Telefonica SA

Good morning and welcome to Telefonica's conference call to discuss January-March 2021 results. Before proceeding, let me mention that the financial information contained in this document related to the first quarter 2021 has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unaudited. This conference call and 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 risks and uncertainties, including risks related to the effect of the COVID-19 pandemic that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review publicly available disclosure documents filed 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 investor relations team in Madrid or London. Now let me turn the call over to our Chief Operating Officer, Ángel Vila.

Thank you, Adrián. Good morning, and welcome to Telefónica's first quarter results conference call. With me today is Laura Basolo, and as usual, we will first walk you through the slides, and then we will be happy to take any questions. First, I would like to briefly go through our Q1 results. It has been a strong start to 2021 on the commercial front. Our customer base grew 2% year on year and group NPS improved to 27%, a record high and nine percentage points higher than in Q1 2020. It has also been a strong start on the financials. Momentum quarter-on-quarter improvement seen in Q4 was maintained in Q1 2021, with sequential improvements in both revenue and OEPDA trends. Despite Q1 facing the toughest year-on-year comparison in the whole 2021, once comparison base eases, as from this Q2, we should see a gradual improvement along the year. Cash conversion improved on higher operating leverage paying off with growing operating cash flow and margins. Free cash flow ex-spectrum payments grew by 200% year-on-year, while net debt will soon be reduced further. And we posted stellar EPS year-on-year growth of 158%. we see growth gaining momentum. March already showed year-on-year growth in terms of revenues, and . And we are generating the strongest growth from our strategic priorities, our new tech businesses, ultra-broadband, particularly fiber to the home, and in high-value and converged services in our four core markets. Moreover, B2B revenues continue to improve sequentially, plus 2.8 percentage points above total revenues, showing we are best placed to grow. Also, it's worth noting that the return of growth comes whilst managing capital intensity, as we remain focused on smarter capital allocation, aimed at enlarging growth opportunities while capturing efficiencies to increase returns. In this respect, spectrum acquisition in the UK at much lower prices than benchmark is a clear win. And third, we continue making clear progress on our strategy. We advance towards completion of our UKJV, which received preliminary CMA approval and the most likely approval of Telcius Towers deal in Q2. These two deals should allow to book already in Q2 capital gains of more than 6 billion euros and reduce net debt by approximately 9 billion euros. We also launched our joint FiberCo in Germany, with also the Brazilian and Chilean FiberCo's operational launches underway. In ISPAM, we continue to optimize our operating model and increasing leverage in local currencies. Telefonica Tech continues to grow strongly with revenues increasing by over 25% year-on-year. We continue to streamline our operations with close to 80% digitized processes and open-run solutions progressing to plan. Finally, all the above happens while ESG recognition continues to excel, showing it is an integrated element in our strategy. Moving to slide number two for the review of our financial performance. Our reported results continue to reflect FX impacts on COVID-19, but less pronounced than in the previous quarter, as you can see in the charts on the slide. We continue managing FX, and headwinds are largely neutralized at the free cash flow level. In organic terms, it is the third consecutive quarter of sequential improvement in revenue in OEPDA, with revenues declining 1.3%, but both OEPDA and OEPDA-GAPEX already showing year-on-year organic growth. We continue to focus on efficiencies and smart capital allocation. CAPEX was almost flat year-on-year organic in the quarter, with NGN-related investments representing close to 50% of total. OIBDA and cash flow margin expanded by 0.6 and 0.3 percentage points organically year-on-year, respectively. Free cash flow of 33 million euros reflects spectrum payments of close to 700 million euros. Free cash flow pre-spectrum grew by 200%. Net debt grew slightly from the previous quarter for the same spectrum reason, but declined compared to March 2020 by 6.4%. Furthermore, and as stated, we expect net debt reduction by approximately 9 billion euros in Q2 due to the completion of the Telsius Towers and UK deals. On slide three, we review the performance of our Spanish operation. Our commercial performance was muted as we continued bringing rationalization to the competitive environment, this being a long-term strategy. In any case, NPS surpassed 30% for the first time in three years, a five percentage points increase from Q4 last year, and 14 percentage points higher year on year. NPS gap versus competition, also increased to 16 percentage points, that's 4 percentage points higher year on year, showing customer perception is gaining strong momentum. Network quality and demand for speed, bandwidth and superior content rank higher in consumer considerations. On these strong satisfaction scores, we are optimistic on our future commercial performance despite sticking to our plan to cool down competition. Financial performance again showed a sequential improvement in both revenues and OFDA. Top line improved its trend by as much as 2 percentage points from Q4 last year, with record growth again in IT sales, accelerating 7 percentage points versus Q4 2020. Convergent ARPU widened its gap versus our closest competitor, thanks to our superior offer and growing contribution from new businesses. As an example, Movistar Prosegur Alarmas gross ads in the quarter being four times higher than in Q1 2020. Moreover, wholesale revenues continue to perform steadily. Profitability remains benchmark as well, despite growing capex into next generation networks. Again, Network quality is the pillar behind our record customer satisfaction. Moving to slide 4, Telefonica Deutschland posted solid operational and financial performance despite continued COVID-19 related headwinds. It is worth highlighting the solid RPA performance up 5.7% year-on-year in Q1, mainly driven by revenue performance plus 0.2% year-on-year and effective COVID-19 cost measures. As such, OIBJ minus capex improved by 8.5% year-on-year. The O2-free portfolio continues to be well-received and drives trading performance and ARPU uplift ex-roaming. Churn remained at historic low levels supported by improved network quality. In April, Telefonica Deutschland was awarded a good rating in the chip magazine fixed network test. a significant improvement versus last year's rating. Moving now to the UK on slide 5, where we continue to deliver market-leading MPS and churn, resulting in a 5% growth in mobile accesses to reach 36.6 million, the highest base in O2UK's history. In a quarter where the UK was under strict lockdown, versus just two weeks in the prior year, revenue was down 9.4% year-on-year. But OETA grew by 7.6% year-on-year on the back of strong cost control and commission savings, driving a record performance for the company in Q1. It is also worth highlighting that Telefonica UK secured a significant share in the latest spectrum auction at considerably lower prices than European benchmarks. As part of the negotiation period in April, the company also agreed a trade to create a contiguous block of 80 MHz in the 3.4-3.8 GHz band, which makes this spectrum even more valuable. And of course, as I mentioned earlier, we received provisional approval for the JV between O2 and Virgin Media from the CMA in April, and we continue to work constructively with the CMA to achieve a positive outcome. In Brazil, as can be seen on slide 6, we accelerated value growth, reaching the highest contract net ads since Q4 2017. That reinforces Vivo's leadership with more than 33% market share in the Brazilian mobile market. This takes place at the same time contract churn reached historic low levels. at close to 1%, which is an indication of the quality of our customer base. We also managed to increase fiber to the home uptake to 23% and continue progressing on the development of one of Brazil's largest digital ecosystems. So, top-line growth is back this quarter, with our core businesses, which are 88% of the total revenue base, growing by as much as 5% year-on-year. and with legacy drag becoming less and less evident, as shown by fixed revenues annual drop of just 1.4%, some six percentage points better than in the previous quarter. This, coupled with continued efficiencies, mainly due to digitalization, allowed Vivo to also post better year-on-year OFDA trends. with OTA margin reaching a remarkable 42.7%. On slide seven, we show latest developments from our fastest growing unit, Telefonica Tech. Top line growth accelerates in the quarter to 25.1% year on year, leveraging the reinforced proposition of our cloud and cyber unit which grew its high-value revenue, namely managed professional and platform services, which account for more than half of this division by 33% year-on-year. Relevant deals in public administration and the financial sector have been signed throughout the quarter, adding visibility to the pipeline. Digitalization is becoming mandatory for businesses of all sizes. IoT and big data continues to be impacted by COVID-19, with certain projects being interrupted, mostly in retail, and lower sales of IoT big data solutions. However, we see a commercial recovery from previous quarters, while IoT connectivity continues showing healthy growth. Telefonica Tech's current perimeter gathers all those services identified as a priority in a first phase. An additional transfer of businesses is still expected along 2021. Moving to slide 8, Telefonica Infra, our infrastructure portfolio manager, continued to focus on pursuing value creation opportunities. Telcius Towers' sale to American Tower Corporation at a record of 30.5 times multiple was a clear example. The transaction is expected to close most likely in Q2. As we announced, Telefónica's strong footprint in fiber is further expanding through sharing agreements and fiber vehicles. In this respect, our German fiber co. UGG has secured financing for its first three years, while SFI Brazil was already approved by CADE, pending only Anatel's green light. Additionally, Telsius Subsea Cable has expanded its state-of-the-art portfolio in Q1, reaching almost 94,000 kilometers of subsea fiber. Its premium and unique infrastructure, together with high top line and cash flow visibility from the renewed contract with Telefonica and growing share of third party revenues and scalable growth platform gives us full optionality with respect to this asset. Finally, the announcement of the acquisition of a 20% stake in Naviax in exchange for the contribution of four data centers into the company also allows value crystallization while Telefonica keeps strategic and operational flexibility. I now hand over to Laura for a review of the financial position, our ISPAM operations, and ESG progress.

Thank you, Ángel. We will now go through the main highlights on slide nine. During the quarter, we continue to reduce our exposure to the region, as demonstrated by the launch of a fiber vehicle in Chile, which is pending regulatory approval, and the recent sale of our wholesale DTH business, a move aligned with our commercial strategy of prioritizing investments in growth, and which will bring savings at both the OPEX and CAPEX levels. Along these lines, we continue to add debt to local currencies, and aligning the region's leverage with that of the Telefónica Group. At the same time, we efficiently manage investments in the region, with capex to sales at 11% in the first quarter. All in all, we continue to reduce capital employed in the region. This strategy to modulate our exposure is happening with our geopartizing growth. Contract net-adds grew 54% for the previous quarter, as much as 1 million improved members with Q1 last year, which we multiplied FTTH net adds by three times. Ongoing value growth and continued OPEX and CAPEX efficiencies led to more than two percentage points sequential improvement in revenue performance to flat year-on-year growth, and as much as 31.5% annual growth in OIPTA minus CAPEX, a remarkable achievement. On slide 10, you can see that despite the slight increase in debt in March by approximately €500 million, once you include the proceeds from inorganic transactions approved, namely Telsis Towers in Europe and the second tranche of T-Deutschland Towers, net financial debt decreases already to €31.8 billion. Furthermore, it will stand at approximately €26 billion with the additional inorganic initiatives announced. we maintain a proactive and innovative approach to financing in 2021, raising €3.1 billion in total, including €1.7 billion related to the Alliance and Telefonica Group deal financing. Similarly, that in 2020, we have been at the forefront of sustainable financing. We have maintained our average step life about 10 years while maintaining a robust liquidity cushion of €19.7 billion, which comfortably accommodates upcoming maturities over the next two years. All this financing activity has been executed at a historically low interest rate, enabling us to reduce our effective interest costs to 2.96% as of March 2021. The first quarter has further consolidated our commitment to sustainability in each of the three pillars in which we work. To highlight these ones, or the first sustainability hybrid bond of the telecommunications sector, which joins the two green bonds we had already issued in the past. This new 1 billion euro bond brings in both environmental and social impact projects, such as the broadband connectivity deployment in rural areas and support for SMEs and entrepreneurship. The bond achieved the lowest hybrid coupon in the history of Telefónica, with demand exceeding 7 billion euro. The bond has become a catalyst to fostering digital inclusion by deploying connectivity infrastructure and supporting entrepreneurship. For example, our WIDA initiative that has just celebrated its 10 years has driven the creation during this period of more than 10,000 skilled jobs in Europe and Latin. In addition, we have renewed our targets associated with remuneration, increasing the weight of our environmental objectives. while maintaining commitments to gender equality, customers and society. We have also defined long-term targets for reducing CO2 emissions and remain committed to achieving net zero emissions in our four key markets by 2025. Precisely, this net zero emissions goal has enabled us to join the European Green Digital Coalition, which is a combined initiative between the European Commission and leading ICT companies to drive digital solutions to create an innovative and sustainable economy. All this effort is being widely recognized by the market. Recently, Telefónica has been recognized by S&P Global Rating Agency for our sound management of environment, social and governance risk, and we rank top global telco in the ranking digital rights 2020. I will now hand back to Ángel to wrap up.