Telefonica SA

Good morning and welcome to Telefonica's conference call to discuss January-June 2021 results. I'm Adrian from Fonegi from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared and the international financial reporting standards as adopted by the European Union. This financial information is un-audited. 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 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 could 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 filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and Chief Executive Officer, Mr. José María Álvaro Thank

you, Adrian. Good morning and welcome to Telefonica's second quarter results conference call. With me today are Ángel Villar, Laura Basolo, Eduardo Navarro, and Lut Schuller, CEO of Virgin Media O2JV. As usual, we will first walk you through the slides and then we will be happy to take any questions you may have. The second quarter was crucial for Telefonica. We reached an inflection point in the transition to sustainable, profitable growth, with organic revenue up and -on-year trends accelerating for the fourth consecutive quarter. We posted our best-ever net income after booking capital gains from the sale of Telstra and the creation of the Virgin Media O2JV. Moreover, these capital gains have translated into a more efficient capital structure. And finally, they help us produce debt financial debt by 30% -on-year. In parallel, a more efficient capital structure was reflected with our net debt denominated in Latin, increasing to 30% versus 21% as of March. On the strategic front, we continued progressing on our objective with key transactions closing in June and July. In the UK, one of our core markets, our position was reinforced as we created the National Connectivity Champion. Additionally, we continued to modulate exposure to e-spams. The eFRACO in Chile has been completed and we announced a new fiber vehicle in Colombia with KKR. Telefonica Tech has reinforced its capabilities in the cloud space with the acquisition of CanCon UK and AltoStratus, while accelerating -on-year growth trends. With regards to Telefonica Infra, PIPROSIL started operations in July, after regulatory approvals were granted. All of this, with digitalization gaining even more relevance and supporting our operating model and facilitating economic and social recovery. Finally, ESG remains an important part of our strategy. We launched a new industry-wide eco-rating scheme for mobile phones and have been nominated Europe's climate leader by the Financial Times. Turning to slide 2, second quarter reported figures reflect the significant capital gains booked, as we just mentioned, as well as other extraordinary effects. Reported figures also reflect changes in the consolidation perimeter, as Telefonica UK and Telstra Star Wars were consolidated until May 31st. And since then, the BG Media O2JV started to be consolidated using the equity method. They also reflect FX headwinds, which eased in the quarter. As such, the second quarter reported figures narrowed the -on-year decline by .6% to 10 billion euros and grew .4% organically, accelerating as much as .8% points versus the first quarter, with all business lines contributing to this improvement. Organic OEDA also improved its annual growth rate to .3% in the second quarter -on-year, whilst net income reached the 7.7 billion mark and EPS reached 1.37 euros. On its side, free cash flow amounted to €877 million in the second quarter, and for the first time, excluding spectrum payments, it topped €1.6 billion, 31% more than a year ago. Finally, net financial debt was reduced by as much as €11 billion in the last 12 months to €26.2 billion, post-distribution of Telstra's minorities as of June 2021. This is how the June 2016 net debt position. Moving to slide 3, we are upgrading our 2021 guidance for revenues and OEDA. First half of the year performance is already meeting or slightly surpassing former full year guidance of revenue and OEDA stabilization, and the outlook is positive for the second half of the year. Base and the positive tariff update calendar make us feel also positive about strong operational momentum being at least maintained. In Germany, as our colleagues shared with you yesterday, full year guidance has also been upgraded as well on strong commercial and operational momentum. Lastly, in ISPAM, we are seeing the commercial turnaround materializing, a top-line reversal happening in all countries, and whilst OEDA is more volatile, we are continuing to gain efficiencies. As for CAPEX, following first half results, where it stood at .4% over revenues, we maintain our up to 15% former guidance. On shareholder remuneration, we paid the second tranche of our 2020 dividend last month for a voluntary script dividend, in which .5% of shareholders opted to receive new shares, further enhancing our financial flexibility as just around 300 million euros were paid in cash. As for 2021 dividend, 0.5 euros per share will be payable in December 2021, and another 0.15 euros per share in June 2022, both through voluntary script dividend. Regarding treasury stock, the adoption of the corresponding corporate resolution will be proposed to the annual shareholders meeting for the cancellation of the share representing .7% of the share capital held as treasury stock. During the second quarter, we further consolidated our commitment to sustainability across our three ESG pillars, helping society thrive, leading by example, and building a greener future. In terms of building a greener future, we have launched an industry-wide equity rating scheme to identify the environmental impact of mobile phones. In addition, BG Media has just issued its first green bond raising 1.3 billion pounds to support the fiber rollout and the use of renewable electricity. I would also like to highlight the Financial Times has nominated Telefonica as a climate leader. With respect to leading by example pillar and in line with our commitment to creating a more equal society, we have updated our new diversity and inclusion policy and announced a target of at least 33% of women in management position by the end of 2024. Thanks to our program, we are one of the best companies to work for women in Brazil, and we have reached a collective agreement with unions to adopt flexible working in Spain. And finally, with regards to our contribution to society, Telefonica has not only extended its network connecting more people, but also has promoted education and employability to reduce the digital divide. For example, in April, we opened a new 42 campus, our second free programming campus with no age limit and open 24 hours, 7 days per week. Also, in terms of offering new solutions for society, we have found Indesia, which aims to drive digitalization via artificial intelligence in Spain, and have launched VidaV in Brazil, a health marketplace to make telemedicine more accessible. All of the above contributes to the achievement of UN sustainable development goals, as can be seen in our new report, A Sustainable World, A Connected World. I will now hand over to Angel to go through a detailed review of our business performance.

Thank you, José María. On slide five, we review the performance of our Spanish operation, which is turning around its revenues and showing annual growth for the first time since late 2019. The market rationalization that we have been promoting since Q4 2020 is bearing fruit. Following a somewhat muted commercial activity over the last quarters, all accesses showed a month on month recovery throughout the quarter, with positive net ads in fixed broadband in June. The early ending of the football season had a negative impact on conversion ARPU. This impact, however, is expected to reverse in the coming months, and we expect better ARPU in the second half. Furthermore, conversion churns continues to come down, and customer satisfaction has reached a new record high, 33% in June. Revenues, hence, were back to growth in Q2 for the first time since Q4 2019, thanks to improved trends in service and handset revenue, helped also by SolidIT, a partial recovery of roaming and the new portfolio. The OVA trend also improved versus Q1, though it was less marked than in revenue due to the lower margin of IT and handsets and the delay in full roaming recovery. Looking forward, we anticipate margin improvement from the next quarter, underpinned by better trading, improved ARPU, and further positive roaming impact. Finally, and in what we would call a very rational option, we secure the spectrum needed in the 700 megahertz band at very favorable terms, which will help us to accelerate our 5G deployment and improve operating leverage. Moving to Germany on slide 6, where we have seen operational momentum accelerate in the quarter, with O2 ARPU now back to growth year on year in Q2. At the same time, we continue to get strong results in mobile network tests, and have 5G available in over 80 cities. In May, we also are continuing our partnership and securing long-term revenue streams. In this quarter, both revenue and OVA year on year trends have improved to plus .7% and plus .3% respectively, with CAPEX growing by .9% year on year in the first half, continuing to ramp up through the year. This has resulted in continued strong cash generation, with RTA minus CAPEX margin expanding by 1 percentage point in the first half of the year. Moving to the UK on slide 7, where I am delighted to say that the JV between O2 and Virgin Media completed on the 1st of June. Since then, Virgin Media O2 has moved at pace to start integration, with senior leadership in place, B2B cross-selling started, and fast product development on the consumer side. During this time, there has been continued commercial momentum and focus, with a total base of 54.6 million plus 7% year on year on the back of solid base growth from across the company. Network rollout continues at pace, with 5G now live in almost 200 towns and project lining adding 89,000 new premises passed in Q2, helping to grow the company's gigabit network to 7.2 million premises passed, and remaining on track for completion of the gigabit upgrade by the end of 2021. The JV has also reaffirmed its target to deliver annual synergies of 540 million pounds by mid-2026, with a net present value of 6.2 billion pounds. To give an overview of the underlying performance, we have included the pro forma results for Q2 here, with revenue broadly stable year on year with improving trends in both fixed and mobile, OID plus .8% year on year on the back of continued cost control and commission savings, and delivering solid cash profitability with OID minus capex, growing by .5% year on year in the first half of the year. Moving to next slide, as the UK's largest gigabit broadband provider, today we are taking the opportunity to bolster our long-term network strategy by upgrading to fibre to the premise or fixed network of 14.3 million cable premises, after taking into account existing 1.2 million fibres to the premises to full fibre with completion in 2028. We see a huge opportunity in the UK, with low fibre penetration of around 20% compared to Spain 80%, where we can utilise our fibre expertise, as well as creating options to potentially pursue the broadband wholesale market in the UK, together with other B2B and B2C opportunities. Regulatory scheme in place is a plus, so the time to invest is now. By utilising the company's fully-adapted network, the upgrade will be one of the UK's most efficient fibre roll-outs. Costing around £100 per premise passed versus £60 per premise for upgrade to a full DOCSIS 4.0 cable network. So, a very modest increase in network cost during the upgrade, with no additional funding needed. In addition, revenue benefits are expected to accrue to BMO2's consumer enterprise and wholesale businesses from the fibre to the premise upgrade. Moving now to Brazil, on slide 9, Vivo's unique value proposition resulted into sound access growth in the most valuable segments, namely contract and fibre connections. Transformation to a fibre company will be further boosted by Fibrezil, which is already up and running, and will help us reach our target of 24 million fibres to the home premises passed by 2024. On the financial side, we posted very solid results, significantly accelerating growth trends in revenues to .2% -on-year in Q2. Better MSR and fixed revenues that are close to stabilisation explain the enhanced top-line performance. This improvement at the top line, along with efficiencies, drove OEDA to return to positive growth at plus 3% -on-year. CAPEX's allocation continues to support cutting-edge technologies that fit our top line, with 83% of its total related to growth and transformation. And finally, ESG commitments continue to expand, generating positive impact for all stakeholders. Thus, Vivo reached the 11th position in Mercos' ranking of the most responsible companies during the pandemic in the world. On slide 10, we show the progress of our fibre vehicles, which allow us to create growth opportunities and value, while accelerating deployment plans and addressing increasing demand for high-quality ultra broadband. In Germany, UGG is progressing well in the rollout of its network and has already connected the first municipalities. The first retail client was connected in June in construction. Additionally, both Fibrezil in Brazil and InfraCo in Chile received all necessary regulatory approvals, with both companies already operational after their transactions completion at the beginning of July. We have also announced a new fibre vehicle in Colombia, with KKR holding 60% of InfraCo and Telefónica Colombia the remaining 40%. The company has a target of around 4.3 million premises passed in three years, with 1.2 million brownfield premises from Telefónica Colombia contributed, at a multiple of approximately 20 times enterprise value to APA, and a net debt reduction at group level of approximately 0.2 billion euros. The closing is expected for Q1-22 after approvals. We have a strong infra portfolio that gives us optionality. We will continue to focus on pursuing growth and value creation opportunities through our infrastructure assets and capabilities across our footprint. On slide 11, Telefónica Tech revenue growth accelerated to plus .6% year on year to 2,003 million euros in Q3, in Q2, on an increasing revenue base and again beating its market growth. Tech services are driving the return to growth of the group B2B revenues, plus .5% year on year in the April to June period. In cyber and cloud, higher value revenues like managed services, professional services, and own partners platform, which account for more than 50% of these revenues, continue to deliver double digit growth. While in IoT and big data, IoT connectivity revenues representing more than 50% improved their growth rate to .1% in the first half year on year. From a commercial perspective, we signed an agreement with TM1 Cyber Security Solutions for Malaysian B2B, and in Spain we adopted our Cloudcom's portfolio to facilitate new ways of working and we reinforced our SME offer. In this arena, we are proud to mention that we were awarded by Microsoft as the best Spanish Partner of the Year in the digitalization of SMEs category for helping them maintain the business in the pandemic. In Q2, we acquired Altostratus in the cloud business, and we incorporated Athens in Spain to the perimeter of Telefónica Tech to continue reinforcing our professional capabilities. Finally, Telefónica Tech has just announced the acquisition of Campcom UK, reinforcing our position in UK and Ireland with an -to-end advanced cloud and security provider of significant size, relevant partnerships, and highly skilled professionals serving customers from both private and public sectors. I will now hand over to Laura for a review of our e-spam operations and the financial position.