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.