RESULTS JANUARY | MARCH 2019
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Q1 19 Highlights Mr. Ángel Vilá COO
Q1 Group achievements 1. Increasing customer relevance 3. Consistent & profitable growth Best technology to engage customers P Reliable revenue growth (accelerating to +3.8%) FFTx/Cable +18% (63% penetration, +9 p.p.) P P 56% of revenues coming from BB & SoC LTE +18% (49% penetration, +9 p.p.) OIBDA (+1.0%) P Pay TV +3% (26% penetration, +2 p.p.) P E2E digital transformation benefits (€340m in 2019E) Leveraging Customer Lifetime Value P EPS +33.8% y-o-y Avg. Revenue/Access +4.2% (+44bps vs Q4 18) P €926m Net Income (+10.6%) Stable churn Efficient CapEx management (13.1% CapEx/Sales) Benefits customer satisfaction & brand value Substantial FCF improvement (€1,408m; 2.6x vs. Q1 18) P “Movistar 2nd* most valuable Spanish brand” 4. Stronger Balance sheet 2. Leading technological platforms Steady deleveraging path, 8 straight Qs of debt reduction P Deeper customer relationships with the best CX & AI Lower absolute net debt; €40.4Bn P Telco cloud (#1 network technology); virtualisation progress €38.7bn including post-closing events Improving ROCE through asset sales Advancing in network elements switch-off Committed with solid investment grade rating Testing 5G; Spain, Germany, UK, 4.5G, Massive MIMO Steady and balanced dividend policy (2019: €0.4 €/sh) y-o-y organic variations; y-o-y accesses *Ranking BrandZ / Kantar. Only telco in top-20 1
Financial summary Q1 19 Reported Reported Organic € in millions IFRS 16 y-o-y y-o-y Revenues 11,979 (1.7%) 3.8% Consistent revenue growth Service revenues 10,700 (3.1%) 2.6% OIBDA 4,264 10.3% 1.0% Reported & Organic growth OIBDA margin 35.6% 3.9 p.p. (0.9 p.p.) OIBDA underlying 3,730 (3.9%) OpCF (ex-spectrum) 2,728 14.6% (5.3%) Net Income 926 10.6% Double-digit growth EPS (€) 0.16 33.8% FCF 1,408 2.6x Almost triple FCF Net Financial Debt 40,381 (5.7%) ex- leases Net debt falling Reported growth rates affected by • Adverse FX • Negative regulation • IFRS 16 positive impact at OIBDA level; negative at Net Income (+€414m and -€17m respectively); leases (€7,439m) • Other special factors: €+120m in OIBDA; €-29m in Net Income (HYP in ARG, restructuring costs, net capital gains, PPA) 2
2019 guidance reiterated Operating 2019 guidance Guidance 2019E Q1 19 (organic) Revenues Around +2% 3.8% Sustained revenue & OIBDA growth despite regulation OIBDA Around +2% 1.0% CapEx / Sales Around 15% 13.1% ex-spectrum CapEx rationality 2019 DIVIDEND €0.4/SH. CASH Dividends to be paid in 2019 calendar yr. €0.40/sh. Cash: 20/Jun/19 €0.20/sh. Interim Dec-19 €0.20/sh. Cash: 19/Dec/19 €0.20/sh. Final Jun-20 €0.20/sh. 3
Double digit increase in net income Q1 19 Reported €m IFRS-16 impact +414 -384 -53 -17 +10.3% +17.4% reported reported 4,264 (2,614) +0.7% +7.7% (34.8%) reported reported +30.8% reported reported +10.6% 1,650 4 (411) reported (234) (83) 926 OIBDA D&A OI Associates Net financial Taxes Minorities Net Income expenses EPS 0.16€ +33.8% y-o-y 4
Revenue trends ramped-up Growth and quality at the top line Revenues y-o-y organic • Q1 shows +80 bps acceleration - Service revenues +130 bps to +2.6% +6.2% LATAM - Handsets sales +15.6% vs. Q1 18 +3.8% GROUP • All revenue segments growing y-o-y (org.) +2.0% +3.0% 1.6% EUROPE +1.9% +2.7% - UK, steady growth of +5.3% - Brazil, improving q-o-q to +1.7% Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 - Germany +0.7% EX-REGULATION +3.9% +4.6% - Spain sustained at +0.3% - South Hispam (+15.2%) supported by ARG - North Hispam (+1.2%) reversing Q4 18 trend - Telxius +18.7% • Unmatched diversification - LatAm accelerating to +6.2%; +260 bps q-o-q - Europe +1.6% 5
OIBDA growth: both reported & organic OIBDA IFRS 16 impacting OIBDA/margin since Jan-19 Reported (€m) • Reported OIBDA growth (+€400m) reflecting - Positive impact from IFRS-16 (+€414m) 4,264 3,864 +10.3% y-o-y reported - FX drag (-€180m) +1.0% y-o-y organic - Organic growth (+€40m) Q1 18 Q1 19 +1.7% y-o-y org. & ex reg. • Sustained organic y-o-y OIBDA increase - Key contributors: South Hispam (+0.9 p.p.), BRA (+0.8 p.p.) & UK (+0.4 p. p.) - Spain improves y-o-y trend vs. Q4 18 (+3.0 p.p.) OIBDA margin • Operating leverage - +14.6% OpCF ex spectrum (reported) 35.6% - OpCF -5.3% org. due to CapEx phasing (+11.2%) +3.9 p.p. y-o-y reported (0.9 p.p.) y-o-y organic (0.9 p.p.) y-o-y org. & ex reg. Q1 19 6
Accelerated deleverage on robust FCF generation FCF incl. lease principal payments €+858m higher FCF y-o-y €m €m 1,408 Negative seasonality Tax refund 2.6x y-o-y 2,728 +€702m 550 563 1,908 (711) 1,408 (500) Q1 18 Q1 19 (673) FCF ex-spectrum 579 1,429 OpCF WC Interest Taxes, FCF Lease FCF ex-spectrum payments minorities ex-lease principal incl & principal payments leases Others payments Q1 q-o-q reduction in Net Debt €m FCF ex spectrum to improve throughout the year as WC seasonality swings (464) 8th straight quarter of debt reduction (693) Q1 18 Q1 19 7
B2C | Accelerating data monetisation, fueling growth Increased differentiation & customisation Video: Increased scale (‘000) y-o-y • Convergent markets; more video and M4M - First convergent offer in Latam (PER Jan-19) 9,761 - “Movistar Play” (OTT) in all HispAm (MEX & ARG Q1) 8,828 5,518 - M4M in Spain & Brazil; Digital services (Cloud, Smart Wifi) 3,310 933 • Mobile contract, enriched offer OTT DTH IPTV/Cable Pay TV Total - Roaming and data sharing (ARG, CHI, COL) - Social Apps add-ons launched in BR (15%) +17% +3% • Prepaid evolution, higher ARPU and CLV - Integrated data plans in all Latam (ex-MEX) UBB penetration - Benefits linked to top-ups - “Movistar Play” bundle in PER y-o-y 68% 66% • Device integrated offer focused on value 51% - High-end devices, financing, personalised renewal - Positive impact on ARPU & churn Hispam Brazil Spain +16 p.p. +6 p.p. +7 p.p. 8
B2B | Speeding up growth on a sustainable basis Business Revenues Superior proposal for a key segment y-o-y organic Q4 18 Q1 19 • Growth y-o-y improved across regions 9.6% • 20% of Group revenue 5.9% • Evolved Lego-like offering 5.3% 3.4% - “Digital Core” (Comms + Cloud + Security) leveraging leading 1.8% 1.7% network and enabling cloud E2E secure Best-in-class Digital Services (in-house + leading partners) - Total Corporate SME €2,368m €1,338m €1,030m Capturing digitalisation opportunity • B2B Digital revenues +34% y-o-y (21% of B2B revs.) - Cloud: +32% y-o-y 9.3% - New agreements (i.e. CloudBlue) 4.3% - Most innovative Cloud service provider (VMare) 2.4% 2.8% - IoT : +62% y-o-y - +905K accesses in Q1, mainly in UK, BR, SP Europe Latam - Security : +35% y-o-y €1,282m €1,086m - New Security Operation Centre in UK - Best player in Security for IoT (MWC’19) 9
Best platforms; improving customer relationship & operations 4P AI focused on personalisation and decision making AURA Movistar Home (Spain) Global Big Data & Data Analytics 6 Countries N New functionalities (videocalls...) Single data & management tools bank Open to 3rd parties (eCommerce,...) More use cases (device sales, NW deployment) 3P Enlarged offering, new revenue stream Personalisation Digital Revenues y-o-y organic Global Service Platforms 39.5% 41.9% B2C customer development Best partner in B2B digitalisation €1,875bn 4.3% +21.2% >100 agreements with 3rd parties Video Cloud+IoT+Sec Content 1P Network leadership 2P Agile virtual systems UBB; industrialised rollout, fiber evolution Digitalised processes 85m premises 52m owned (+13% y-o-y) 66% XGS-PON (10 Gbps), Open Access LTE, 4.5 & 5G (+4 p.p. y-o-y) 71% LTE traffic o/ total; 7% VoLTE 78% LTE 5G tests, Massive MIMO, OpenRAN, OSM Full Stack (customers migrated) 30% Network virtualisation 10 countries (+6 p.p. y-o-y) Innovative and more Core transformation (-40% CapEx need vs legacy) efficient network Fiber maintenance (-50% failure vs copper) VoLTE & IP migration (spectrum refarming) 10
Digital Transformation | Progressing as planned Gross savings ~20% achieved in Q1 >€1Bn >€340M >€300M FY 18 Incremental FY 19E Cumulative FY 20E Agile Mindset 39% 31% 30% Digital Experience in sales Digital Customer Service Process Automation • Boosting own digital channels • Contact Centers (-11% y-o-y of B2C calls in Q1) • Robot factories in almost all countries to reduce • +12% of operations since Dec-18 • Cognitive platforms on board (BR & PE) manual tasks • Leveraging on personalisation, digital • Digital Channels + Bots enhancing customer • Freed resources to provide real value to marketing, automation, Advanced Analytics experience customers • Supply Chain: Blockchain & Advanced Analytics • SP & BR, biggest projects in the industry % over savings achieved 11
Q1 19 Results Ms. Laura Abasolo CFCO
Spain | Growing share of value within a rational market Accesses Sustained growth in value accesses y-o-y Dec-18 Mar-19 15% • Tariff upgrades’ impact fades along the Q 13% 9% 7% 7% 7% 6% 4% - Trading improved gradually; Mar better than Feb, Feb better than Jan Convergent TV FTTH Mobile • Continue improving mix at convergent base Contract - “Convergent" ARPU €88.2 (+0.6% y-o-y), stable q-o-q FTTH improving returns • Taking the lion’s share in Spanish Fiber growth Accesses (m) Share in total fiber net adds* Uptake (%) Retail Wholesale - Retail accesses +13%/wholesale x1.7 y-o-y 78% • Increased customer loyalty, room for M4M 53% 65% nd 5.7 26% 26% - New differential VAS’s: “Priority”, 2 homes… 5.5 23% 4.5 1.5 1.7 5% 7% 8% 1.0 Unmatchable platforms yield superior returns 3.6 3.9 4.0 18% 18% 18% Mar-18 Dec-18 Mar-19 Mar-18 Dec-18 Mar-19 • Best-in-class NGN and TV network Share in total fiber market* 64% - FTTH wholesale agreements bring-in sustainability - Leading LTE coverage/speed (OCU) High-value o/convergent base - Addressing Pay TV upside (5m): improved offering (convergent & OTT) 81% 41% • Improved share of retail revenue 30% High-end Pay TV UBB y-o-y +3 p.p. +3 p.p. +2 p.p. (*) As per latest CNMC data (Q1 18, Q4 18, Jan-19) 12
Spain |Improving revenue and OIBDA trends Service Revenues & OIBDA Setting better trends on wholesale turnaround y-o-y organic Serv. Revs. OIBDA • Service Revenue grows for 7 straight Qs - “Consumer” flat y-o-y; lower tariff impact vs. Q1 18 - “Business” +3.0%; growing for 4 Q’s 0.8% 0.8% 0.2% 0.6% - “Wholesale & Other” reverses trend; +0.2% (vs. -7.1% in Q4 18) 0.6% 0.1% 0.0% • Drags in wholesale being gradually removed (1.4%) (1.3%) - TV wholesale growth set to accelerate (4.4%) • Tailwinds ahead for H2 - Tariff update, promo’s expiry, fiber & MVNO agreements Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Strong cash conversion Capex/Sales OIBDA y-o-y improvement (+3.0 p.p.) €m 973 • Negative content one-offs seen in Q4 removed 12.1% - Incremental savings (personnel, digitalisation...) • Reported OIBDA impacted by IFRS and others • CapEx +9.2% y-o-y on phasing • Benchmark in CapEx/Sales; 31.3% OpCF margin OpCF Q1 13
Germany | Strong trading performance Contract net adds Accelerating data monetisation Innovative commercial propositions k y-o-y Avg. data usage of O2 contract LTE cust • New value-added initiatives to enhance ARPU and churn LTE penetration • Enhanced infrastructure portfolio; cable wholesale access through long term agreement with Vodafone 4.2GB 306 4.1GB • Strong own and partner trading; partners 60% of gross 279 additions 3.9GB • LTE cust. 19.3m (+20% y-o-y); penetration +8 p.p. y-o-y 41% 44% 46% • O contract churn improved by 0.2 p.p. y-o-y 2 Q4 18 Q1 19 +50% +94% Q3 18 Q4 18 Q1 19 Key financial highlights Revenues OIBDA • Sustained revenue growth y-o-y organic y-o-y organic - MSR ex-reg. stable (+0.3% y-o-y; -0.4% in Q4 18) +0.7% - Strong handset sales: +12.6% y-o-y • Improved OIBDA y-o-y (+3.8 p.p. vs Q4 18) • Reported OIBDA includes +€129m of IFRS 16 implementation (0.2%) • Strong Q1 CapEx increase (+28.3% y-o-y), due to front-loaded LTE Q1 19 Q1 19 roll-out, a trend expected to normalise over the full year €1,779m €522m 14
UK | Customer centric approach drives growth trends Strong commercial performance O2 contract net dds Leading in the UK (incl. M2M) “Best Network Performance” • Leading as UK’s favourite mobile network at Mobile News Awards Q1 customer growth of +2% y-o-y - +220k - O2 contract customers +4% y-o-y - Strong customer loyalty; leading Q1 postpay churn at 0.9% “Best Sponsorship of the last 25 years” • 65% LTE penetration (+5 p.p. y-o-y) at UK Sponsorship Awards Q1 19 Good growth across all key financials Revenues OIBDA OpCF y-o-y organic y-o-y organic y-o-y organic • Strong top-line 5.8% - Continued MSR growth in Q1 (+0.5% y-o-y) 5.3% - Accelerated handset & other revenue growth (+18.7% y-o-y) 3.4% • Reported OIBDA includes +€55m of IFRS 16 implementation • Q1 CapEx of €185m broadly stable (+0.2% y-o-y) Q1 19 Q1 19 Q1 19 €1,691m €504m €319m 15
Brazil | Delivering profitable value growth Value growth amidst M4M strategy Accesses Penetration y-o-y Q1 18 Q1 19 • M4M strategy backs solid mobile ARPU growth & stable churn - Tariff changes: +9% in Pure Contract in Sep-18; +11% in Hybrid Dec-18; +20% in prepaid in Mar-Apr 44% 44% 66% 50% 56% 55% - Contract churn: 1.7% (stable q-o-q; +0.1 p.p. y-o-y) 14% 19% 27% 9% - Q1 19 contract net adds 616k Contract LTE FTTH • Well built leadership Contract LTE FTTH IPTV - 40.1% contract mkt. share; 32.1% total mob. mkt. share • 88% 4G coverage; 63% 4.5G coverage ARPU • Fixed: Transformation journey to major ARPU increase y-o-y organic - FTTH: 9.0m HPs (1.7m in LTM; 0.3m in Q1 19) 14.4% 3.1% - 2m connected (623k connected in LTM; 141k in Q1 19) 2.6% - Outstanding results in cities launched since 2017 with occupation above average Mobile FBB Pay TV - IPTV offered in all cities with FTTH (130 vs. 121 in Q4) Postpaid Fiber IPTV ARPU: x4 ARPU: ARPU: prepaid x1.4 XDSL x1.2 DTH 16
Brazil | Confirmation of top-line improvement Value growth flowing into P&L Revenues y-o-y organic Q3 18 Q4 18 Q1 19 • Service revenue y-o-y trend again improved (+1.1 p.p. vs Q4 18) MSR: - 1.7% 1.6% - Strong postpaid growth (+8.2% vs. +6.9% in Q4 18) 0.5% - Fostering migration to higher data plans (0.0%) (1.0%) (1.0%) - Fixed: Revenue ex voice +7.9% y-o-y (3.5%)(3.2%) - Fiber outperforms (+25.7%); IPTV +45.1% (5.4%) - Voice -18.1% (reducing weight o/ fixed revs: -7 p.p. y-o-y) Total MSR Fixed - B2B improving (+0.9 p.p. q-o-q) OIBDA Margin (organic) Previous year Profitability continues to expand • OpEx +2.3% y-o-y on higher handset consumption, still well 39.1% below inflation (4.6% in LTM) 37.3% 37.2% 36.8% • OIBDA +3.1% y-o-y 36.3% 34.9% • OpCF €654m (-1.2%) on CapEx acceleration (+9.6% y-o-y; fiber and 4G deployment) • FCF 16% y-o-y (under Brazil reporting criteria) Q3 18 Q4 18 Q1 19 17
South Hispam | Better revenue trends Penetration Positive contract net adds for 6th consecutive Q Q1 18 Q1 19 TEF Penetration in Europe • Fiber deployment acceleration: 8.8m premises passed (8.3m Dec-18); 70% 67% 56% 30% FTTx take-up 46% 49% 38% 40% 33% 40% • Q1 ARGENTINA (Revs. €543; OIBDA €145m) - 495k FTTx connections (1.7x y-o-y); 59k IPTV accesses (launched in Oct-18). Movistar Play launched since Mar-19 Contract Pay TV LTE - Revenue y-o-y acceleration (+40.0%). OIBDA: +17.4% y-o-y Accesses +3% +8% +18% y-o-y • Q1 CHILE (Revs. €498m; OIBDA €169m) - Continued solid contract (+11%) and mobile ARPU growth (+2.6%) Revenues OIBDA - 556k FTTx conections (1.5x y-o-y) and 90k IPTV accesses y-o-y organic y-o-y organic 15.2% • Q1 PERU (Revs. €518m; OIBDA €107m) 11.1% 7.4% 7.0% - Positive net adds in contract (66k) backed by Movistar Total launch - OIBDA y-o-y trend improved to -7.9% (+29 p.p. q-o-q) on better revenues, lower subsidies and network cost efficiencies Q4 18 Q1 19 Q4 18 Q1 19 18
North Hispam | Top-line turns around Accesses Accelerating revenue growth in COL & CAM Mar-19 y-o-y organic Penetration • Value growth: contract (+3%), FTTx (+82%) & LTE (+43%) 82% • OIBDA: -14.9% highly affected by MEX (+0.3% ex. MEX) 43% • Q1 COLOMBIA (Revs. €359m; OIBDA €131m) - Sound increase in contract (+4%) & prepaid (+9%) 3% - Fiber deployment accelerates: 1.2m FTTx premised passed (x1.6 Contract LTE FTTx y-o-y); 305k connections (x1.8 y-o-y) - Revenues +3.8%; OIBDA +3.2% y-o-y 15% 33% 23% • Q1 MEXICO (Revs. €296m; OIBDA €22m) Revenues OIBDA - Contract accesses +3% y-o-y y-o-y organic y-o-y organic - Revenue trend reversed (+1.2% y-o-y) on improved ARPU and lower regulatory impact. OIBDA impacted by spectrum 1.2% fees/regulation (2.4%) • Q1 CAM (Revs. €189m; OIBDA €72m) (15.8%) (14.9%) - Revenue & OIBDA growth improvement (+6.5% & +5.6% y-o-y) Q4 18 Q1 19 Q4 18 Q1 19 19
Telxius | Reaping the benefits of premium infrastructure Positive operational momentum Towers Tenants # # Net adds • Towers Net adds - Solid growth of new tenants in Q1 (>2x net adds y-o-y) 291 285 - 75 towers built in Q1 (>3x y-o-y) 125 - Increased tenancy ratio: 1.37x (+0.03x y-o-y) 75 139 24 • Cable - Sustained commercial momentum Q1 18 Q4 18 Q1 19 Q1 18 Q4 18 Q1 19 Base (Mar-19) 16,754 Base (Mar-19) 22,924 Accelerating growth trends Revenues OIBDA • Q1 financials impacted by exceptional sale in Cable y-o-y organic Ex-MAREA effect y-o-y organic Ex-MAREA effect • Improving top-line growth +6.0% +9.1% - Towers: +8.0% y-o-y (vs. Q4 at +10.1%) +18.7% +18.2% - Cable: +27.4% y-o-y (+4.5% ex-MAREA effect) • Q1 Reported OIBDA impacted by IFRS16 (24M€) +5.5% +6.3% • CapEx down 83.6% once new cables are completed • Improved OpCF (2.9x y-o-y organic ex-MAREA effect) Q4 18 Q1 19 Q4 18 Q1 19 €195m €219m €91m €129m 20
One more quarter of material debt reduction Net Financial Debt €m -693 € billions ND/OIBDA ND/OIBDA ND/OIBDA 2.62x 2.61x 2.54x 41,074 (1,408) 570 40,381 (1.7) (139) (186) 232 239 38.7 Dec-18 FCF Hybrid Shareholder Pre-retirement Net financial FX & Mar-19 Post-closing Mar-19 2 replacement remun. (incl. commitments investments Others events including Post- closing events hybrid coupons) €47.8bn incl. IFRS-16 Leases1 2,728 (711) (673) 676 (113) (500) 1,408 OpCF ex- Working Net interest Tax Dividend to Lease FCF spectrum capital payment minorities, principal accrued spectrum & others payments Seasonal effect 1. IFRS 16 leases: €7.4bn (lower part of the range) 2. Post-closing events: sale of Telefónica Costa Rica, Telefónica Móviles Panamá, Telefónica Celular de Nicaragua and Telefónica Móviles El Salvador; sale of 11 Data Centers 21
Strong liquidity thanks to attractive long-term financing Sources of long-term financing Net Debt maturities 2019 YTD | €bn Hybrids LME Mar 18 & Mar 19 Mar-19 | €bn; not considering hybrid NC dates Annual coupons -102 b.p. to 4.1% Avg. years to call from 3.2Y to 4.9Y 78% debt Avg. debt life of 10.2Y 0.9 5.3 in fixed rates (9.0Y Dec-18) 1.3 1.0 5.5 4.5 1.1 Cash > gross 1.0 maturities 2019 2020E 2021E € Green USD Bonds € Bonds Hybrids Financing at Total Bond Subsidiaries Liquidity position Interest payment costs Mar-19 | €bn Mar-19 96% LT 12.7 24.0 3.57% (18 b.p.) 11.3 3.39% Mar-18 Mar-19 Cash position Undrawn credit Liquidity position lines & synd. credit facilities 22
FX impact neutralised at FCF Currency weakness in Q1 • Solid organic contribution to Revenues & OIBDA - Q1 y-o-y: +€464m revenues & +€40m OIBDA FX headwinds • FX detracts 4.9 p.p. in revenues, 4.7 p.p. in OIBDA • ARG & BRL depreciation, major drags in Q1 • Impact in net debt (Spot GBP/EUR appreciation) FX reduces OpEx FX reduces CapEx, FX increases Taxes & others NDebt FX impact in Q1 FCF €m Revenues OIBDA FCF Net Debt Taxes + -€597m -€180m -€74m +€32m 12M rolling Working OIBDA CapEx Interest + FCF Capital Others +104 +17 (14) (74) (180) 23
Conclusion Mr. Ángel Vilá COO 28
Wrap-up | Solid start of the year Revenue Consistent, profitable & sustainable growth +3.8% organic EPS +33.8% EPS & Net Income double digit growth Net Income +10.6% Net Debt Continued net debt reduction, for 8 consecutive quarters -€0.7Bn in Q1 Cov. Infrastructures are key to ensure best customer-experience Fiber 52m LTE 78% Savings Improving efficiencies; monetisation B2C + B2B & digitalisation digitalisation 2019E >€340m Outlook 2019 reiterated 24
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