Telefonica SA

Good morning, thank you for standing by and welcome to Telefonica's January-December 2023 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 1 on your telephone keypad. You will then hear an automated message advising your hand is raised. To answer your question please press star 1 1 again. As a reminder today's conference is being recorded. I will now like to turn the call over to Mr. Adrian Zunfunegi, Global Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefonica's conference call to discuss January-December 2023 results. I'm Adrian Zunfunegi from Investor Relations. Before proceeding let me mention that financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unedited. 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 the relevant securities 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 Chairman and Chief Executive Officer, Mr. Jose Maria Alvarez-Pallete.

Good morning and thank you all for joining us today. Reflecting on 2023, I'm proud of the progress we have made as a company and the dedication and resilience demonstrated by our teams worldwide. 2023 was a pivotal year for Telefonica where we enhance our networks, our operations and an overall customer experience. While there is clearly a lot more to do, I am confident that we have a lot more to do. As we continue to execute against our strategy, we delivered on our promises in 2023 and we are comfortably on track to meet the GPS plan ambitions we shared with you last November. With the GPS plan as our guide, we stand ready and eager to invest the opportunities that 2024 holds. In 2023, we not only achieve an over-updated guidance but also, and importantly, over-deliver in terms of free cash flow generation. We are growing revenues, with P2B remaining a differential engine growing 6.3 euro a year in organic terms, significantly above the overall .7% top-line organic growth. OEDA also grew more than 3% and we reduced CAPEX by another 3%, allowing us to expand our OEDA minus CAPEX margin to 19%. In turn, this higher OEDA and lower capital intensity contributed to the very strong free cash flow of 4.2 billion euros, 200 million above what we guided to in July. We are delivering solid results across all of our markets, driving exceptional performance in Brazil and Germany and improving trends in Spain. These successes are underpinned by our investment in the latest technologies, which have enabled significant growth in our customer base, who now enjoy the benefits of our advanced fiber and 5G networks. As we progress, our strategy of reducing exposure to legacy networks is paying dividends, allowing us to streamline operations and drive our efforts in simplifying the business. We have now reached more than 94% ownership of Telefonica Deutschland following our tender offer, reinforcing our confidence in the German market. Our journey towards simplicity and efficiency is ongoing and you can expect us to continue to optimize our business structure. As we look ahead, our path is clear. We are seeing momentum in our business and we are ready for 2024 as the first year of our growth, profitability and sustainability plan. We remain committed to driving growth, enhancing our customer experience and leading the digital transformation that will shape the future of Telecom. We will share more details on guidance, but in 2024 we will grow revenues, EVTA and EBITDA minus capex and our capital intensity will continue to decline. Importantly, despite a stronger 2023, we expect that free cash flow will grow by more than 10% this year. This is strong free cash flow generation supports our key capital allocation priorities, including our dividend, our expectation to deliver over time and our path to create a significant shareholder value. I am confident in the direction of our business and the opportunities that lie ahead. As you heard on our Capital Markets Day, Telefonica is on a mission to be at the forefront of the telecommunication industry. Our journey has been and is guided by three pivotal pillars in addition to sustainability. Firstly, our investment in future proof networks has been transformational. With the deployment of FTTH to an additional 10 million premises globally, increasing our pool stream by 15% over 2022 and achieving 62% of 5G in our core markets, we have expanded our infrastructure to revolutionize the connectivity landscape. Our networks are not merely conduits of communications, they are the backbone of innovation for the service and products of tomorrow. This provides us with new opportunities to monetize our network and enhances our ability to increase our return on invested capital. Secondly, our focus on an enhanced customer experience and being customer-centric organization has generated considerable rewards. We are not just adding customers, we are fostering relationships, growing our customer base to 388 million. And our satisfaction metrics are growing. By example, our MPAs expanded by 31 this year and we continue to be focused on improving the overall experience. Ultimately, trust, reliability and superior service are the backbone of Telefonica. Lastly, our pursuit of linear and more efficient operations has propelled us into the new level of operational excellence. We have refined our organizational structure, stripping away complexity to reveal a more agile organization, which has improved our operating leverage by up to 19%. At the same time, we have optimized our structure with many employees joining our redundancy program, a strategic move that aligns our workforce with our future needs. Moreover, we have made significant progress in phasing legacy networks, including the shutdown of almost 2,000 copper central offices in Spain, with full retail copper network shutdown to be finished by April of this year. This shift reduces costs and reallocates investment to more advanced efficient technologies, ensuring our infrastructure meets devolving demands of connectivity and sets the stage for future service innovation. This is not just about cost savings, it's about crafting a business that is as resilient as it is dynamic. With a robust network infrastructure in place, a customer-centric approach with a growing base and a relentless focus on efficiency, we are well positioned to be a global leader in fiber and 5G and ultimately to unlock value for shareholders. Our strategic initiatives have allowed us to deliver on our upgraded 2023 guidance, which we set in July in organic terms. Revenue grew by .7% and FDA grew by .1% year on year. Our capital intensity continues to decline. CapEx to sales declined year on year to 14%. Bottom line free cash flow ended up stronger than anticipated, reaching more than 4.2 billion euros above our guidance of 4 billion euros. In other words, we are delivering. The financial strength secures our dividend for 2023 of 0.3 euros per year, comfortably funded by our free cash flow of 0.75 euros per share. And even with the updated free cash flow calculation, we maintain a healthy free cash flow per share of 0.41 euros, more than covering our dividend payment. And while we deliver on organic terms, year 23 also shows our GPS plan and are already kicking in in reported terms too. We are back to growth in reported terms in both revenue and OEDA by between 1% and 2% year on year, despite effects such as the Argentinian Pesod Evaluation. This is even more pronounced in our EDL minus CapEx, which grew more than 5% demonstrating the tangible benefits of efficiency measures and declining CapEx. The driving forces behind the growth were Brazil, Germany, and Spain, with the former being the biggest contributor to operating improvement. Looking forward and starting in 2024, we expect Spain to increase this contribution to EDA growth, adding to continued growth for Brazil and Germany. I will now hand over to Angel to give you an overview of the progress across our core business during the last quarter of 2023. Thank you,

José María. Starting with slide six, you can see momentum has strengthened in the fourth quarter of the year. Most notably, we saw sequential acceleration in growth across our six key financial metrics. Organic revenue growth stood at .1% year on year in the quarter, 1.7 percentage points more than in Q3, driven by better service revenue performance and again strong B2B, a truly differentiating factor of Telefonica. OEDA ramped up 1.5 percentage points to plus .5% year on year, with all geographies growing, Spain reaching stabilization, and Brazil and Germany robust growth. Worth noting the sharp improvement in operating leverage in Q423, with OEDA minus capex up by 19% year on year in organic terms, adding more than 2 percentage points to our operating cash flow margin. This all fits into our strong free cash flow generation in the quarter of more than 1.5 billion euro, more than 400 million euro higher than in the previous quarter. Moving to slide seven, Telefonica España confirmed its commercial and financial recovery path in 2023. The improvement in commercial trading was consolidated, and for the first time in four years we have posted two consecutive quarters with NetAds in all accesses. We did this in phase of industry competition. This is thanks to our superior platforms and smart commercial strategy adapted to changing market dynamics. Moreover, whilst continuing to show benchmark low churn, the lowest in a decade, and industry leading ARPU. All of these continue to fuel retail revenue growth to plus .7% year on year in the fourth quarter. As we have committed, OEDA stabilized in Q4, even showing slight year on year growth, supported by solid retail revenue and further efficiencies in network transformation, digitalization and energy consumption. In Q4 we recognized a 1.4 billion euro provision associated with the announced restructuring plan, which will generate around 285 million euros of direct savings in personal costs from 2025, with positive impact on cash generation from day one. 2023 capex increased slightly as we remain focused on the rollout of fiber and 5G to reach the target of switching off retail copper network by April this year. Despite this, OEDA minus capex margin remained at benchmark levels, and both that of the same quarter previous year. Telefónica España is hence stronger, better positioned and ready to capture growth opportunities ahead. Moving to Brazil on slide eight, where we review how VIVO keeps up with strong commercial, operating and financial momentum. VIVO ended 2023 with a clear leadership position. Its differential value proposition, superior network quality and the growing demand for bundles led to the highest mobile ARPU in four years. In addition, VIVO's fiber is now present in 443 cities with 26.2 million premises passed, resulting in a 13% -on-year increase in fiber connections. Revenue grew by .9% and OEDA by .9% -on-year in the quarter, both well above inflation, thanks to our strong commercial activity, price adjustments and ongoing operating efficiencies. And this operating leverage further improves down the line, with OEDA minus capex margin reaching an all-time high in 2023 of 27% as capex intensity declined. Moving to Germany on slide nine, which overachieved the fiscal year 23 outlook, driven by robust commercial performance on value over volume focus and its successful return to low churn levels. O2 for state ARPU grew plus .9% -on-year in Q4, reflecting customer demand for high value tariffs. Telefonica Deutschland made steady progress with the densification and further rollout of its 5G network, with pop coverage already at around 95% at year end, up from more than 80% last year, and well on track for nationwide 5G coverage by year end 2025. Furthermore, Telefonica Deutschland's O2 network has been awarded a very good rating for a fourth year in a row by Connect magazine, reflecting the continuous investments into network quality. At the same time, capex intensity declined to 13% in 2023. Stronger and more advanced networks allow for strong operating performance. In Q4, revenue accelerated to plus .6% -on-year growth, value OEDA grew by .7% -on-year, driven by on-brand momentum, another record quarter of sales and successful cost management. We now move to slide 10, to the UK and our joint venture Virgin Media O2, which delivered resilient trading performance, expanding its fixed mobile and conversion base throughout the year, despite a challenging macroeconomic backdrop. The fixed network rollout progressed at an unprecedented pace, reaching 17 million premises past, with a 836,000 increase in 2023. In mobile, the target of 50% UK outdoor 5G coverage has been reached. In Q4, revenue grew by .7% -on-year, while OEDA growth accelerated to .6% underpinned by the realization of synergies, price rises, and cost efficiencies. We expect to reach full rate synergies of 540 million pounds by mid-2026. Slide 11 reviews Telefónica Tech, the cornerstone of our B2B transformation. Telefónica Tech has completed its first three-year cycle with a consistent over-delivery. Its revenue growth doubled that of the market. Slide 12 Revenue grew by 27% -on-year in 2023, or 22% in constant perimeter, to reach around 1.9 billion euro on strong foundations, a highly skilled workforce, and a well-established reputation for delivering with a sizable scale advanced IT services for B2B digital transformation. Momentum is robust, as qualified commercial funnel and bookings are growing double digit versus 2022. Its new organizational model continues to progress and Tech has expanded cybersecurity capabilities in the UK over the fourth quarter. As such, Telefónica Tech faces a new growth cycle well positioned to deliver additional value. This will be underpinned by strong sales pipeline, enhanced capabilities, and the realization of operational synergies. Telefónica Tech has proven to be a strong player in the IT market and a key engine for the superior growth of Telefónica's B2B revenue. Moving now to slide 12, Telefónica infrastructure is strengthening Telefónica's infrastructure to support growth and efficiency. We are accelerating fiber deployment with around 60% -on-year growth to 21 million premises passed, with a target in 2026 year-end of 30 million, approximately 30% of Telefónica's group future fiber to the premise deployment. The portfolio of joint ventures across our footprint are advancing in their requirements and delivering value. As such, Telefónica infra is allowing us to maintain Telefónica group differentiation. Telseus, with more than 100,000 kilometers of international fiber to grow to more than 110,000 in 2026, maintained a high profitability, boasting an OTA margin above 50% in 2023, and is joining Furmina's subsea cable, providing three redundant routes to connect US, Brazil, and Argentina. I will now hand over to Laura, who will guide you through ISPAN performance and the main financial topics.

Thank you, Ángel. Moving to ISPAN on slide 13, we continue to move towards an asset-like model in the region, resulting in a decline in the average invested capital of 37% since December 2019. Following the regulatory approval of the mobile network, JV, between Movistar and Milicon in Colombia, the two companies obtained 80 MHz in the 3,500 MHz band last December. On top of that, we expect to obtain the regulatory approval of FANGEAS deal in Peru later in the year. We continue growing in high value customers, while continuing in our efforts to cool down competitive intensity in most markets. OIPDA minus CAPEX fell 5% -on-year in 2023, a significant sequential improvement on improving OIPDA and full-year CAPEX over revenue ratio, reducing 1 percentage point -on-year to 9.4%. On slide 14, we wanted to briefly address our bottom line performance. An ongoing transformation process implies non-cast one-off charges. As you know well, we have completed a workforce reduction program in Spain and carry on less sizable restructuring programs in several other countries. This coupled with good will impairment change in the UK led to reported losses in 2023. Nonetheless, and was once adjusted for all these non-cast items, underlying income growth by more than 17% -on-year to almost 2.4 billion euro. And once we continue canceling own source, underlying EPS growth even further, but as much as 19% to 30 cents of euro. Moving to our balance sheet, we feel comfortable with the strength of it. Telefonica has demonstrated robust financial health this year as evidenced by the solid precast flow, which has comfortably covered shareholder remuneration and employee commitments. The increase in net financial debt from 26.7 billion in December 22 to 27.3 billion euro in December 2023 was mainly due to our strategic decision to increase our stake in Telefonica Deutschland. Excluding such impact, net debt to OIDA ratio would have decreased from 2.54 in December 22 to 2.52 in December 23. Despite the temporary uptick, we remain on track to align on our outline leverage target for 2026. We maintain a strong liquidity position of 19.5 billion euro, which together with the live maturity profile allow us to cover debt maturities over the next three years. Simultaneously, we have reduced our debt-related interest costs from 3.96 to 3.80%. Thanks to the active refinancing exercise undertaken in previous years and the robust position of fixed interest rates in strong currencies, allowing immunization to raising the debt. Telefonica maintains over 80% of its debt linked to fixed rates, primarily in euro with an average life of 11.6 years, which puts us in a comfortable position to navigate in any market environment. Overall, we have a very strong balance sheet that allows us to support our key capital allocation priorities. And our capital allocation priorities are underpinned by the strong balance sheet as well as our focus on reducing capital intensity as we have previously discussed. Early on, we saw the potential of Fiverr and invested in Ind when it wasn't a popular choice. Today, we are beginning to see the substantial benefits of these early investments. To rate the rate, peak capex is well behind us. Capital intensity has consistently decreased in 2017 from 17% then down to .3% in 2023. Looking ahead, we are looking for a further drop to up to 13% in 2024 and for it to continue to fall below 12% by 2026. This reduction in capital intensity is one of the main drivers behind precast long growth of more than 10% between 23 and 26. But it's not the only lever behind precast expansion. It will also play a major role. Thanks to the flow through of growth as well as realizing efficiencies, the biggest component of which we now have certainty on. Around 2.85 million euro annual from the Spanish workforce reduction program are now secure. Hence, a very relevant part of the flow from slightly more than 2 billion in 23 to around 3 billion in 2026 makes us feel even more comfortable than last November that we will meet our commitments. Our capital allocation priorities are crystal clear. Even as we bring down capex, we are continuously investing in our networks, enhancing our Fiverr and 5G capabilities to stay ahead of the curve. We are committed to a great position to pay the dividend with euro 30 cents per share as a floor. And I want to stress that our dividend are well supported by growing precast flow. At the same time, we remain on track to deliver it to 2.2 to 2.5 times net depth to every range by 2026. And lastly, any excess cash in the future will be carefully evaluated for opportunities such as share buybacks. To summarize, we have a robust balance sheet, we are committed to our investment credit rating, and our capital allocation priorities are clear. I will now hand back to Jose Maria who will wrap up.

Thank you Laura. Turning to slide 17, we maintain our commitment to sustainability as a key part of our business. On the environmental side, I am proud to report that we have been included on the climate A list for the 10th consecutive year. We have reduced our total emissions by 51% in the last eight years. Furthermore, in 2023, we helped our customers to avoid 86.1 million tons of CO2 in the last year through our connectivity and EcoSmart services. In terms of social impact, our latest SDG report shows a total annual contribution to society of more than 100 billion euros. Internally, we strive for gender equality against solid targets, achieving 33% women executives and equal pay for equal work. Regarding governance, our board composition shows our commitment to best practices with 40% women and 67% independence. Our rigorous measures in business ethics continue to uphold a zero tolerance of corruption. Finally, we remain leaders in our sector in sustainable financing with an additional green bone already issued in 2024. Following our strong 2023, we have even more conviction in our journey and are looking to continue to make strong progress in 2024. The massive transformation we have undergone, improving our networks, increasing customer engagement, making our operations more efficient and ensuring business sustainability, place us in a considerably improved position. Thanks to the capabilities of our networks, we are prepared to enlarge our addressable market. We are focused on reaching 70% 5G coverage in key markets by 2026, with some markets approaching 90% or beyond. Importantly, we are committed to increasing our return on capital, which is a key metric for our business. At the same time, we are looking to grow converging customers to more than 60% and use more AI to support customer engagement as appropriate. We are also leveraging the transformation to double down on efficiency and boost customer experience, fully benefiting from massive legacy switch off, streamlining our business model. We will be realizing the advantages of our proactive investment in platforms and artificial intelligence, which will manifest as highly automated operations and content manage, autonomous network management and cutting edge customer engagement strategies. We will have a fully programmable network infrastructure that will reduce operating costs and introduce a new wave of personalized and real-time services to our customers. This is opening up a new avenue for monetization and strengthening our value proposition while reinforcing our ability to increase our return on invested capital. We have a very high confidence rate. As we think about this year, we remain confident that the momentum that we have built in 2023 will continue in 2024. Importantly, our guidance for the year shows our high degree of confidence, not only in the medium term, but also in year one of the GPS plan. Despite 2023 successes set in a higher bar, we expect free cash flow to grow by more than 10%, even with the higher starting point. That growth is driven by reported revenue growth of around 1%, DBA and EBITDA minus capex growth of between 1 and 2%, and lower capital intensity of up to 13%. The 2024 dividend in cash of 0.3 euro per share will be paid in two tranches of 0.15 euros in December 24 and June 25. As we share at the capital market today, our ambitions going forward are even higher, with revenue growth around 1%, EBITDA growth of around 2%, and EBITDA minus capex growing further to around 5%, thanks to further decline in capital's intensity to below 12% by 2026. Free cash flow will grow by a compounded rate of more than 10%, helping to reduce our leverage ratio to between 2.5 and 2.2 times in 2026, and again allowing us to commit to a floor dividend of 30 euro cents per annum in cash, with improved dividend coverage. So to recap the key takeaways for the year. In 2023 we delivered again on our guidance for the sixth year in a row. This is on a guidance we updated mid-year, and furthermore, we over-deliver the guidance of free cash flow generation. Despite the stronger free cash flow in 2023, we reiterate our guidance of more than 10% free cash flow growth in 2024, showing our degree of confidence. This put us on track with our GPS plan to grow more than 10% KGAR between 2023 and 2026. Our markets are healthier planned than ever. We turn around Spain, where EVDA is already growing. Brazil's performance remains stellar. These two balloons make for 67% of our consolidated EVDA. Germany, that makes for another 20%, has again guided for EVDA growth in 2024, and its spam is more and more self-sustained. This momentum will last as we continue to smartly invest in -in-class next-generation networks while we streamline our operations for the best customer experience. Remember, our Spanish workforce program has been successfully completed and have now full certainty of around 295 million euro grand rate of EVDA savings from 2025. This is close to 50% of the 600 million euro group efficiency we guided for in the GPS plan, not a small detail. And you can count on us remaining disciplined on capital allocation and prudently managing our balance sheet so we can continue to increase coverage of our dividend while the leveraging remains our focus as capital intensity comes down. We are now ready to take your questions.

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

Yeah, good morning everyone. So I wanted to ask a question about how you feel European authorities are supporting your pursuit for digital infrastructure investment and higher returns. We've obviously had a lot of new news flow this week from the EU, and so just wanted to get your response to that. And specifically, if you think about the spectrum, if you think about the remedies in general, if you think about the spectrum remedy for Digi, do you think that's providing a platform to have a new full nationwide network competitor to Telebonna from Spain? And then on the wholesale side, what is your confidence that you will retain your wholesale agreement with Digi? Thank you.

Lainey, let me take the first part of your question and then I hand it over to Angel for the second part. In terms of the remedies out of the NHMAS mobile transaction, no change on the final approved remedy package versus the expectation that we had at the time of the capital markets day and that we share with you were implicit in our guidance. So on that regard, no further news. Telefónica, Spain, as you know, is back to revenue growth. And as committed, we have been able to stabilize the VTA during the fourth quarter of last year, proving that Spain, our operation in Spain is becoming stronger and stronger. We have the stronger network in Spain. We have record levels of customer satisfaction, record low levels of churn, and efficiencies are flowing through. So we feel strong to compete in this market, even though honestly we consider what has happened is a missed opportunity, is a lost opportunity to send another message. So in summary, we feel prepared to keep building on the positive trends of our Spanish unit and stated in our capital markets day. And we feel that Telefónica España is in a strong position and we are fully confident on its future.

Yes, and on the specifics of the remedies, no? With respect to spectrum, probably there is not enough spectrum in the high bands and none in the low bands, which do not allow to build a full-fledged national network, would be a partial network, given the size and the frequencies of the spectrum blocks. These are 60 megahertz with an absence of low band frequencies. Consider, for instance, that Yoigo its cell phone more than as part of MassMobile, 140 megahertz, and didn't have this network. Now, so this you will need in addition to the network, they may want to build a national agreement and probably a ranch setting arrangement for the rest of the footprint. We are clearly in a position to negotiate with DG on these fronts. Regarding the roaming agreement, the remedy is an option for DG, not an obligation. Our partnership with DG is assured under a long-term wholesale agreement. We believe that DG is satisfied on the deal that we have now and the service that we are providing. We are in permanent discussions with DG and with other existing and potential wholesale customers on this type of topics. I am very minded in our recently shared 2326 plan and in the implied financial guidance that we are putting forward today for 2024. We are already assuming certain pricing pressure in our wholesale activity in Spain over the next period, which probably is a realistic assumption with respect to the dynamic that we expect to see in the market. We have the best network, the best infrastructure assets, and these are in a very long established relationship with contractual commitments and contractual penalties. We believe that this puts us in a good position to renegotiate with DG a win-win arrangement for the two companies.

Getting back to the overall question on the European landscape and the European regulatory environment, we think that the recent white book issued by the Commission is a very good call to action. We think things are starting to change. We think it's just the beginning, but it's a step into the right direction. We fully agree with the diagnosis. I mean, it highlights digital infrastructure are key. It highlights that the networks are going to evolve towards full IP, fully programmable and autonomous network. It also points out an unbalanced relationship between the internet traffic generators. Therefore, it also points out in terms of the fragmentation of the market. Overall, we think it's the right diagnosis. We think it sets the tone for the future commission to act. We think some of the measures should go even further, but overall, we think it's a very good call to action and a step into the right direction. Thank you very much.

Thank you. We will now take the next question from the line of Mathieu Robillard from Barclays. Please go ahead.

Yes. Good morning and thank you for the presentation. If I follow up on the question from Andrew, is it fair to say that this deal between Orange and MassMobil that was approved with the remedy is not going to materially change the competitive environment in Spain going forward? And then the second question had to do with Telefonica Deutschland. I think you mentioned in your presentation that you now own 94% of the company. And I was wondering if you could share with us what are the following steps, if it makes sense to completely take out the company and if there would be any benefits to do that. Thank you.

Thank you, Mathieu, for your questions on the evolution of the Spanish market approval of the Orange MassMobil. Of course, it's a dynamic and competitive environment. You know, the landscape is shifting in Spain with this consolidation having been approved with certain remedies. We continue to believe it should have been without remedies, but we are where we are. And this was an scenario that we were anticipating by the time of the capital markets day. And we have been working on contingency actions for this type of situation. Yes, the market will continue to be competitive. The market will continue to be a segmented market between the premium segments and the medium and low cost, which is much more dynamic. And we don't expect that segmentation and the competitiveness of the market to change. But we have very strong levers. We have been in these type of situations before. We have seen consolidation among players before. We continue to have the best assets. We have been adapting our commercial offer to provide flexibility and modularity for our customers. We have the highest MPS we've had in three. We continue to see and post in the last quarter our growth with a record minimum churn. This creates the best customer lifetime value compared to the rest of our competitors. So we expect the market to continue to be dynamic, not to be disruptive. One has to bear in mind that Orange MassMobil starts its new situation as a joint venture, highly levered. This does not lead to thinking that they would want to be disruptive. And they're still pending to be approved. Vodafone, Zegona, is also a very highly levered transaction with back book that the players need to defend. So we think we have experience of reformulations of the Spanish market and we have very strong assets that allow us to compete and to stay confident with the outlook that we're giving for 2024 and beyond.

Taking your question on Germany, we are really happy with the outcome of the tender offer. We think it was a fair value proposition to minority shareholders. There was and there is no specific stake needed for us to achieve our strategic objectives in Germany. And as a result, we are happy with the outcome. Let me say that we currently do not plan to support dividend payments beyond the already confirmed 80 cents of euro per share for the fiscal year 2023. And we intend to evaluate Telefonica Deutschland dividend policy over time because we currently do not see a need to pay dividends at the current level for the future. Beyond that, we keep analyzing all options and we'll keep you posted.

Thank you very much.

Thank you. We will now take the next question from the line of Jacob Bluestone from BNP Paribas Exxon. Please go ahead.

Hi, good morning. Thanks for taking the questions. I had two questions. One, firstly on leases. If I look at your IPDA organic, it was about .5% growth in Q4, but IPDA after leases was about 1.6. There's a sort of 300 basis point spread between the two. Could you maybe just comment on what is the outlook for leases for next year? And then secondly, if you can maybe just give a little bit of color around your expectations for the other segment, given it tends to be a little bit volatile. And so what do you expect for for EBITDA as a sort of run rate going forward? Thank you.

Thank you, Jacob, for your questions. On leases, as we know, we don't give a public target, but we will continue working on achieving efficiencies. Important to say our free cash flow is fully loaded and includes the leases. So despite leases evolution, we are targeting a plus 10% growth in 2024, even starting for a higher basis. So you should expect us to keep on focusing on this, and that should have a more linear evolution as macro-stabilized and as it's linked more to the ROU additions. Having said that, there will be some increases basically linked to the bill to obligations and site expansion in Germany. In Brazil, it was explained yesterday, we incorporated some leases, although we have been very active in shutting down sites and towers. We also have regulatory obligations related to 5G in Brazil and some renovation of contracts. Spain should be Mexico. So no doubt we are really, really focused on this. This is part of the free cash flow. So the free cash flow is still strong despite this evolving, having some increase. I explained the reasons behind and you will be able to see the least impact on a quarterly basis as we report the results. On the others, this is usually difficult to track. I know that because it has many bits and pieces. It includes the headquarters and the global units, which have some restructuring costs this year. Therefore, that is impacting the negative OIPDA in this line. However, as part of the GPS plan, we are driving efficiencies at the headquarters and global units. So that should be moving in the right direction. We also have Telefonica infra, which tells you slightly below last year's EBITDA in euro. Telefonica tech, yes, the opposite, which is going to drive this line in 2024, which I will explain later. Telefonica tech improving margins. And then we have what we call instrumental companies. Some of them are operational, like our supply company. And as we have reduced capex, that should be decreasing their impact over time. We have the roaming, which is basically stable. We also have financial insurance, and those are usually insignificant figures. So you should expect this not being negative, the negative being linked to the restructuring I mentioned. It should be a positive balance, and it should be Telefonica tech driving growth and also headquarters being more efficient driving growth. And on the other, on the opposite direction, some operational companies like the supply company reflecting our lower capex and capex peak being behind.

Thank you. That's very clear.

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

Yeah, thank you very much, guys. I just, a little bit of a step through from the kind of operating cash flow, the EBITDA minus capex down to free cash flow. Please, Lara, maybe just a little bit of guidance if you could give us on working capital, cash tax, just the moving parts essentially below the operating free cash through to the free cash flow guidance. That would be really useful. Thank you.

Thank you, David. I understand you are talking more about going forward rather than the free cash flow bit we had. So, okay, thank you for clarifying. Okay, so on free cash flow expectations, first, this is an absolute priority to us. This was obviously reemphasizing our capital markets day and pre or in the year when we for the first time committed to a four billion bar that we have surpassed comfortably. And that surpass means our dividend is better coverage and we can improve the delivery path. And you saw that that was improved before the Telefonica Deutschland minority purchase. So, very confident on our levers around free cash flow evolution. So, the free cash flow growth, it will be very much anchored in the EBITDA minus capex performance. EBITDA is growing. The guidance is between one to two percent and capex is decreasing. We are putting a threshold of, well, not a maximum of 13 percent and we will keep on working on all the items below. Working capital will continue to have a positive balance. But in line with what has been in 23 and 22. Working capital sometimes is not easy to follow because we have a spectrum impacts as we don't pay all spectrum at once in some cases. But excluding that, it has followed a very business as usual. It's been very much linked to the capex needs, to the commercial. We had an acceleration on commercial revenue on handsets in this year. We don't do any supply financing. So, it's pretty clean and it's all linked to the operations and the business as usual. And it will have a positive contribution but not differential from 23 or 22. Financial payments. You are seeing how we are optimizing this. We continue with a very strong liquidity and 80 percent fixed rate of the debt and 100 percent in euro. That's fielding us and that figure has been decreasing in the relative financial payments. For tax payments, similar guidance to the capital market. We continue with a normalized rate of 20 to 25 percent. BMO2 dividends are confirmed. There's been guidance of 850 million. That includes proceed of CTIL. No recaps. And I just see because of guidance embedded in that 850 is 500 million. And that was guided by the OB earlier, I mean last week. A dividend paid of minorities, obviously a positive contribution for the lower leakage from Telefonica Deutschland. And in all this I mentioned in the previous question, a slight increase. Commitments also an increase. But despite that, and that's linked to the latest restructuring in Spain, despite that increase, we are increasing more than 10 percent. And hybrid coupon payments, very, very stable. I mean a slightly increase. You from the previous but very stable around the 0.3 billion per year. So I go through every line because in fact there's work around every line. And the combination of everything, encore with the BIDDA minus CAPEX strong performance, place us very comfortable to give these guidance and confirm these guidance today.

Yeah, that's everything. Thank you.

Thank you. We will now take the next question from the line of James Ratzar from News to Research. Please go ahead.

Yes, good morning. Thank you very much indeed for taking the questions and congratulations on all the kind of free cash flow beat and the guidance. I was wondering if I could just focus on the EBITDA guidance. So you've given for this year of one to two percent. Now within that, you've guided that in Spain, the savings from the new restructuring program should add about 200 million euros to EBITDA for this year. So that alone should be around one and a half percent growth for the Telefónica group EBITDA. So right in the middle of the guidance range, which would seem to imply if I'm doing my maths right that excluding that new benefit, the rest of the group would be flat. So what's guiding that? I mean, is that conservative? Could we expect to see you move the EBITDA guidance up as we go through the year? And then the second question I had was regarding Virgin Media 02. So your co-controlling shareholder Liberty Global gave a big presentation last Friday in which they talked about the creation of a new Virgin Media Netco. So as the joint shareholder in the entity, we'd just love to get your thoughts on what your views are for that Netco. Would you be interested in potentially selling a stake in that Netco going forward? And I also see you've changed your valuation of the M02 on the balance sheet. Could you just give us the new details you're using of the cost of capital and the revenue assumptions? I mean, previously you were using 6.9 percent and naught to three percent revenue growth. So just love to get the updated parameters you're using for the new balance sheet valuation. Thank you.

Thanks for your question. I'll start taking part of the first one and I'll hand it over to Angel to contribute on a business by business point of view. In terms of EBITDA guidance, I mean, for one to two percent. Remember that we are starting from a stronger, I mean, figure in 2023, which is good news with a stronger traction in the businesses in terms of revenue B2C, B2B, and wholesale. And remember as well that we are guiding in reported terms and we are embedding a devaluation of the Argentinian peso that was not there at the time of the capital market. In spite of that, we stick to the commitment that we have been given. Also, you were right in mentioning the impact of workforce reduction in Spain that will be incremental over the year, jointly with the switch off of copper. So you will see an accelerated trend in EBITDA over all the year and we are fully committed to the guidance that we gave at the time of

the year. I would like to elaborate a bit more on the outlook by OVIS. Spain expects for full year both revenue growth and EBITDA growth for the first time since 2019. Germany's guidance as issued yesterday is slightly positive revenue growth and low to low single digit EBITDA growth. Sorry. Brazil's intention is to maintain both a strong revenue growth and EBITDA growth. So here you can see that the hard currency revenues and EBITDAs are guided or have an outlook of growth. And Brazil, XFX, but the Brazilian regis is behaving very nicely, should be showing growth above, at least aligned or above the group guidance. In ISPAM, which is an EBITDA minus capex story, Jose Maria already commented on some FX pressures that we are experiencing and we are reporting from this year on worth on reported basis. By the way, just to complete the outlook, capex intensity, capex on sales, we are guiding for the group for declining intensity. In Spain, we'll be declining intensity. In Germany, the guidance as issued yesterday in a range 13 to 14 percent. Brazil also indicated that they will reduce the capital intensity. ISPAM will maintain the same levels in 2023.

And Angel, do you expect EBITDA to grow in 2024, excluding the new 200-gain from the count savings?

Sorry, I didn't get the question. Could you repeat it?

Sorry. So, just saying, you, sorry, you that Spanish EBITDA for this year will grow, but would it grow if you didn't do the headcount savings of 200 million euros, which I suppose is a new benefit for this year?

Yes, we expect the Spanish EBITDA grow for the year. We see also the trend building across the quarters. It will be progressing along the year because we have several elements that kick in at different moments in the year. So the capital, the people reduction plan kicks in from the 1st of March because employees will be exiting on the 29th of February. Price increases that we are putting forward also don't kick in for the full first quarter, but they gradually build up across the quarter. We switch off the retail corporate network in April, and this will accelerate savings across the year. But for the full year, EBITDA growth is the outlook that we have and with growing momentum quarter on quarter. Going to the second question, which was on the net goal that we are building in the UK alongside our partners, it's all about focus and optionality. Focus, we are creating a 100% net goal under Birgid MediaO2 that will be able to provide more emphasis, more focus on the fiber upgrade and the wholesale revenue through a dedicated team, through having a dedicated strategy and a dedicated balance sheet. So focus on this fiber migration and upgrade. And second optionality, this vehicle can give us, as with our partners, optionality to accelerate this upgrade and both passing and connecting, if needed. Gives us optionality to find new financing options and to raise money in order to, and also gives us optionality to consolidate. This can create a currency for consolidation in the space. So it's a project that we clearly, obviously support. We are very excited about, and it's about focusing on this fiber upgrade and giving us optionality going forward. All of this, by the way, without affecting the financial commitments of the joint venture to shareholders.

And finally, on the James, on the question on balance sheet impacts, as you know, we carry out the annual goodwill impairment test at the end of the year. The future cash flows used in the value for this calculation is the business plan approved by the board of directors of BMO2. On that business plan, we have guided on 2024 already. We do not provide longer term guidance, but we have positioned 2024 as a transitional year, better prospects from 2024 onwards. The impairment is a consequence of this new business plan, but even more of the increase in the discount rate. We have applied a discount rate of 7.5 after taxes compared to 7.3 the previous year. We are reflecting the macroeconomic conditions, competitive environment in the UK, and also the increase in the financial rates. Growth to perpetuity remains the same at 1%. You have all the detail in our annual accounts. And I just wanted to point it out that this is very sensitive to WAC. So should that .5% WAC decrease, which I think could be the case in the midterm, that implied valuation would improve significantly. Just for, I think you have all the sensitivities in our annual accounts, but if 50 basis points improvement in WAC, it would imply a higher valuation just at the telephonic side of 1.4 billion euros. So extremely sensitive and the main reason behind the balance sheet impact that you see.

Great, thank you so much.

We have time for one last question

please. Thank you. One moment please. Our last question comes from the line of Keval Kiroja from Deutsche Bank UK. Please go ahead.

Thank you, I've got two questions please. So firstly, you've had a bit more time to network. Tefte yesterday suggested a retail-centric approach in 2025 and 26 would be key, but what gives you the confidence that such an approach won't be disruptive to the wider German market? And secondly, implemented a 4% point lower price rise in Spain than the prior year. Can you comment on whether this should lead to lower revenue growth than the .6% service revenue growth seen in Spain in 2023 or are there any other offsets we should be mindful of? Thank you.

Thank you Keval for your questions. In Germany we are completely focused in the recovery plan, what we call our accelerated growth and efficiency plan. This has several elements. We have an element of using the capacity of the network that has been or will progressively be freed by by -on-one and here we are going to work once we are not bound by the remedies of that arose from the A plus transaction. We can grow both on retail and yes we are aiming to retain our own customer, to grow on our own customer base and also deepening some wholesale partnership relationships that we already have. We are doing this and you have seen last year we were the only ones to to propose price increases in mobile the market didn't follow so we have been looking at value over volume approach and now we are seeing also opportunities with the family plans to grow in conversions. We have always been rational but we aim to grow and this is behind the guidance that was given yesterday by Telefónica de la Docenta of slight growth in revenues. Regarding the price rises in Spain we are increasing slightly below inflation 3.1 percent our revenues our prices for the Mi Movistar bundles not the O2 bundles and some of the we're experiencing very strong commercial momentum we are growing in all accesses all type of accesses we're getting net ads with higher output better mps record low churn this is in a big part the result of how we modified the offer and made it more flexible with Mi Movistar compared to the previous fusion packages and it's it's when you look at the slide number seven in our presentation in Spain if you look at the trend of retail revenues and acceleration that we achieved 2.7 percent growth in the last quarter but this has been accelerating over the last quarters this is what underlies our expectation of revenue growth to continue in Spain for for 2024.

That's clear thank you.

Thank you at this time no further questions will be taken.

Thank you very much for your participation and we certainly hope that we have provided some useful insights for you should you still have further questions we kindly ask you to contact our investor relationship department. Good morning and thank you.

Telefonicus January December 2023 results conference call is over you may now disconnect your line thank you.