Telefonica SA

Good morning. Thank you for standing by and welcome to Telefónica's January-June 2024 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 withdraw your question, please press star 1 1 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 would 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 Telefónica's conference call to discuss January-June 2024 results. I am Adrian Zunfunegi from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is un-audited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica 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 Telefónica's Investor Relations team in Madrid, London. Now let me turn the call over to our Chairman and CEO, Mr. José María Álvarez Payute.

Thank you, Adrian. Good morning and welcome to Telefónica's second quarter conference call. With me today are Ángel Villar, Laura Basolo, Marcus Haas, Lute Schuler, and Eduardo Navarro. As usual, we will first walk you through the slides and we'll then be happy to take any questions. We are pleased to report solid Q2U results that demonstrate the continued success of our strategy. Our top-line growth has accelerated with revenue up 1.2 percent -on-year, driven by sequential improvements in both our B2B and B2C segments. Notably, all our main markets are growing revenue. Our key markets are showing positive commercial momentum. In Spain, we are achieving annual growth across all main customer segments. Germany is expanding in all main access categories, and Brazil is hitting record customer levels. This confirms our commitment to putting customers first. Importantly, we have seen robust growth in EBITDA minus capex, which increased by 11.5 percent -on-year. This impressive double-digit growth this quarter puts us -to-date, already trending above our full-year guidance, and precision us well for the second half of the year. The strong performance was supported by the solid -to-sale ratio of 12.1 percent in the second quarter, reflecting our efficient capital allocation. This performance is also driven by our focus on operational efficiency. Our optics reflects the full impact of Spain's personal restructuring program and ongoing efficiencies for the decommissioning of legacy copper and other legacy networks within our portfolio. We continue seeking further efficiencies. Within our strategic goal to modulate exposure to ESPAN while creating value for our shareholders, we have signed a non-binding MOU with MIDICOM for the potential corporate transaction of our operations in Colombia. In Spain, we have as well signed a non-binding MOU with Vodafone for the creation of a fiber code that should bring further rationality and network optimization to the market. Accordingly, we continue making good progress and remain confident in achieving our financial outlook for the full year 2024. Moving to slide 3, we show how this strong moment will translate into tangible financial results, starting with growth. Our top-line growth accelerated to 1.2 percent on strong service revenue that grows by 2.2 percent. All main units showed revenue growth in euro terms despite headwinds from weaker FX rates. This momentum is driven by high-quality customer addition across our fiber and mobile accesses, with premises passed by farther to the home, growing 13 percent -on-year. Profitability remains core. This healthy top-line expansion is driving profitability growth without a big, rising 1.8 percent -on-year in the second quarter. We are seeing a virtuous cycle of growth and efficiency that flows to our operating cash flow. Our EBITDA minus capex growth has accelerated by as much as 15 percentage points versus the first quarter, supported by our ongoing capital expenditure. Our capex over revenue ratio stands at just 12.1 percent for the quarter, demonstrating our commitment to efficient capital allocation. Importantly, this growth is slowing through to the bottom line. Adding sustainability, our second quarter free cash flow performance keeps us firmly on track to meet our full-year targets, excluding extraordinary tax payments in Peru. Our free cash flow is going by over 20 percent. We had a timing-related 279 million euro payment in the second quarter. It was already factored into our guidance and doesn't affect our outlook. We remain confident in achieving our free cash flow objectives for the year. Laura, we provide more details later. Going into greater detail on slide four, our network transformation continues at pace. In the second quarter, we expanded our -the-home footprint by an additional two million premises. Five-year coverage now reaches 66 percent of the population across our core market, a three-percentage point increase this quarter. Spain and Germany lead the charge with average five-year coverage exceeding 90 percent. Our customers remain at the center of transformation journey. We close the second quarter with 392 million total accesses, adding four million new customers, which is an eightfold increase from the previous quarter. Churn continues its downward trend, while our industry-leading NPS so far does sequential improvement. We are lazy focused on operational simplification to try profitable growth. The workforce destruction program in Spain is already delivering full-cost savings, filling higher EVDA growth as we have made significant progress in our nationwide copper network switch-off, with over 4,000 central offices closed since 2014. This strategic shift is a key driver in reducing capex, boosting our operation cash flow and free cash flow growth. And AI is embedded in our business and how we do business. Our networks are becoming more and more open and more intelligent through softwareization and automation. We are digitalizing to be closer to customers, enhancing offers with increased personalization. AI is also helping to streamline our capex deployment and boosting efficiency across the organization. We are fundamentally changing how we operate and deliver value to customers and stakeholders. In summary, our strategic initiatives, building next-generation networks, prioritizing customers, and creating linear future fit operations are yielding tangible results. This progress reinforces our confidence in delivering on our ambitious goal for growth, profitability, and sustainability. This quarter, Telefonica continues to consolidate its leadership in sustainability, as shown on slide 5. In June, we have published the annual update on our climate action plan. It details our roadmap to net zero and the tangible steps we are taking to decarbonize across the value chain. With 392 million accesses worldwide, Telefonica continues to bridge the digital divide. We are connecting people and raising awareness about the responsible use of technology. Being a responsible technology company also means building a strong code of ethics with regards to artificial intelligence, while pioneering AI code of ethics was first published in 2018. We have now updated it to include a new commitment to the environment while broadening responsibility and traceability across the value chain. Finally, on SG, I'm very proud that Time Magazine has ranked Telefonica among the top 10 world's most sustainable companies. I will now hand over to Ansel.

Thank you, José María. On slide 6, we review our execution during the last quarter. At the time of the Q1 results, we shared with you near-term catalysts and positive opportunities we saw ahead of us in all of our core markets. In Spain, we had a new contract with TG. Back in May, we said we had signed an MOU for a new long-term mobile network agreement with TG, which we expected to complete in a few weeks. The full, final, and definitive agreement, which spans over 16 years and includes both national roaming and run sharing, was announced three weeks ago. This confirms our ability to provide high-quality services over our infrastructure, which is further reaffirmed with the signing yesterday of a non-binding MOU with Podaphone to enter into exclusive discussions to create a joint Fiber Code that would cover some 3.5 million premises with Fiber to the Home with a targeted take-up higher than 40%. In Brazil, we said negotiations were under way to potentially migrate to an authorization regime. During May, we reached the agreement with San hotel and the Ministry of Communications, which we expect to complete in the coming months. In Germany, we expected the spectrum extension, and this was later confirmed by PANETSA. A five-year extension is a step in the right direction. At the same time, we have progressed in the development of wholesale agreement with Freenet. Finally, in the UK, we anticipated the Fiber build acceleration as projected, and the NetCo was receiving strong interest from intro investors. Investor interest has continued during the second quarter, and the Fiber build continues to ramp up with five million premises passed as of June, whilst the operational and financial NetCo design remains well on track. In addition, in the UK, the mobile network sharing agreement with Bodathon has been extended beyond 2030. We are delivering tangible and clear progress in all core markets. On slide seven, we review the consistent positive performance of our Spanish operation. Progress across commercial PPAs and financials further increases the growth, profitability, and visibility of our domestic business. We are in a well-segmented market with a premium positioning. Sound commercial momentum continued and translated into the fourth straight quarter of positive NetAds in main services, with all customer bases showing -on-year growth in the quarter. In convergence, the combination of increased NetAds and superior MPS and ARPU not only reflects the high value of the base, but also the right balance to sustain revenue growth. All of this resulted in revenue growth in Q2 with an acceleration in retail revenue, up to .6% -on-year, and improving EBITDA growth, helped by the full contribution from the redundancy program savings. The inflection point of the EBITDA trend is also noteworthy, showing a sequential improvement, which is expected to continue throughout the year. To highlight, as proof of our superior network infrastructure quality, we extended the valuable wholesale agreement with DG, securing wholesale inflows beyond the next decade at an operating cash flow margin similar to the previous contract. And we continue to seek new win-win agreements with our existing wholesale partners. So, we are very pleased to announce that yesterday we signed a non-binding MOU with Vodafone Spain to enter into exclusive discussions to create a 3.5 million premises pass FiberCo to add further visibility and stability to the broadband market, which we continue reshaping, on top of which, opportunities will open up from the ongoing deregulation process. On slide 8, let me explain in a bit more detail our recent wholesale agreements, both supporting rationality in the wholesale market. The new contract with DG has evolved to provide national roaming and partial range sharing for the next 16 years. Infrastructure sharing will boost the effective use of our mobile network, while DG benefits from efficient use of its new spectrum. The range sharing agreement includes spectrum utilization in the 3.5 GHz band. This will be progressively deployed and help us to release all resources devoted to this high frequency band. Additionally, yesterday we announced the signing of an MOU with Vodafone Spain to create the joint FiberCo. In this fiber sharing agreement, Telefonica Spain will contribute 3.5 million premises of its -the-home network, and joining with Vodafone Spain will connect an estimated base of around 1.4 million customers at closing. This model increases our fiber network returns and adds long-term visibility to our wholesale revenue via long-term MSA agreements. As both parties will independently compete in retail and wholesale markets, network utilization will be optimized. We will also crystallize value through the evaluation of parts of our fiber at attractive terms, and further monetization may be realized with a potential sale of a stake in such FiberCo. Finally, optionality increases with the network becoming a vehicle to share the fiber upgrading costs and a source to unlock additional funds in a potential market consolidation. All in, these two new agreements are value-accretive for Telefonica Spain, as they allow us to monetize our networks, increase the visibility and sustainability of our wholesale revenue function, and also bring efficiencies. Regarding Brazil, on slide 9, Vivo maintains its leadership in both mobile and -the-home business as a result of a very strong operating momentum. At the same time, mobile customer value increases, with contract ARPU growing .7% -on-year, while churn is maintained at very low levels of 1%. Accordingly, mobile revenue grew .7% -on-year, reflecting market rationalization and increasingly boosted by digital services, which are growing double-digit, whilst on the fixed business, fiber pick-up reached 24% and conversion customers more than doubled -on-year. Strong execution helped main financial KPIs to continue posting -on-year growth in Euro terms, even despite Brazilian real depreciation. In local currency, revenue on OETA posted a -on-year acceleration to plus .4% and plus 7.3%, respectively, way higher than growth. To note, the improved operating leverage, margin to 15.3%, .2% percentage points, increased -on-year. Vivo continues also to reinforce its ESG commitments and has announced new targets for 2035. Finally, an important milestone was achieved during the quarter, with the agreement with regulatory and administrative bodies to progress on the migration from concession to authorization, which is value-accretive and will be finalized in the second half of the year. Our German operations maintained ongoing operational and financial momentum in Q2, as shown on slide 10, driven by the focused execution of the accelerated growth and efficiency plan. Our core business continues to demonstrate robust commercial traction, with contract debt conditions increasing by 37%, quarter over quarter supported by a low O2 contraction rate of 0.9%, which reflects our strong brand appeal and ongoing network enhancements. Revenue remained flat -on-year, with growth, enhanced sales and fixed services partially offset by declines in mobile service revenue impacted by regulatory effects, changed in the partner's business model and lower roaming. However, we achieved sustained EBITDA growth through ongoing commercial momentum and effective cost management. In the first half of 2024, progress on 4G network densification and 5G deployment was significant, with over 550 new operational sites and approximately 3,400 expansion measures completed, resulting in our 5G population coverage reaching 96%. Other business fundamentals saw significant de-risking as well during the quarter. The spectrum extension was not only already signaled by the regulator, but the position from the German government on Chinese vendors was finalized, an outcome that falls within our expected cap-example of hence being neutral to our long-term guidance. Moving now to slide 11 to review our UKJB key M02. In the UK, we have remained committed to our strategy of investing in key drivers for future success, despite the competitive landscape. We continue to focus on delivering value to our customers, while transforming and simplifying our business for long-term sustainability. We maintained our position with the highest fixed tarp in the market, achieving .1% -on-year growth driven by recent rising prices. Additionally, our combined consumer fixed and mobile revenue, excluding handset, remains stable, with O2 contracturing maintaining stability at 1.2%. Furthermore, fiber deployment has significantly accelerated, with the M02's full fiber footprint now reaching 5 million premises past. Looking ahead, our new network sharing agreement with BodaFont UK not only strengthens our successful relationship, but also statistically positions the M02 for the potential approval of the BodaFont free merger, including a prospective spectrum agreement. And finally, the Netco car vault is progressing well, perimeter established, and we see continued interest from investors. Telefónica Tech on slide 12 showed another strong quarter. Since creation, T-Tech is delivering quarterly double-digit -on-year revenue growth. In the last 12 months, T-Tech has generated 2 billion euro of revenues, showing a 14% annual increase. Both funnel and bookings are showing higher growth and revenue so far, mostly driven by the private sector, with large contracts awarded. For example, two weeks ago, multinational financial player BBBA chose T-Tech to boost the cybersecurity of its operations on a global scale. With incorporation of the most advanced technologies in AI and process automation. We also recently closed large and relevant deals with Sejitur and Children's Health Hospital Island in Q2. Hence, this solid trend will continue to translate into revenue growth, which we expect to accelerate throughout the remainder of the year. We are seeing growth that is well balanced, with increased contribution from higher value services, longer dated contracts, a wider customer base and better currency mix. We continue to gain relevance in higher growth markets and our thought delivery capabilities continue to be recognized by industry partners and analysts. This should allow T-Tech to continue growing ahead of its peers. Telefónica infra on slide 13 is driving profitable growth, leveraging a capital-efficient deployment of future-proof infrastructure. Our -home-built base continues its momentum after passing more than one million premises this quarter to 23 million. Terceus, our global connectivity provider that combines next-generation subsea cables with terrestrial back-haul systems and communication hubs, maintained consistently high profitability of around 50 percent and is expanding colocation facilities across USA, Spain and Latin America. And as you may be aware after looking at recent media comments, interest on NavX, the data center's business where we own 20 percent, is mounting. This provides us with optionality. I will now hand it over to Laura who will guide you through the main financial topics.

Thank you, Ángel. As for ISPAN, on slide 14, we returned to growth in main financial KPIs, service revenue, EBITDA and EBITDA minus capex. As such, service revenue grew 4.9 percent in Q2 -on-year. EBITDA was up 2.7 percent -on-year, driven by Argentina, Colombia and Mexico. To highlight, the 67 percent EBITDA growth of our operations in Mexico on very good contract performance and network efficiencies. EBITDA minus capex, accelerating on EBITDA evolution, leads to stabilization and capex decline. Cax to sales stood at 6.6 percent in the first half of the year. Lastly, Telefónica ISPAN is making progress in achieving greater rationality in the market, avoiding network overlap through different agreements on fiber and mobile. To continue seeking market rationality, we enter into a non-binding memorandum of understanding with Millicom for a potential corporate transactions of our operations in Colombia that may imply the sale of our stake in Telefónica Colombia. Slide 15 shows free cash flow performance in the You are confident on our trajectory and our ability to meet our full year guidance of more than 10 percent growth. Let me address that we've been managing a tax dispute in Peru for some time. In fact, in December 2022, we made a full provision of 0.9 billion euro for this tax litigation. The exact amount and timing of payments have been uncertain, but we're consistently incorporating our best estimates guidance. In Q2 of this year, we made a 279 million euro tax payment to Peru. This amount was larger than initially expected for the quarter. However, this is primarily a timing issue. The payment was already contemplating in our full year guidance, which remains unchanged at more than 10 percent growth for the full year. With this behind us, you have even greater clarity on our free cash flow generation outlook, putting us in a stronger position for the second half. Importantly, this situation is fully contemplated not just in our 2024 guidance, but also in our 2026 targets. We are in control, our position is strong, and our commitment to deliver it on our free cash flow performance remains unwavering both for this year and through 2026. As of June 2024, our net financial debt stood at 29.2 billion euro, translating to a net debt to EBITDA ratio of 2.78 times. This anticipated increase from year end 2023 was primarily driven by our strategic move to raise our stake in Telefonica Deutschland and to a lesser extent free cash flow seasonality in the first half. We are committed to reducing leverage and remain on track to meet our delivering strategy focus on four key areas. First, driving EBITDA growth for operational efficiencies and revenue expansion, starting with Spain, our highest cash conversion market that will see EBITDA growth acceleration as from Q3. Operating cash flow measured as EBITDA minus CAPEX is already growing above the guidance range of between 1 and 2 percent. Though we see the half of the year, EBITDA should keep improving, accelerating free cash flow generation, which as usual will be half back half loaded even more this year, and continued discipline capital allocation. You should also remember that in the second half of 2024, a couple of deleveraging events will take place. We will receive the proceeds from the stake in CTIL and a stake regulatory approval for the FiberCo in Peru. All in all, both will help bring down by some 0.4 billion euro, and both are set times, close events, just waiting to receive the proceeds. Furthermore, we lower our debt-related interest cost to 3.58 percent versus 3.80 in December last year, thanks to the active refinancing exercise undertaken in previous years, the robust position at fixed interest rates in strong currency, and the reduction of interest rates in Brazilian Reais. I will now come back to José María, who will wrap up.

Thank you, Laura. All operating metrics are either aligned with or exceeding full-year guidance. Revenue growth of 1.1 percent aligns with our full-year target of around 1 percent. EBITDA is growing 1.9 percent -to-date, at the high end of our 1 to 2 percent guided range. At the first quarter results, we set EBITDA minus capex glutrous units our trajectory from the second quarter. Indeed, it grew 11.5 percent -on-year in the second quarter, bringing first-half growth to 3.1 percent, above our 1 to 2 percent full-year guidance. This is driven by full benefits from Spanish workforce cost settings, moving past Q1 impacts from lease inflation, an accelerated 5D deployment, and excellent capex management. CAPEX 2 sales stands at 11.3 percent -to-date, below our up to 13 percent full-year guidance. While usual phasing should increase capex intensity in the second half, we are increasingly comfortable with our 2024 capex guidance. We provide more details on the track to meet full-year guidance. It is back-end loaded as usual, so we expect acceleration in the remaining two quarters of 2024. This will allow us to resume our delivering trajectory. After the first half of the year, we are expecting net debt and leverage ratios to decline, keeping us on track for our 2026 targets. Our strong first-half performance supports our 2024 target and long-term strategy goals. As stated in the previous slide, and as we showed on slide 18, capex is among the main drivers of our fixers for growth towards our 2026 targets. Let me give you an inside-out view of how we are approaching capex to reach industry-leading levels of less than 12 percent capital intensity. Our strategy revolves around three key areas. First, business evolution. We grow more in low-capex businesses, such as B2B and digital services within B2C, changing our capex profile. Legacy shutdowns, particularly capital decommissioning, significantly reduce our maintenance capex. This allows us to continue to invest in growth, passing more premises with fiber to the home, and increasing 5G coverage. Both have higher efficiency than legacy technologies. Second is network optimization. We are leveraging our open and desegregated networks, virtualization, -to-cloud strategies, and AI and automation, increasing deployment efficiencies and flexibility to adapt to demand. Open run and open broadband models are key to this transformation. And third, strategic investments. We are past peak network expanding and now focusing on tech cycle optimization. We are exploring ways to reduce capacity capex, such as our extended collaboration with Meta for video optimization, aiming for more responsible network use and reduced resource usage. No single initiative alone will be sufficient to achieve our ambitious targets. It's the combination of all three areas that creates a powerful synergy, driving us towards our goal. This approach will take us from our 23, the capex to cell ratio of 13.3%, to our 26 guidance of less than 12%. This reduced capital intensity is an important lever to help achieve our target of more than 10% free cash flow growth, CAGR, through 2026. While the second half should show usual facing with some higher capex allocation, our first half progress make us more confident in our 2024 capex guidance than before. To summarize, on slide 19, Telefónica's second quarter 2024 performance demonstrated again solid execution as we continue to deliver against our strategic roadmap. We reported a solid set of consistent with our full year 2024 guidance across all key metrics, as well as our overarching GPS plan, which targets more than 10% free cash flow growth CAGR between 2023 and 2026. In fact, operational leverage improved significantly with every dial minus capex standing above the guided range for the full year. Our core markets show robust commercial and operational trends. In Spain, we are achieving annual growth across all main customer segments. Brazil and Germany maintain consistent profitability growth and ispanshows sequential improvement. Our strategic investment in fiber and fiber infrastructure enhanced Telefónica's customer experience, positioning us for continued commercial momentum and top line expansion. Cax intensity remains well contained with legacy network shutdowns freeing up resources for growth. Which coupled with streamlined operations by digitally transforming processes and friendly focused capital allocation priorities, will allow us to deliver going forward towards our target ranges and further sustaining our dividend. Finally, we continue seeing positive near-term catalysts in all our markets, starting with deregulation. In Spain, we expect full FTTH deregulation and the removal of certain rental obligations, which should result in increased commercial flexibility. At the EU level, we see progress as well in three main key topics, including market definition, open Internet and fair share. As for the latter, we are starting to sign our first commercial agreements with large traffic generators to optimize video for efficient use of network resources. In Ispán, we have entered into a non-binding memorandum of understanding with MIDICOM for a potential corporate transaction of all operations in Colombia. And as detailed by Ángel, we have signed a non-binding MOU with VoraFone Spain to enter into exclusive negotiations for the creation of a fiber code that should bring further rationality to the market, optimize network.

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Coupled with our focus on execution and combined with further wholesale and consolidation opportunities, we will allow us to keep building on our momentum and demonstrating the continued success of our strategy. 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 11 on your telephone keypad. Once again, that is star 11 to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 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. Our first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Good morning, everyone. I had two questions, one on Spanish EBITDA growth and then the next on the group wholesale revenue growth outlook. On the Spanish EBITDA growth, you said you expect this to improve through 2024, but I think you delivered around half a percent decline in the second quarter if we strip out the litigation effects. I might be wrong there, so happy to be corrected. While consensus still models FY24 declines and investors are noting today your negative ART trends in Spain. I wondered maybe you now have better visibility to give us a better idea on your expected Spanish EBITDA growth front rate into the end of 2024 and what you think the sustainable EBITDA growth should be in Spain longer term. Any incremental color you can give on that Spanish EBITDA outlook would be really helpful. Then on the wholesale revenue growth, how has your group wholesale revenue growth outlook changed in the medium term given you've now, as you stated through the call, you've now signed a new Digi wholesale contract. I'm guessing there are positive externalities to your Spanish fiber wholesale business from the Vodafone Zagona MOU you've just signed. Any color you can give on your expected impact of that fiber MOU on wholesale revenues and the broader declining group wholesale revenue outlook would be really helpful there. Thank you.

Thank you, Andrew, for your questions. The first one on Spanish EBITDA, I got a similar question in the first quarter and as I said back then, EBITDA and EBITDA performance in Spain in the beginning of the year were to be the weakest you would see this year. The factors that affected leases in Q1 and partially in Q2, which were volume additions, inflation and rates affecting accounting of recurrent leases are starting to phase out. So even if we have some non-recurrent factor affecting the -on-year EBITDA in Q2, EBITDA growth has been improving from plus 0.2 percent in the first quarter to plus 0.6 percent growth in the second quarter and -on-year EBITDA performance has improved further by 1.8 percentage points quarter over quarter moving from minus 3.5 percent in Q1 to minus 1.7 in Q2. We are expecting further EBITDA and EBITDA sequential improvement in the following quarters already starting in Q3. Not only on higher EBITDA growth but also on lower leases, annual increase, which is going to help EBITDA to stabilize in the second half of the year. Then regarding the evolution of Spanish wholesale revenues, the revenue source is going to be a drag in 2024. We have a reliable network, we are protected by solid commercial agreements as proven by the deal, the definitive deal signed with DG and the MOU just announced with Vodafone. What are the the drags that we're seeing as headwinds? Mobile termination rates prices are halving since the first part of 2024. By the way this also affects our German operation. Some international traffic services were impacted by declining voice traffic. We don't resell Formula One, it's a content that we don't own although this was EBITDA neutral because we're selling it as per the cost that we had on it. Roman prices also decreased and then the pass-through that we have on energy to some of our clients that were collocated in our central offices with the decline of energy prices is no longer supporting us. On the other hand, the MBNO revenues are growing. So we have lots of moving parts here that are putting pressure on the wholesale revenues in Spain. The agreements that we have signed with DG, if you take into account the conditions of price and expected volumes should be going forward at least the level of revenues that we had with the old contract and also at the level of operating cash flow. The MOU that we have signed with Vodafone would be a creative or additional to the wholesale revenues that we're getting with our partners. So lots of moving parts but the two agreements that we have signed are supportive of the wholesale revenue function for Telefonica Spain at rational prices that would not necessarily or would not produce erosion in the conditions of the retail market. So supportive to the wholesale revenue line but also to the retail revenue line.

Thank you. Can you give us any census to the materiality of the expected boost from the Vodafone MOU on wholesale revenues or is it too early to say?

Sorry it's too early to say. It's an MOU. So let us move to definitive agreements and we will be able to give a bit more color.

Thank you.

Thank you. We will now take the next question from the line of Andre Cavajes from UBS. Please go ahead.

Hi, good morning and thank you for the presentation. I think my question is too they're quite similar but from different ends. So maybe if I just look at the at the down minus CapEx guidance for the year and where we've progressed thus far. So you're targeting you know more than or roughly five percent and you are 3.1 percent year to date with CapEx the sales running below the kind of 2024 run rate about two percentage points. So if you can just maybe talk to us about the building blocks if CapEx goes up in the second half where the acceleration the likely you know material acceleration and the EBITDAO maybe across the group coming from to get to the five percent and the EBITDAO minus CapEx guidance please. Any comment on that? And then just looking at the deals that you're signing in Spain specifically or maybe just to focus on Spain from that perspective looking at just returns because obviously you're you're enhancing the usage of your networks. You're avoiding some overbuild. You're expanding the partnerships to different operators. So just from a returns perspective if you can give us any color on midterm return on capital or something improvement that you expect from these deals because I assume they're pretty positive. Thank you very much.

We were not sure if the question was around Spain or in general but if it's in general we have a midterm guidance of EBITDAO minus CapEx of five percent in the life of the plan. However the guidance for the specific 2024 is more in the range of one to two percent and at the moment we are about three percent so we are doing better versus guidance. The reason behind this is that we explained when we gave the year guidance as part of the GPS plan everything improves. Leases though grows slightly throughout the life of the plan and that growth is higher at the beginning of our plan because of the network growth impacts remaining CPI with decreasing interest impact of new contracts and new raw additions. So all of that in place that EBITDAO minus CapEx growth is back loaded in our long term plan. Having said that we are super focused on lease monitoring. We are working on all mitigation measures. We are sharing as you know. We are reducing the quantity. We are recognizing the agreements and you can see that it's basically linked to the 5G expansion being more acute in the first years. We have some regions like Eastbound where leases are completely on the downward trend. Spain as Angel explained at the beginning the lease impact was higher. It was the highest in the first part of the year so you should be comfortable with our long term EBITDAO minus CapEx guidance and with the guidance for 24 which is lower than the full year. I hope I answered the question with that.

Regarding your second question you have to frame the deals that we're announcing within the restructuring of the Spanish market that has followed some consolidation or some M&A in our market. So this continues to be a very segmented market in which you're having B2C premium positioning like we have in the mid-high end of the market which is a very rational market. Some more competition in the bottom end. In between we continue growing very substantially with a very strong positioning and in wholesale which is where your question I understand was focusing on these deals. The whole market is configuring and under a principle of rationality that we are perceiving on the side of all the players. There is clearly as you were saying an objective to optimize the return on capital employed by avoiding overbuilt risk. Also at the same time there is a need and there is a willingness from the different players to optimize network utilization and doing this in a way that the market retains a healthy level of competitiveness but without putting undue pressures on the market. We have been, and we were describing this on slide number eight, we have been very active in sharing not only on the mobile side but also the fiber side infrastructure and we believe that these are win-win agreements for the different players. I don't know if this responds to your question or if you needed some additional detail.

That is helpful. Thank you very much. Just sorry for the confusion with the first question. I was basically trying to understand by which means does the growth and lease cost especially as they moderate and I was going to follow up by asking in terms of the corporate shutdown that is happening over this year and next year. Is that a big part in terms of moderating leases?

Yes. Sorry, I'm not sure I understood exactly the question because your first question was on repeat.

In terms of the lease moderation, because a lot of the growth as Laura was already addressing is coming in Spain. I was just trying to understand that the growth rate in leases should therefore moderate and I was going to follow up specifically on the corporate shutdown over this year and next year. Is that a big part of how you contain the lease growth in the midterm as well?

As you are referring to my first answer, maybe you didn't, maybe I was not explaining myself clearly because I said exactly the opposite about Spain. I said leases are under control, they are slightly increasing at a group level. We have certain places such as East Bank where are in the downward trend, others like a Brazil with the oil transaction and the five gene regulation may be in the upside trend although very much under control. In the case of Spain, it's exactly the opposite. We have the highest level in the first half of the year and that should be annualizing during the year. So if Dalma and Nascapes won't be a problem at the Spain level and the worst quarter has been actually Q1 and that could be annualized. Maybe now it's more clear. Otherwise you can ask high investor relations and I can provide you full detail but the message in Spain was just the opposite.

Yes, I said in a previous response leases growth in Spain should continue easing quarter to reach a bit dull stabilization in the second half.

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. Thank you for the presentation. I had a question on the free cash flow. So as Laura pointed out, there is a one-off link to a payment in Peru and as you said initially there was a 900 million euro provision for that item. Now I understand you may not want to share your expectations for what will be the final total payment because it's still not settled but in case all the reminder of what you could have to pay was to be done in 2H2024 and again I'm not sure what is in your numbers but I think so far you've probably paid more than half of it. So if you had to pay theoretically all the rest in 2H2024, would your full year guidance still be secure for 2024? That's my first question. And then I had a second question on Latam, Hispano-America. So as you flag, capex is very low. I think you said .6% of revenues. I understand that in a country like Mexico you're essentially operating like an MVNO but in countries like Peru, Chile, Colombia or even Argentina you do have a network. So I was wondering how it was possible to maintain the quality of the network with such a low capex and whether that number would spike back again in H2 or you thought this was something sustainable. Thank you.

Thank you, Mati for the question. I'm very happy to talk about Peru so I can clarify. As you said and I said there's a provision of around 0.9 billion euro, specifically the very 845 million are the specific ones to 1998 to 2001 that have taken so long and there's so much related to interest and some of that is still under discussion but the payment, you were right we have paid approximately half already because on top of the 279 payment we did in 2024 we had an outflow of around 123 million in 2023 but the remaining is not going to be paid in 2024. The Peruvian law allows for fractioning and the fractioning will start from 2025 beyond so it will go even beyond the GPS plan but we are fully in control on the situation. Obviously the timings of the payments so far have been uncertain with the fractioning and the agreement with the Peruvian authority will be much more certain but then the punchline here is this has been included in our guidance and in our estimates both for 2024 both for the midterm guidance so it doesn't affect whatsoever the 10% growth in 2024 nor the 10% growth all the way through 2026. I would give, I mean it has been much concentration in Q2 which is not ideal but on the other hand as I said now we have more certainty and it does not put in your party at all our free cash flow guidance. We are very confident on the free cash flow growth trajectory and completely on track to meet our full year guidance. On the ispan situation regarding capex usually capex is also back loaded in the case of of ispan so you shouldn't expect the .6% of revenue we have at the moment. We run ispan within a 10% envelope approximately we can be a little bit up and down but that that would be the the figure you should have in mind but that doesn't mean we invest 10% we invest in different ways in the case of the fiber this goes through the fiber cost so we are accessing to the best ultra-rural technology in the region through those vehicles instead of doing it through capex. We have just gone through a very very successful run negotiations for 5g in the in the region and in some cases we are sharing network as we did in in Colombia we are happy to share network elsewhere in the region so you should expect us to do it in a very disruptive way as said light sharing through vehicles but the 10% in that framework allows us to to put a good technology at the service of our customers.

That's very clear thank you very much.

Thank you we will now take the next question from the land of David Wright from Bank of America please go ahead.

Yes thank you for taking my questions another two please so first of all just on guidance you chose to guide in moving currency which I guess was always a risk that could perhaps be firing a little now with the Brazilian rail just gapping out a little and I guess if I just did simple back of the envelope Brazil is give or take 30% of your group EBITDA. I think the currency had been very stable around 5.5 to the euro looks to be now around 6 to the euro so there's a 10% depreciation on something that contributes 30% of group EBITDA which I guess dirty math says 3% over time given your group outlook is around 2% CAGA to 2026 I'm just wondering how that can be captured that risk or whether your guidance does assume that the Brazilian rail winds back in a little and then I guess just my second question just a little bit of a mix up from my understanding you said that UK fiber was all on track that's not quite what was said in the Liberty Global call where I think it was made clear that the next fiber build had actually lagged expectations a little and that the if I'm right I still don't think you're actually I think you're behind the curve monetizing some of that fiber infrastructure so contradicting messages there if might be one for loops to maybe resolve thank you

David on the on the Brazilian REI I think is is soon to see how it will finish the year or not because we we think the fundamentals are solid no solid GDP growth external accounts remain consistent and I think it it has to do with uncertainties regarding domestic fiscal and monetary policy but it could it could definitely improve in any case we protect ourselves from the effects in different ways no I mean we protect the solvency and the ratio the net debt to EBITDA by putting putting debt in local currencies as is the case in Brazil and some of the hispanovies there's a natural there's a natural hedge as the revenue impact is much higher and it diminishes till it gets all the way to free cash flow and on top of that for the given year we hedge 70 percent of or above of the free cash flow that comes from from case has has not been annexed this year has not been an exception and we have fetched that free cash flow at better rates that the ones we have we have at the moment what is definitely true is that the consolidating once we consolidate into euros if the the is not only the Brazilian REI impacting noise is every currency and up to June 2024 the effects impact has only been 11 million in revenue and two million in in EBITDA so our guidance as you correctly said is in euros because we think we have to grow in euros but it's also true that we gave the effects attached to that guidance and sometimes the effects in a given year may not reflect the fundamentals so if that could divert x in a huge amount then we will to reconcile a bit the effects of the guidance and the actual effects but the punchline here again is that we think the fundamentals behind the REI are strong and it will convert to the assumptions we we use for when we gave the long-term guidance and this is a long-term game

regarding your second question I'll pass it to Lutz to make sure that we don't inculcate any inconsistency in the messages

can you repeat that?

Yeah no the message from Angel was that UK fiber build is all on track but I don't think that was the message on Friday's call I thought that there was a bit of you were lagging targets perhaps a little with some of the conversion I think it might have been more the next fiber footprint

we are on track with the build on next fiber we had a record quarter in q2 with almost 300,000 homes released right and we also on track with fiber up I think what I said on the call was that we are a bit behind our ambition in selling into the fiber homes with next fiber right so because here we are investing and we want to generate more customers in the second half of this year but with the build we are fully on track.

Okay thank you and maybe Lara just to double check so I guess if the currency does remain a little weaker then the potential situation we're looking at is that you could see a sort of revenue EBITDA impact but the point you're is that it's protected at free cash flow because of the various hedging mechanisms and capex that's the point here is the cash flow is secure.

Yeah that's exactly the point David.

Okay thank you so much guys.

Thank you that's why we are so confident on our free cash flow guidance for the year and our ability to deliver the 10% growth.

Thank you David. Yeah we have time for one last question please.

We will now take the last question from the line of James Ratzar from New Street Research please go ahead.

Yes thank you very much indeed good morning I had two questions please both actually on your wholesale agreements that you've just signed so the first one on the Digi contract I'm intrigued by the line in your presentation where you say the revenue will also be driven by traffic driven growth. I was wondering if we could just kind of go through the economics of the deal a little bit more because predicting how data pricing is going to develop over a one or two year let alone 16 year view is very difficult so you know we saw in Germany when Vodafone signed an NRA with one and one it was actually linked to network costs to give a bit more security to the market. I mean how can you help to give us some confidence around the pricing that Digi get with this wholesale agreement that they can't be disruptive or more disruptive on market pricing and then the second question I had please was you're announcing here today as well that you've expanded your wholesale agreement with Freenet in Germany which I think is a new announcement today could you kind of run through a bit more of the economics on that in more detail are you expecting Freenet now to bring more traffic over from Vodafone and Deutsche Telekom we'd just love to hear a bit more of the details of how that agreement will work thank you.

Thank you James I'll take the first one on Digi and I'll pass the second question to Marcus Haas who is also connected. First thing I would like to say is that you know we move swiftly from an MOU to a full-fledged definitive contract in two months with Digi because we have lots of experience in wholesale contracts and you know very long-standing relationship I think the case that you alluded to in Germany is taking a little bit more time. Another difference of the two cases is our deal is not a capacity deal whatsoever we need to be very clear you know we're expecting and we have projected some volumes and we have a pricing mechanism which is structured with payments that depend on the number of subscribers and their consumed traffic it's not based on the costs of our network. Regarding the range sharing it will depend on the number of sites that will be shared and there will be a payment on that one. Marcus if you can take the Freenet please.

Thank you Anxel thanks James for the question I think we renewed our agreement with Freenet a 10-year deal and with a steep customer increase and we foresee the full run rate of this strong increase of customers on our network coming from Freenet already in 2026 clearly compensating some of the effects that we will see from -on-one so what is a win-win deal that we signed it's long-term and it's a substantial increase of the relationship and partnership that we have with Freenet going forward.

Marcus on that thank you that I mean you mentioned there a increase in customer numbers I mean are you able to just quantify that a bit more what are you expecting for customer growth from Freenet then on your network out to 2026 or for future revenue growth from the deal?

It's a significant increase I think we should respect that Freenet is also a listed company and what we can share on this call so from that perspective it's a significant increase of our partnership this is what I can say and it's a fast ramp up so we will see already the full run rate effects reflected in our 2026 numbers in Germany.

Okay so that's a binding agreement from them to migrate more customers over to your network from Vodafone to Telecom. Okay then Angle could I just follow up on just on the traffic growth point I mean traffic growth is growing at kind of 30 to 40 percent per annum in Spain but presumably the Digi wholesale revenues aren't going to grow in line with traffic growth so there must be some price deflator baked into your contract how does that work to just offset traffic growth please?

I'm afraid I cannot disclose commercially sensitive information but you know the projection and the figures that we have is that the yearly revenues will be properly in line with the current ones and that is you know as much as we can say on this agreement.

Got it many thanks indeed.

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 departments good morning and thank you.

Telefonica is January June 2024 results conference call is over you may now disconnect your line thank you.