Telefonica SA

Good morning. Thank you for standing by and welcome to Telefonica's January-March 2023 results conference call. At this time all participants are in 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 one and one on your telephone keypad. You will then hear an automated message advising your handy phrase. To withdraw your question please press star one and one again. We will kindly ask you to ask a maximum of two questions for participants. As a reminder, today's conference is being recorded. I will now like to turn the call over to Mr. Adrian Funfunegui, Global Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefonica's conference call to discuss January-March 2023 results. I'm 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 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 relevant security to market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chief Operating Officer, Mr. Angel Villa.

Thank you, Adrian. Good morning and welcome to Telefonica's first quarter conference call. With me today are Laura Masolo, Eduardo Navarro, and Lutz Chuler. As usual, we will first walk you through the slides and will then be happy to take any questions. I would like to start highlighting how we continue to progress on our strategy and to deliver on our goals. Strong momentum continued in our core markets. In Spain, service revenue growth accelerated. And -on-year OETA trend improved as we had anticipated. Brazil posted double-digit growth on both revenue and OETA. In Germany, 5G deployment progressed well and financials remained robust. In the UK, revenue stepped up another quarter. Our scaled European cloud and cyber champion, Telefonica Tech, increased revenue by 44% -on-year, largely outgrowing its market. And at Telefonica Infra, we continued progressing in fiber core from out, while Celsius again recorded very solid growth rates. Group-wise, the Open Gateway Initiative, a joint effort for leading telcos under GSMA sponsorship, was successfully presented during Mobile World Congress 23, while on the ESG side, our Greenabler strategy continues anticipating regulatory needs. Looking ahead, we are shaping opportunities in our core markets, such as in market consolidation in Spain, stellar growth and lower capital intensity in Brazil, normalized levels of capex to sales in Germany, and ongoing capture of synergies in BMO2, with more than 50 percent of run rate expected by year-end. Telefonica Tech, where we envision to grow double-digit this year, continues to be a source of value. Telefonica Infra will further expand its fiber networks, while assessing consolidation opportunities. And optionality remains on self-sustainable Telefonica ISPAM. Finally, from an industry point of view, the coming months are key for next steps on fair share regulation and a broad federal regulation environment. On slide three, we can see that we had a strong start to 2023. Revenue growth accelerated during the quarter, both in organic and reported terms. Moreover, all business lines are growing, with a 10 percent to plus 4.2 percent -on-year in organic terms. B2B continues to perform strongly, with 9 percent -on-year growth, and remains one of the key and differentiating growth drivers of the group. Commercial traction strengthens, with fiber and mobile contract accesses growing 16 percent and 7 percent -on-year, respectively, while 5G deployment is progressing well. Our focused investments in next generation networks and quality of service allowed us to post record levels of MPS and lower churn rates in a quarter of proven pricing power. This resilient performance, coupled with proactive management of efficiencies within a streamlined operational model, resulted in the third consecutive quarter of underlying OEPG growth -on-year. Financially speaking, net debt and leverage declined, despite the functionality in Q1. As such, the balance sheet remains strong, with a light maturity balance sheet, strong liquidity, limited debt refinancing ahead, and a high portion of debt in long-term fixed rate. Lastly, and along the lines of legacy shutdowns, we announced the Spanish full copper switch-off for April 2024, the best example of our sustainability pathway in the transformation of our networks. Moving to slide 4 to review our key financial metrics in figures. In organic terms, revenue growth accelerated 1 percentage point to 4.9 percent, while OEPG maintained a steady growth of 1.1 percent, with capex increasing by just 0.7 percent, all that resulting in a 2.1 percent annual growth in OEPG and minus capex. In reported terms, revenue growth improved sequentially by 1.3 percentage points to 6.7 percent -on-year, while underlying OEPG increased 2.4 percent -on-year. Effects continued to be a tailwind in the quarter. Free cash flow reached 454 million euro along the usual capex and working capital seasonality in this period of the year, while net debt declined 0.2 billion euro in the quarter or 3.5 percent lower -on-year. Moving to slide 5, let me tell you that we are well on track to fulfill our 2023 guidance of low single-digit growth in both revenue and OEPG and around 14 percent capex to sales despite inflationary pressures. We expect the strong momentum and the current positive trends to continue further, supported by some price actions taking place in Q2. Energy cost pressure and inflation continues easing further supporting our ETA evolution. As part of our shareholder remuneration, we canceled 25 million ounce shares and we will be paying 0.15 euro per share in cash, the second tranche of the 2022 dividend on the 15th of June. As for the 2023 dividend, 0.15 euro per share will be payable the 14th of December and another 0.15 euro per share in June 2023 both in cash. Turning to page 6, we continue working quarter after quarter to achieve our ambitious ESG targets. On the environmental side, our efforts in reducing scope 3 emissions were again recognized as we are nominated CDP supplier engagement leader for the fourth consecutive year. Within the social pillar, we are pushing ahead with network rollout to connect more people as well as promoting affordability with social tariffs. We are immensely proud that the World Benchmarking Alliance has for the second year running ranked Telefonica in 12th position within its digital inclusion benchmark. And on the government side, we highlight the renewal of ESG certifications across Telefonica Spain while we continue to lead the sector in sustainable financing. Moving to slide 7, we can see that Telefonica España successfully started into the year with supportive commercial momentum and better financials. Fixed broadband and contract accesses posted their best quarterly performance since the end of the pandemic in Q320. A new record low churn of .9% helped to deliver contract net ads for the third consecutive quarter and return to year on year growth in fixed broadband for the first time since second quarter 19. We achieved this better commercial momentum despite the tariffs revision that took place in mid-January, a proof point of our pricing power amidst an increasingly rational market. Service revenue growth accelerated to plus .0% in Q123 driven by retail revenue growth, which accelerated by 0.8 percentage points versus the fourth quarter of last year to .7% year on year. This acceleration is driven by a growing ARPU, better trading and double digit growth of IT revenues. Likewise, OIPDA continued its recovery path, limited its decline to .7% year on year as a result of the mentioned better revenue trends and despite higher personal costs. OIPDA minus capex margin remained at benchmark organic levels of 26%. Moving to Germany, on slide 8, it delivered a robust start to the year with another quarter of good commercial traction and sustained financial performance. The company implemented its more for more strategy across all brands and portfolios, backed by its widely acknowledged network, products and services quality and extended ESG leadership. Telefonica Deutschland's 5G network is well on track to deliver around 90% population coverage by year end 2023. Revenue posted strong organic growth at 8% year on year in the first quarter, OIPDA grew .7% year on year supported by operational leverage mainly mobile, which was partially offset by anticipated inflationary cost pressures. Post the successful completion of the three-year investment for growth program, Telefonica Deutschland returned to a normalized capex envelope, which declined .2% year on year to an .7% capex to sales, resulting in operating cash flow growth of .6% organic. We now move on to slide 9, to the UK and our joint venture Virgin Media 2, which focused on operational progress and accelerating long-term growth drivers. BMO2 delivered resilient trading performance with a stable customer base of 58 million while keeping churns steady and at low levels of just 1%. Broadband ads remain healthy during the quarter. Network investment continued with 108,000 premises deployed during the quarter and with 5G connectivity now available in over 2,100 towns and cities. Q1 was the first full quarter of network rollout on behalf of NextFiber and delivery is being prepared to ramp up through the year. In the first quarter, revenue growth accelerated to plus .9% year on year organically underpinned by the increase mobile and NextFiber revenue. At the same time, IPA grew plus .4% impacted by fading of both fixed price increase and synergies and higher costs mainly energy. Moving to Brazil on slide 10, BMO started 2023 posting once again a very strong set of results both commercially and financially. Mobile market share reached 39% in February, increasing by 1% since OIMobile assets acquisition and by 2% in the contract segment to 43.7%. Vivo continues to be the clear market leader in a more rational environment. Vivo connected 813,000 new accesses to our FTTH network in the last 12 months, twice the performance of the second player in the market thanks to our leading footprint and differential value proposition. Revenue growth accelerated to plus .1% year on year in Q123, the highest revenue growth seen in 10 years thanks to growing accesses, price increases, and the good performance of digital services. In terms of operational leverage, OEDA minus CAPEX grew .7% year on year as a result of growing OEDA close to 10% and lower CAPEX intensity in line with the target of bringing it down below 9 billion Brazilian reais by 2023. Slide 11 reviews the performance of Telefónica Tech, a global next generation IT provider with a distinctive growth profile. Telefónica Tech continued to perform the market in Q123 with a 43% year on year revenue growth or plus 27% in constant perimeter, proving the benefits of transformation into a leading scale provider of advanced IT solutions. The growing partner ecosystems and its diversified team of around 6,000 professionals with close to 4,000 certifications in strategic partner technologies are key for Telefónica Tech to become a reference player in delivering differentiated digitalization journey with higher relevance of managed services. Bookings increased by 40% over the last 12 months, which supports future revenue flows. Leveraging Telefónica Tech success, Telefónica's position in the B2B large global category clearly improved. According to industry analysts, Telefónica gained fourth place and entered the first division of telcos providing global IT services after years of steady progress from a regional player to a regional operator. Turning to slide 12, Telefónica infra continued to consolidate its leading portfolio of fibercos, which already covered 15 million premises as of March 23. Lubeas deployment in Spain is progressing as planned and has already met more than 80% of its deployment target. Ugege in Germany continued to promote MOU sign-ins with more than 870,000 households as of the end of March. Next fiber in the UK is scaling up the team processes and interaction with VM02. Fiberdeel is already present in 151 cities in 22 Brazilian states with 4.3 million premises passed. OnNetFibra Chile and onNetFibra Colombia are both leading their markets with 3.7 million and 2.6 million premises passed respectively. Moreover, Telcios posted again healthy financials with rising revenue and OEPDA growing for the fifth quarter in a row. Thanks to continuous cost management, Telcios achieved an impressive OEPDA margin of 54.2%. I will now hand it over to Laura who will review ESPAM's operations and the group's financial results.