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.

Thank you, Ángel. Moving to Telefónica ESPAM. We continue to focus on value growth, improving returns, while reducing investment invested capital in the region. Contract accesses grew plus 4% -on-year, especially in Mexico and Colombia, with plus 13% and plus 7% respectively. The transformation to fiber continues supported by the infra-cost. Fiber uptake remained high at 30% despite the fast FTTH deployment. Revenue continued to grow and was up .6% -on-year thanks to the good performance in both contract and FTTH. OEPDA declined by 3.9%, namely impacted by high commercial activity and the infra-com model in Chile. Turning to slide 14. Telefónica maintains above 80% of its debt linked to fixed rates, million euro, with an average life of 13.2 years, which places us in a comfortable position to face any market environment. We maintain a solid liquidity position of 21.4 billion euro that, together with a life maturity profile, allows us to cover the maturities over the next three years. Meanwhile, net financial debt and leverage ratio continue their downward trend. Net financial debt declined from 26.7 billion euro in December to 26.4 billion euro in March. Net debt to withdrawal ratio improved from 2.54 times in December to 2.51 times in March. As of March 2023, we have contained a debt-related interest cost at 3.87%, thanks to the solid position of fixed interest rates in strong currencies, which allow us to navigate the rising rates. I will now hand back to Ángel, who will wrap up.

To wrap up, on slide 15, Q1 delivered again positive momentum, continuing with resilient performance whilst further executing our strategy. First, our differentiated and premium infrastructure is clearly taking off in terms of churn and MPS, which helped Q1 revenue growth to accelerate on the back of our proven pricing power. Furthermore, OEPA maintained a steady performance thanks to efficiencies that allow us to mitigate inflationary pressures. Second, our balance sheet was further strengthened thanks to our proactive debt management. Third, Q1 performance, coupled with maintaining positive momentum, allow us to reiterate full year guidance and dividends. Fourth, our sustainability pathway is demonstrated with the transformation of our networks. On ESG, we are progressing well and anticipating regulatory needs. And finally, we continue to shape opportunities that should create value for our shareholders. Thank you very much for listening. We are now ready to take your questions.

Thank you. If you would like to ask a question, please press star followed by one and one on your telephone keypad. Once again, that is star one and one to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. We will kindly ask you to ask a maximum of two questions per participant. We will now take the first question. It comes from the line of David Wright from Bank of America.

Good morning, guys. Thank you for the call and taking questions. A couple from me, please. I noticed on the EBITDA beat today, it was quite material at the other level. I think you recorded about 53 million euros consensus. I understand some of that is driven by Calpheast and Telefónica Tech where you have given some quite optimistic commentary in the presentation. Could you give us a little bit of guidance where we could expect that line to trend this year, please, or is there else that is exceptional? Maybe, Laura, just for you on his spam, we have obviously seen the EBITDA decline starting to go into decline again. I think that is partly due to the infaco model, which means you are now bringing on wholesale cost. I wondered if you could give us an idea of what EBITDA minus CAPEX organic trend is, perhaps Q4 and Q1, to really understand to what extent that decapitalization is working. Those two questions from me, a little detailed. Thank you very much.

Hi, David. On the first one, on the EBITDA that we have in other companies and others, here there are some businesses which are included along this line, one of them being Telsius, the unit that holds our submarine cable. We have some detail on slide number 12 on the performance of this unit, which is growing revenues at the high single digit level. Sorry, EBITDA on double digit level with 54% rate of margin. That's an actual business which is performing very nicely, included in that line. Second element would be the Telefónica tech companies that got acquired in the UK. We bought Cancom UK and then a company called Incremental. The Telefónica tech company were acquired in Germany and the DAAC region called Viterna. These are also included in this element of other companies, Eliminations and others. These two companies are growing revenues double digit with margins of around 14-15%. So you have actual businesses, I would say hidden jewels in this line which are performing quite nicely. And the third relevant element in this line is the efficiency that we are achieving on group corporate costs, even our efforts to optimize our operating models. So we would be aiming to continue providing positive results on this line in the coming quarters.

Hello David, on your question on ESPAN, as you said, year on year variations are softer this quarter. And it has to do with the capex to opex model and it also has to do that we are going faster commercially. These infracom models are allowing us to start connecting homes faster than what we have done with our own capex. And therefore, we have more commercial pressure but at the same time we are building a super strong value access so we will be stronger for the future. I think when you look at ESPAN, you have to look at it in each trajectory since the beginning of 2020 when we decided a new strategy as non-core. OIPDA minus capex has improved tremendously in the last three years. We have been posting very good results as we transition to a linear model focused, as I said, on value customers and building on a way of deploying infrastructure but which is being very valid to build that value customer base. We are better in general terms in market share and these results were very much aligned with our expectations. Maybe Peru has been a bit softer due to the political environment and also there's a lot of portability and we need to cool down the market there but we are in that trend. I'd rather talk to you about the OIPDA minus capex for the full year which is how we are working. We are working on a full year basis and we are still ambition to grow OIPDA minus capex in 2023 as has been the case in the accumulated from 2020. We keep on working on reducing capital employ. We keep focusing on being super rational on spectrum auction. We just had the Uruguay spectrum auction a couple of days ago which was at reserve price, very well managed again and that should be following the strategy we already announced a few years ago and we are executing thoroughly.

If I could just ask an additional follow-up. Just to angle, given that Q1, EBITDA, the other line, you said you want to remain positive but is there any reason we shouldn't be sustaining those kind of levels given the growth in the underlying businesses and the acquisitions? Any reason not to imagine it's trends broadly similarly for the rest of the year?

Yes, as you know we don't guide by line but the businesses which are and I was quite explicit about which companies are included in these other companies. These businesses are all of them in growth mode, both in revenues and in EBITDA with steady margins so there would be no reason to at least for the element that corresponds to those businesses not to project them not only steady but growing.

Very useful, thank you guys.

Thank you. We will now take the next question from the line of Georgios Yuridiakono from Citi. Please go ahead.

Good morning and thank you for taking my questions. I have two questions on Spain please. The first one is just to understand the outlook we should expect in terms of our pool for the business and obviously there were the price increases in January. We've seen the output continue to grow but perhaps not accelerate that much so I was curious if this is down to tougher comps because you did some price increases also in January last year or whether you are seeing optimization within Me-Mobi Star with perhaps that effect maybe also affecting the future quarters so if you could give us perhaps an idea of the mix between those two effects and also the comment you made earlier about more pricing in the second quarter whether you feel confident that the excellent KPIs you reported in Q1 can be sustained even with these pricing changes you are putting through and my second question is on B2B and the growth you are delivering and obviously that's not common for all the telcos in Europe. Do you mind just perhaps giving us a bit of an idea of what are the growth drivers they are, how sustainable they are and a bit like the comment you made earlier on some of the acquisitions in Telefonica Tech if you can give us an indication on the

questions. You saw that in this first quarter we made the highest price increase that we've done for a long long time and potentially in history following the adjustments for inflation and this has resulted not only in not suffering churn but we have experienced the lowest churn in the last how many quarters and you can see clearly in the slide the trend of improvement of the churn. NPS by the way has gone up by nine percentage points year on year and the gap versus the second player has also widened and ARTO is gone up to 92.6 euros which is a growth of 1.7 percent year on year and is a growth quarter on quarter of more than two euros per share. One of the questions that you may have is you know with a price increase of 6.8 percent ARTO is growing 1.7 percent year on year. I should say that ARTO growth is in language what we were expecting. The price increase was not applied to all the conversion base was applied to the MIMO Vista brand not to the O2 brand and it's not applied to all the ARTO components it's applied to the fees but not to extra consumptions new digital services or advertising. Also another relevant element is that the price increase was executed in the second half of January so it's impacting not the full quarter but a fraction of the quarter and there has been some repositioning that between our customer base that is not a significant element. Also one relevant point when one looks at the translation of this into growth of revenues not only of ARPU is that we have in the wholesale line a less comparable metric year on year because we are selling less content because we bought 55 percent of La Liga not having 100 percent of La Liga. This is resulting in one percentage point less growth in service revenue. Service revenue growth has accelerated in the Spanish operation to one percent it would have been two percent growth in service revenue if we had had the same comparable perimeter of wholesale revenues through resale of content and this effect will annualize in the third quarter so this detraction of one percentage point in the year on year comparison will disappear from the third quarter onwards. So we expect the the effect of the price increases to continue kicking in into our revenue function and given that we are two months and a half into the price increase and the very good customer reaction we think that the momentum is that the price increase has been digested and the momentum should continue along the along planes that we are seeing. Regarding the second question on B2B I agree with you we have a differential performance at Telefonica Group B2B revenues are growing nine percent in our Spanish operation B2B and also revenues are also growing high single digit in in our perimeter. This is a very robust performance and is very much based on a few elements. We are growing market share and especially in the SME category we're also managing to stabilize the coms element of the B2B revenues with better performance in renewal of contracts and essentially here the performance of Telefonica units through the pandemic allowed us to gain the confidence from from our customers from our clients and then very important we are growing in the IT and tech elements double digit we made a very strong bet a few quarters ago on cloud fiber security IoT and big data and this is helping us you know help our customers in their own digitalization needs and this is proving to be a a key element in the growth of our of our businesses. The companies that we acquired in geographies like the UK and Germany in Telefonica Tech are having a bit the margins uh around between 10 and 15 depending on the quarters which are maybe the margins you were asking gross margin I don't have the figure but in every the margins they are in in that line the companies that we acquired and are included as we were discussing before in in other and eliminations.

If I could ask just a clarification based on what you described and the processes are coming now in the second quarter is it fair to assume that the ARP momentum should improve in the future quarters? I know you don't guide line by line but broadly speaking is that a fair assumption?

We see uh you know with the data in mid-January that was not effective the whole of the month you have seen the positive evolution of the ARP so these these ARP levels are here to stay.

Thank you. Thank you. Thank you. We will now take the next question. From the line of Joshua Mills from BMPP Exxon please go ahead.

Hi guys thanks for taking the question a couple from me the first one is actually just coming back on this ARP point because there's been a few questions around this. Can we clarify exactly what gets included in the convergent ARP definition? Is it purely the service revenue side of the service component of the contract and how much if any of the the ARP is made up of add-ons like TVs, handsets, other bits and pieces and the reason I ask is you know one of the reasons we might be seeing a slightly slower improvement in ARP this quarter is that last year you were doing more of these add-ons and that probably boosted the ARP for Q1 2022 so you're getting clarification on what's in the ARP and then what's in the service revenue would be great and then secondly on the EBIT data directory in Spain you've reiterated that this should be a steady improvement through the course of the year reaching stabilization in the second half. I guess if I think about the moving parts on the cost side one of the tailwinds you have in the first half of the year which won't repeat in the second half is from lower content costs so aside from a broadly improving service revenue trend through 2023 what other cost tailwinds will kick in in the second half which means even should be getting better rather than worse. Thanks.

Thank you for your questions. Let me try to give you more color on the ARP. ARP of course includes the communications, the connection, the mobile, the TV options, the TV add-ons, the mobile add-ons. It's the same definition of ARP, Convergent ARP that we have been applying consistently for now all the last years. The growth of ARP that we're seeing year on year and and quarter on quarter can be broken down across different areas. On the positive side more for more the price increases both the one that we had this year in January last year it was in the month of February. We also have the higher contribution of new services in the portfolio. The reduction promotions is quite relevant. Market continues to be very rational and the dilutive effect that promotions have on the calculation of ARP is disappearing. On the negative side we are experiencing a little bit less out of bundle. On the mix because this Convergent ARP is the mix of the brand Mimovistar and the brand O2, the growing penetration of the O2 brand is reducing slightly the ARP. And then now that we have a few contents or less content on the league we have the elements on lower revenue from advertising. But this ARP we see as I was looking for resilient and visibly higher than it was one year ago. On the outlook on revenues and then I will get to your question on cost on revenues we see service revenue continuing to grow and we are having less handset revenues than we had last year because we had a very strong performance in 2022 when we introduced the new Mimovistar offer that included all type of electronic devices possibilities for the customer. So we have less handset and devices revenue but service revenue growing. This we see through momentum in trading the solid Convergent ARP that will continue to develop the new digital services ecosystem. We see growth in communications and especially in IT and tech in the B2B side. The B2B digitalization and the impact of European recovery funds expected also in the second half although we have less TV contents to wholesale. In a bit though this sound behavior of revenues has to continue contributing to continue the year on year recovery and we aim to stabilization as and reiterate that we aim to stabilization at some point in the second half. Margins you saw the first quarter of 36 percent we expect margins to stand in the mid high 30s the capex will continue of course to be you know benchmark in line with what we had last year which was 12 percent and because capex peak is behind. The cost components that will help us here the personal cost once we have done all the negotiations not only with employees in the collective agreement but the employee site collective agreement that cost increases slightly above six percent less than the price increases. Energy prices we continue to expect a year on year decline and we continue with efficiencies from network transformation and the savings of lower price of LaLiga and the continued efforts to make more efficient digitized operating model. So all in all we expect the trend of recovery of EBITDA to continue we reiterate that we expect in the second half at some point stabilization on the year on year comparison and margins of EBITDA to be in the high 30s.

Great thank you.

Thank you. We will now take the next question. It's from Mathieu from Barclays please go ahead.

Good morning and thank you for the presentation. I had two questions please first on Spain you may have touched on it but I could have missed it which is on the pay tv where I think since the of April you have no more regulatory obligation to wholesale it and no more regulation on the price at which you need to wholesale it. How do you see that going forward and when will it could it have an impact the fact that you change the prices or some of the providers join you or do not join you is that starting from September 2023 and then a second question on leverage you good progress on your deleveraging on your slides and I think rating agencies also see you deliver but at least for one of them you still remain quite high in terms of the rating adjusted leverage and I was wondering if you could give us a bit of color in terms of what will lead you to the leveraging throughout 2023. I realize you don't give guidance but you can point out the main elements that you expect will contribute to deleveraging thank you.

Thank you Mathieu for your questions the remedies that the CNMC had imposed from the DTS acquisition in 2015 expired as of 30th of April so now Telefónica Spain has much more flexibility to shape the content softening. We are no longer dominant player in the PTV market given the much higher subscriber shares of other platforms and we will assess in this new scenario the policies that we want to apply of course always keeping competitive and you know being respectful with a competitive nature of the market but we now have different flexibility in terms of which content we could keep or we would also want to share more flexibility on the pricing of such content or flexibility on the bundling more flexibility on elements like mass carry channels that we no longer have to carry so much more flexibility in order to shape our offer to be more attuned to the needs of our customers also to be more efficient on the cost side of certain contents that we could not need to carry going forward as well so this is providing us much more commercial flexibility that we will use in order to continue to reinforce our very strong performance in the Spanish business.

Sorry Laura I think that the CNMC you had bought the rights for if I remember currently three or five years the CNMC disputed the length of the contract has that been resolved in terms of LaLiga contract?

The last auction was of LaLiga for five years with the previous remedy that was a restriction of us acquiring the rights for longer than a three-year period those remedies are no longer in place

but

it's still a dialogue with the CNMC but that limitation is no longer applicable going forward. Great.

Hello Matias on your question on leverage and trajectory we do not have a public leverage but we do have a target of being committed to investment great trading rating and deliverage remains a priority for us. Our main driver is going to be a steady organic improvement as has been the case the capex peak being definitely behind so the main driver for reducing net debt should be free cash flow generation on that regard we are well on track to achieve a sound free cash flow in 2023 we see that growth accelerating forward throughout 2023 exceeding shareholders remuneration commitments high risk couples and therefore allowing for further deleverage that free cash flow generation is very much anchor in the positive underlying operating cash flow trend but we see that we also optimize every single line below that another thing which is very important is how we are prioritizing balance in the strength our prudent debt management has allowed us to be more resilient in the current environment we have a very strong liquidity position and a live maturity profile and we have anticipating many of the liability management so we are really tapping the markets at the right moment. We continue having a very strict capital allocation in organic we also have a top quality asset base which could complement the sound free cash flow generation on the credit ratings we have regular meetings with them I think they have seen that we have fulfilled the guidance for the last few years that we have started a strong start of the year and we ended up the year very strong despite everything that has happened and we have shown our resilience and rate agency value definitely are a strong commitment and welcome the measures we take to protect the credit rating.

Thank you very much.

Thank you. We will now take the next question from the line of Yemi Salarna from Goldman Sachs please go ahead.

Good morning everyone thanks for taking my questions taking a step back from the result it seems Spain was solid and you expect that to continue Telxius and Telefonica Tech ultimately came in better than expected and that should continue but the area that was a bit softer was on the free cash flow side so maybe focusing in there could you walk us through the cash flow items that get better through the year I think you're expecting a reversal on the working capital side for example what's your level of confidence there and could you talk us through any kind of key moving parts thank you very much.

Sure no problem free cash flow for Q1 was aligned with our expectations you see it's always very affected by seasonality Q1 and free cash flow generation is generally back and loaded as I just said to Mathieu we are well back to achieve sound free cash flow in 2023 and that growth will be accelerating forward to the end of 2023 the moving part is the growing OIVDA growing OIVDA on top line and also efficiencies and the lower capex one percentage below that it was a year ago no you are seeing that that OIVDA is already growing in Q1 and that should continue below right working capital should reverse and it will have a positive balance working capital in Q1 reflected seasonality as always a handset or supplier financing had no differential impact and it's been really meaningless and not contributing to working capital so it's been basically seasonality deferred payments and and part of that is going to change as we approach in the year as every year does we will continue optimizing our financial payments you have seen that our debt financial debt related cost is very is very attractive and we will keep on working on that trend in the case of tax it's sometimes affected by refunds and payment in advance but we expect the normalist tax payment is standing at around 23 percent which is below the nominal rate we have to emphasize on the cash inflows from the uk jb which is on track to deliver that we gave a guidance of 1.82 billion and then all this is we are working on optimization i think part of the peak came last year with inflation effects and so on it should be more stable this year but monitoring that very very closely so we will continue to manage every single line starting from consolidating the improvement of the operational trends and i think very important to mention how resilient a free cash flow has been in all those past years over the last seven years we generated as much of a 32 billion euro community free cash flow including three billion and a very important to mention that a spectrum in the core of this has been mostly secure so that shouldn't be a detractor in free cash flow a relevant one in in the in the near term and definitely free cash flow continues for us to be an absolute priority and linking into the previous question from marty are mainly for for deliveries so working on that confident on a sound result for the full 2023

very clear thank you maybe just one follow-up on the lease side it seems like kind of inflation year over year was about six percent is that a clean number xfx or is fx a driver within that within that cost bucket and could you maybe give us a steer as to where you expect to be from a kind of lease inflation perspective on a four-year basis kind of excluding fx that'd be super helpful clearly it does seem like free cash flow doesn't really improve through the year

yes it's difficult to give guidance on inflation for leases because not every lease is affected by inflation some of them are affected by other indexes and in some cases we have very long term leases we can renegotiate maybe lengthening the terms and getting better terms last year as you rightly said it was a combination of effects which by the way affected positively revenue or not but it had the opposite effect in leases also some of the similar indices adjustments and also that we incorporated a new right of use of oil for instance or build to suit we are doing in germany so the full combination of that gave a lease a uptake a little bit above the what should be the general trend but it's not as easy to give you an inflation because inflation target because there's a lot of moving parts but definitely a priority for us and we will keep optimizing this line

thank you

thank you we will now take the next question one moment please it's from the line of call murdoch smith from bernberg please go ahead

hi thank you if i look at the income statement versus consensus one of the biggest beats this quarter is net financial expense at 266 million euros that's quite a surprise and lower than every analyst in consensus given rising interest rates and 80 percent of debt being fixed i was wondering if there are any positive one-offs in that cost line this quarter or should we be thinking that interest rate interest costs could be sustainably lower than previously expected going forward so that's question number one question number two is just on them your comments about the legacy copper switch off in spain by april 2024 i was wondering if you could just expand a bit more on that in terms of the quantitatively what what could be the near-term financial impact of that as we go past april 2024 thank you

hi carlon the financial expense question i would say it's being rather the opposite it may have been below a sorry expenses net financial expenses below a consensus but that's of the good management we are doing because there hasn't been a significant one-off actually last year we had some reverse of provisions for some items so it was actually more positive last year in the other side so if you look at the year on year evolution the good results is is the debt management we we are doing we are benefiting from having a very high rate of 80 percent of fixed rates we are also seeing that we had a big ramp up in interest costs in hispan and latam last year that's more stable there we have also reduced a slightly deliveries ratio in real currency and that's helping also a bit but it's basically the debt related financial expenses being very controlled and being and being optimized on the other expenses there are many bits and pieces we have hedges we have some a commercial depth we have anytime we have a fine or a contingency it always has a tax element and that's very very volatile that's why we are working now in an increasingly focused market on interest rates raising we are focusing more on the debt related kpi and and that's been very well managed but on the other not big things in in 23 i would say was more beneficial in 2022 and this year actually is working it's not helping us just the opposite is the debt related piece which is bringing all the overperformance

and regarding the the benefits from the copper network shutdown we as i was saying before we have confirmed the determination to condition our copper network by april 24 we will be one of the first players in the world to achieve this and and in fact we are no longer adding subscribers on copper technology already since since april this year this will this brings is already bringing opex and capex savings as running a fiber to the home network is much cheaper on the back of lower maintenance and higher efficiency in terms of energy consumption fiber is 85 more efficient than copper now we're already capturing part of this in cost savings in energy maintenance lower failure rate less call center attention and also in disposal of legacy assets mainly copper and some real estate although this already already peaked in 2022 so we think efficiencies will continue increasing year by year until transformation is completed we will need during 2024 to continue some wholesale wholesale services not retail but wholesale services on on copper for extra six months and we will need some time for dismantling this after that but all in all we estimate that we may have captured already 0.8 percentage points in the margin from permanent deficiencies of what we have been dismantling already so far and we already have 90 percent of the fixed broadband customers in fiber and in the next two years we could get an additional one percentage point of oeda margin improvement on this of course there will be other moving pieces around and this will also allow us to keep our capex to sales at the benchmark low level going forward

that's fantastic thank you very much

thank you we have time for one last question please

thank you our last question comes from the line of piladovico from credit swiss please go ahead

hi good morning and thank you for taking my questions i have two on my side so the first one is on spain and i would like to get a bit more clarity on whether you're starting to see some sort of spin down there were some comments in massmo we call this week where they were highlighting the intensive promotional activity on the low end so i'm not pretty sure how how much of this is actually being reflected into into the customer base angel mentioned that oh two has been quite strong this quarter so it would be good if we could get a bit a bit more clarity here and whether this promotion activities is impacting the base and the second one is on brasil it has been a very strong performance so i'm not sure if part of this is already capturing benefits from the icms tax reduction when to to start expecting price increases or if there is sort of of mechanism in place even just to capture this potential upside thank you very much

thank you on on your first question we are seeing a limited spin down the same way that maybe in other markets like the uk with cost of living crisis is impacting partially in spain we are to this the fact that we anticipated trends by adjusting from fusion to me movistar and making the bundle more flexible more modular more adaptable to to the customer needs and this is in the end yes the mix of auto has been has been increasing but at the same time we have also been adding new digital services in our digital v2 ecosystem devices and so on that allow us to to manage the different moving parts and and all in all continue increasing the the arpu at the and actually we anticipated it with the reconfiguration of the of the me movistar portfolio because in brasil and i cms we passed that benefit to to the customer there was different timing of adjustments this is a by state different states have applied different adjustments and in different moments of time this process is over we have passed this to the customer on the other side you know this has allowed us to increase prices according to inflation or there about both in fixed and in mobile but the customers thanks to this reduction of the tax have not been suffering so much in in their bills and this has allowed us also in brazil to continue growing arpu to grow mps maintain or reduce churn and achieve the spectacular rates of growth and that that we have been posting in the results that you saw in the market so the i cms which is i think was your question it has been passed to the customer and has allowed let's say the customers to digest the price increases without suffering such a a big impact in their overall bill including taxes so thank you very much for your questions i'm sorry go ahead pillar

no thank you very much just in terms of the promotional activity is there any anything that you you are just supporting which which might be worried in terms of market moves or could trigger higher commercial activity what

we see is that the market continues to be a two-tier market promotions are out of all the main brands in the higher arpu higher value segments in the low end there is a more intensity of competition i think that in the statements massmobile was also pointing at the activity in those in those segments so in the in the lower price lower cost lower arpu segment yes there is more to be a competitive environment in in those but the market is is confirming the rationality on on the on the promotional activity and many other elements clearly in the in the mid and high end tiers and yes we will continue to see pressures on the low end

thank you very much so with

this yeah with this i would like to to thank everybody we hope that we have been able to respond to your questions if there were question less please don't hesitate to contact our investor relations team thank you

telephonic as january march 2023 results conference call is over you may now disconnect your line thank you