Telefonica SA

Good morning. Thank you for standing by and welcome to Telefónica's January-March 2025 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. We will come to you and kindly ask you to ask a maximum of two questions per participant. As a reminder, today's conference is being recorded. I will now like to turn the conference call over to Mr. Torsten Achtmann, Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefónica's conference call to discuss January-March 2025 Results. I'm Torsten Achtmann 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 unaudited. 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 risk and uncertainties that could cause the final development 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 or London. Now let me turn the call over to our Chief Operating Officer, Mr. Mio Gayo.

Good morning and thank you for joining the call, my first call with the financial community. With me today are Laura Basolo, Marcus Haas, Lutz Suller, and Eduardo Navarro. Welcome everyone. It's a pleasure to have you here. I'd like to start this call by highlighting our progress in operations, especially along our three main pillars, customer engagement, network transformation, and efficiency. First, customer engagement. I am proud to report that we continue to excel in this area, with MPS score reaching new highs. Spain continues to lead the market, while Brazil and Germany show strong and consistent improvement, a clear sign of our competitive strength. Our portfolio of products and services also continues to improve while we maintain focus and customer care. We have an outstanding market position of our digital ecosystem in Spain and Brazil. This allows for very low level of churn and a differential R2. Next, Fiber and 5G. We rolled out fiber to over 1.5 million premises in the last three months, and we've reached 75% 5G coverage in our core markets. Our networks are virtualized, more efficient, and flexible, and more reliable. Finally, efficiencies. We progress in the southbound of legacy services, with copper switch-off in Spain that will be completed this month. We're also 3G in Germany and 2G in Uruguay. In Spain, we keep on executing our strategy and optimize our portfolio, including the sale of our operation in Argentina and Peru, and the signing in Colombia in just three months. All of this shows that we continue to execute. We want to speed up this execution across businesses with an industrial rationale, accelerate financial flexibility and simplification, and operate under technology and operational excellence. In parallel, we have started a strategic review, which we expect to complete and set with you in the second half of the year. Please give us time to conclude this review and focus for now on the business operating performance. Moving to slide three. Our core businesses show a strong performance. In Spain, growth accelerated across key commercial and financial metrics. The robust combination of our strong brands, best in class infrastructure, a matched portfolio and powerful channels continue to deliver strong results. In Brazil, momentum remains steady. Our leadership in the market remains intact, with a strong growth in mobile contract and fiber accesses. FX impacts our reported accounts, but in local currency, we continue to grow clearly about inflation. In Germany, operating cash profitability remains strong, so our efficiency focus. We have made change to our expand portfolio as we continue to further reduce our exposure, and we are determined to progress in this direction. Our main financial metrics are impacted by intense competition in the different markets and by Forex in reported terms. Despite this, it is worth mentioning the growth in contract attacks in Q1, which we are seeing for the first time since Q4-23. At the root level, reported results were negatively affected by Forex. However, in organic terms, we are growing in main metrics, and GOMs will ease around the year. I'd like to highlight the differential growth of B2B. .4% -on-year. Finally, net debt has decreased. Freqas flow is affected by sessionality in Q1. In summary, our core business, Spain, Brazil, and Germany, continues to show resilience across all key metrics, while at the same time, we are reducing our exposure in Spain. Moving to slide 4. Here we can show that we are on track to meet 2025 guidance in all financial metrics, a constant perimeter, with Q1 results being fully aligned with internal expectations. In fact, we expect our performance to improve as the year progresses, as com-VC during the year and operational trends continue our progress. As such, we can fully reiterate our 2025 outlook. Revenue, EBITDA, and EBITDA-CAPES will grow in organic terms, with CAPES to sell continue to decline. Freqas flow will be similar to the figures posted in 2024. We expect a lower leverage despite the temporary increase in Q1, which is mostly driven by Forex and working capital sessionality. We also confirm 2025 cash dividend. Moving to slide 5. We will review the start of the year in our domestic market. Telefónica Spain's commercial and financial performance continues to improve in the first quarter of the year. We have a strong commercial momentum. Q1 NetAs were above Q1 24 level, and we delivered customer growth in all accesses for our seventh quarter in a row. TV NetAs were the best in more than six years. The growth in B2C is being driven by our segmented and flexible offering, an attractive ecosystem with a very positive performance and our focus on customer care and service excellence. I would like to highlight the increasing device sold and the performance of Movistar ProSobre Alarms, which is the second largest player in the alarm market in Spain. All this means Telefónica Spain has the best charm and art view compared with our competitors in the convergent market. We have also seen strong growth in B2B, fostered by double-digit growth IT sales in the corporate segment. These sales are thanks to our cutting-edge technologies and highly experienced sales force, combined with the extension of long-term contracts with large enterprises. Full-sale sales are also anticipated. Nevertheless, the new long-term agreements signed in 2024 give stability to this revenue flow. As a result, domestic revenue grew by 1.7 percent -on-year, which has been down accelerating by 1 percent, quarter on quarter. On top of that, the reduction in CAPES led to a 2 percent improvement in operating cash flow generation. Let me say that our best practice CAPES to sales does not come at the expense of network coverage or quality. We have passed 1.3 million premises with fiber in the last year, and we have already activated standalone across the 5G network. All this means advanced functionalities to our customers. In summary, a strong performance with an outstanding set of commercial and financial KPIs. On to slide 6. Telefonica Brasil again showed solid commercial momentum, remaining a leader in both OSPEC and Fiber. Vivo reached the largest customer base in its history. Vivo Total, our market-leading full bundle, grew 77 percent in accesses -on-year. In addition, digital services penetration accelerated, reaching more than 11 percent of total revenue thanks to our ecosystem of services. Revenue rose 6 percent above inflation due to the double-digit growth of our flagship services. This was driven by higher arpu, growth in mobile contracts, and fiber accesses, acceleration in digital services, and a strong B2B performance. Prepaid to post-paid migration is leading to arpu growth and improved customer satisfaction. We are capturing an increasing share of wallet thanks to our differential portfolio, ranging from connectivity to digital solutions. Despite this commercial push, we achieved a 14.5 percent increase in EBITDAO minus KPIs with margin expansion. Finally, in April, we formalized an agreement with Anatel to migrate to the authorization regime. This is an important step that will enable greater business transformation and deliver positive commercial and financial impacts thanks to an improved service quality to corporate customers, office reduction, and asset sales. In summary, Brazil is performing solidly, and we expect to maintain these results throughout the year. Moving to slide 7, Telefonica Deutschland maintained a robust commercial momentum in mobile with -on-year growth in contract net ads. This was achieved with B2B customer wins and stronger B2B partnerships, as well as the attractiveness of the O2 brand. Both continue to focus on operational leverage in a market with increased commercial and promotional activity. In the sixth segment, arpu increased by 5 percent -on-year, based on improved value missed due to the demand for higher speed packets. Revenue was impacted by headwinds related to the B2B combined with weaker handset sales. However, this is not the case with market trends. Evita also faced difficult -on-year comps. Nevertheless, efficiency gains combined with successfully implemented growth initiatives in both the consumer and partner businesses helped maintain a stable evita margin -on-year. Evital minus caps grew by 4.8 percent -on-year. I also like to highlight a German regulator confirmed the 5-year spectrum prolongation until 2030. In summary, Telefonica Deutschland remains focused on operational improvement while at the same time increasing efficiency. Moving to slide 8. Now I'd like to update you on Virgin Media O2. In Q1, despite a tougher trading environment, we remain focused on delivering fast and reliable connectivity while protecting customer value. We continue to invest in our UQ networks and services, ensuring we remain in a good position for the future. Our 5G population coverage reached 77 percent and we expanded our fixed network footprint to over 18.4 million premise passed, of which 7 million are fiber homes. In mobile, contract chance remained stable at a total of 1.1 percent -on-year, proving that our efforts to increase customer retention are working. The chain ventures just expressed its portfolio with better airtime rates and multi-sign offerings. In our fifth consumer business, our public growth grew, once again supported by our value strategy. Revenue has begun to grow again, excluding handsets and next fiber, which reflects the successful phasing of price increases into service revenue. This contributed to a bit of growth, further supported by cost efficiencies. Evidal minus capes grew by 15.2 percent and the margin improved, reflecting capex seasonality. Finally, the net cost sale process has been paused to assess the best path forward to create value. Our next fiber will build towards a cumulative 2.5 million homes in 2025. In summary, in the UK, the team is focused on value while it continues to progress in next fiber and 5G rollout to capture growth opportunities. Next slide, please. In Istanbul, we have accelerated execution of our strategy in the last three months. We completed the sale of Telefónica Argentina for 1.2 billion euros in February, with simultaneous signing and closing, eliminating execution risk. We have also signed a binding agreement to sell Telefónica Colombia, pending regulatory approval and agreements with minority shareholders. Finally, just last month, we completed the sale of Telefónica Peru, which helped us avoid future liabilities and financial needs, while the consolidation improves free cash flow outlook and leverage of the group. In summary, these steps marked strong progress in simplifying our footprint and are also indicative of our financial discipline. Moving on to slide 10, staying with Hispan. I'd like to now focus on the operational and financial performance. We record positive net tasks in mobile contracts, the first in five quarters, thanks to better results in Chile and the launch of Movistar Antigua's single mobile network in Colombia. On the fixed side, fiber rollout keeps advancing, while 98% of broadband now on fiber. Revenue dropped 3.4%, mainly due to sales of copper in Chile in Q1-24. However, this drop was partially offset by a 5% growth in service revenue in Mexico. Evidal minus Capes fell 31% due to lower EBITDA and higher lease costs due to the single network launch in Colombia. Summary, in Hispan, we are happy with how the execution of our strategy has accelerated in the last quarter, which has resulted in a significant reduction in invested capital since December 2019. And finally, before I pass on to Laura, on slide 11, I'd like to talk about the performance of our transversal units, Telefónica Tech and Infra. Firstly, Telefónica Tech, the engine of our B2B segment. We help our customers with the digital transformation of their processes and businesses, leveraging our unique combination of leading professionals, leading technologies and the best platforms, all supported by a global ecosystem of market-leading partners. I am delighted to say that Telefónica Tech has increased revenue .6% -on-year. Commercial activity continues to grow, led by the private sector, with bookings up 7%. The 15% expansion in the commercial funnel and Telefónica Tech's strong market recognition as a global leader position it well to capture further growth. Secondly, Telefónica Infra. Our Fiber cost footprint reached 29 million premise past, including Fiber Pass in Spain. We recently closed the sale of our Staking Naviax. And finally, our submarine cable company, Telsus, continues to show strong profitability. I will now hand over to Laura, who will guide you through the main financial topics.

Thank you, Emilio. Moving to slide 12. We expect free cash flow generation to accelerate throughout the year, as free cash flow profile is back-end loaded and will be managed efficiently. Q1 is affected by regular seasonality. Free cash flow from continuing operations total minus 205 million euro versus minus 13 in the same period of 2024. The higher -on-year decline is explained by higher seasonality in working capital, leases, and financial payments. The -on-year average depreciation of the Brazilian real also affected, but we have proven successful, approximately 60% with a combination of natural hedges and active hedging. And as we commented in our full year results last February, free cash flow continues to be key for driving business performance. Net financial debt has decreased by 0.1 billion euro in the first three months of the year. While our net debt to a vital ratio has increased to 2.67 times due to free cash flow seasonality in this quarter, as the year progresses, free cash flow will gain traction heading to a stated free cash flow target. Furthermore, a net debt will be reduced to 25.8 billion euro after the sale of Peru and the signing of the binding agreement of Colombia and just the consolidation of net debt. We maintain an ample liquidity, which together with a smooth maturity profile allows us to cover the maturities over the next three years. And the average cost of debt has been reduced -on-year from .64% in March 2024 to .49% in March 2025. Moving to slide 14. At Telefonica, we have a pragmatic approach to ERG. We work exclusively on those levels that reduce risk and deliver value. For example, on the environmental front, we are hedging at an energy cost via renewables. 30% of group electricity consumption is now covered by PPAs. On the social side, we are connecting more people while providing secure services. For example, this quarter blocked 7.8 million cyber threats in Spain. In terms of governance, all resolutions were approved at the last AGM demonstrating shareholder confidence. Finally, our efforts have led to a positive socioeconomic contribution in the communities where we operate and are aligned with the United Nations SDGs. I will now hand back to Emilio, who will wrap up.

Thank you, Laura. So, to conclude my presentation and before we open for questions, in the first quarters we continue delivering and executing our strategy. Core units showed a solid performance. We keep on reducing our exposure to Spain. This allows to relocate capital to core markets and core business while reducing leverage. In just three months, we execute the sales of Argentina and Peru and the signing of Colombia. We expect to persist on exploring options for all other markets in the region. At the same time, we are focused on capturing further efficiencies. We are reiterating our all-annual guidance with better comps in the next quarters and as usual, an acceleration in free cash flow generation along the year. We are delivering positive results that we have shared with you today while we progress on our strategy profession. This reflection is based on our guiding principles. First, customers are the core of everything we do. Second, technology and operational excellence are fundamental to our business. Third, we apply an industrial rationale to all our decision making. Fourth, our ultimate goal is to create value for all our stakeholders. All of this in a context where we believe that Europe will change. Our priority will be Europe and we will maintain our leadership position in Brazil as a core market. Thank you very much for your attention and 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 telephone keypad. Once again, that is star 1-1 to register a question. You will then hear an automatic message advising your hand is raised. To answer 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. Our first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Good morning everyone. I appreciate your comments about not asking around the strategic review. I am going to try and tread the wire on that a little bit. First question was just on TULITS and VM02. You did the Daisy deal this week but you have hit pause on the net co-process ahead of the strategic review. On that net co-decision you need to pause. Obviously you need to get going with fiber expansion plans. The question is do you still see a capability to go after the buy element of your fiber expansion strategy in the coming months, i.e. acquiring altnets and how quickly can we see you starting to execute on that? My second question was just on Spain. Again, I appreciate we have to wait for the strategic review but there have been comments attributed to you in the press on the need to consolidate markets in order to strengthen Teff's position. In Spain you are raising prices and growing but not to the levels of incumbents in concentrated markets elsewhere in Europe. The question is do you see that changing or is further inorganic effort required on your part? I don't expect any specific comments but can we assume that your thinking on consolidation in Spain would have to be limited to fixed Spanish mobile has only just consolidated from four to three players or do you not think you'll be involved in consolidation in Spain in any material way? Thank you.

Should I go ahead Emilio with the UK?

And thank you for your question. Remaining the the Spain consolidation, we don't comment on any specific operation. Our priority in Spain is to maintain commercial momentum to sustain organic growth and delivering our budget and executing our strategic plan. As a group, our goal is to reinforce our core markets and core capabilities with financial and industrial rationale. We will focus on one we know how to do as an industrial operator. We have already been at an active player consolidation in our core markets. Remember DPS, GBT, E+, BNO2. At the same time, we believe Europe needs large telecommunication and technology companies. We will consider economically profitable in market consolidation. But there will be no European consolidation unless we first consider in market consolidation. Any consolidation is positive, especially for the functionality of the sector. Finally, let me reiterate that our priority in Spain is to maintain commercial momentum to sustain organic growth and delivering our budget and executing our strategic plan. I will let Lutz address to BNO2 question.

Yeah, thank you Emilio. Well, so first of all, the jet deal, a very important step for us. And with that, we are creating what we call a B2B surfco and that is obviously operating on our mobile and our fixed network. But it is completely independent from these netcode approach. The netcode as you have heard, right, is this approach is paused for now and I think it's linked to the timing Emilio has shared with us for the strategic review of Telefonica. And we are, as we speak, progressing with expanding our fiber network and also upgrading our HFC network to fiber. So that continues. And of course, there are conversations going on

with

possible consolidation with altnets, which is not really dependent on creation of a netcode. Back to you Emilio. Thank

you, that's really helpful.

And just only to remark that we see clear value in developing the fiber in the UK. Remember that Telefonica is the operator with the most and largest fiber deployment in Europe. And we own eight fiber codes with different models. We believe in the opportunities in the UK market and we believe that fiber is going to be a key element on these opportunities.

Thank you. Just to follow up to your comments on Spain, obviously I appreciate you can't comment too much, but you've been having conversations at the EU level. Have those been encouraging on the scope to actually get in market consolidation deals done in Europe versus previously?

Yes, I mentioned we believe that the market consolidation has to be the previous step before any European consolidation.

Thank you, Andrew. Operator, next question, please.

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

Yes, good morning. Thank you for the presentation and welcome Emilio to the call. I have two questions, please. The first one was on your free cash flow guidance. So you've twisted it a bit in the sense that you're now guiding for free cash flow excluding discontinued operations. And the base to which we should compare it is maybe the higher than it was including those operations. I think it's 2.83 or something around that. So that suggests that Peru and Argentina were very diluted. And I was wondering, is it because in 2024 there was some one-off or was it just generically diluted? And if we think about the disposal of Colombia and potentially Chile, should that have also a potential creative impact on free cash flow when that happens? And if I may, you say it should be similar, the free cash flow to 2025 to 2024. Obviously I'm not a native English speaker. It's similar, does similar mean flatish or is it a bit more broader than that in terms of variation? And then lastly on Germany, -on-one continues to insist that they will get some low-bend spectrum. I don't know if you can give us any update on your thoughts on that one. Thank you.

Matthew, thank you for your question and thank you for your warm welcome. Related to the free cash flow, I would like to reiterate our guidance and I'm going to let Laura to answer and to give you more details about your question.

Thank you, Matthew, for your question. There was a few questions within the free cash flow. One was the guidance, one was the tweeting a bit and I will explain that that's not been the case. And third, it's the Peru and Argentina contribution so far and whether they were diluted or not. So on the guidance, first answer, our guidance remains unchanged. We expect 2025 to be similar to 2024. Similar seems stable around the same plus minus. You can call it flatish if you want but I think similar stable will be what we said is what we speak to at the moment. We also said under the same guidance, we are focusing on the free cash flow and the free cash flow is the first step in the consolidation perimeter and perimeter has indeed changed. As you know, Argentina and Peru are now reported as discontinued operations. Argentina has already been deconsolidating since the 24th of February and Peru will be deconsolidated on April 1st. So the free cash flow of Peru has gone through the free cash flow of Telefonica and Q1 under the discontinued operations line. We are focusing indeed on the free cash flow generated from continuing operations and if we do that, the base for 2024 would have improved 0.2 billion euros approximately. It's not because Argentina was dilutive, it's more because of the negative contribution from Peru which as you may remember included the payments related to Sunat. So there was more negative from Peru that offset the positive contribution from Argentina. On the changing tweeting thing, I'm very happy to go through full free cash flow as well. I truly believe that as these companies are no longer in our perimeter, it doesn't make sense to keep on focusing on that. So we think continuing operations free cash flow shows much better the underlying. But if you include the free cash flow for discontinued operations as well, then the base will be the 2.6 we reported last year and we should include the 153 million negative you have on slide 12 and under that definition, we would also give a guidance of a stable free cash flow. So we rather focus on continuing operations free cash flow, but to simplify, we confirm a stable free cash flow under both metrics. So nothing has changed. We remain with the guidance we provided and we are very committed and we are very certain that we can achieve such guidance. And finally, you ask about Colombia and Chile. There's nothing to report on Chile. They are just rumors and we won't say anything about deals until they don't happen. On the impact of Colombia, I think regulatory process will take longer than Argentina and Peru and therefore, whatever impact is going to, I mean, I think most of 2025 is going to include free cash flow of Colombia in any way. So it's too soon to talk about that because regulatory process will be longer and we are expecting an outcome around Q4, late Q4. So I hope I answered your question, Matthew. Regarding

the question about Germany, let me hand over to Marcus to give you more details.

Thank you. Good morning, Matthew. I think first of all, I think it's really a big achievement that Germany extended the spectrum for the next five years. I think this is a real game changer in the overall context. To your question, Benets are decisions to grant 2.5 MHz in the low-bound spectrum to -on-one is directed to all the free established MNOs. As we all know, Telefonica Germany is already granting a spectrum sublease to -on-one of 2 x 10 MHz in the 2.6 band. This obligation will be extended and Telefonica clearly will deliver against this request. On the low-band, Benets are reflecting in its decision that -on-one might want to approach its national roaming host Vodafone for such a grant first. So Telefonica Germany is from that perspective not in the lead for offering additional spectrum in that sense.

Very clear. Thank you very much,

all. Thank you. We will now take the next question. From the line of Fernando Cordero Barreira from Banco Santander. Please go ahead.

Hello. Good morning. I'm taking my two questions and also welcome Emilio to the call. The first question is on Spain. As a follow-up on your comment on your priority on the commercial momentum, I would like to understand which are your views regarding one of the key drivers in my view on the current trends on the Spanish market, which is the even higher than 3% growth year on year on fixed broadband. In that sense, that growth is allowing all the players to post their ads and in that sense also to understand which is your view on how or for how long this growth trend can persist and what are the reasons behind this nice trend of the whole fixed broadband market in Spain. And the second question is for Laura, particularly on the financial structure. We have seen the disposals of Argentina and Peru and more are likely to come. I want to understand the impact of those disposals on your balance sheet flexibility and particularly on the impact on the credit rating. Should we expect that you can just directly reallocate the capital to be extracted from from any other initiative or can also we can also expect that the credit ratings may give you more flexibility given that the risk profile of the group is diminishing or is being reduced with the exit from ISPAM? Just understand if there is a qualitative increase flexibility on your balance sheet for an exit in from ISPAM. Thank you.

Thank you very much for your question and again thank you for your one welcome. Talking about Telefonica Spain, first of all to remind that Telefonica Spain Q1 has a really excellent performance with all main services accelerating in general growth. We expect in the next quarter to follow with this performance. We don't see relevant change in the market with a similar trends in terms of competition. In the case of our revenues, first of all talking about B2C, I will say that our B2C trends are really excellent too and we think we are able to maintain these trends because are based in structural advantage. We are talking about our brands, we are talking about our customer care policies, we are talking about our networks. These advantages permit us to see ahead the same kind of trends in B2C. Remember that we maintain the lowest RPU and the highest MPS of the market. In terms of B2B, we realize that we are performing very well too. We see growth ahead, the funnels are increasing and our capabilities both in Telefonica Tech and Telefonica Spain permit us to be very positive in the performance in the next quarters. In terms of wholesale, as you know, our declining is something that was predicted, it was based on a long term agreement that gave us sustainability at what was included in our guidance. Then we can see that we see a strong performance ahead and we are pretty sure about the confidence in the performance of Telefonica Spain.

Fernando, thank you for your question. Let me explain the impacts of the announced and executed sales. The sale of Argentina reduced leverage by 0.02 times. In the case of Peru, it will reduce leverage by approximately 0.01 in Q2. But also very important to mention that Telefonica Group will no longer account for the negative operating cash flow, nor consolidate the current or potential future debt of the company. Colombia has a further delivery impact. We have accounted in the post-closing. You can see we have included the consolidation of the Colombian net debt as of March and the whole lot will bring net debt as of today, post-closing at 25.8 billion euros. But as we said, it's not only the quantum, it's not only the ratio, it's definitely the quality of the free cash flow. And I can confirm credit ratings see this as a very clear positive. And it will improve the quality of our free cash flow and the quality of our leverage ratios as well. They also welcome the strict capital allocation, which can be delivered, but they also welcome when we reallocate to business where there's definitely higher returns, which is the case because we are exiting businesses with lower returns that are core businesses. And they really welcome this simplification of the portfolio, that the free cash flows are higher quality in a simpler organization. And all of that has been achieved through these three disposals. On credit ratings, if I may add, we had already the annual meetings with them in the month of April. A stable outlook is maintained as there's no specific concerns whatsoever, just the opposite. We ended up the year better than expected and all these strategic capital allocation around Spain is being a clear positive. Obviously, the strategy review is pending and we will announce on the second half of the year on that. And we will definitely do a special focus on the financial policy and the capital structure supporting that plan.

Many thanks, Laura. Just to clarify, if I understood you well, what you are saying is that your balance and flexibility will improve on top of the pure quantitative effects from the disposals given the, let's say, lower risk profile.

Absolutely. Yeah, that's right, Fernando.

Perfect. Thank you.

Thank you. We will now take the next question from the line of Akhil Dattani from JP Morgan. Please go ahead.

Hi, good morning and thanks for taking the questions. I've got two as well, please, if I can. The first was just on changes that have been made to the organizational structure of Telefonica year to date. I just wondered if you could quickly update us on the major changes. I guess we're aware of, obviously, Emilio, you coming in as the COO. Obviously, we've had a change at Spain and change at Telefonica Tech. I just wonder if there's any other major changes you'd highlight and if you could maybe just help us understand the general thinking behind these changes. Is it just a new CO and a need to or desire to create some change or the other specific initiatives in terms of what you're hoping to bring into the group through these changes? I guess the first question. And then the second question is around, I guess, a much bigger picture question around the strategic review. And it's not about any details. It's just more about the philosophy behind it. But you've probably seen there have been rumors around you as a group looking at some pretty transformational potential moves to the group as a function of that strategic review. I guess what I'm trying to understand is when we see headlines on Bloomberg in regards to maybe a potential rights issue, maybe dividend cuts, I guess what I'm trying to say is could those sorts of major capital allocation changes end up being part of this? Or should we end so therefore, you know, anything and everything is on the table? Or are these things being maybe slightly overplayed in the press and these are more evolutionary rather than transformational? Thanks a lot.

Thank you. Thank you very much for your question. Talking about the organization, we have done some change related to some movement that has produced in the company. The rationale is to assure that we execute in the same way and we execute our plan and deliver our budget. This is the main rationale of all changes that we have done. Regarding there will be more changes after the strategic plan. I will not comment on anything because it depends on the strategic review. We will see the results and we will serve with you in the second half of the year any kind of change or any kind of transformation that we decide or not decide to do.

Thank you for the question on the part of the transformation versus evolutionary movements on the capital structure. As everything else is really too soon to say anything or cover that. That will definitely be part of the strategy review we are undertaking. We are going to review our capital strategy which is the base that will support the rest and will support best the plan. We will present our conclusions as everything else in the second half of 2025. Maybe let me share some points on the flexibility we start this strategy review with. I think the fact we are reducing our exposure to expand and the new group much more focused on core operations could support higher leverage than the previous configuration of the group. We continue with a very strict capital allocation policy. The leverage ratio needs to be also in combination with the quantum quality of free cash flow, liquidity, life and cost of debt as I always emphasize. As a recycling into a bit of free cash flow generating business is also part of the debate. We have plenty of options and as I said at the beginning, a strategy review will include the most suitable capital structure to support this plan. You can be sure that we will always look to finance anything in the most efficient way to maximize their value. As we said in the presentation and Emilio, the guidelines of our strategy framework, one of them and probably the most important is the value creation for all stakeholders.

Great, thanks so much.

Thank you. We will now take the next question from the line of James Ratz from New Street Research. Please go ahead.

Yes, good morning, everybody. And thank you for taking the two questions. So the first question was coming back to the free cash flow guidance. So thank you for the new base figure you've given. I think if I look at 2.85 billion as the base for 2024, you're saying that would be flat or stay similar on an organic basis. So I'm estimating you'll have around 100 to 150 million of FX weakness this year, assuming current FX rates are broadly stable. So that would mean you should report around 2.7 to 2.75 billion of continuing operations free cash flow consensus. So on the sheet you sent around is a 2.4 billion. So when you look at the consensus figures you've gathered, where do you think they're too low? Which line items stand out to you? There's a 300 to 350 million gap is reasonably sizable. And then the second question I had, and maybe this is one for Marcus, is really on Germany. I think a lot of people have been rather worried about what could be in a kind of pending mobile price war in Germany. And yet this quarter your O2 contract ARPU has recovered very strongly to being stable, having been down 3% in Q4. Now I know there's a bit of an MTR boost in there, maybe about 140 basis points of that recovery. But what else has really led to that improvement in ARPU you've seen in Q1? Can a stable ARPU be maintained for the year or can that maybe even get better through the year? It would just be great to hear your views on how you're actually seeing the competitive environment in Germany and ARPU developing through the year. Thank you.

Thanks. Thank you very much for your question. Laura and Marcus will answer your questions.

Thank you, James. I start with the free cash flow question. As you said, the basis for free cash flow from continuing operations to remain stable is a combination of many items as usual. The most important is the growing organic EBITDA minus CAPEX, which is embedded in our guidance in 2025. It's true that FX could affect somehow negatively, but please let me remind you that there's a very large natural hedge from FX at free cash flow level. And you see how much the impact we have in revenue diminishes as we go through the free cash flow, the final free cash flow. And also, as you know, we do financial hedges every year and we commented that we have hedged quite a lot of our free cash flow coming from Brazil already. So the impact from free cash flow will be minimized. On that growing organic EBITDA minus CAPEX, all our three main markets are growing operating cash flow in organic terms. And as I said already, the quality of that is larger as we are removing the FX volatility in Argentina and the uncertainty on future free cash flow impacts from Peru. Below that, we will continue managing every line. There's a gap versus consensus, but let me tell you that last year we also overperformed on consensus and we overperformed on our guidance. So we have a good track record on managing every line below EBITDA minus CAPEX. We should expect a positive working capital contribution in 2025. Lease payments are less affected by changes in volume and lower inflation. Very stable debt-related interest costs, very proactively managed, continue to optimize taxes. Dividends from BMO2, as we already announced, will be slightly lower, but we also have normalized hybrids and personal payments, which are now part of the free cash flow. But nothing, I mean, just the very granular management of every single line. Ispán still brings some uncertainty on the performance, although commercial performance has improved, as Emilio explained. But that needs to be settled. Argentina and Peru have already been sold. We are waiting for regulatory authorizations in Colombia. Some things may come, but the important is the strength of the core free cash flow as the pillar and the strength and management of the other financial items that we will continue managing in the right way.

Hi, James. Your question on Germany. I think overall the German mobile market structure remains intact. Yes, we saw some more promotional activity in the first quarter, but overall I think the market is growing and there's growth potential for all players in the market because there's still more demand for mobile data. On Telefonica Germany, on our commercial strategy, we remain committed to profitable growth on the back, clearly, of a fair share of available growth sets in all channels. Having said that, I think you mentioned the point. We drive in the mixed profitable growth and we have been able to stabilize our APU maybe as the only player in the German market, even taking into account the XMTR effect that you mentioned. So overall, we drive in the mix of high value, mid value and low value, profitable growth and see a good momentum with our own offers. So we are not worried about the market structure. The first message, second message clearly, yes, there are promotional activities, but in the mix and that clearly shows the stable or two postpaid APU, the key revenue source, and we clearly see that we are able to drive profitable growth. And we have time for one more question, please.

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

Thank you for taking the questions and I have two, please. So firstly, you've been quite vocal on consolidation benefits. At a high level, do you think there would be benefits of mobile in market consolidation in Germany or do you feel you're now very much on a standalone path after you've evolved your strategy, post one on one, leaving your network? And secondly, the Spanish headcount reduction benefits drop off in Q2. Will you have other OPEX cuts which come into effect to allow domestic EBITDA growth to accelerate? And if so, would you be able to elaborate on the source and magnitude of those, please? Thank you.

Thank you very much for your question. Regarding the consolidation, especially in Germany, I have to tell that our priority in Germany is to grow our business organically. We see ahead opportunities, as Marcus mentioned before, leveraging our network of our brands. But it's true that we believe Europe needs large telecommunication and technology companies. In market consolidation is needed to have a strong European telco sector. In Germany, there are already three very good mobile networks. We don't see too much space for one. We have a responsibility to consider all options, of course, but let me stress that our priority in Germany is organic growth. Regarding the question about the revenue growth plan in Spain, our expectation is 2025 EBITDA to sell higher 0.0G growth than in 2024. This is based on retail revenue growth. Remember that our revenue growth is even in retail revenue growth is even above the inflation. We have some tailwinds coming from the revenue plan that we launched last year. The technological transformation, both in IT networks and the setup of the copper, permit us to see more efficiency. At the same time, all the simplification that we are doing in Spain, both in network system processes, permit us to see again more efficiencies. Artificial intelligence and automation permit us to see commercial efficiencies too. We see a lot of examples that permit us to see this efficiency. And then with all of that, we believe that we are able to maintain our EBITDA level, our performance in financial KPI.

Thank you.

Thank you. At this time, no further questions will be taken.

Thank you very much for your participation. We hope we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. Good morning and thank you very much.

Telefonica's January-March 2025 Results Conference call is over. You may now disconnect your line. Thank you.