through RepTrack, reached a record of 66, 10 percentage points over last year. Looking at gender diversity, we achieved an increase of 1.8 percentage points to 27%, something I'm proud of considering this figure was below 20% five years ago. Among the range of ESG awards and recognitions we received throughout the year, I want to highlight, for the second consecutive year, we lead the ranking of digital rights, which is a prestigious third-party reference. Finally, Telefónica is committed to achieving net zero emissions in our four main markets by 2025. I will now hand over to Ángel to go through a detailed review of our business performance.

Thank you, Josemaría. On slide 8, we show the performance of the Spanish business. During Q4, we took steps to cool down pricing competition, enabling us to continue with our more-for-more strategy. We announced the fiber speed upgrade to one gigabit per second and agreements with DAZN and Disney Star to include their premium content in our offer. These actions temporarily lead to lower gross ads and muted KPIs, but do deliver positive results in terms of churn and value mix and add further sustainability to our business. By year end, the conversion base remains stable ARPU improved in the second half of the year, and churn was reduced year on year. Hence, the value of our conversion business has grown, even with the toughest macro environment in decades. In addition, we have the largest fiber-to-the-home network in Europe, with the uptake reaching 29%, as a result of higher accesses connected in both the retail and wholesale businesses. Continuing with Spain, let's move to financials on slide nine. Service revenue accelerated its improving trend sequentially across all revenue lines, and especially in the second half of the year, mainly on the back of a solid convergent ARPU and record IT sales. Continued cost containment and benefits from digitalization led to an improved R&D trend quarter on quarter, with an OFDA margin of almost 41% in 2020. On the investment front, and despite having rolled out more than 2.1 fibre to the home premises and switched on 5G to cover 78% of population, 2020 CAPEX declined to 11% of sales. As a result, Telefónica Spain proved once again its ability to deliver solid cash generation amid very challenging conditions, with an ETA minus capex of 3.6 billion euros virtually flat year on year. Finally, we are committed to achieving net zero emissions in 2025 in our Spanish operations. Moving to slide 10, Telefónica Deutschland maintained its strong trading momentum in Q4, with the O2 free portfolio continuing its good traction and O2 contract churn registering historically low levels at 1%. Our improved perception amongst customers is a result of a successfully equalized network quality as the company met all its LTE coverage obligations. In the current mobile network test conducted by Trade Magazine Connect, The O2 network secured a very good rating for the first time, reflecting the enhancement in network quality driven by the 4G rollout. In terms of financial performance, Telefónica Deutschland met all its full-year revenue, OEDA and CAPEX II sales guidance. Network development and targeted customer focus continue to drive growth momentum. with revenues increasing 2.7% year-on-year in the fourth quarter, whilst the IPDA growth continued to improve strongly, up to 3.4% year-on-year in Q4 versus 0.7% in Q3. Full-year capex increased by 4.8%, driven by investments for future growth in 4G and in the 5G launch, now active across 15 cities. And in terms of our sustainability efforts, Telefonica Deutschland's stated aim is to be carbon neutral by 2025. With 5G consuming 90% less energy per byte than 4G, we are very well placed to reach this target. Turning to Telefonica UK on slide 11, we continue to be the UK's number one network. We have grown our base by 5% to reach over 36 million mobile customers, with market-leading MPS and customer loyalty that continued to improve in 2020. Looking at the financial performance, top-line trends have been adversely affected by COVID impacts. However, with solid trading in the fourth quarter, we saw improvements in mobile revenue from Harvard and Smith, containing the total revenue decline in 2020 to 4.4%. OFDA grew by 2.5% year-on-year in Q4, while declining by 2.4% in the full year 2020. It is worth highlighting that this is the fifth consecutive year of margin expansion in the UK business, driven by our flexible operating model and continued efficiency gains. OFDA minus CAPEX grew by 2.7% year-on-year in 2020, as a result of strong cost control and CAPEX flexibility with an increased focus on growth areas such as 5G. In line with the Group's ESG agenda, Telefónica UK has committed to become the first UK mobile network to achieve net zero carbon by 2025. I am also pleased to say that the O2UK Virgin Media joint venture is progressing to plan, and we expect it to close around the middle of this year. This transaction values O2UK at 7.8 times OTA and will create the UK's connectivity champion with a joint enterprise value of £38 billion, with an expected cash inflow for Telefonica of 5.5 to 5.8 billion pounds subject to customary adjustments in this type of transaction. Let's now move to the performance of our Brazilian operations on slide 12. In 2020, we have reinforced our leadership in mobile with a record 33.6% market share and accelerated our transformation to Fiverr. In contract, we added 729,000 new accesses in Q4, following a more-for-more strategy and thanks to the increasing demand for high-quality and reliable services. At the same time, churn improved to 1.1%. In fixed, we passed almost 5 million premises with fiber to the home during the year, doubling what we did in 2019, for a total of 16 million. We want to continue capitalizing on the fiber opportunity, using different models to address different profiles. In line with this, we are in advanced talks to create a neutral wholesale fiber network vehicle where both Vivo and Telefonica Infra will hold equity stakes, targeting more than 5.5 million premises passed in four years. Looking at our financial performance, We delivered outstanding OFDA minus CAPEX growth of 8.5% versus 2019, with a margin expansion of 2.5 percentage points. This outstanding result was supported by our continuing focus on driving OPEX efficiencies and optimizing capital allocation. On top of that, the acquisition of OIS Mobile Business is progressing to plan. with closing expected in the second half of 2021. This will further enhance Vivo's position in the market, allowing us to deliver even higher service quality while creating significant value through synergy generation. Finally, on the ESG agenda, Brazil is committed to achieving net zero emissions in 2025. Moving now to slide 13, Telcius continued to deliver a strong performance, demonstrating the resilience of its business model throughout the COVID-19 crisis. In the tower business, the portfolio increased 46% year-on-year with a number of third-part tenants up 15%, driving both organic revenue and OTA growth above 40% year-on-year in the quarter. In the cable business, A second round of contract extensions with relevant clients was executed, resulting in an increase in net full contract value in the semester of approximately $620 million, despite a consequential short-term negative impact on revenues and OETA. As a whole, Telcius delivered accelerated year-on-year revenue and OETA growth of 11% and 13% respectively in the quarter. while the division's OIBD minus capex margin reached 46.9% for the full year. On top of this, Telefonica Infra successfully crystallized the value of our assets. Last month, Telefonica Infra announced a landmark agreement with American Tower Corporation for the sale of Telsius Tower division in Europe and in Latin America, as Jose Maria mentioned at the beginning of the presentation. Slide 14 shows how Telefonica has been focused on pursuing value creation opportunities in fibre. Telefonica's footprint has grown exponentially in recent years, reaching almost 50 million fibre-owned premises passed in 2020. Additionally, including our wholesale agreements, our ultra-broadband footprint reached 135 million. Penetration of ultra-broadband connections over total fixed broadband accesses rose to 77%, that is, 6 percentage points more than in 2019, driven by a strong technological transformation that provides visibility to long-term revenues. In Germany, as announced last October, we have signed an agreement with Allianz to create a neutral wholesale operator called Unserer Grüne Glasfaser, which stands for our green fiber in German. This new company has received approval from the European Commission with construction starting this year and a plan of passing more than 2 million premises in six years. In parallel, in Chile, we've announced the creation of a vehicle called InfraCo, which will also enable us to accelerate fiber deployment with no capex impact. and reach 3.5 million premises passed by the end of 2022. Telefónica Chile will contribute its footprint of 2 million premises passed at a very attractive 18.4 times EV to OTA, while holding a minority stake of 40% in the company, while KKR will hold 60%. This transaction is expected to reduce net debt by 0.4 billion US dollars. And in Brazil, We are in advanced negotiations with the leading international financial investor for the construction of a neutral, independent fiber optic wholesale network. The new company, Fiberasil, that will also have the participation of Telefónica Infra, aims to accelerate the expansion of fiber to new locations through a CAPEX light model for Telefónica Brasil and capture value through third-party penetration. Telefónica Brasil is carving out 1.6 million brownfield premises passed into FI Brazil, and the target is to reach over 5.5 million FI to the home premises passed over the next four years. As you can see, FI to the home networks are fast consolidating their position as a core infrastructure asset class, with buoyant M&A activity at very rich valuations across geographies. we have optionality to continue exploring further growth and value creation opportunities across our footprint. Turning to slide 15, revenues from tech services, that is cloud, cyber and IoT and big data, grew consistently by 13.6% year on year in 2020 to 1.5 billion euros, improving to be the fastest growing and most resilient business despite the challenges posed by the COVID-19 crisis. It is important to highlight the competitive integrated portfolio, the strong operational capabilities, extensive commercial reach, and its large base of B2B customers. Growth was mainly fueled by the corporate segment, where Telefonica plays a key role in driving digital transformation thanks to the company's unique ability to address the converging demand for cybersecurity and cloud services. Telefonica tech companies are already established and running, with close to 50% of revenues already transferred to them. The new structure will help us to capture revenue growth and efficiency gains ahead. So, We met our targets and have outperformed the market once again. I will now hand over to Laura to cover ISPAN and the financial results.

Thank you, Ángel. Turning to ISPAN on slide 16. Our focus remains on reducing exposure to the region without jeopardizing growth thanks to alternative investment models that have been implemented in the last few quarters. Thanks to both this extra focus on value growth and our differential assets in the region, contract accesses and fiber connections show a very robust performance at record low churn levels. Some commercial performance in value segments was then coupled with efficiencies, fostered by acceleration in digitization and capex optimization. that allow us to post OILDA minus capital growth versus 2019 despite the tough year. Let me highlight, we are reducing significantly the average capital employed, close to 20% versus 2019. Diverging on an asset-light model through co-investment deals with ATC and ATP, the announced infracoin in Chile 4G serving in Colombia and AT&T agreement in Mexico for infrastructure rationalizations, among others. In addition, our capital structure improved with significantly increased leverage in Colombian and Chilean pesos, respectively. And finally, we are crystallizing value through disposals, as demonstrated by the Central American-saved Latin Tower sales to ATC and the announced InfraGo in Chile. Slide 17 shows how FX headwinds are mitigated at the free cash flow level through our natural hedge. The impact of FX in the fourth quarter was lower than in Q3. In 2020, FX detracted 6.5 percentage points year-on-year from revenue growth and 8 percentage points from OIBJA, mainly due to Brazilian real depreciation versus the euro. Nevertheless, the negative impact of €1.2 billion at OIBDA level translated into just €231 million at the pre-cash flow level. On the other hand, ethics had a positive impact of net debt of as much as €1 billion in 2020, which increases further to €1.8 billion if we include leases. On slide 18, you can see how a strong free cash flow generation was last year, topping €4.8 billion and comfortably allowing us to cover dividends, hybrid coupons and commitments, while helping to bring down net debt. We paid down €2.5 billion to €35.2 billion as of December 2020. Once we take Telefonica's recently announced strategic and inorganic initiatives into consideration, net financial debt will decrease by an additional €9 billion to the €25 billion mark. And we remain committed to reducing our net debt going forward through solid organic free cash flow generation as proven even during the worst operating environment in decades and further inorganic measures. Slide 19 shows a proactive and innovative approach to financing in 2020. navigating a volatile market to raise €17.9 billion in total, including €6.3 billion related to the Virgin Media O2 UK deal financing. We have been at the forefront of ESG financing, as the first ever telco issuer to tap the green hybrid market, and more recently, as the first telco to issue a sustainability hybrid bond. In addition, we have reduced our maturities to 2022 through €2 billion equivalent of liability management exercises in 2020 and 2021 to date. And we have extended our average debt life to close to 11 years, while maintaining a robust liquidity cushion of €21.4 billion, which comfortably accommodates upcoming maturities. Should we include the recently announced inorganic deals, our maturities will be more than covered for the next three years. All this financing activity has been executed at historically low interest rates, enabling us to reduce our effective interest costs to three points.

Sorry. I think now it's... Can I please check?

All these financial activities have been executed at a low interest rate, enabling us to reduce our effective interest costs to 3.11% as of December 2020. and 38 basis points in improvement from the previous year. I will now hand back to Jose Maria to wrap up.

Thank you Laura. 2021 guidance reflects our expectations that recovery and normal life trends will be more evident from the second quarter onwards. We expect revenue and ODA trends to stabilize in 2021 in year-on-year organic terms. and capexus fails to turn back to normal high levels of up to 15% of fails. In 2021, we foresee no general confinement post the third quarter, and a gradual recovery in global economy, especially as of the second half of 2021, to condition the trade-off between vaccine coverage and the pandemic evolution. This is the premise in which over-distance is based. COVID-19 impact is expected to be lower than in 2020. recovery to turn more evident as from the second quarter of 2021, with a higher demand in B2B segment. This along with continued efficiency in cost and accelerated utilization measures. In addition, there will be changes in the consolidation perimeter along 2021 derived from inorganic transactions. Guidance 2021 is calculated under organic criteria, homogenous consolidation perimeter 2021 and 2020, and average FX 2020. Having said that, the uncertainty surrounding COVID-19 and how the pandemic develops is always going forward, and despite anticipating some recovery for 2021, we will continue to manage our resources according to results evolution. On dividend, we are announcing €0.3 per share for 2021 to be payable through voluntary script dividend in December 2021 and June 2022. Our decision to adapt the dividend allow us to combine the need for financial flexibility in a year where several spectrum auctions concur with expectations of a strong free cash flow generation and significant inorganic transactions. And still want to incentivize our shareholders and provide them with attractive by sustainable returns. And now to conclude, I'd like to leave you with a few takeaways from today's results. First, We have proved our resilience in challenging times during 2020 and continue to deliver for all stakeholders. We delivered on our 2020 guidance and proved our cash preservation capabilities while strengthening our business positioning. Second, we executed material progress towards our strategic objectives with reduced exposure to ESPAM, value creation and realization from infra and tech, as well as significant development across our four core markets. Again, We sold our towers at the highest ever multiple, both for the industry and in Telefónica's history. These achievements help us deliver significant progress in deleveraging, both organically and inorganically. Once the inorganic deals have been completed, net debt will be further reduced by as much as €9 billion, or 25% of year-end debt. And finally, we are announcing a positive outlook for 2021 and dividend of 0.3 euros per share. Thank you very much for listening. We are now ready to take your questions.

Okay, so Georgios is asking us about Fiverr. He says that we have already done the deal in Chile and we have the one in Brazil on the way. The question is if the plan is to maintain the control in Brazil and what other options we have for similar deals in other countries in Spain? This will be the first question from Georgios.

Thank you, Georgios, for your question. We are announcing different formats of Fiber Deals depending on the objectives and the market conditions. The deal that we announced in Germany is a deal of co-control to grow from a greenfield point of view in Germany. It's a deal structure 50% Allianz and the 50% held by Telefonica will be half Telefonica Deutschland and half will be Telefonica Infra. The aim of that deal is to grow in a greenfield manner. Then the deal in Brazil It's a different format of deal. We have divided the country into three tiers of towns and cities. Tier one is going to be developed with our own CAPEX. This will be 100% owned by Telefónica Brazil. Then there is a second tier that we are addressing through either agreements with fiber owners like American Towers that we team managerize or with the projected vehicle goal 5 Brazil where we will have co-control with a partner. 50% will be owned by the partner, 50% will be split equally between Telefónica Brazil and Telefónica Infra. This is a deal which is slightly different from the German one because it has a brownfield component. Vivo will contribute 1.6 million premises and the rest will grow via Greenfield and potentially through acquisitions to reach 5.5 million in the next four years. There could be other fiber deals in Hispano-America. We just announced the deal in Chile, but these are countries where the fiber penetration is still not as high and there are opportunities to create value in the region.

And Fiverr Co., we are very satisfied. We have created the largest neutral wholesale operator in Chile, and we have also maximized valuation. As you know, the enterprise value is above $1 billion, and that results in a multiple of over 18 times AIDA. Moreover, we will be having a 40% stake in an infra-co., which will have greater value for the future. This is serving many of the targets we have around ISPAN, which is modulate exposure, but at the same time go back to profitable growth, which we have already managed in 2020, despite the difficult conditions, and create a continued contributing to net debt reduction. And this transaction is going to reduce net debt in approximately 0.4 billion. I think there's some read across this transaction because I need the great value of our infra assets. If you look at the ultra broadband premises passed in Eastpac, those are over 12 million. And if you think we have been selling this at around $500 per home, that would imply a total value just for the fiber in Eastpac of 6.1 billion, just extrapolating that, which is which is the consensus right now for Spain is around 7.7 billion. So I think the opportunity and optionality here is huge, and at the same time this is compatible with continuing growing profitable in the region.

Thank you, Laura. The second question from Georgios is about fiber in Spain. Is that something that you consider? And what are the considerations that would prevent us from taking similar decisions? Understanding that you don't need greenfield funding, but it can help with the leverage.

Well, our operation of fire in Spain is very well developed. Spain is a highly penetrated market. It's leader in Europe. It's a market where we have already several commercial agreements in place to wholesale the fiber. As you said in your question, that is not the greenfield opportunity that we see in the places that we are setting up a new fiber course with partners. We have a very valuable and very well developed fiber in the country, which is for us strategic. It gives optionality for the future, but we are not contemplating at this stage transactions regarding the fiber. It's strategic.

The next question came from Mandeep. Mandeep is asking, Mandeep from Red Bull, Mandeep Singh, asking in Spain if there is any possible revenue contributions in the Spanish revenues, any revenues coming from the joint venture with ProSegur, and how much, and if there are benefits from copper sales, I understand, central offices in EBITDA. And the second question is regarding UK spectrum, if TEP will bear the cost and then contribute it to the joint venture.

Thank you, Mandeep, for the question regarding ProSegur. The GenVenture is 50-50% owned. It's account by Telefónica Spain as per the equity method, so it does not consolidate the OEPA from the ProSegur GenVenture, neither the revenues. Yes, Telefónica Spain is accounting in its figures the commercial commissions from selling to our customers those alarms that are being supplied by the ProSegurgen Venture. So, partially the results are included in the terms of the commercial fees that Spain gets from selling those. The results of the alarm activity itself is accounted through equity method. Regarding copper sales, we continue to decommission our legacy copper This is allowing us to undo investments that we have in our perimeter, be it through selling real estate, which has been more active in prior years than this year, and also regularly selling copper sales, which are accounted as other revenues in Telefónica Spain numbers. Regarding the UK spectrum, the auction is expected to start in the month of March. It has two tranches of spectrum being sold. Since the JV has still not closed, this is a process that will be run single-handedly by Telefonica, and the cost will be borne by ourselves, and then the asset will be contributed into the JV.

Okay, the next question comes from Michael Bishop from Goldman Sachs. The question is about free cash flow. Michael says, given the strong bid in 2020 versus your guidance of more than $4 billion, do you have a similar guide or ambition for 2021, given consensus is only at $2.5 billion free cash flow 2021?

Thank you for the question. We do not guide on free cash flow, although we remain focused on delivering a very robust free cash flow, as it's been the case in 2020, and also hope to reach the consensus, as it's been the case in 2020. Let me tell you that free cash flow is an absolute priority, and we expect it to comfortably exceed dividend payments, the labor commitment, and the hybrid coupons payment, and will continue to be a sustainable driver for continuing the leveraging. I will elaborate a little bit, although it will not be guidance, as I said at the beginning, but if you start from our operational guidance, we are expecting recovering and normalizing trends that will be more evident from Q2. Those will stabilize and also CapEx2 sales will trend back to normalized pre-COVID level up to 15% of sales. This will put some pressure on operating cash flow year on year, but will allow to continue capturing future growth. Below operating cash flow, we will continue with our business-as-usual working capital measures. We will optimize and continue optimizing our financial payments with a strategy that considers cost, but also life, currency, and liquidity needs. For tax payments, we have a midterm guidance of 20% with the unavoidable volatility around advanced payments and refunds. In that sense, in 2020, we had some positives, such as spectrum auctions being delayed for 2021, low level of payments in advance, and also, as you know, we successfully hedged free cash flow, and that also flew through financial payments. But you can count on us managing every single line, starting from stabilizing operational trends and optimizing all other financial items. And of course, CapEx and resources in general, There's still uncertainty surrounding COVID-19 and how the pandemic will develop. It's a risk going forward. And despite anticipating recovering for 2021, we will definitely continue managing our resources according to results evolution. All in all, we have proven resilience in challenging times, and we have many levers to maneuver. And we are closely monitoring our free cash flow generation, and that will be the same in this year. We keep on improving efficiency and prioritizing our investments to adapt our expense towards revenue and profitability generating sources. We will continue working in this direction, Michael. Free cash flow generation is a priority for us.

Then the next question is from Mateo Robillier from Barclays. Mateo is asking about the business in Spain. If you can discuss recent competitive trends in Spain and what it will take to stabilize the top line and when.

Thank you, Mathieu, for the questions on Spain. In this quarter, Telefónica Spain has shown market leadership by deliberately reducing commercial pressure during the first half of the quarter. We have been deliberately cooling down the market since late Q3, offering lower discounts and shortening promos. We were the first mover, and this has penalized our growth by early Q4, But other players followed us. The Q4 campaigns, the Black Friday, Christmas, have been softer than previous years. The promotions that could have been by some players 50% for six or 12 months now are generally reduced to three months promos. And we are seeing not only Q4 but also now that in February all promos in unlimited mobile data have been removed by all players. And, for instance, Orange is decommissioning some of its lower-end brands. This has allowed, as I was saying in my speech, to enable more formal initiatives. We saw that from Vodafone in November, from Euskaltel in December, and ourselves also in January 2021. This decision, which was on purpose to cool down the market and had to be exerted by the market leader, will still hit us in our commercial metrics in Q1 because of expiration of promos, but clearly is paying off in terms of market repair, is paying off in terms of lower churn, and it's paying off in bringing in high-value subscribers. Churn has improved month over month in Q4 for all segments. The convergent gross ads mix has improved sharply. 74% of the fusion gross ads in the second half of the year are in the mid to high end, that is, 19 percentage points more than in the first half of the year. And ARPU is virtually stable quarter on quarter, and the year-on-year trend is improving. So, as you have seen, these results are allowing us to improve our revenue trend, are allowing us to comply with what we had been stating that ARPU in the second half would be higher than in the first half, and also with cost control and efficiencies have allowed us to have the margin higher in the second half than in the first half. Then, your second question was regarding revenue stabilization. What we see, and again, this is the outlook for Spain and this is not a guidance and should not be taken as such, and of course it's highly dependent on the evolution of the pandemic, what we see is that the sequential revenue recovery trend has clear momentum. We have been able to sustain the conversion base with growth in contract mobile and fixed broadband, especially in fiber. We are launching some more formal actions. We are getting traction from new digital services. This in B2C, but in B2B what we see is that we have achieved record growth in IT services that far more than offset the communications erosion. Roaming should be recovering as the pandemic recedes. And wholesale will continue to be strong. All of these trends are supporting revenue in Spain towards stabilization or even slight growth for 2021. At the same time, we're expecting our ETA margins to be around the 40% level and CAPEX to be benchmark around or up to 12% for the Spanish operation.

Also related to Spain, there are questions coming from Jacob Bluestone from Credit Suisse and Jules Mills from Exxon. I think that that have been already covered part because jacob is asking about the outlook for spain in revenues and mda but also regarding what what we see ahead in terms of subscriber evolution this same question regarding the evolution of subscribers and the changes between high and low value is being asked by by yours meals and um how we see um in relation with this if we continue to see value in content, in football content, in sport content in general, to continue including it in our offer. And if we would perhaps offer more football content to lower-end subs, and if this changes our view on how much this content is worth ahead of upcoming auctions.

thank you pablo for your 27 questions okay on the outlook i think that i elaborated we see sequential recovery trend in revenues to have clear momentum which should support for the factors i responded before stabilization or even slight growth in revenues with the margin oba being around 40 percent i should add to what i said before that the second half will be better than the first half, given the comms and the evolution across the year, and capex to be below 12%. In the question there were also, you know, what are the perspectives for evolution of KPIs. Again, we are deliberately working at cooling down the market. We are with a clear strategy of going for value, not for volume. Others may choose to go for better cosmetic KPIs at the expense of financials and sustainability. That is not our case. And here we are in the high end focusing on retention and the low end we are focusing on acquisition. On the football or on the content. Football again has proven to be a commercial engine in the high end. especially in COVID times. We have been growing in high-end subs. As I was saying before, in the gross ads volume, the mix has been excellent. In the second half of the year, three quarters of the gross ads have been in mid to high-end. This has allowed the conversion output to improve. I should also say that football gross ads in the second half have been double the ones of the first half. And we have also been able to get an improved ARPU in the second half than in the first half. I don't know if I responded to several elements of your question, Pablo.

I think you did. Then Carl Murdoch Smith from Berenberg is asking about the dividend and the guidance. On the dividend, he says, can you talk about the logic of cutting the dividend but maintaining ice-cream options? Surely it would make more sense to cut the dividend to a sustainable level and pay it in cash, then rebuild from there. How would you react to the accusation of that persistent use of a script option like a series of mineral rights issues? And then on guidance, on what does stabilization mean in numerical terms, there are two ways to think about stabilization, something around zero. or something closer to zero than 2020 trend. And he thinks that the right one is the first one, a kind of minus one to plus one range.

Well, thanks for your question. Taking the first one on the dividend, the decision of proposing a dividend payment of 0.3 euros per share in a voluntary script option is based on the following framework. First, we really want to speed up our internal transformation process and therefore we want to preserve a strong free cash flow generation and at the same time being able to invest in the growing part of our business. The second one, keep in mind that we will keep exploring inorganic options but and that's helping us to reallocate capital into growth areas and at the same time to reduce leverage. I mean, we will be closing transactions during this year likely that would represent more than 9 billion euros of additional debt reduction or additional funds flowing through the business. In 2021, it's a year in which we will be most likely facing a spectrum of auctions in three of our four core markets. I mean, Spain, the UK and Brazil. And we are still surrounded by some degree of uncertainty around COVID-19 impacts, though the outlook is positive. And keep in mind that we want to preserve a sound investment grade rating. Taking all this into consideration and adding that we think that it is important to preserve an attractive level of shareholder remuneration, we think that €0.3 per share meets all the targets. It reinforces the company both strategically and financially. It provides flexibility in uncertain times, it accelerates the leverage, and it provides an attractive return. In terms of preserving the script option, we think that through a voluntary script we have been able to keep some flexibility and at the same time offering greater optionality to our shareholders. Remember that two-thirds of our shareholders decided to reinvest their dividends. And we think it's important to keep that flexibility once the outlook is still affected by COVID-19. Keep in mind as well that any excess free cash flow will be devoted to neutralize the dilution. And in year 2020, we have partially offset the dilution by canceling 1.6% of the share capital. And therefore, share buybacks are going to be used as a tactical tool to control those levels of dilution to adapt to the excess funds coming from M&A when we are able to preserve sound investment and great rating. And therefore, in summary, we think that it implies more flexibility and at the same time it can help us to accelerate our strategic transformation. In terms of the guidance, for us, stabilization means that we see better trends. As Angel has been describing in some of the markets, namely in Spain, we see better trends growing up. And we have momentum in operational trends. But we still have some uncertainties surrounding COVID. COVID effects should be fading away all along the year, and that has significant impact in places like roaming, or SMEs revenues, or B2B, or handset sales. And therefore we see a progressive improvement in the metrics. So for us, stabilization mean close to stable, mildly positive, mildly negative.

Thank you. Then Keval Tiroya from Deutsche is asking two things. One, the first question is, could we have an update on the timing of inorganic actions in LATAM? Any views on how you are thinking about disposals versus spin-off? And the second is, can you please help us to understand better the fourth quarter Spain retail revenue? You mentioned stronger support from IT revenues and improving trends in non-convergent revenues. any more color on what the extra support from IT revenue would be helpful, and if the non-convergent revenue improvement, if this is sustainable.

I take your question on LATAM. In November 2019, we established as a strategic priority to reduce our exposure to LATAM in order to mitigate our exposure to FX volatility. During 2020, a lot of things have been done. First, as Laura has been saying, we have moved towards an asset-like model. We have been doing a very selective capex allocation towards growth. We have become an MVNO in Mexico. We have accelerated network sharing agreements like the one that we have in Colombia. We have reduced capital intensity by selling towers and monetizing fiber assets. And all those divestments have been done at very attractive multiples. In the case of the divestment of Central America, above six times OETA. And in terms of Star Wars or Fiber assets, in the high teens. In order to give you an example, as Laura was mentioning before, the Fiber transaction in Chile has an implied value per home pass of $500. And that means that we have significant optionality because we have 12.1 million home pass in Latin. We have also increased debt in local currency significantly, and as a result, we have reduced capital employed in Latin America during 2020 by more than 20%. We are moving into a lighter asset model, more naturally hedged structurally, and more easy to hedge in terms of FICA slow growth. We will certainly keep exploring inorganic transactions, but only if it creates value for telephonic shareholders. In the meantime, we will manage will manage the region according to our strategic priority to reduce capital exposure to LATAM.

Thank you. Excuse me, Pablo. Yes, regarding the Spain retail revenue trends, let me try to give you some more color. The fourth quarter revenues in Spain declined by 2.9% year-on-year. This rate is 1.5 percentage points better than in Q3 and would have been a positive 0.5% ex-COVID impacts. If we decompose it between handset and service revenues, handset sales continued to have a weak evolution of minus 24.5% in the quarter. It was minus 26% in the third quarter, so still weak, while service revenues at minus 2.1% year-on-year have improved 1.5 percentage points versus Q3, despite roaming and lower comms because we have had other impacts quite positive like IT in the B2B segment, record growth at 23% year-on-year. We have also had new digital businesses impacting and also wholesale has been quite positive. The tariff upgrade has contributed as well to this revenue improvement. So, if I were to decompose the acceleration or the improvement of trend between Q3 and Q4, the softening of COVID impacts has been helping us. This IT reactivation to record high as well. We have had better performance of the consumer non-conversion revenues, far lower recline than previous, and wholesale has been strong, but a little bit of a drag from some of the wholesale revenues. All in all, ex-COVID, the top line in our Spanish operation would have increased 0.5%.

Then Sumit from New Street also has questions regarding the Spanish business. He asks if we can provide an update on thoughts on the European recovery program implications for Spain and Movistar, and if we have an idea of potential timing of this process during 2021.

Thank you, Samit, for the questions. The Spanish government has already announced and set up plans for the European recovery funds, which will be to the tune of 140 billion for Spain in the next few years. Those have to comply with the priorities that have been set up by the European Union. And we see opportunities in the digitalization axis and also in the environmental axis, given that many of our new investments are going to go in the direction of net zero or net zero target in 2025. These digitalization areas will amount to 20 billion overall figure. This is more than the 20% European community threshold for digitalization, so good news. are already making specific proposals to benefit from these funds and we think that we are best positioned to make the most out of these subsidies. Materialization of this would be later in 2021 and then in the years to come. So, we see a high chance of Telefónica benefiting from these measures, but as soon as they become more precise, we will be able to factor them in our outlooks.

I think that we have to finish, but I think that we have one final question, because Fernando Cordero and Fernando Abril from Santander and Alantra were asking about Spain and Spain, and I think that all the questions they had have been already answered. And Akil Dattani from JP Morgan, He's also asking about infrastructure that I think has been already answered, the Spanish KPIs that has been already covered, the guidance and what the stabilization means that has already been covered. But he has another question that I don't think has been covered, which is the Spanish consolidation. Akhil says, there is a lot of speculation in the market at the moment of a Vodafone mass mobile deal. Should a deal materialize, how do you think it impacts your retail and wholesale outlook?

Well, first let me framework the question and then I will pass it over to Ángel for the detailed operational impact. We think consolidation is welcome. It makes no sense that there is so much pleasure in Europe. I mean, just to give you two two specific references. Average revenue per axis in Europe is half. Average revenue per axis in the US according to analysis figures. And also investment in 5G per capita in Europe is something around 94 euros, while it is 150 in the US. So I think that consolidation makes sense. Intra-market consolidation makes sense. And we will certainly support that if that was to happen in Spain.

Yes, not sure that there is much more to add. Current market structure seems hard to sustain. This seems to be a consensus view now and looks like a solution is needed. In market consolidation, maybe one. We have always said that we are supporters of market consolidation and if this were to develop, we would be supporters.

So thank you very much all of you Apollo EIs for the technical problems. I've been in 46 quarterly calls and this never happened. This is the last one and something had to happen. Now let me turn the call over to Jose Maria to finish the call.

Before concluding, there is something important to say. I would like to thank Pablo for his great contribution, commitment and dedication during his 10 years here in the IR team. I know it has been tough, but he was totally up to the challenge. Now it's time for him to assume new responsibilities within the group, and you know he has been appointed Chief Financial and Control Officer of Telefonica Tech, which is our fastest growing unit. I'm sure he will excel in his new role, as he has always done. Thank you very much for your participation, and we certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations Department. Good morning and thank you.