Telefonica SA

Good morning. Thank you for standing by and welcome to Telefonica's January-December 2021 results conference call. This is Adrián Fontenay from Investor Relations. Before proceeding, let me mention 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 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 forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties 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 markets 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 chairman and chief executive officer, Mr. José María Álvarez-Pallete.

Thank you, Adrián. Good morning and welcome to Telefónica's fourth quarter results conference call. With me today are Ángel Vila, Laura Basolo, and Eduardo Navarro. We will first take you through the slides, and then we'll be happy to take any questions you may have. I would like to start by highlighting the strategic execution during 2021, which is delivering positive results. We remain focused on our core markets. We completed the biggest transaction in Telefónica's history, the JV with Virgin Media in the UK, whilst the acquisition of Oi's mobile asset in Brazil got final regulatory approval and is expected to close in the coming months. We secure key 5G spectrum in Spain, Brazil, and the UK, accelerated fiber deployments, and brought our German network quality to the highest market standards. We also continued building a digital consumer ecosystem in Spain and Brazil in areas such as connectivity, entertainment, home wellness, and finance. We further reduce our exposure to ISPAN through portfolio simplification and data allocation. We are implementing a new operational model which, together with CapEx optimization, allow us to reduce capital employed. At the same time, we now have a higher share of debt in local currencies, accounting for 28% of the group's total. Telefonica Tech again outperformed the market, increasing revenues in 2021 by over 30% year-on-year to almost 1 billion euros. This was achieved while strengthening capabilities through acquisitions and best-in-class partnerships. In Telefonica Infra, ongoing value creation and crystallization continues, along with the creation of growth opportunities through fiber vehicles. This strategy was proven by the tower sales to American towers at a record multiple. Finally, our streamlined and digital operating model is delivering enhanced efficiencies. with 80% of our processes already digitized, and implementing technology solutions such as Open RAN, green energy, fiber, and 5G. We are focused on attracting and retaining the best talent, offering agile and flexible working, and striving to be at the forefront of innovation. Slide number two shows the solid performance across our key metrics in 2021. Our connectivity leadership was reinforced, with group accesses growing by 3% to 369 million, and with strong traction in strategic areas that are key to economic growth, such as ultra-broadband, fiber, and mobile contract. We remain Western world leaders in ultra-broadband, with total ultra-broadband premises passed reaching 159 million as of 31st December. Second, In 2021, sustainable growth was restored with revenues growing organically 2% year-on-year and OVDA growing 1.4%. Third, free cash flow generation remained robust, with free cash flow excluding a spectrum reaching almost 3.8 billion euros or 0.66 euros per share, well above the dividend per share of 0.30 euros. Our focus on smart capital allocation is reflected in the 14.2% CAPEX to sales ratio, comfortably below our guidance. Fourth, net financial debt has decreased by a remarkable 26.2 billion euros since the peak in June 2016 to 26 billion euros at year end, driven by completion of M&A deals and solid and steady free cash flow generation over the last years. it is worth highlighting the group shareholders' equity doubled versus 2020 to 22 billion euros, mainly due to capital gains booked along the year. Moving to slide three, our focus on delivering sustainable growth is evident in our fourth quarter performance. Starting with the financial, we posted simultaneous organic growth and OED growth for the third quarter in a row, At the top line, all business units are growing, and OEDA has proven resilient, with an improving year-on-year trend in Spain. FX had a declining and minor impact in the quarter, and spot rates implied further tailwinds to come. The significant reduction in net debt in 2021 was achieved mainly through capital gains from M&A transactions, totally €11 billion. In addition, free cash flow ex-spectrum cost improved sequentially in the last quarter to almost 3.8 billion euros in 2021. We remain a customer-centered group. Commercial momentum improved in the quarter, driven by products and services with superior connectivity, outstanding digital experiences, and highly efficient networks. We also remain efficient in capital allocation, with CapEx allocated to next-generation networks being approximately 45%, and committed to promoting inclusive connectivity. And we continue to deliver on ESG, which is a core part of our strategy, including how we contribute to the economy in terms of GDP, employment, and fiscal contribution. Moving to slide four for our financial summary. Our full year reported figures were impacted by capital gains, changing the perimeter of consolidation and in the last quarter by restructuring provision of 1.4 billion euros in OEDA, mainly in Spain, and an impairment in Peru. Revenues reached 9.7 billion euros in the fourth quarter, growing 3.1% organically, while OEDA increased by 0.4%, underlying OEDA total 3.2 billion euros, while net income for the full year was over 8.1 billion euros, despite restructuring charges and the impairment mentioned earlier. Net financial debt for the year was 26 billion euros, 26% lower than the previous year, and free cash flow reached almost 2.7 billion euros. Slide number five highlights that we successfully achieved our recently upgraded 2021 guidance across revenues, OEDA, and capex to sales ratio. We are also confirming today the payment of the second tranche of the 2021 dividend of 0.15 euros per share which will be paid in June through a voluntary script dividend. The first tranche, 0.15 euros per share, was paid last December, with 65% of shareholders opting to receive shares. In addition, we will propose to the shareholders meeting the adoption of the corresponding corporate resolution for the cancellation of 2.41% of shares held as treasury stock as of 31st December 2021. At Telefonica, we are committed to sustainability, and we align and measure our progress across our ESG pillars against the United Nations Sustainable Development Goals. We are reducing our environmental impact by using cleaner energy and shifting to more efficient technologies. We are taking our customers on a journey towards decarbonization by providing them with products and services such as EcoRating and EcoSmart, that enable them to monitor and reduce their environmental impact. On the social side, we are committed to connecting the unconnected and bringing high-speed internet to as many people as possible. For example, we have now connected 2.4 million people in remote communities with mobile broadband in Peru. We also continue to innovate internally through our new innovation and talent hub and externally through new programs to scale up startups. Furthermore, we are ensuring that our workplace are more inclusive. We continue to make progress on governance. Our board of directors has been restructured, and we now have a leaner and more diverse board of directors with 15 board members, nine of which are independent, and with female representing 33%. Finally, I would like to highlight that our progress has been recognized externally. We have been included on the prestigious CDP-A list for the eighth consecutive year for our leadership in climate action, and we have been ranked first worldwide in the World Benchmark Alliance Digital Inclusion Benchmark. Telefonica has set robust targets to underpin our ESG commitments, and we have summarized the main ones on this slide. We will reduce our carbon footprint by becoming net zero in scope one and two emissions in our main markets by 2025, and across our whole footprint and our value chain by 2040. By 2030, we'll be using 100% renewable energy in every market we operate. We have made tangible commitments to become a zero waste company by 2030. We plan to reuse 90% of customer premise equipment by 2024, recycle 98% of waste, and introduce eco-design criteria in all our branded equipment by 2025. We have also set objectives to monitor how we are contributing to decarbonization of other sectors by enabling our customers to avoid emissions via digital services and choose sustainable products and services. We will bridge the digital divide by promoting digital inclusion with 90% to 97% connectivity in rural areas in the main markets by 2024, and we have committed to train at least 100,000 people every year in new digital skills. We will promote gender equality by eliminating the pay gap by 2050 and achieving parity at the highest level of the business by 2030. Finally, we align our remuneration to ESG metrics, accounting for 20% of all employees' annual variable pay and an additional 10% of senior executives' long-term incentives. I will now hand over to Angel to go through a detailed review of our business performance.

Thank you, José María. Moving to Spain on slide 8, commercial activity improved in Q4, supported by a year-on-year improvement in churn to its lowest level since the second quarter of 2017, and record level of customer satisfaction. Our convergent ARPU improved sequentially to 90.4 euros, leading to an ARPU in the second half of the year 1.4 euros higher than that of the first half. We further strengthened our market positioning during the quarter. We acquired Lariga Content for the coming seasons at a lower cost and launched Fusion Digital Pymes, a digitalization solution that enabled capitalizing on the European recovery funds in the SME segment of the B2B sector. On financials, Q4 revenue growth improved year-on-year to plus 0.5%. An OEPDA annual decline was reduced to minus 3.4. On captured efficiencies, mitigating higher energy costs and higher costs from strong sales in IT and handsets. Worth to note is the voluntary redundancy plan, implying a provision of 1.4 billion euros in Q4 personal expenses, with a positive impact on cash flow from 2022 and an annual run rate of savings of around 200 million euros from 2023 onwards. Once again, cash conversion stands out, with an organic OTA minus capex margin of 27% in 2021. Finally, we are announcing today that Telefonica Spain is ready to launch, in conjunction with Telefonica Infra, the process to create a Fiber Co. focused on lower density areas, targeting more than 5 million premises past, and open a substantial minority stake to potential investors. Moving to Germany, we continue to have strong commercial momentum. underpinned by the O2-free portfolio and network parity resulting in over half a million contract net additions and ARPU growth in the quarter. The 3G switch-off was completed in 2021 and the energy efficiency ratio of the network improved by 78% compared to 2015. The 5G network covered 30% of the German population by the end of the year. Looking at the financials, this commercial momentum has driven continued top-line growth of 3.1% year-on-year, with OEPDA expanding by 4% year-on-year on 2021. The company's three-year investment for growth program passed its capex peak in fiscal year 21, resulting in an OEPDA minus capex margin of 14.7% in 2021. Moving to Virgin Media 2, which completed its gigabit rollout on time across its 15.6 million premises passed during Q4, and is now the biggest contributor to the government's broadband target. 5G is also now available in more than 300 towns and cities, and remains on track for 50% population coverage in 2023. As part of VMs O2, As part of BMSO2's ambition to roll out fibre further and faster across the UK, Liberty Global and ourselves have initiated discussions with a number of potential financial partners regarding the creation of a network-built joint venture. The focus of the entity will be on building a full fibre network of up to 7 million premises in new greenfield areas by the end of 2027. Commercial momentum remains strong, with the total base growing 5% year-on-year to reach 56 million at the end of 2021, driven by fixed broadband accesses growing by 3% year-on-year to 5.6 million, and the mobile contract base growing by 2% year-on-year to 15.9 million. Looking at the financials, revenue was broadly stable in the fourth quarter, while SOIPDA growth has slowed due to the return of some sales and marketing costs, as well as increased investment in growth drivers. In 2022, VMO2 expects to deliver mid-single-digit growth in pro forma transaction-adjusted EBITDA before cost to capture, supported by improved top-line growth and the delivery of synergies so that the cash distribution to shareholders is anticipated to be £1.6 billion. Moving to Brazil on slide 11, Vivo finished the year with outstanding commercial and financial results. In mobile, contract accesses grew 8% year-on-year, improving the customer mix and lifetime value. In fixed, fiber to the home reached 4.6 million connections, an increase of 36% year-on-year as we expanded our fiber coverage in the most valuable areas across the country, through organic deployment and via FI Brazil. Looking at the financials, we posted simultaneous year-on-year growth in revenues and OTA, with fixed revenues growing for the second consecutive quarter and efficiencies offsetting high levels of inflation. On ESG, we continue to make good progress this quarter, demonstrated by the inauguration of our first biogas facility and being ranked as the top telco in the Latam Dow Jones Sustainability Index. Finally, after receiving the final approvals, the acquisition of OE's mobile asset is almost complete and will allow us to further improve the quality of our mobile network and reinforce Vivo's market-leading position. Moving to slide 12, Telefonica Tech, our sustainable, focused, fast-growing technology company, delivered superior revenue growth throughout 2021. Revenue almost reached 1 billion euros in 2021 as growth accelerated to plus 50% year-on-year in Q4, driven by improving organic trends and further enhanced by M&A operations executed along 2021. Telefonica Tech, as a leading integrator of technology with strong operational capabilities, is already benefiting from the recovery of economic activity and the digitization projects post-COVID-19. proven on the better revenue performance in the second half of 2021. Telefonica Tech has delivered on its priorities, outperformed the market, enhanced its capabilities and scale, and improved its growth profile towards higher value services. Looking forward, a solid increase in sales well above revenue growth makes us predict a strong performance for 2022. Moving now to slide 13, Throughout 2021, Telefónica continued to focus on pursuing value creation opportunities and enlarging its infra portfolio. In Germany, UGG launched operations in six federal states and in Q4 accelerated the MOU signed with municipalities representing more than 170,000 premises passed. PHI Brazil is on track to reach its deployment target with 2 million premises passed in 2021. On net fibra, Chile continued its accelerated rate of deployment, reaching 1 million additional premises passed in 2021. And in Colombia, Infracore received all necessary regulatory approvals and the transaction closed in January 2022. We continue to explore alternatives to crystallize the value of our infra assets and look for growth opportunities while assessing our optionality across all asset classes. This was demonstrated by the acquisition, together with Ponte Gadea, of KKR's stake in Telsius Cable at the beginning of the month, reinforcing our ownership in an extremely relevant asset. And, as I previously stated, we have initiated processes for the establishment of FiberCo vehicles in the UK and Spain. I will now hand over to Laura to take you through our ISPAM operations and financial position.