Telefonica SA

Good morning and welcome to Telefónica's conference call to discuss January-September 2022 results. I am Adrián Fontunegui 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 Telefónica 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 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, Mr. Ángel Vila.

Thank you, Adrián. Good morning and welcome to Telefónica's third quarter results conference call. With me today are Laura Basolo, Eduardo Navarro, and Lutz Schuller. As usual, we will first walk you through the slides, and we'll then be happy to take any questions. We have again proven how to manage the current challenging macro situation. The relentless execution of our strategy has allowed us to report improving growth trends in euros in both revenues and ODA, and to reiterate our recently updated guidance on the dividend Our streamlined and linear operating model enabled us to generate a stable organic OEPTA margin versus Q3 2021 despite ongoing cost headwinds. At the same time, we maintained a strong balance sheet and have a strong liquidity position that covers maturities over the next three years. we reinforced our leadership in our core markets. In Spain, Mimovistar helped to improve our commercial momentum and sequential OFDA performance. In Brazil, our unrivaled operating and financial performance helped us to reinforce our leading market position. Germany posted strong operational and financial metrics, while in the UK, VM02 accelerated OFDA growth as synergies started to kick in. And, whilst running our operations, we continue to build optionality. Telefonica infravehicles have already passed 12 million premises with fibre as of September, while the growth story of Telefonica Tech continues to develop and remains a potential source of value. In Telefónica ISPAM, we again reduced capital employed and crystallized value, while Spain is set to benefit from the EU recovery funds and in-market consolidation. At the same time, we continue to expand our network leadership and to develop new opportunities for telco growth in the new Web3 environment. Moving to slide number three, we review how commercial growth flows down to free cash flow within a prudent balance sheet management. High value accesses grew strongly once again this quarter, with fiber up 17% year on year, underpinning the ultra broadband expansion to 166 million premises passed, 6% up year on year. The transformation of our business continues at pace, and we now generate more than 20% of our service revenues from broadband and services beyond connectivity. We are very excited to see the remarkable 6.5% organic growth in B2B, proving right our Telefonica Tech approach. At the same time, Organic OFDA grew 3.1% on a group level, supported by sequential improvements in all of our core markets. On a reported basis, trends accelerated in the quarter, and we now report the second consecutive quarter of revenue growth and the first quarter of underlying OFDA growth. Free cash flow improved as well throughout the year. growing 35% quarter on quarter. From a balance sheet perspective, we are better positioned to face macro and market challenges thanks to our prudent debt management and solid liquidity position. Fixed rated debt represents 74% of total debt with an average debt life of 13 years. Furthermore, we have reduced leverage during the year even after M&A activity. And finally, recent confirmation of a tax refund in Spain for an amount of 1.3 billion euros will be reflected during Q4 in our free cash flow through lower tax and interest payments and net debt reduction. Moving to slide number four for a quick review of our financial performance. Reported revenue accelerated 10.5 percentage points versus the second quarter to plus 11.2% year-on-year. Underlaying OEPA grew 8.5% year-on-year to 3.3 billion euros, once impacts from changes in the consolidation perimeter annualized. Forex continued to contribute positively, mainly due to depreciation of Brazilian Real versus the Euro. Pre-cash flow was strong in the quarter at 1.1 billion euros, leading to 2.5 billion euros in nine months or plus 68.2% year on year. Net debt stood at 28.9 billion euros of September, roughly stable versus June. But if we account for post-closing events, net debt would have been 26.7 billion euros. On slide five, we give you an overview on how we successfully manage inflation. In Q3, reported annual growth rates in revenue underlying OIPDA and free cash flow at above inflation for the average of countries where Telefonica operates. Inflation can bring an opportunity for a revenue development as we exert pricing power in most markets, which comes in addition to our strong B2B and wholesale position. However, inflation also poses a challenge to costs, and that is why we continue to work on efficiencies, cost savings, and simplification initiatives. Energy costs, for example, represent 2% of our revenue, but more than 60% of our 2023 consumption is fetched through long-term PPAs, and we have an ambition to continue increasing the coverage. We continue as well working on initiatives to reduce energy consumption. Fiber and 5G are 85% and 90% more efficient than copper in terms of energy consumption. and deployment brings forward legacy shutdowns, such as the copper decommissioning project in Spain, which we aim to complete in 2024. As for labor costs, they account for around 13% of group revenue below our peers, and showing the steps taken to manage this OPEX item. Our CAPEX peak is behind us, with an outlook for the year of up to 15% of sales whilst active tax management at group level provides an additional buffer supporting free cash flow. Moving to slide 6, let me confirm our full year guidance and dividend. We believe these results demonstrate our ability to cope with an overall tougher context than originally anticipated. Nine months results are aligned with our full year target for revenue of high end of low single digit growth and OEPDA of mid to high end of low single digit growth. While capex to sales at 13.8% stands well within the up to 15% target. On short holder remuneration, and as previously stated, We will be paying the first tranche of the 2022 dividend of €0.15 per share in cash in December 2022 and the second tranche of €0.15 per share in June 2023. In addition, we will propose to the AGM the adoption of the corresponding corporate resolutions for the cancellation of 0.4% of shares held as Treasury stock as of 30 June 2022. Moving now to slide 7, we report on our progress across the pillars of ESG. On the environmental side, we continue to implement a renewable energy plan, thereby reducing emissions. Chile has become our sixth market to become 100% renewable, joining Brazil, Germany, Peru, Spain, and the UK, with the rest of ISPAM ramping up to 50% renewables by the end of the year. With this progress, we are fully committed to reaching our target of 100% renewables across the group by 2030. In parallel, we were the first telco to publish a detailed life cycle assessment report, which demonstrates our alignment with the EU taxonomy. Within the social dimension, we continued to bridge the digital divide, connecting more people and more places. Through our infra unit, we expanded our fiber core portfolio with deals in Spain and the UK, bringing digitalization to the underserved. We also progressed on diversity and inclusion. Our comprehensive equality policy was approved by the board. Establishing minimum group-wide standards to ensure we achieve our gender equality objectives, such as pay gap and equal representation. In governance, we remain committed to the highest standard of business ethics. As of the end of September, 74% of employees had already taken our Responsible Business Practices course in the three months since its launch. And now let me start with the review for businesses on slide number eight. Telefónica Spain's commercial activity continued to improve in Q3 22 across all KPIs. In a more rational market, fixed broadband and mobile contract grew sequentially. The convergent MiMovistar portfolio gained traction and now exceeds 1 million customers. ARPU grew year on year for the third consecutive quarter and churn improved again to 1.2%. In a complex environment, our better levels of output churn and MPS confirm our premium market position. The better quality experience perceived by our customers that enjoy a compelling and complete portfolio with a much value is the main driver behind this success. Revenue grew year-on-year for the sixth straight quarter, although growth decelerated due to a tougher year-on-year comparison for handset revenue and lower wholesale TV revenue as the new football model kicked in. Excluding this latter impact, service revenue trend showed another sequential improvement. OFDA year-on-year improved by 0.6 percentage points sequentially to minus 2.8 year-on-year in Q3-22 on a lower energy drag, content cost deflation, and ongoing efficiencies from the redundancy plan and network transformation. Moving to Germany on slide 9, which has delivered another quarter of strong operational and financial trends. The company's mobile base continued to expand due to core business momentum and strong traction of the O2 growth tariff. Revenue grew by 6% year-on-year in the third quarter, driven by sustained mobile revenue momentum of plus 6.6% year-on-year and a record third quarter for handset sales, which grew by 18.9% year-on-year. OEPA grew 4.2% year-on-year with continued on-brand momentum, driving improved operational leverage mainly in mobile and further efficiency gains as well as some roaming support. In line with plans in its final year, Telefonica Deutschland continued to execute its Investment for Growth program with Q3 representing the peak investment in 2022, so that 5G coverage now stands at 75%. We now move on to slide 10 and our joint venture in the UK, Virgin Media 2, which has made strong strategic and operational progress supporting delivery of synergies. Customer growth trends improved in fixed mobile and converged products, as the company passed a significant milestone as it connected its one millionth vault customer in September, highlighting its continued progress in conversions. Network investment has continued, so that the fixed network now reaches 16 million premises and is on track to deliver over half a million new network premises in 2022 with 5G connectivity now available in over 800 towns and cities. In the third quarter, OEPA growth accelerated to plus 8.1% year-on-year, which includes a 3.3 percentage point impact of a non-cash, non-recurrent effect, and was also supported by the delivery of synergies and continued cost efficiencies. Moving to Brazil on slide 11, VIVO released an outstanding set of results, growing double digit in both accesses and main financial KPIs. Contract accesses grew 18% year-on-year after capturing more than 70% of new connections in the market during July and August. Fiber-to-home connections accelerated in Q3 and were 9% up versus June thanks to the progressive fiber deployment, which has already reached 22 million premises past, an increase of almost 4 million in just Despite inflationary pressure, which has started to ease in the country, year-on-year organic OEFDA growth accelerated to 12.3%, expanding the margin to a remarkable 43%. OEFDA minus CAPEX increased by 4.4% in the first nine months of the year, despite the acceleration of our own fiber deployment. And finally, Vivo continues to put ESG at the core, being in the top 100 companies in the Refinitiv D&I Index 2022. Moving to the next slide, Telefonica Tech consolidated its position as a leading tech solutions provider, with solid year-on-year revenue growth of 1%. plus 70% in Q3 22 and 9 months 22, or 30% year-on-year growth in constant perimeter. Both businesses grew more than 70% in the 9 months of 22. Main drivers of this consistent market outperformance are T-TECH's profile and its differentiated go-to-market approach. Around 5,000 800 professionals, mostly located in Europe with high value skills in professional and managed services, strong credentials, higher geographic diversity, and in the last 12 months, 1.4 billion euros of revenue. And a differential customer journey based on the migration from traditional communications and IT services to next generation IT solutions. This allows Telefonica Tech to be the trusted partner to accompany the large base of B2B Telefonica customers in their path to full business digitization and optimization. Commercial activity remains robust in both cyber and cloud and IoT and big data, with bookings growing by 60% year on year, which will support a sustainable revenue flow going forward. Finally, in Q3, we strengthened our partner ecosystem with Aruba, McAfee, and Zeteliot, among others, and reinforced cloud capabilities. For example, we achieved specialization distinction from AWS and Netskope for our technical expertise and exceptional scale of services. Turning to slide 13, We offer a unique portfolio of best-in-class fiber codes, both in Europe and in LATAM, with an aggregated target of more than 25 million premises to be passed by 2026, from the current 12 million deployed to September 22. In July, we announced the creation of Bluevia in Spain, and also the fiber JV in the UK with Infravia Capital Partners and Liberty Global. In Germany, UGG signed a MoU to deploy 550,000 premises and one additional wholesale agreement with a regional ISP. Five Brazil enhanced its commercial position, announcing wholesale agreements with Sky Brazil and Vero. OnNet Fibra Chile reached its deployment target of 3.5 million premises passed by 2022 ahead of plan and strengthened its market leadership by announcing the purchase of Entel's fiber network. With this transaction, Entel will become a wholesale tenant. And in Colombia, OnNet Fibra is not only the largest neutral fiber to the home wholesale provider in the country, but also the market leader. On another front, during the first nine months of the year, Telseus subsea cable maintained its strong commercial momentum which, together with good cost management, fueled year-on-year OEPA growth of 13.6% organically and 26.3% on a reported basis. Bandwidth provision for capacity services grew by 46% year-on-year in the first nine months of the year, and the value of contracts signed with third parties increased by 17% year-on-year during the same period as a result of incremental demand from hyperscalers and relevant carriers. I now give the floor to Laura, who will review eSPAN's operations and the group financial results.

Thank you, Ángel. Moving to next slide. On eSPAN, the quality of accesses continue to improve thanks to the strong momentum in contract and broadband. FTTH connections now account for 81% of total fixed broadband accesses, up 10% year-on-year, due to the successful execution of the alternative fiber deployment model. This deployment allows us to capture the growing demand for fiber and at the same time to reduce exposure to the region. Revenue and OIPDA continue to grow year-on-year organically, plus 3.8%, and plus 1.2% respectively, thanks to access, growth, and the progressive generation of synergies. Operational efficiencies offset inflation and commercial cost pressure. OIBDA minus capex grew a remarkable plus 15.1% year-on-year in the first nine months of the year. Finally, Telefonica is acknowledged as the telco with the best corporate reputation in Latin by Merco. Turning to slide 15. Following the intense long-term financial activity over the last years, we face a smooth maturity profile. We maintain a solid liquidity position of 22.1 billion euros that compares with a 23 to 26 gross debt maturities average of 2.9 billion euros, 56% lower than the four-year average we had at September 2016. This light maturity profile, together with a strong liquidity position, especially after cashing in some inorganic deals, allows us to cover debt maturities over the next three years. As of September, we have contained interest payment costs amounting to 3.94% versus 3.85% in December. Our debt is 74% linked to fixed rates, mailing euros, which is a solid position to face rising interest rates in the coming years. Net financial debt stands at 28.9 billion euros as of September. Considering post-closing events, it will decline to 26.7 billion euros, deleveraging to 2.52 times end-of-period net debt to IFTAL. despite M&A activity in 2022. We also strengthened our balance sheet, with shareholders' equity increasing 15.8% versus December 2021, to 25.7 billion euros at the end of September. I will now hand back to Ángel, who will wrap up. Thank you, Laura.