Telefonica SA

Good morning and welcome to Telefonica's third quarter 2025 results. I am 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 presentation, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group. These statements may include financial or operating 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 information, please contact Telefonica's investor relations team in Madrid. To ensure an efficient Q&A session, we kindly ask virtual attendees to submit their questions to our inbox, cmdquestions at telefonica.com. For in-person attendees, please raise your hand, and we will hand you the microphone when it is your turn. Please state your name and institution before asking your questions, and we kindly ask you to limit your queries to a maximum of two questions per participant. We'd appreciate if you would solely focus your questions on Q3-related topics. For any other inquiries outside the scope of the Q3 results, we encourage you to reserve those questions for the dedicated session during the Capital Markets Day. As a reminder, today's presentation is being recorded. Now I'd like to pass the floor to our Chief Operating Officer, Emilio Gallo.

Good morning. and welcome to Telefónica's third quarter results. With me today are our Chief Financial and Control Officer, Laura Basolo, Borja Ochoa, CEO of Telefónica España, Christian Guevara, CEO of Telefónica Brasil, Lutz Söhler, CEO of BNO2, and Markus Rohl, CFO of Telefónica Deutschland. As we have the Capital Markets Day session right after this presentation, you will be disappointed to hear that the call will be shorter than usual. I would like to highlight the consistent execution across businesses in the quarter. Therefore, today I will talk about the following. First, we are accelerating the portfolio transformation in headspan. Second, commercial momentum is accelerating in our core markets, with growth in fibre and mobile contract accesses. This is driven by low levels of churn and a superior NPS. our total customer base has reached 350 million. Growth accelerated year on year in all main accesses in Spain, with promising demand for our digital ecosystem services in Spain and Brazil. Third, our network leadership is key to our steady performance. Feverbile continues already reaching 8.6 million premises past, while our 5G coverage stands at 78%. And finally, we are working to increase efficiency across the Group on a daily basis. Our industry-leading CapEx-to-Sale ratio continues to decline. Moving to slide 3, for the overview of the third quarter key financials. We again deliver sustained organic growth. We are growing in revenues and EBITDA, and EBITDA minus CapEx is back to growth in this quarter. As a result, for the first nine months of the year, we have been growing in key operating metrics. In reported terms, the negative forex impact slowed down during this quarter. Frequent flow trends were affected by several issues which Laura will explain later in more detail, while net financial debt is down year on year. Moving to slide four. Performance in Spain was strong with accelerating growth in both customer and financials. Trading in the third quarter was again very positive, recording the highest convergent net gaps in more than six years and growth in all accesses. Convergent ARPU remained the best in the market, close to 90 euros. This astounding commercial performance reflects Telefónica Espanya's premium market positioning and a smartly segmented commercial strategy. Q3 revenue increased year-on-year thanks to sustained growth in service revenue. Retail revenue increased about 2% year-on-year, driven by customer growth, price upgrades and solid IT sales growth in B2B. EBITDA improved its growth rate, while EBITDA's minus cap accelerated to almost 4% in the quarter. This shows our leading cash conversion in the domestic market. In summary, in Spain, we continue to leverage our solid fundamentals to deliver a stronger performance. On the next slide. Telefónica Brasil delivered a strong set of results in Q3, maintaining robots' growth in the most valuable segments and a solid financial performance. In mobile, RPU continued to grow, driven by the higher adoption of 5G, now available in 683 cities. This proves the success of our selling strategy. Churn remained at low levels, around 1%. In fixed, we continued the transformation to Fiverr. New connections were up 17%, driven by our convergent position Vivo Total. Revenue grew over 6%, outpacing inflation, thanks to growth in postpaid on Fiverr, and increasing contribution from new businesses, representing 11% of total revenues. EBITDA growth continued to accelerate, while EBITDA minus cap rose 14%. Margin expansions were supported by the first positive impacts of the migration to authorisation. In summary, once again, we delivered very positive commercial and financial results in Brazil, just as in previous quarters. Moving to slide 6 to cover Germany. Telefonica Deutschland delivered solid on-brand momentum in the third quarter. Even now, the one-on-one migration continues to weigh on financial results. The migration is very close to completion. We are growing both in fixed broadband and mobile contract net ads. This performance was supported by attractive O2 promotion and the success of both the family and unlimited plans. Network quality remains a key strength, with 5G coverage at 98%. We have also continued progress on densification. From a financial perspective, performance was weaker than expected across the main metrics. Revenue declined over 6% year-on-year and EBITDA dropped 9.5%. This was due to the one-on-one migration which we could continue to wait on Q4 before starting to analyze in the course of the new year. Nevertheless, underlying EBITDA still grew thanks to our efficiency measures. In summary, despite the migration, the underlying operations show resilience. Moving to slide 7. Virgin Media 2 improved its commercial results in Q3. The company remains focused on customer loyalty and protecting value in a challenging market. The launch of Gigaf broadband expanded our convergent offering, strengthening our position in the market. In B2B, we completed the merger to create O2DAISY. This is a key milestone to improve our position in the segment. Revenue continues to be impacted by challenging market dynamics. Software-enhanced sales and lower next-fiber construction. However, when we exclude the combination of handset sales, next-fiber castration and B2B with the completion of the O2DACY transaction, Guided revenue remains virtually stable year-on-year. In addition, Guided EBITDA improves its year-on-year trend to 2.7% thanks to the reduction in operating expenses. All in all, Virgin Media 2 continues to enhance convergence, expand its network, and drive operational efficiencies to support future profitable growth. Moving to slide eight. In Hispan, we continue to make progress on the portfolio optimization. We completed the sales of Telefónica Uruguay and Telefónica Ecuador in October, and Telefónica Colombia will be in the coming months. Organically, we are delivering growth in contract and fiber accesses. In financial terms, revenue declined in the third quarter, but EBITDA improved its strength compared with previous quarters. I will now hand over to Laura for the main financial topics and ESG.

Thank you, Emilio. Thank you, Emilio, and good morning, everyone. Let me start explaining you our 2025 guidance and dividend. Given our solid operational performance and growth in the first nine months, we confirm our guidance of revenue EBITDA and EBITDA minus CAPEX growth with a CAPEX to sales ratio below 12.5% in 2025. We reiterate also our 30 euro cents dividend per share in cash for the year. We are updating our free cash flow expectations for the year to around 1.9 billion euro, and as a consequence, we expect a slightly higher leverage in 2025 versus a decline previously. Let me go straight into explaining our current 2025 free cash flow expectations. As we approach year-end, we have more clarity on some events. We were expecting a tax refund and the collection of familial litigation of around, in combination, €0.4 billion for this year. The refund has not occurred yet, and we now expect it for next year. And for the litigation, we have agreed a three-year payment from 2025 to 2027. perimeter is also impacting beyond the effect of discontinuing the company salt. We accelerated the execution and exited five out of eight East Bank countries so far. And as we close the operations, we are seeing all induced impacts. As we accelerate the exit of ISPAN, we are managing those full impacts. Lower-scale benefits at our purchasing unit, the closure of our ISPAN financial subsidiaries, the exit of TechISPAN, among others. We are working to concentrate most impacts in 2025, which will flow through free cash flow from continuing operations, while in reality this is more the cost attached to exit the region. Related to ISPAN, also our expectations for working capital have changed, and we foresee a worse working capital contribution versus our initial expectations. Germany's performance is challenging. On one hand, B2C revenue continues to consistently deliver growth despite a more competitive environment. On the other hand, B2P free cash flow loss impacts accelerate. Q3 told us that full-year performance could be worse than originally expected. We took immediate action, and we will explain the strategic plan for Germany later on today. Finally, year-on-year comps are difficult. FX negative impact, restructuring from organization changes, and a less positive one-off, such as some infrastructure says stop under a more industrial approach. In comparison with 2024, free cash flow was very positively affected by 288 million euro cash from 5G capex subsidies received the third quarter last year, and a 211 million euro tax refund in the same period. With all these moving parts, we see free cash flow for the year now more in the 1.5-1.9 billion euro range. But it is worth mentioning that facing impacts will revert. An lifespan full transition is being coupled with value accretive deals on top of leading to a simpler and more predictable portfolio with most of free cash flow mid-term coming from Europe and Brazil. In this slide, I will drive you through the first nine months' financial performance. Net financial debt stands at 28.2 billion euro in September, and including the sale of Uruguay, Ecuador, and Colombia, and the acquisition of the 50% of Five Brazil, net financial debt reduces to 26.5 billion euro. Free cash flow from continued operations amounted to €414 million in the first nine months. Year-on-year comps, as I said, were tough on some positive effects last year. FX moves had also an impact on the reported operating cash flow. Working capital consumption was slightly higher and leases reflected seasonality. Our solid financial profile shows our ample liquidity, with debt maturities covered over the next three years and an average dead life of 10.5 years. The average cost of debt reduced 0.13 percentage points year-on-year to 3.44% in September. We'll continue with our prudent financial policy and free cash flow management, which are key priorities for us. Moving to slide 12, now we turn to sustainability. This quarter, I'm pleased to highlight the recent signing of a 10-year PPA in the UK, together with an additional PPA in Germany coming into operation. These long-term agreements permit financial predictability and operational resilience, exemplifying our ESG approach, which is focused on reducing risk and generating value. And now we'll hand back to Emilio, who will wrap up.

To conclude, and before we open for the question, we continue to be focused on executing our plan for 2025. As Lauro just explained, and despite an updated frequency outlook for the year, we are maintaining consistent operating performance in our core markets, allowing us to reiterate our operating guidance for the year. Germany's underlying performance continues to be resilient. Brazil posted strong growth in local currency, and Spain recorded very robust KPIs and growth across the board. The UK was delivered strong growth in EBITDA on a guidance perimeter. Our dividend committed for 2025 is also confirmed. And finally, we continue with asset disposal in Spain, a process that is ongoing and will finalize, we expect, during the next coming years. Thank you very much for your attention.

Thank you. We're now ready to take your questions. Again, for those attending in person, feel free to ask your question live by raising your hand. For those attending virtually, please submit your question to our inbox, cmdquestions at telefonica.com. Please focus on Q3 here. And I can see, I think Josh was the first hand on the back up there.

Thank you. It's Josh Mills here from BNP Paribas. It is related to Q3, but given the moving parts in free cash flow, I just wanted to clarify whether the 400 million of free cash flow dropping out of the FY25 free cash flow number is now all going to be taken into account in the 2026 year? And if so, is that 400, 300 million included within the guidance of 2.9 to 3 billion, which you've laid out? Thanks.

Thank you. I'm going to hand over to Laura to answer your question.

Yes, thank you, Josh, and you're right, that's a question for later, but anyhow, I will answer it. Our guidance always has a lot of moving parts, and we have as the heart the operating cash flow after leases, and then we have both negative and positive one-offs. But due to 2025, it's a phase-in effect. Indeed, we expect the tax refund in Spain for 2026, and in the case of Millicom, we reach an agreement for cashing in between 25 and 27. So we'll be distributed along those years.

Thank you. I think Mathieu was the next one over here, and then I think going on the back again.

Thank you. Hi, Mathieu Robillard from Barclays. I had two questions, first on Germany. You had the soft target to stabilize the EBITDA in 2025. It seems trends remain challenging. I was wondering if that soft target still holds. And also, I was intrigued to see that the ARPU of O2 postpaid declined a bit more. So I wanted to understand what was behind that. And then more generically about free cash flow. So I think you're showing the slide that the disposals of Latin America have a negative impact. on the free cash flow. Is that also something that we should see in 2026 for some of the other disposals? Thank you.

Regarding Germany, we will explain in the CND about the 26, but just to give some color about your question, just to know the one-on-one migration during this quarter was accelerated, more than expected. We have a lot of efficiency measures that are taking longer than we expected in a very challenging market. This efficiency measure will take the next coming quarters the result that we are expecting. It's true that the market is very challenging. We can see in the handset sales that there are really weaker trends. However, we are seeing an underlying business that is working with a good performance and it gives us the basis in order to think of a recovery for the next coming quarters. for the second question and hand over to Laura.

Thank you for the question, Mathieu. On ISPAN, ISPAN has been nurtured into our operations for more than 25 years. So when we say we are selling some companies, it's not just the selling of the companies. First, it impacts the remaining companies. Mostly one example is working capital. So our ability to do working capital initiatives now in Chile is much more difficult or it's under much worse conditions. To give you an example, and as we are also closing our factoring companies there, the ones we had in JB with the Spanish banks, for instance, we used to do some reverse factoring in Chile with those factoring companies that now we have to do with third parties or we cannot do at all. So the first block is the impact on the remaining And then there's many others. And as I said, as we are exiting, we have less volume for purchases, and then we have less impact in our purchasing subsidiary, or now we have to act also in the tech latam. To your specific question, we are trying to concentrate most of the impacts in 2025. There will be some more impacts in 2026, but there will be no material. And in any case, they are embedded in the projections we will share at the capital market stage. So first, it's well beyond just exiting a few countries. We really need to... fulfill all the transition plan to get out of the region so to say and second we are doing a big effort to concentrate most impact in in this in this year and whatever comes next should be already included in in our projections

Yes, I missed the answer. No, related to the German apple, it's true that we are in a challenging market, as I mentioned. We are starting to see signs of a more rational market, but it's true that it's too early to consider that this is a change in the trend. Anyway, I think ARPU and NetAds is a combination in the case in Germany that this is the underlying business in the mobile business and we consider the trend is positive in any case.

Morning, everyone. It's Andrew Lee from Goldman Sachs. I just had a couple of questions on the free cash flow in the quarter and for the full year. There obviously are implications for the guidance of the midterm, but we can keep it to this year. Firstly, on the German side of things, you mentioned there's a bigger drag in free cash flow than you anticipated for the full year. That was one of the reasons, I think. for why you downgraded your free cash flow for this year. What exactly is going on there? Can you just give us a bit of color? I think you mentioned B2B being a bigger drag and maybe there's more free cash flow generation in that part of the business, but just help us understand the difficulties that you're having in Germany from a free cash flow perspective. And then secondly, I think another element of the free cash flow drag is on working capital. And you'll now understand going to more of a kind of neutral working capital profile going forwards. So what's happening in terms of working capital that's changed your perspective on that for 2025? Please. Thank you. Yeah.

I will take both questions. Thank you, Andrew. On the free cash flow expectations, I wouldn't say there's a huge impact of Germany. It's a collection of different impacts, and half of it has to do with facing, and the other fourth has to do with the Spain-induced impacts, and then you have Germany, but also Brazil and Brazil, Spain and Brazil are doing better, and then you have Spain. Different other things like restructuring or sales not being done and all of that. So Germany, it's a part of that. Maybe I missed the spell, it's B2B, not B2B. I mean B2B is the anonymized impact. and that is being accelerated in the second half of the year. So Q3 had very little impact from an anise, Q4 is going to have almost none impact and that will be fading away towards Q26 and will be completely comparable in 2027. Regarding the free cash flow of Germany, it's all linked to what Emilio said. On the positive side, B2B is growing consistently, as you've seen. It's a more competitive environment, but we have delivered a strong result quarter after quarter b2p as i said has accelerated and we have a very important impact in free cash flow in the second half of the year efficiency you've seen we're doing a lot of efficiency improvements and more to come but it doesn't have a linear a linear effect yet so we are seeing those but not to the to the to the fullest extent and all of that is leading to a free cash flow worse than expected. That is the combination and we have a strong plan in place we will talk about later. And then working capital. Working capital in the past has had a positive contribution, in some years larger than others, depending on its business, long-term contracts, how you pay them and so on, and capex seasonality. As we are a smaller company now, we will have less working capital contribution. more positive in ISPAN. So as we take ISPAN out, that will have a lower working capital contribution. So we will share with you in the Capital Markets Day how we see that in the future. But definitely for 2025, we expect also a lower working capital contribution than originally expected.

Thank you, Andrew. The gentleman over here to the right, and then we'll move a bit forward together.

Good morning. Just a couple of questions on the Spanish business in Q3. I see the retail business has shown similar trends to previous quarters, but any comment on the balance, volume, value, and the competitive intensity would be welcome. And then also in Spain, the B2B, Okay, Laura, you've mentioned generally that B2B is going well. Just to hear also your view in Spain, some of your rivals, telco rivals, are showing more ambitions to grow in the B2B business, and they've made good inroads, particularly with the public administration. So simply to have your comments on the dynamics in the B2B in Spain, if you're feeling more pressure, more pricing pressure, more competitive pressure. Thank you.

Yes, regarding the first question, the balance between value and volume for us is the right balance and at the end the resources, the growth in the revenues and the EBITDA. Even taking into account when you change the mix of your volume, you can have some pressure on the ARPU. It doesn't mean that your trends are not positive. We value these trends very positive in the Spanish market with the right combination between growth, churn and ARPU. Then our expectation for the next quarter. following quarters, but something for the CND, is to maintain the strong performance in the retail business. In the case of B2B within the Telefónica Spain has a very strong capabilities during the last years. And then we expect to grow in digital services in a similar path that we are doing today. We feel that, of course, the competition can increase, but we feel comfortable with our capabilities and the way that we can compete in the market. Regarding the government contracts, of course we expect to win as much as possible, but this is a competitive market and it's not easy sometimes to win it. But if we see the winning rate that we are maintaining, the truth is that we are obtaining the result that we are looking for.

Let's take one here and then move over to there.

Thank you. It's from Deutsche Bank. I just want to come back to Germany. You've tried to explain that the core business is still quite solid. When we look at the EBITDA trends of minus 2% in Q1, minus 6% in Q2, and minus 9.5% in Q3, I appreciate most of that is driven by one-on-one. But can you just disaggregate, if you exclude the one-on-one impact, what is happening to the EBITDA trends over those three quarters, or at least over the nine months, x one-on-one? I think that would help us understand what's happening to the core business.

Let me answer about Germany. As I mentioned before, the underlying business in Germany, we think that we are doing, performing very well. In fact, the trends in excluding the one-on-one migration is positive and we expect to maintain this performance. As you know, the one-on-one migration, I explained before, the one-on-one migration waits during this quarter and we expect to recover it in the next year when the migration will be behind us.

Thank you.

Hello. Good morning. Thank you for taking my questions. I think we have already asked about the B2B and B2C dynamics in Spain. My question is around the wholesale. I've seen there is a decline of around, I think, 4% year-on-year in this quarter. That's softer. decline compared to previous quarter, but still a decline. So I would like to better understand your dynamics, the different moving parts here and the prospects you see for going forward. And then second question, quick one on the debt. There is, I think it was 800 million impact on Forex and other. So if you can elaborate a bit on this as well. Thank you.

Thank you, Fernando. Regarding the whole sales in Spain, as you mentioned, we are declining, but this is declining that we expected, and it's not different than our expectation. It has to be with different aspects, mainly with the contract we signed during the last year that give us sustainable business in wholesale but it has an impact during this year. We expect to improve in this area because although the contrast will be in part during the next year too, we have opportunities to grow as a new market regulation and the fiber pass that permit us to see better trends in the future coming quarters. And regarding free cash flow,

The NEP debt, as I said, we are reporting both post-closing and which is lower as we need to include on the investment side through Brazil and in the divestment side Uruguay and Ecuador that both were executed in the month of October and then Colombia. But I'm mentioning this because in the others we also have the finance spectrum of Colombia. and that will be out when we discontinue. And the other is usually the difference between accruals and payments. It's many bits and pieces. But the largest amount will be FX, which is more than 100 million, and then, as I said, the finance spectrum of Colombia, and that will disappear with the discontinuation and the closing of the operation.

Thank you. We have probably time for one more question. I've seen Fernando in the back.

Yeah, hello. Antonio Rodriguez from JB Capital. Just wanted you to elaborate a little bit more on a question from before on working capital. You were at the beginning of the year hoping for a kind of neutral working capital. The results so far are not there. You were explaining a bit some of the reasons, but I would like to know if you can please explain how it's going to end the year, specifically the working capital and why, because obviously we're far away from that flat working capital. And the second one is for 2026, specifically what could we expect on that line?

Thank you very much. Thank you for the question. I do not recall we said it will be a flat contribution of working capital because we don't usually give a specific guidance per line. We just comment on how we see the different bits and pieces and the different items and usually our answer about working capital is that it has a positive working capital contribution and we give you the range that we had in the past. And the range in the past has moved from 200 to, in some given years, even a billion. So we usually said that we expect a positive working capital contribution. And now it's going to be slightly lower than what we originally expected. As I said, we have less management capacity, mainly in ISPI. And it doesn't mean... It's just that it's much harder for us to get the correct terms to do some of the business as usual initiatives that would have done it a year ago. But don't take that it was going to be flat because I don't think we ever said that. It's usually a positive contribution. And for 2026, if you don't mind, we will wait for the capital markets day in which I will give a specific outlook rather than guidance of working capital for the next three years.

Let's do a quick one from Fernando in the back there.

Thank you. Fernando Cordero from Santander. Just a quick question on Telefonica Tech. Given that you have made a write-down of close to 250 million euros in the quarter and also considering a nice momentum in B2E, operational one, just to understand the rationale of the write-down.

Yeah. Every quarter we have to go through if there's any indication of any of our assets being deteriorated. We did so. And in the case of Telefonica Tech, it's UK. and Germany, and it's a combination of several factors. The mult, you know, it's a combination of the expectations you have and also the fair value of those assets. So we have the multiples of those companies have decreased. the expectations of revenue in the sectors those two companies work are also lower sector-wise and also our projections for those companies were somehow below our original expectations. So the combination of the three references, WACC has also worsened a bit, made us to take a decision to continue, because we already did some at the end of 2024, to continue writing off some of the goodwill of those two companies. But it would be a combination of sector and own performance in those two specific countries, plus some update on WACC assumptions.

Thank you very much. And I think now it's hand over to Emilio for the closing remarks.

Okay. Thank you very much for your question. As we mentioned at the beginning, we reiterate our operating guidance for 2025. We reiterate our commitment in the in the dividend of 2025. And as far as moving parts in the frequency flow, we expect really a strong performance in Q4 and in the overall year. Thank you very much again. We will get to your question in the CND about the future in a few minutes.