Telefonica SA

Good morning, thank you for standing by and welcome to Telefónica's January-December 2022 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. If you'd like to ask a question please press star followed by 1 and 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 and 1 again. As a reminder today's conference is being recorded. I would now like to turn the call over to Mr. Adrian Sunfunegui, Global Director of Investor Relations. Please go ahead sir.

Good morning and welcome to Telefónica's conference call to discuss January-December 2022 results. I'm Adrian Sunfunegui 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 un-audited. This conference call and webcast including the Q&A session may contain forward-looking statements and information relating to Telefónica Group. These statements may include financial or operating forecast and estimates or statements regarding plans, objectives and expectations regarding the different matters. All forward-looking statements involve risks and uncertainties that could cause the fiscal developments, 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 Chairman and Chief Executive Officer Mr. José María Álvarez Payete.

Thank you Adrian. Good morning and welcome to Telefónica's fourth quarter and annual results conference call. With me today are Ángel Vila, Laura Basolo, Eduardo Navarro and Lúz Schüller. As usual we will first talk you through the slides and will then be happy to take any questions. I would like to start looking at the strategic plan we shared with you back in November 2019. We then said we were to focus on our key markets where we tended to be more relevant and aim for sustainable growth. We also wanted to reduce capital employed exposure to ESPAM whilst addressing efficiency, to promote growth opportunities through the launch of Telefónica Tech and Telefónica infra and at the same time leverage value of our infrastructures. All under a new operating model in which BEST and ETA's networks anchored everything. We could not anticipate the challenges we have faced since then but we overcame them. Through execution we have addressed and adapted to difficulties proven our resilience and managed to deliver under difficult circumstances. Let me run you through this progress on the next few slides. As you can see on slide three we delivered on our commitments and have met or exceeded our guidance for the past six years. Through consistent financial performance and steady execution quarter after quarter Telefónica returned back to growth. We are proactively addressing the headwinds the business faces. We are mitigating inflationary pressures through price actions in all markets based on the pricing power we built. We are constantly optimizing our cost structure and have a very focused investment strategy. This shows the resilience of our business. We are shaping the regulatory debate to bring rationality back into the sector. Recent spectrum options show a more rational approach from us industry players and now jointly pursue a more reasonable regulatory environment. In this respect the fair share consultation process just to be opened by the European Commission hints a potential change in the playing field. And finally we continue capitalizing on the opportunities the business has. We completed in market consolidation in the UK and Brazil. We are actively embracing the industry transformation by sharing the GSMA and by joining forces with other operations to develop network as a service whilst continuing to build on our leading position in ESG. Moving to next slide we continue building customer focused networks of the future. We are building a strong network across our markets. We have already launched 5G in our core markets and we are leaders in fiber to the home with 64.5 million premises passed. We are pioneers in building stronger networks via alternative deployment models. And we are also pioneers in switching off legacy networks. We will be the first tech world wide to fully shut down a copper network over casing Spain in 2024. We are also shutting down our legacy mobile networks and have so far turned off 3G networks in Germany and expect to do it in 2025 in Spain. This network modernization improved the rate of digitized processes. 14 percentage points in December 2019 while traffic per customer multiplied by two times in fixed broadband and mobile broadband. At the same time we continue to be pioneers in the cloud paradigm. Moving to the next slide. This stronger and transformed Telefonica lies on a strong financial foundation as shown on slide five. A growing base of high value and loyal customers is the driver for revenue growth. Revenue that along with our digital transformation have evolved significantly over the last few years. The weight of revenue coming from broadband and services beyond connectivity over total service revenue increased to 73 percent versus 64 in 2019 while oil and access weight declined to 27 percent versus 34 percent in 2019. Organic revenue growth that is profitable and sustainable. We are already above pre-pandemic growth rates. Throughout the same period our capital intensity has come down and will come down further in the future which will continue fueling free cash flow growth. We continue optimizing capital allocation. Between 2019 and 2022 we generated cumulative free cash flow of 18 billion euros which allow us to reduce debt over this period by 11 billion euros and to improve shareholders equity as much as 46 percent higher than in 2019. Our focused strategy drives performance and better outcomes and ultimately allow us to remunerate our shareholders to whom we have devoted more than 9 billion euros since 2019. Moving to slide six. You can see that the proof points achieved in 2022 are the result of our successfully executed strategy. During the year revenue, OFDA and OFDA minus capex organic growth has steadily progressed which allow us to fulfill our updated guidance despite a challenging macro environment. Cost containment and cost efficiencies were key to offset inflationary headwinds and to achieve a stable organic margin year on year. Prudent capital allocation has been crucial supporting our robust free cash flow, a well covered dividend and a high liquidity cushion. Across our four core markets we strengthen our competitive position. Spain has posted top line growth for seven consecutive quarters. In Brazil we have reinforced our market leadership after integrating the OEI mobile base and achieved double digit revenue and OFDA growth. In Germany record commercial traction supported by state of the art network translated into healthy revenue and OFDA growth. Whilst in the UK we made good operational progress and synergy realization ensure sound profitability. Looking ahead, we remain excited about the opportunities. At Telefonica Tech we continue to build new capabilities that will support the sustainability of growth. At Telefonica Infra we continue to execute on the fiber rollouts building optionality for the future. In Telefonica Hispan the sustainable profitable growth increases optionality as well. B2B will in turn benefit from a digitalization boost. Lastly, we have an outstanding sustainability record and contribute more than 95 billion euros of positive impact towards the SDGs annually. Moving to slide seven. Revenue grew 4% year on year in organic terms with growth in all business lines supported by service revenue and B2B growth. Commercial momentum improved for high value accesses through a right commercial approach and active term management. This coupled with a continuous cost focus approach helped OFDA to grow 3% year on year proving our resilience in a challenging year. 2022 is the first year with reported year on year revenue growth since 2015. Revenue grew .8% to almost 40 billion euros while underlying OEDA reached almost 13 billion euros and was broadly stable. Operating performance translated into sound free cash flow growth that reached 4.6 billion euros for the year or 0.8 euro free cash flow per share more than comfortably exceeding the 2022 dividend. We maintain as well our prudent debt management during these complex times. In 2022 we have reduced the leverage ratio to 2.54 times. We have covered maturities over the next three years with more than 80% of total debt fixed and an average debt life of 17.1 years with the average cost of debt being down year on year at .76% despite rising rates. Slide 8 shows we deliver upon our full year updated guidance of high end of low single-digit organic growth in revenue, mid to high end of low single-digit organic growth in OEDA and up to 15% in capex to sales ratio. We are also confirming today the final dividend for 2022 of 0.3 euro per share in cash. The first tranche of 0.15 euro per share was paid in December and the second tranche 0.15 euro per share will be paid next June. Again this dividend is more than covered with a strong free cash flow per share which stood at 0.8 euro in 2022. Moving to slide 9 we review our progress on ESG priorities. We have a clear action plan on renewables, emissions and energy efficiency to become net zero by 2040. We have reduced energy consumption by .2% since 2015 despite traffic on our network growing 7.4 times and we are well on track to achieve our 100% renewable electricity target by 2030 with six markets already across the line. On the social pillar we continue to expand coverage to underserved communities and ensure affordable connectivity. Within our progress on diversity and inclusion we have increased the proportion of women directors in the group by more than 40% over the last five years and brought the adjusted pay gap down to .7% in 2022. Looking ahead we have committed to deepening our talent pool by doubling the number of employees with disabilities. Finally we remain committed to best practice in corporate governance, ethics and compliance and across our value chain. We are proud to be the largest issuer of sustainable financing in the sector reflected the market confidence in our ESG performance. And we are gratified to have received external validation and the highest recognition from some of the most prestigious rankings such as the Carbon Disclosure Project, World Benchmarking Alliance and Ranking Digital Rights. Across the most prominent ESG, Analyst Telefonica is federally rated as one of the top performing telcos in ESG. I will now hand over to Ángel to give you an overview of the progress across the operating businesses.

Thank you Josemaria. Moving to slide 10 for our financial summary during the fourth quarter. Growth sequentially accelerated year on year in organic terms to plus .9% in revenue, plus .5% in OEPA and plus .7% in OEPA minus CAPEX. This was well supported by accelerating service revenue and B2B growth in Q4 to .1% and .9% year on year respectively including service revenue growth in Spain. On a reported basis, this has been the third consecutive quarter of revenue growth plus .4% year on year and the second one in underlying OEPA plus 6% year on year. Effects continue to be a tailwind in the quarter adding 0.5 and 0.2 billion euro to revenue and OEPA year on year. Fourth quarter free cash flow was the strongest in the year, surpassing the 2 billion euro mark and growing plus .7% year on year. This figure reflected the tax refund of 1.3 billion euro but also dividends from BMO2 and solid operating cash flow. Debt declined 2 billion euro versus September mainly due to the tax refund just mentioned and the sale of 45% stake in Bluevia. Finally, financing on ESG continued with the issuances of last November and last January of up to 1.75 billion euro. On slide 11, we detail how we are structurally well positioned to offset inflationary pressures. We have been operating in a high inflationary countries for decades and know how to manage these environments. Despite the high inflation we are currently experiencing, we are growing in reported revenue in underlying OEPA and reported free cash flow as mentioned. This is the result of successfully managing the following items. First, our top line through pricing power and inflation pass-throughs, along with our strong position in wholesale and B2B. Improving customer metrics like MPS and churn are key in this respect. Secondly, our OPEC with lower weight of personal expenses over revenue versus peers, significant long-term hedging on energy, positive environmental impact from 5G and 5G and lower energy consumption puts us already in a comfortable position. Overall, we continue to generate further efficiencies through simplification and digitalization. And third, on our CAPEX, as we are more advanced versus peers in terms of fiber to the home deployment and new partner models, along with legacy switch-off allows us to be more flexible. And now let me start with the review of our businesses on slide 12. Before reviewing the quarterly performance, let me take a step back and give an overview of our Spanish operation along the last two years. In a complex environment and whilst taking action to cool down the competitive environment, Telefónica Spain managed not only to defend but reinforce its leading position. Some claimed our ARPU was difficult to be sustained. Through our differential value proposal, increased fiber connections, premium customer care along with a rational pricing strategy, we have been able to improve MPS and churn and maintain our ARPU. Whilst stabilizing our conversion and contract customer base over this period. All widening our competitive advantage versus competition. Revenue returned to growth, not only fueled by handset sales but also by stabilizing service revenues. Progress in both B2B and B2C allowed retail revenue to show a recovery path and deliver a plus .9% -on-year growth in the fourth quarter of 2022 for the first time since 2019. At the same time, OIDA trend improved on revenue flow and savings from cost efficiency programs, which helped to offset inflationary headwinds. Finally, committed to our network excellence strategy, we continue to enlarge our fiber and 5G coverage to build future growth while maintaining a benchmark capex intensity to preserve our strong cash generation. Moving to slide 13, we can see that throughout 2022, commercial performance in Spain has improved across all access segments. Driven by our strategy to provide our customers enhanced value and flexibility under the new conversion portfolio of Mimobi staff. Despite the reduction of promotional activity to almost none, Telefónica Spain's commercial activity continued to improve in the quarter across all KPIs. Fixed broadband and post-pay accesses continued to grow sequentially. MPS increased significantly by 7 percentage points -on-year to 42. In conversions, Fuli Herarpu grew .3% -on-year and CERN achieved its best level since the first quarter of 2018 at 1%. Revenue grew -on-year for the seventh quarter in a row, despite lower wholesale TV revenue due to reduced direct ownership of football content. Service revenue grew -on-year in the fourth quarter by plus .6% for the first time since the outbreak of the pandemic. This turnaround, which we expect to maintain in the coming quarters, was underpinned by better trading, a strong performance in B2B, mobile and broadband wholesale revenue. OEVDA trend improved by 0.7 percentage points sequentially to minus .1% -on-year in the fourth quarter on a lower energy drag, La Liga cost deflation and ongoing cost efficiencies, while OEVDA minus capex margin remained at benchmark levels. Following a 6.8 average increase in tariffs since mid-January, we faced 2023 with optimism, hoping to bring the best from our strong position and tailwinds ahead. Moving now to Germany on slide 14, it again delivered a quarter of robust commercial traction, leading to a consistent financial momentum across the year. The company successfully completed its three-year investment for growth program within the planned capex envelope, achieving more than 80% 5G population coverage at the end of 2022, aiming for around 19% coverage by year-end 2023 and one on track to offer nationwide 5G coverage by no later than year-end 2025. Revenue and OEVDA growth accelerated to more than 6% -on-year in Q4-22, with continued on-brand momentum driving improved operational leverage, while handset sales had a record year of plus .9% -on-year growth in fiscal year 22. OEVDA benefited from further efficiency gains throughout the year, offsetting cost headwinds. Furthermore, Telefonica Deutschland is pursuing a -for-more pricing strategy from 2023 across brands and portfolios. It is backed by its widely acknowledged network, products, and services quality and extended ESG leadership. We now move on to slide 15, to the UK and our joint venture Virgemedia O2, which improved growth and made strong operational progress. The company expanded the UK's largest gigabit network, which now covers a total of 16.1 million premises, passing more than half a million new premises in 2022, while progressing in its fibre upgrade activity and making 5G services available in over 1,600 towns and cities. In the fourth quarter, VMO2 returned to revenue growth, with accelerating OEVDA trends to plus .9% -on-year, underpinned by the realization of synergies and cost efficiencies. For the full year 2022, the revenue base was broadly stable, and OEVDA grew by .3% -on-year. Moving to Brazil, on slide 16, Vivo ended the year with very good commercial and financial KPI momentum. Commercially, Telefónica Brasil strengthened its leadership in mobile, mainly in contract, and increased its market share by 6 percentage points in the last 12 months to 43.5%. In fixed, Vivo accelerated -the-home deployment through different network deployment models and already reached 23 million premises passed, which makes us the leader in fibre in Latin America. On financials, revenue grew plus .1% -on-year in the fourth quarter of 2022, well above inflation for the second quarter in a row. OEVDA margin remained comfortably above 40% once again, despite the higher weight of low margin revenues and inflationary pressures. OEVDA minus capex grew .1% compared with 2021, despite a high capex spend during 2022. In this year, 2023, capex is expected to come down to below 9 billion reais. Moving to the next slide to review the performance of Telefónica Tech. Telefónica Tech delivered a strong -on-year revenue growth of plus 57% in 2022 to close to 1.5 billion euros. 27% annual growth in constant perimeter, outperforming its market once again. A strong product portfolio, value-accretive M&A and increased geographic diversity drive this consistent outperformance. Telefónica Tech has become a next-generation tech provider with a unique profile differentiated by, first, having 6,000 professionals, 80% of them located in Europe, highly skilled in professional and managed services. Second, by offering a differentiated customer journey based on quality and a wide range of solutions in cloud, cyber security, IoT and big data, easily integrable with our -in-class partner services, and backed by our strong security and IoT platforms, which offer a trustful path to business digitalization. And third, by having an EcoSmart portfolio that helps our customers to fulfill their sustainability targets. Commercial activity remains healthy in both cyber and cloud and IoT and big data, with bookings growing by 50% -on-year and supporting a sustainable revenue flow going forward. Turning to slide 18, Telefónica Infra continued developing its leading portfolio of InfraCore, passing 13 million premises as of December 22. In Spain, Blubia launched operations in December with an initial footprint of 3.9 million -the-home premises passed. UGEG in Germany has signed MOUs to deploy over 720,000 premises. Next fiber in the UK, transaction closed in mid-December, is already in operation. Fibrazil accelerated its rollout to 3.3 million premises passed, having added 1.3 million in 2022. And due to their accelerated rates of deployment, OnNetFibra Chile and OnNetFibra Colombia have both become market leaders in their respective countries, with 3.7 million and 2.4 million premises passed respectively. Value creation-wise, as shown by recently closed transactions, show very attractive valuations for our infrastructure assets. Blubia, where Telefónica retains a 55% stake, was valued at 27 times OEPDA. In addition, Telcios maintained its strong commercial momentum, which together with good cost management has fueled a -on-year OEPDA growth of .2% organically and .3% on a reported basis to €218 million in 2022, reaching a 52% growth. Marcia. Earlier this year, Telcios announced the deployment of a new subsea cable, T-Cal, in partnership with American Mobile, which will link Guatemala and the US. I will now hand it over to Laura, who will review ISPAM's operations and the group financial results.

Thank you, Ángel. Moving to Telefónica-ISPAM. We continue progressing in the region. Contract accesses grew plus 4% -on-year, after adding 1 million accesses in 2022. In FIX, FTTH premises passed rich 17 million, accelerating versus last year, mainly driven by the Chilean and Colombia infracos. This growth in high-value subscribers led to mobile and fixed broadband output -on-year growth, despite tough competition in main markets. Revenue continued to grow by plus .8% -on-year, while EBITDA declined by minus 1.5%. The OEPDA decline was mainly driven by our new operational model in which we replaced CAPEX for OPEX. OEPDA minus CAPEX increased plus 2% -on-year in 2022, showing a clear upward trend in the last three years. Finally, Telefónica-ISPAM continues to promote inclusive connectivity and social progress based on digitization. Leaving no one behind and Internet para todos, Internet for all, is a very good example with 3 million people already connected. Turning to slide 20. Leverage ratio has been reduced for the third consecutive year despite M&A activity in 2022. Net debt to OVITAL ratio stands at 2.54 times, while net financial debt was 26.7 billion euros as of December. And considering post-closing events, they will decline to 2.51 times, and 26.4 billion euros respectively. As of December, we lowered our interest cost to .76% versus .86% in December last year. Our debt is about 80% linked to fixed rates, mainly in euro, and has an average life of 13.1 years, which is a strong position to face the uncertainty around interest rates movements going forward. We maintain a solid liquidity position of 21.4 billion euros that, together with a light maturity profile, allows us to cover the maturities over the next three years. It is to note that Telefónica reinforced its position as a leader in ESG financing. Beyond launching the industry's first green bond in 2019, the company stands as the leading telco globally in terms of issuance with more than 6.6 billion euro funds raised in the capital markets. In 2022, Telefónica has extended its portfolio with a sustainable link syndicated facility, sustainability link committed credit bilateral alliance, and the first sustainability link bond at Telefónica issued in Brazil. All in all, we have completed ESG financing for an amount close to 17 billion euro. I will now hand back to José María, who will wrap up.

Thank you, Laura. Our 2023 guidance reflects our expectations about the undergoing transformation of our company, and we feel well positioned to continue on our profitable growth path. We continue to simplify our company and focus our investment on differentiated connectivity projects. We will of course maintain a disciplined capital allocation adapted to market context. As such, we are guiding for a low single-digit growth in both revenues and OEDA -on-year organic, and around 14% capex to sales organic and exit spectrum. Whilst our growth ambition is a continuation of 2022 guidance in a complex macroenvironment, our declining capex to sales ratio proves investment peak is behind for Telefónica. On dividends, we are announcing 0.3 euro per share for 2023 to be payable in cash in December 2023 and June 2024. In addition, we will propose to the next annual shareholders meeting the amortization of .4% shares in treasury stock. All this shows our commitment to provide our shareholders with attractive and sustainable returns. Slide 22 shows our framework and ambitions for the year. We have aligned our strategy along five strategic pillars. First, on core markets we will continue to drive profitable growth as a leading player in attractive at scale markets. Second, Telefónica Tech will sustain its growth and crystallize value by focusing to be a digital B2B specialist. Third, Telefónica infra will unlock value from Telefónica's digital infrastructure, accelerating deployment and enabling further monetization. Fourth, Telefónica ispan as a sustainable regional player provides optionality for the group. And fifth, as a group we add value by having a clear focus to drive shareholders value and simplicity. And now to conclude, I'd like to leave you with a few takeaways from today's results. First, in 2022 we delivered on our updated guidance which demonstrated our resilience and ability to manage macro challenges while we continue to execute our strategy. We are growing organically and in euro terms with a sound free cash flow generation and we see this growth as sustainable. We continue to transform our company and are at the forefront of developing new digital capabilities to build our network as a service business. Second, Q4 posted sequentially improving growth in our main financials while we generated record free cash flow which allow us to reduce net debt further. And finally, we are announcing a positive outlook for 2023 and a dividend of 0.3 euro per share in cash which signals the confidence we have in our business and our strategy. Thank you very much for listening, we are now ready to take your questions.

If you would like to ask a question, please press star followed by 1 and 1 on your telephone keypad. Once again, that is star 1 1 to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. We would kindly ask you to ask a maximum of 2 questions per participant. There will be a short silence while questions are being registered. We will now take the first question. It comes from the line of Jamie from Goldman Sachs. Please go ahead, your line is open.

Morning everyone, thanks for the helpful presentation and thanks for taking my questions. A couple from me. Firstly on Spain, clearly you are continuing to deliver improved dynamics within that market. Could you perhaps comment on the run rate of compensative intensity that you are seeing in 1Q relative to 4Q? Could you talk about the churn dynamics in light of the price rise? Secondly on capital allocation, forgive me if it is too early, but given we are past peak capex at Telefónica now and the UK business is guiding to a strong dividend stream, stronger than most had expected, how far are we from dividend growth at the group level? Thank you very much.

Thank you for your questions, I will take the first one on Spain. What we see in terms of competitive intensity is that although it is of course complex and competitive environment, market rationality is now a confirmed reality. Noticeable step forward towards this rationality was taken in Q4 when cooling of the market was quite visible and there are significant proof points on this. Conversion promotions were gradually reduced in all the main brands during Q4 to vanish almost entirely since early December. Promotions in standalone products such as fixed raw and or post pay were also withdrawn. Main brands announced price increases for the first quarter of 2023 to offset inflationary pressures. This lever has been applied by most players and by older brands that have grown on value and quality, not so possible for brands that were captioning subscribers under a price sensitive approach. Both Black Friday and Christmas campaigns were extremely soft. The Christmas campaign was almost non-existent for the first time. Second brands such as O2, Low Ease Emeo are increasing prices on the value entry level products. We are seeing in this beginning of the quarter in 2023, so far following the fourth quarter, we are seeing strong commercial performance. We continue to see market rationality and what we see, at least for our figures, is that January turn is staying below the four quarter levels in spite of the price increase in mid-January. So we expect in Q1 to continue growing year on year in total revenues and also in service revenues and we are in the trend of improving sequentially the year on year trend of OEPA versus the last quarter of 2022.

Taking your question on the capital allocation and dividends, as you know we don't guide for long term and therefore we are just issuing the overview for the dividend for 2022. But allow me to elaborate on why we feel confident and why we feel that this level of dividend is very well covered. In 2022 we posted a very strong free cash flow generation. For 2023 we expect free cash flow to continue exceeding shareholders remuneration, labor commitments and hybrid coupons and at the same time as you know we preserve and we maintain a very high commitment to investment grade rating. As we speak we are growing revenues in all business units. We are guiding in the UK for revenue growth and OEDA growth. We are guiding at the group level the same. Germany has guided yesterday so all in all in terms of the guidance of the group, revenue growth and OEDA growth with a contained capex allow us to think that OEDA minus capex should fuel a strong free cash flow generation. So overall considering that all lines below operational free cash flow we continue on practically managing working capital. Our JV is going to deliver a very strong dividend. Lease payments should not change much year on year. Interest cost remains under control. So overall we think that we should prove along the year that the dividend is very well covered and that we are in a well covered position. So we will retake the questions at the end.

Thank you very much.

Thank you. We will now take the next question. It comes from the line of David Wright from Bank of America. Please go ahead your line is open.

Please hold.

Hello guys can you hear me okay?

Yes we can hear you David.

Sorry apologies there with my mute function. Two very quick questions. The first is perhaps just for Lara and just if you could give us a little guidance on where you expect cash tax and working capital to trend through 2023 please. And then secondly my question is a little bit more strategic perhaps for Lutz and maybe yourself Jose Maria and Angel. But just on VM02 it seems quite an aggressive recapitalization that seems more predicated on the synergies. The actual revenue growth of VM02 I think continues to labor and there doesn't seem to be any monetization of the price rises in the UK. And it also seems like you are very very behind the curve on your 2028 rollout ambitions. I think even with the Q4 run rate you would only manage about 750,000 lightning lines and you obviously need a run rate of 3 million a year to make that target. So is there not a likelihood of an increased capex? And therefore I come back to my original question. Why would you re-lever so aggressively when the fundamentals remain a little bit more unproven and there is a capex hike ahead? And of course that higher leverage does come into the group leverage from the agencies. So it just seems a little back to front to me so if you could explain that thinking. Thank you.

Thank you David. Taking the first question on tax, cash tax and working capital. I used to say that cash tax was more predictable but these days with super positive tax refunds and payments in advance we have to do in Spain is less so. But looking at 23, 24 we see that our tax rate could be along 23% more or less. Obviously then we may have someone else that should be the structural cash tax payment. In working capital we continue doing our usual activities. I mean working capital sometimes is affected by the spectrum because we do not pay all of it and it continues flowing through working capital. In the past we also have a positive impact from the judicial review in Brazil but excluding that we just capex seasonality, some deferred payments, we are not doing any supply financing, we have some handset financing but very low numbers so I would tell we still expect working capital to contribute positively to the free cash flow but not in huge amounts and we are not seeing worsening conditions in the actions along working capital so I would say quite business as usual and similar trends but what we have seen excluding the Brazilian tax recovery in 2022 and 2021.

Okay thanks Larmone. Thank you.

Should I answer the Virgemedia or two questions David? Okay. So first of all on the revenue side although it's flat for the year the underlying service revenue is actually growing and therefore the underlying gross margin is growing so it's not really flat and as you can see from our guidance we are more positive for 2023 so we are from a flat year in overall revenue we are guiding revenue growth into 2023. From your capex investment assumption I'm not so sure if I can follow that because we have actually disclosed lightning numbers for fiber rollout but we are not behind because we have not disclosed so far the cable fiber upgrade numbers so we have upgraded to fiber more than 1 million homes this year and we will upgrade to fiber including network expansion next year 1.5 million homes so therefore we are obviously not guiding longer term capex investment over the year 23 but I'm not so sure if you take the right assumptions in the model so therefore we see sustainable EBTA growth coming also from revenue in the midterm and we also don't we are not behind in fiber rollout at all we are not talking about it because our customers today are buying our 1 gigabit speed solution based on the coax network hopefully that helps

David if I may complement with the capital structure and the dividends as you rightly mentioned we are anticipating a strong dividend of 1.8 to 2 billion pounds including both precast flow and recapitalization the leverage it is true it is what we have decided at the shareholder level it's a 4 to 5 net leverage range but this is a cut generating business with organic and synergy driven opportunities and it will continue growing having said that let me remind you that the debt tenor is 6.5 years excluding vendor finance and the average cost of debt is 4.7 percent and the debt financing strategy means it's not forced to go into debt at the not opportune times and we will continue to optimize this based on market conditions right now we are seeing the markets are again open so I think we are being proactive and prudently managing tapping the markets at the JB level as well

thank you we will now take the next question this one comes from the line of Karl Murdoch-Smith from Barenburg please go ahead your line is open

that's great thank you very much almost following up on David's question and slightly on slide 18 when you are looking at infra and the opportunities and the rollout progress there I was wondering if you could talk slightly both at a group level but also again potentially looks on a UK level how you think about organic versus acquisitive opportunities regarding infrastructure given potentially struggling smaller alt nets given higher inflation and interest costs thank you

let me first take the view from the group and then I will also hand over to Lut to complement fiber cores are very efficient alternative infrastructure investment vehicles because they allow us to accelerate fiber deployment putting together infrastructure money infrastructure funds with our strategic view and we have been pioneers in doing through Telefonica infra this type of vehicles we already have we are covering through the fiber vehicles that you have on slide number 18 13 million homes passed by the end of 2022 we are aiming to cover 25 million by 2026 it's critical that all these infra fiber cores have our local operating businesses as anchor client and this is differential versus alt net fiber cores because this gives the best prospect for critical ratio of homes connected to homes passed and this is critical for the return on investment in some markets the gap not in the case of Spain but in some markets the lower deployment of fiber has resulted in the creation of several alt nets and again some of these given the increasing cost of construction because of inflation or the increased cost of funding and some pressure on wholesale prices sometimes from regulation and sometimes from the behavior of certain players are stressing the business plan of this alt net that do not enjoy as our fiber cores do the benefit of having an anchor client in our obese so we think that this may lead to potential consolidation in the alt net fiber cores space in several geographies we do not comment on any specific name but we see such opportunities in most of the markets and we have already consolidated one asset in Brazil our fiber core in Chile is consolidating another asset this always done in a return on capital employed very effective way I don't know Lutz if you want to complement

yeah thanks Andre obviously Virgil MediaO2 is not a shareholder of NextCyber so we are building the network the shareholders are Virgil MediaO2 it's Telefónica, Liberty Global and Infavia but I can reassure that we keep accelerating the rollout from 22 into 23 so obviously we have been doing that from 21 into 22 and we will continue doing that and your question concerning possible consolidation in the market alt nets have now built 7.6 million fiber homes in the UK you see that the penetration of these alt nets is around 15 to 18 percent so very low and therefore with increased capital cost it is indeed the question how many will be long term sustainable and of course we will the shareholders I just mentioned will have an opportunistic view on it and we will be open for consolidation as you can expect

that's

great, thanks very much

thank you we will now take the next question it comes from the line of Georgios Yero Diakounou from CT please go ahead your line is open

yes good morning and thank you for taking my questions I had one follow up on Spain from the first question I think Angel you mentioned you gave us a lot of color on the KPIs I was wondering if you could also clarify your comment about EBITDA improvement whether that is based for the whole year or just for the start of the year because I understand the coms on the labor cost in particular are a bit favorable initially maybe not so favorable later in the year so if you could perhaps give us a bit of an idea whether we should look at a much better 2023 or just the start of it and also on that if you could comment also on whether the promotional environment obviously is better whether you are seeing any down trading in MIMO Vistar or whether on that respect you are also seeing your behavior exceeding your expectations and my second question is more on an industry wide and I appreciate that there's probably going to be some statements coming up from the commissioners in the coming days I'm just curious you mentioned earlier the spectrum terms improving across Europe what else are you expecting to see over the course of the next couple of years and when do you think we get some clarity on the support that the industry may be getting from regulation and maybe other actions that are taken thank you

Hi Giorgio I'll take the first questions on Spain and you were asking about OIPA let me give you a wider view on the outlook which is not guidance as I always have to say for Spain in 2023 we expect for the year the revenues to continue showing year on year increase we have a very good momentum we have now several quarters in a row of growth we are already growing in service revenue and we believe that the service revenue will keep on growing in 2023 in the year leveraging on several levers first the trading recovery the tariff upgrade and the evolution of MPS and churn leads us to expect a solid conversion tarpu we are getting revenues from new digital services ecosystem clearly B2B in communications and IT is growing the impact from European Union recovery funds should be more notable and despite some headwinds of lower wholesale TV revenue because we have less content now we keep expecting and we see service revenue continue to grow year on year handset sales could decline but all in all the full revenues will continue to expect will continue to show a year on year increase this behavior of revenues combined with strict cost management will contribute to continue the year on year recovery trend and we expect that to continue to be the case in 2023 as you can see in the second Spanish slide every quarter the year on year evolution has improved and we expect that to continue to be the case in 2023 reaching at some point in the second half we don't know in which quarter stabilization of year on year we expect to see the same situation with OEPA when we are in the second half we expect margins to stand in the mid high 30s for the Spanish operation you saw the margin in the fourth quarter very strong and then for capex we expect it to be in line in terms of capex intensity as in 2022 you were also asking about down trading we are not seeing that to be the case and the proof point is the ARPU performance we have seen convergent ARPU in the fourth quarter at 90.3 euros showing year on year very good progress and this is the result of several moving parts we had some more for more in February we have as I was saying at the beginning almost none promotions in the fourth quarter so the dilutive promotions effect has been helping the SME portfolio has been also supporting this and the stickiness that we are seeing in the price increases that were already put in place by mid January gives us a good expectation for the ARPU going forward into 2023

taking your question on regulation globally or more broadly well the starting point the European sector has a very low return on capital employed barely beating cost of capital and that is because the sector is too fragmented the average European mobile operator covers 5 million people while the average US mobile operator covers 107 million people I think the situation is unsustainable and data volumes are growing 30% year on year so the networks need to be there and the overall problem is that the current framework for the regulation was designed at the time of the copper incumbent monopolies and now we are fiber companies and there is a huge fragmentation in number of competitors it was thought at the time of voice and is now the time of data as a result the overall competitive competition policy and the rules have become obsolete and I think they are going to evolve I think that the movement is for an evolution because in other regions of the world they have evolved we think that Europe is starting to evolve in that regard and we see the commission more open to this kind of debate more specifically keep in mind that 56% roughly 60% of data volumes today in Europe in all networks are being generated by 6 players which are not contributing to the huge investment need of the 4 deploying that amount of capacity European companies we invest in the neighborhood of 30-35 billion euros just in capacity of the network and we are taking the hint of that so there is a debate ongoing that I think is going to be heated in the next few days around the need for a fair share for a fair share compensation of that effort among the different parties and I think that the debate is fair the debate is needed and the debate is very dynamic I would say so I think that in terms of consolidation for the avoidance of doubt in the case of Spain we are in favor of the orange mass mobile transaction and we think it should be approved without remedies because I think it proves the situation of our sector so we are not we are stating the same thing when we are not part of the consolidation process and in fact it's going to be affecting us and I think that's what time has come for a more rational approach

very clear thank you thank you we have time for one last question please

thank you we will now take the last question it comes from the line of Fernando Cordero Barreira from Grupo Santander please go ahead your line is open

thank you very much the first question is regarding the strategy guidance that you have updated particularly on telephonic attack and at which extent you are understanding the crystallization opportunities in that sense you have mentioned in the past that the M&A trend in order to launch a business was already made so in that sense do you believe that you are already prepared to incorporate some financial partners or what is the let's say crystallization process and the second question is coming back to Spain I agree on the fact that the operational project regarding the commissioning of the copper network is a massive one I believe also that you are starting to have some visibility on the end game in terms of office and tap saving on the front just willing to understand the impact of the commissioning

of the network thank you thank you Ferrando on telephonic attack I understand there were two parts to your question one our M&A strategy so far with the company and second the crystallization of value let me start with the M&A strategy of telephonic attack we have been expanding our scale and capabilities with very selective acquisitions which are now mostly completed to expand our service offering and for this we acquired for instance in Spain a company which is specialized in multi cloud services and a Google cloud premier partner for southern Europe or G-Prom also in Spain small acquisition which reinforce our capabilities in industry 5.0 but we also wanted to expand and strengthen our geographic presence most notably in European markets and in the UK which accounts for a small part of telephonic attack we have made two significant acquisitions the former Cancom UK and Ireland now renamed telephonic attack UK and Ireland and then we acquired that was in 2021 and then we acquired in March 2022 a company called Incremental thanks to these acquisitions we have now nationwide coverage with cloud capabilities more than 1000 highly skilled professionals and we are with extensive accreditations in Microsoft solutions and for the rest of Europe and a special focus in Germany we made the acquisition of and thanks to this we enriched our situation in Germany and in the DAG markets with this telephonic attack continues to show a very strong growth momentum without the change of perimeter and we continue progressing in the plan that we had which at some point may entail crystallization of the value through different methods we are trying to give you more and more visibility of this unit in our presentations and reports so that hopefully at some point you can reflect it in our sum of the parts which are is 85% more efficient than copper. Some of these benefits are already being captured, either in revenues through sale of copper, sale of real estate, also in OPEC and CAPEX. We are already experiencing lower cost of maintenance and energy consumption, less failure rates, less call center attentions. So in 2023, we will continue, gradually be capturing those. And then the process will continue when in 2024, as was said in the presentation, we would be the first telco globally to switch off the copper network. Due to regulatory obligations, we will need to maintain the wholesale services for extra six months after switch off. But that will be the case. So network transformation efficiencies will continue increasing year on year until this transformation is completed and many structural benefits will remain. Clearly, reduced OPEC via lower network costs and lower recurrent investments.

OK, thank you very much.

Thank you. At this time, no further questions will be taken.

Thank you very much for your participation. And we certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relationship Department. Good morning and thank you.

Telefonica's January, December 2022 results conference call is over. You may now disconnect your line. Thank you. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.