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.