Telefonica SA

mentioned that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is an auditor. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Trifonica 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 Chief Operating Officer, Mr. Ángel Villa.

Thank you, Adrián. Good morning and welcome to Telefonica's third quarter results conference call. With me today are Laura Basolo, Chief Finance and Control Officer and Head of Telefonica ISPAM, Eduardo Navarro, Chief Corporate Affairs and Sustainability Officer, and Lutz Schuller, CEO of Virgin Media Auto Joint Venture. As usual, we will first walk you through the slides and then we will be happy to take any questions you may have. Our third quarter results highlight consistent growth, smart capital allocation, and further deleveraging. It is the second straight quarter of simultaneous year-on-year organic revenue and OEPA growth. The revenue growth trend accelerated on the back of strong service revenues and continued improvement in B2B revenues. FX was not a drag in Q3. Unreported revenue growth, excluding changes in the perimeter, is aligned with organic growth. EPS rose 6% on an underlying basis in the first nine months of the year. Organic OTA minus CAPEX stabilized in the quarter through efficient capital allocation, with CAPEX to sales at 13%. Net debt further declined in the quarter to 25 billion euros, down 32% year-on-year. Operationally, total group accesses grew 3%, and we further extended what already is one of the largest fiber footprints in Europe and Latin America, with 157 million premises passed. We continue to make good progress in our strategic priorities. We continue reducing complexity, reprioritizing capital allocation to core markets. In the UK, the joint venture integration is moving ahead at pace. In ISPAM, we continue reducing our capital employed, completed the Costa Rica sale, and announced the sale of El Salvador. Telefonica Infra continued with the development of fiber vehicles while maintaining the optionality across the group's asset base. Telefonica Tech again posted very strong top-line growth of 25% year-on-year in Q3, while our digitalization program increased to 79% of all processes, making our operating model more efficient and sustainable. Finally, we continue to be fully committed to our ESG goals as demonstrated by our achievements in the three categories. Moving to slide two, reported figures were affected by capital gains and changes in the consolidation perimeter. Q3 revenues amounted to 9.3 billion euros and grew organically by 3.6% year-on-year. 0.2 percentage points higher than in Q2, while OTA maintained a steady growth of 1.6%. Net income reached €706 million in the quarter and a record high of €9.3 billion in the first nine months. Free cash flow in the quarter was affected by the €310 million Spectrum payment in Spain. In the nine months of 2021, excluding spectrum payments, free cash flow reached almost 2.5 billion euros, a very solid result. Finally, net financial debt declined by 1.2 billion euros versus June to 25 billion euros post-distribution to terms use minorities. Moving to slide three, let me confirm our full-year guidance and dividend. Nine-month results are aligned with our full-year targets for revenues and ODA of stable to slight growth, while capex to sales at 13.2% stands well within the up to 15% target. On shareholder remuneration, and as previously stated, we will be paying the first tranche of the 2021 dividend of €0.15 per share through a voluntary script dividend in December 2021 and the second tranche of €0.15 per share in June 2022. In addition, we will propose to the AGM the adoption of the corresponding corporate resolutions for the cancellation of 1.65% of shares held as treasury stock as of the 25th of October 2021, according to the CNMV filing. Moving to slide four, we reiterate our strong commitment to ESG, with key milestones reached in Q3. In the E-pillar, building a greener future, to move towards becoming a net zero emissions company, we have reached new long-term renewable electricity agreements in Spain and Brazil, and continued our network transformation with copper shutdown in Spain and 3G switch-off in Germany, helping optimize energy usage. Over the last five years, Telefónica has implemented more than 1,200 projects, saving 2 million tons of CO2 and 7 terawatt hours of energy. In addition, we have launched the free online platform NetZero Hub to help small businesses become net zero in the UK. With regards to the S pillar, helping society to thrive, Telefonica continues to connect people. 13 million premises passed have been connected to the M02 gigabit broadband in the UK. where we have also created the first-ever national data bank providing free mobile data to tackle data poverty. And we highlight special advances in rural areas and inland areas, with agreements to connect 600 blackout zones in Spain, 250,000 premises passed in the south of Argentina, and 13,000 areas are already connected in Peru. Lastly, on the G-pillar, we are leading by example. VIVO has been listed for the seventh consecutive year in the Best Immersive Markets Performance ranking by Visio Ares and introduced a new target to achieve 30% ethnic minority executives in leadership positions by 2024. In addition, Telefonica has been awarded prestigious awards for its commitment to and achievements in diversity. In Chile, the Ministerial Equal Conciliation Seal. And in Peru, the Scotiabank Equality Grant Prize 2021. On slide five, we review the performance of our Spanish operation. In Q3 21, Telefónica Spain recorded year-on-year revenue growth for the second consecutive quarter, supported by sequential improvement in net ads with customer satisfaction remaining at record levels with an MPS of 33% in September. The already low churn rate further improved year on year, proving that market rationalization is already a reality in the high-value segment. As expected, the start of the football season had a positive impact on Converge and ARPU, which improved plus 2.5% versus Q2, up to 89.6 euros. Year-on-year revenue growth was again recorded thanks to handset sales and record growth in IT. This was achieved in spite of more unfavorable comparison, intense low-end competition, and the extension of travel restrictions still impacting roaming levels. Year-on-year OETA was negatively impacted by the rise in energy costs and the extraordinary one-off effect of lower content costs in the third quarter of 2020. Excluding these factors, OETA trend would have improved sequentially in Q3, with an OETA margin higher than 39%. The development of net generation networks also advanced and we delivered on our first priority. Strong cash flow generation of 2.5 billion in the nine months with a margin of 27.2% in organic terms, which is a benchmark among incumbents in Europe. Finally, as the first visible allocation of European funds, on the 28th of October, Telefonica Spain was awarded in the 2021 call with close to 80% of the total funds devoted to extend ultra-fixed broadband in rural areas. Moving to Germany, where we have had another quarter of strong commercial traction, underpinned by a successful network marketing campaign, driving quarter-on-quarter acceleration in contract net additions and ARPU growth. The 5G network is now live across more than 100 towns and cities and is on track to reach 30% of the population by the end of this year. Looking at the financials, this commercial momentum has driven sustained improvement in revenue trends of 5.1% growth year on year, which, together with operational efficiencies, has resulted in an OFDA increase of 3.5% year-on-year in Q3. This has led to continued strong cash generation, with the OFDA minus CAPEX margin remaining broadly stable in the first nine months of the year, leading to 2.6% year-on-year growth despite accelerated CAPEX spending during the same period. Moving to slide 7 and our joint venture in the UK, Virgin Media O2, which continues to move at pace with integration, launching its first joint conversion product called Volt in October, leveraging the combined capabilities of the new company. Commercial focus has remained a top priority, with the total base growing 5% year-on-year to reach 55.3%. million accesses as of September, together with 5G now available in over 210,000 cities, and the fixed gigabit upgrade is on track to cover 100% of footprint by year-end. Looking at the financials, revenue has returned to growth in the quarter, whilst OTA growth has slowed due to the return of some sales and marketing costs, as restrictions were eased and commercial traction picked up. CAPEX grew by 9.2% year-on-year in the first nine months, driven by increased investment in future technology such as 5G and fiber. Given the trends in the first nine months of this year, GMO2 expects pro forma transaction adjusted EBITDA growth to be flat to positive. and a second half 2021 dividend of at least £300 million. Moving now to Brazil on slide 8, Vivo continues showing a strong momentum in both mobile and in fixed. In mobile, we maintained clear market leadership with a very low contract churn leading to robust year-on-year growth in our customer base. In fixed, our second-to-none fiber-to-the-home assets continued to deliver. In just the first nine months of the year, Vivo connected more customers to its fiber-to-the-home than in the whole of full year 2020. On the financial side, we posted very solid results, generating fixed revenue growth for the first time in four years and the strongest mobile service revenue growth in six years. Thanks to this positive revenue momentum, together with progressive digitalization and efficiency enhancements, the company was able to reach a 42% organic OTA margin in the first nine months of the year. And finally, we continued prioritizing our ESG commitments. We are planning to have 83 renewable energy plants functioning by the end of 2022, while on the diversity front, we launched a new internship program that 50% will be filled by black students. Moving to slide nine and the main highlights of our fastest growing unit, Telefonica Tech. Revenue growth continued to be strong, up 25% year on year in Q3, and once again, well above market growth. Over the quarter, Telefonica Tech's scale was reinforced with an annualized revenue base of around 1 billion euros following the integration of Cancom UK and Ireland, now Telefonica Tech UK and Ireland, in August. This further reinforced our position in advanced cloud and digital services in Europe and improved our revenue mix owing to the increased weight of value-added services. From a commercial perspective, sales continue to grow. In cyber and cloud, sales growth is largely driven by public administration, banking, and retail. While in IoT and big data, the growth is attributable to connectivity and connected cars, industry 4.0, and utilities. Tech services continue to support the sustained growth of group B2B revenues, which were up plus 4.8% year-on-year in Q3, delivering a differential performance in Europe. Moving to slide 10 to review our infra projects. In Q3, we continue to focus on executing the initial phases of work across our portfolio of neutral fiber-to-the-home wholesale vehicles. In Germany, UGG continued its roll-out and commercialization program, with the first customers already connected and new wholesale agreements signed with two regional ISPs. Additionally, MOUs signed with municipalities represent more than 100,000 premises. FibraZil announced the acquisition of Fibra T1 in August, improving and expanding its footprint. As a result, the company updated its target to reach over 6 million premises passed in four years, up from 5.5 million previously. In Chile, Onnet Fibra continued with an accelerated rate of deployment, with around 90,000 premises passed per month. reaching 713,000 premises passed in the first nine months of the year. And in Colombia, we expect to receive all approvals for the InfraCo by the first quarter of 2022. In parallel, we continue to analyze our portfolio to capture further growth ahead, while assessing our optionality across all asset classes including fiber towers, subsea cable, and data centers. I will now hand over to Laura for a review of our ESPAN operations and the financial position.

Thank you, Ángel. Moving to ESPAN on slide 11, we can see how our new strategy is gaining traction. We continue transforming our operation to FTTH after connecting 669,000 new accesses in the first nine months of the year. Additionally, new fiber vehicles in Chile and Colombia will further accelerate FTTH deployment. In mobile, accesses rose 9%, with all five main countries posting growth for the fourth straight quarter. This focus on high-value accesses together with the maximization of operational efficiencies from the new operating model and this decision drove an improved year-on-year trend in both service revenue and OIPDA for the four consecutive quarters. It is also worth highlighting that revenue and OIPDA posted positive growth on both reported and organic basis. Finally, we continued to lower capital employed in the region, and capex to sales was reduced to 9% in the first nine months of the year. Turning to slide 12. Net financial debt stood at €22 billion as of September, or at €25 billion post-estimated distribution of proceeds to Celsius minorities. Including post-closing events, net debt would be reduced to €25.6 billion, a reduction of €9.6 billion since December 2020, mainly due to inorganic deals such as the sale of Telsius and the BMO2 UK JB, coupled with a resilient free cash flow generation of €1.5 billion. Net debt to OIDA ratio went down to 2.49 times, 0.3 times below the fiscal year 20 ratio. We maintain a healthy liquidity cash-in of 22.6 billion euros, thanks to some liability management exercises and repayment of short and medium-term bank debt. As a result, our average debt life has increased to 13.85 years and debt maturities are covered beyond 2024. Telefonica financing activity amounts to 5.4 billion euros year-to-date. including the financing of JVs such as BMO2 and the fiber vehicles UGG and FI Brazil. We maintain an increased focus on ESG financing and continue to increase debt in Latin currencies, most recently in Uruguay. Effective cost of interest payments over the last 12 months stood at 3.27% as of September 2021. Telefonica Group with the vast majority of its debt at fixed interest rates and denominated in Euros, is in a solid position to face any future rise in interest rates in the G7 countries. I will now hand back to Ángel to recap.