Telefonica SA

So I guess we're ready. Good afternoon, everyone, and welcome to Telefonica's Q3 2022 results. I'm Adrián Funcinelli from Investor Relations. Before proceeding, let me just mention that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unaudited. This presentation, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group. These statements may include financial or operating forecast and estimates or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant information, please contact Telefónica's Investor Relations Team in Madrid or London. In the interest of facilitating an official Q&A session, we kindly request that those attending virtually Direct your questions from Q3 results to our inbox, cmdquestions at telefonica.com, which has just been opened. Please note that for Q3-related inquiries, we would appreciate if each participant limits their queries to a maximum of one question per participant. And ensure that the questions pertain solely to the matters concerning this specific quarter. For any other inquiries outside the scope of the Q3 results, we encourage you to reserve those for the dedicated session during the Capital Markets Day. Additionally, for those standing in person, please feel free to raise your hands and ask live questions during the Q&A session. As a reminder, today's presentation is being recorded. And now I'd like to pass the floor to our Chief Operating Officer, Ángel Vila.

Welcome, everybody, to Telefónica's third quarter results presentation. With me today is Laura Basolo. Our chairman and CEO, José María Álvarez Pallete, will join later for the Capital Market Day session. This morning, we announced our Q3 earnings. We have delivered another quarter of particularly solid performance, where we continue to progress in all of our key performance indicators. We maintained a strong market position, growing in high-value accesses such as Fiber and Mobile Contracts. Investments in next-generation networks, like 5G deployment acceleration, allow us to grow an increasingly satisfied customer base with both leading NPS and churn levels. Profitable and sustainable revenue and OFDA organic growth continued, while OFDA minus CAPEX accelerated its growth in Q3 to plus 9.3% year-on-year. growing 4.8% in organic terms during the first nine months of the year. In Q3, top line grew 2.5% organic, with service revenue growing 3.1% year-on-year, again showing our pricing power. B2B maintains a remarkable performance, with growth of 4.6% year-on-year. OFDA grew 3% year-on-year in organic terms, driven by efficiencies and consistent and disciplined execution. On a reported basis, and despite FX headwinds, OFDA performance improved in Q3 to plus 2.5% year-on-year, showing an improved operational leverage. Bottom line, active management of all free cash flow lines supported the conversion of this better operating performance to free cash flow and helped us to reach €1.1 billion free cash flow in Q3 and €2.4 billion in the first nine months of the year. Net debt declined to €26.5 billion while the leverage ratio declined to 2.5 times during the quarter. In summary, we continued to deliver in all metrics. Moving to slide 3 for the overview of quarterly key financials. In reported terms, OIBDA grew plus 2.5% year-on-year to €3.3 billion, accelerating by 2.6 percentage points versus the previous quarter. Revenue surpassed the €10.3 billion mark, virtually stable year-on-year. Net income reached €1.3 billion in the first nine months of 2023, or €0.5 billion in the quarter. Free cash flow grew 0.4% year-on-year in Q3, reaching €2.4 billion in the first nine months. This strong free cash flow generation helped net debt to decline both quarter-on-quarter and year-on-year by 3.4% and 7.4% respectively. As mentioned before, All key financial metrics show growth also in organic terms during the quarter, which added to an improved operational leverage results into stronger growth down the line. Revenue growth of 2.5% resulted in 3.5% OIDA growth and as much as 9.3% OIDA-CAPEX growth. Moving on to slide 4. Given the strong nine-month performance and expected evolution of our business, we are well on track and reconfirm our full-year guidance, which we recently upgraded. Organic revenue, year-on-year growth of around 4%, organic oil, the year-on-year growth of around 3%, and capex to sales organic guidance at around 14%. The €2.5 billion free cash flow ex-spectrum for the first nine months is on track as well to meet the ambition of around €4 billion free cash flow markets ex-spectrum for the year. Our 2023 €0.3 dividend per share, €0.15 in December 2023 and the second tranche in June 2024, is also confirmed. Regarding ESG, on slide number 5, we are ahead of the regulatory curve with a solid and transparent roadmap to achieving our goals. We have published our second Climate Action Plan, which follows TCFD guidelines. TCFD means Task Force for Climate-Related Financial Disclosures. This updated plan includes more details on our governance model and the risks and opportunities related to climate change. Another example is our Human Rights and Environmental Impact Assessment, which we have published ahead of the new due diligence requirements. Finally, we continue to explore sustainable financing options successfully, issuing a green hybrid bond for €750 million in the last quarter. We have also updated our financing framework to align with the latest market practices. Moving to Spain on slide 6, Telefónica Spain Q3 results again confirm how a strong and improving commercial momentum positively impacts our financial trend evolution. Following the refreshment of the B2C portfolio and the launch of a new over-the-top proposal in August, convergent customers and TV accesses simultaneously grew year on year in Q3. Moreover, a benchmark low churn and industry leading ARPU are boosting our premium conversion customer lifetime value. This is an important proof point of the successful commercial strategy of Telefónica Spain, which has been permanently adapting to market dynamics, allowing us to continue to lead the market with a great focus on value share. Service revenue growth increased sequentially in Q3, with retail revenue growth accelerating to plus 2.4% year-on-year, with the stronger trading acting as the main leverage. OIBDA decline slowed to minus 0.5% year-on-year in the quarter, and continued the path to stabilization seen throughout the year, This stabilization we expect to reach in Q4. OIBDA progressive improvement is mainly driven by the higher revenue flow, lower energy costs, and network transformation efficiencies. OIBDA minus CAPEX margin remained at benchmark levels, 24% in the first nine months, with CAPEX intensity to further soften year-on-year in Q4. Moving to Brazil, on slide 7, once again Vivo delivered a very strong operational and financial performance. Operationally, Vivo remains the clear market leader. In mobile, ARPU continued to grow almost double-digit year-on-year, driven by progressive upselling and continued tariff upgrades in both contract and prepaid, while churn remains very low at 1%. 1.1%. In FTTH, VIVO accelerated new connections to 183,000 in the quarter. Revenue grew by 7.5% year-on-year in Q3, again well above inflation, which together with efficiency gains drove 11.6% OIBDA growth to a margin of 44%. The already anticipated reduction in CAPEX intensity allowed OIBDA-CAPEX to increase 26% year-on-year in the first nine months of the year. Moving to Germany on slide 8, which delivered another quarter of robust growth driven by its value over volume strategy, and with commercial momentum building on its successful more-for-more portfolios and normalized churn rates. Since October 23, O2 customers can experience 5G+, which marks the beginning of a new technology era with this service being available to more than 90% of the German population. Moving to financials, revenue grew by 2.2% in the quarter, while ODA grew plus 3.6% year-on-year, supported by improved operational leverage, mainly in mobile, which was partly offset by some anticipated cost increases related to commercial activity in the quarter. We now move on to slide 9, to the UK and our joint venture Virgin Media O2, as it continues to invest in product services and networks to provide an enhanced customer experience. Despite an ongoing tough economic environment, VMO2 delivered and improved trading performance, growing the customer base in both fixed and mobile. The focus on network investment continued. with 251,000 premises passed deployed during the quarter, surpassing the 500,000 premises passed milestone in the first nine months of the year, and with 5G connectivity now available in 3,200 towns and cities. In addition, the MO2 has reached an agreement to sell a 16.7% minority stake in the Mobile Tower Joint Venture cornerstone, to UK-based infrastructure fund GLIL Infrastructure for £360 million. Looking at the financials, both revenue and ODA accelerated sequentially to 7.1% and 6.3% respectively, supported by next-fiber construction and underpinned by the delivery of synergies which remain on track to achieve their target. Slide 10. reviews Telefonica Tech, the leading provider of advanced next-generation solutions in B2B. Telefonica Tech outperformed the market again, delivering a 30% year-on-year revenue growth in the first nine months of the year, on the back of its strengths, a highly skilled workforce and a well-established reputation for excellent delivery across Europe and the Americas. In constant perimeter, revenue grew by 23% year-on-year, and outlook is very positive, supported by 26% year-on-year increase in last 12 months bookings. The new organizational model recently put in place is consolidating with two new global service units created, IoT and business apps. These will provide a global portfolio and service to maximize the opportunity in all markets and create synergies. Finally, let me highlight that Telefonica Tech has become one of the most relevant Microsoft partners in Europe after receiving Inner Circle Award for Outstanding Sales and Innovation and Partner Designation in Security. In addition, Telefonica Tech was again named a leader in IoT managed connectivity services worldwide by IDC and representative vendor for 4G and 5G private mobile network services by Gartner. On slide 11, we review our top-tier infrastructure portfolio, Telefónica Infra. Our well-established FiberCo portfolio, with first-class partners, reached 20 million premises passed as of September. Let us highlight the UK this quarter, where NextFiber reached a rollout milestone of 500,000 premises passed, and BMO2 acquired AppUPP, a UK alternative fiber operator. The network assets will be transferred to NextFiber after integration works are completed, accelerating the deployment by 175,000 premises passed. In addition, we expect to obtain regulatory approval for the agreement with Entel in Chile in Q4 this year. Telcius maintained a solid profitability with margins above 50% in the first nine months and Q3, and announced that it will be extending the submarine cable Tikal to land in Cancun, Mexico. I will now hand it over to Laura, who will review ISPAN's operations and the group financial position.

Thank you, Ángel, and welcome everyone. Moving to Telefónica ISPAN. In Q3 2023, we continue to take steps to improve profitability of the business. We continue growing very fast in the most valuable segments, like FTTH, where we posted an access increase of 12% year-on-year. We received the regulatory approval from the Colombian government for the integration of our mobile radio access network with Milicom. InfraCoin Chile is awaiting for the green light for operation with Entel that would allow for an increase in the size of the neutral fiber network, avoiding overlap and making the business more profitable. Results, and mainly OIBDA, continues to be affected by a difficult macro and competition backdrop in Peru, the impact of the FTTH access migration in Chile and Colombia, and the network transformation efficiencies in Colombia in Q3-22. However, we expect a better OIBDA-CAPEX trend in Q4-23. Turning to slide 13, net financial debt declined to 27.5 billion euro in June 2023 to 26.5 billion euro in September 2023, mainly due to the solid free cash flow generation in the quarter. Net debt to orbital was significantly reduced from 2.62 times to 2.51 times as of September 2023. We maintain a solid position of 20.8 billion euro that together with a light maturity profile allows us to cover dead maturities over the next three years. Meanwhile, we have contained our debt-related interest costs at 3.61%, thanks to the very active refinancing exercise undertaken along previous years and the solid position of fixed interest rates in a strong currency that allows immunization to the environment of raising interest rates. Telefonica maintains above 80% of its debt linked to fixed rates, mailing euro with an average life of 12.3 years, which places us in a comfortable position to face any environment. I will now hand back to Ángel, who will wrap up.

Thank you, Laura. Tomorrow is on slide 14. We delivered another solid quarter in Q3. Revenue and OEPDA growth remained steady year-on-year, supported by stronger KPIs and improved customer satisfaction, while OEPDA-CAPEX growth accelerated significantly year-on-year, driven by our operating leverage. We continued our ongoing technology transformation through the promotion of artificial intelligence machine learning, bringing benefits in terms of minimizing costs and resources allocation. This has enabled us to reduce our net debt to 26.5 billion euro, while reducing leverage to 2.51 times. Free cash flow ex-spectrum is progressing towards the full year target of 4 billion euro, having reached 2.5 billion euro in the first nine months of the year. We are on track to fulfill our upgraded 2023 guidance, free cash flow ambition, and we confirmed the dividend for the year and the 1.5% treasury stock cancellation in the next AGM. We continue to monitor ongoing industry and regulatory changes while keeping ESG priorities at the core of our business. Thank you very much for listening. Now we are ready for your questions.

Maybe a question on Spain. I've seen the KPIs are quite solid, but it looks like a lot of the acceleration of retail revenues comes from non-conversion revenues. So perhaps if you can comment a bit on what's driving that? And also you mentioned the new tariff plans that are out. If you could comment both on whether these will improve the conversion art going forward and what competition is doing at the same time. Thank you.

Thank you, Georgios. Well, we have had a third quarter which has been probably the most successful commercially in quite a long time. This was in the wake of a back-to-school campaign, also in a quarter that is marked by the disconnections or suspension of football subscriptions at the beginning of the quarter and then the reconnections again. The commercial improvement is the result of two measures. One, the reconfiguration of the MiMobi Star portfolio that we did to make it more modular. And second, the launch of the new pay TV over the top offering that has reverted a many quarter trend of negative net ads in pay TV that now have moved to positive. So, We are doing this while at the same time managing to increase our ARPU year on year. It declined quarter on quarter because of the football effects that we have always in the third quarter. But increased year on year, we are having the lowest churn ever at around 0.9%, no? 0.9%. And this combined with all the metrics, we get to a customer lifetime of nine years, which is quite resilient. We are now in the fourth quarter. We're starting the typical back to school, the typical Black Friday promotions in this season. So you will see. And some people like to write, you know, potential promos, but no. From what we're seeing so far and what we saw in the back-to-school campaign and the beginning of the football season campaign, no more intense promotional activity than what we had one year ago. I don't know if the response to your question or I can elaborate. Sorry, there?

On the non-conversion revenues which seem to be driving the retail revenue growth, is that business, is it sustainable?

Well, we are also having traction in part of our services that we have around the digital ecosystem, the pure convergence, and also we are getting traction in positive territory in post-paid mobile that we managed to achieve as compared to previous quarters. Thank you.

Hello, Fernando from Santander. Just a quick question on wholesale business in Spain. Just to understand if the deceleration that we have seen in the third quarter is driven by or what is the reason behind that deceleration? Is it coming from low margin wholesale revenues like content or is it from high margin wholesale revenues like, for example, fiber access and so on? Thank you.

Well, the wholesale has also a seasonal impact in the third quarter linked to resale or not resale of, for instance, the football content. It's less linked to fiber, which I continue to see good traction. But in the content resale, we always have seasonality, the same way that our subscribers resale. of soccer either disconnect or suspend that connection at the beginning or at the end of the football season which is the beginning of the quarter and reconnect later on the same happens with our resale to other players that buy the content from us Thank you

Thank you. Javier Barrachero. On the domestic EBITDA, can you maybe walk us through the different items and the moving parts? I think in previous quarters you mentioned some tailwinds, lower energy costs, lower content costs, probably network facing. Just maybe if you can comment on these different items. Thank you very much.

Thank you, Javier. Well, the first part is the revenue growth. As you could see in the slide, it's accelerating, both on service revenue and retail revenue. This is both on the B2C and it's higher on the B2B side. So the more we grow on the B2C side, the better margins, because B2B has lower margins. In addition, we have seen an analysis of some cost items, like content cost. At the same time, we continue hedging and covering our energy costs, which are no longer a headwind but a tailwind in comparison with the previous year. And we continue working on all type of efficiencies linked to the progressive transformation of our network to a fully fiber network, which we're going to elaborate more later on today on what savings and to what level of OPEX or margins. can take us and what level of capex or revenues we will be projecting particularly in Spanish operation and in general in the group Laura, feel slowly

If there's no further questions, we can leave it here. And we'll reconnect at 2 p.m.

Thank you very much. I'm sure we will have plenty of questions when we reconnect in half an hour time. Thank you.

Thank you.