Telefónica Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2025
Skip to Participants
Operator

Good morning. Thank you for standing by, and welcome to Telefonica's January March twenty twenty five 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 one one on your telephone keypad.

Operator

You will then hear an automated message advising your hand is raised. To whisper your question, As a reminder, today's conference is being recorded. I would now like to turn the conference call over to Mr. Toaster Atman, Director of Investor Relations. Please go ahead, sir.

Torsten Achtmann
Director of Investor Relation at Telefónica

Good morning, and welcome to Telefonica's conference call to discuss January 2025 results. I'm Thorsten 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 and A session, may contain forward looking statements and information relating to the Telefonica Group.

Torsten Achtmann
Director of Investor Relation at Telefónica

These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chief Operating Officer, Mr.

Torsten Achtmann
Director of Investor Relation at Telefónica

Emilio Gallo.

Emilio Rodríguez
COO at Telefónica

Good morning and thank you for joining the call. My first call with the financial community. With me today are Laura Bassolo, Marcus Hajj, Lutz Schuler and Eduardo Navarro. Welcome everyone. It's a pleasure to have you here.

Emilio Rodríguez
COO at Telefónica

Slide two, please. 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 NPS score reaching new highs. Spain continues to lead the market, while Brazil and Germany show a strong and consistent improvement, a clear sign of our competitive strength.

Emilio Rodríguez
COO at Telefónica

Our portfolio of products and services also continues to improve while we maintain focus on customer care. We have an understanding market position of our digital ecosystem in Spain and Brazil. This allows for very low level of churn and a differential ARPU. Next, fiber and five gs. We rolled out fiber to over 1,500,000 premises in the last three months, and we've reached seventy five percent five gs coverage in our core markets.

Emilio Rodríguez
COO at Telefónica

Our networks are virtualized, more efficient and flexible, and more reliable. Finally, efficiencies. We progressed in the shutdown of legacy services with copper switch off in Spain that will be completed this month. We shutdown also three gs in Germany and two gs in Uruguay. In ISPA, 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.

Emilio Rodríguez
COO at Telefónica

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 share 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.

Emilio Rodríguez
COO at Telefónica

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, unmatched portfolio and powerful channels continue to deliver strong results. In Brazil, momentum remained steady. Our leadership in the market remained intact with a strong growth in mobile contract and fiber accesses.

Emilio Rodríguez
COO at Telefónica

FX impacting our reported accounts, but in local currency, we continue to grow clearly above inflation. In Germany, operating cash profitability remained strong, so were our efficiency focus. We have made change to our East Bank 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 net adds in Q1, which we are seeing for the first time since Q4 twenty twenty three.

Emilio Rodríguez
COO at Telefónica

At group level, reported results were negatively affected by ForEx. However, in organic terms, we are growing in main metrics and comps will ease around the year. I'd like to highlight the differential growth of B2B, 5.4% year on year. Finally, net debt has decreased. Free cash flow is affected by seasonality in Q1.

Emilio Rodríguez
COO at Telefónica

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 Hispana. Moving to Slide four. Here, we can show that we are on track to meet 2025 guidance in all financial metrics at constant perimeter, with Q1 results being fully aligned with internal expectations. In fact, we expect our performance to improve as the year progress, as comp is seen during the year and operational trends continue our progress. As such, we can fully reiterate our 2025 outlook.

Emilio Rodríguez
COO at Telefónica

Revenue, EBITDA and EBITDA minus CapEx will grow in organic terms, with CapEx to sell continuing to decline. Free cash 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 seasonality. We also confirmed twenty twenty five cash dividend. Moving to Slide five.

Emilio Rodríguez
COO at Telefónica

We will review the start of the year in our domestic market. Telefonica Spain commercial and financial performance continued to improve in the first quarter of the year. We have a strong commercial momentum. Q1 net adds were above Q1 twenty four level and we delivered customer growth in All Accesses for our seventh quarter in a row. TV net adds were the best in more than six years.

Emilio Rodríguez
COO at Telefónica

The growth in B2C is being driven by our cementing 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 increase in devices sold and the performance of Movistar ProSeguro Alarms, which is the second largest player in the alarms market in Spain. All this means Telefonica Spain has the best churn and ARPU 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.

Emilio Rodríguez
COO at Telefónica

Wholesale revenues declined in Q1 as was already 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% year on year, with EBITDA accelerating by 1% quarter on quarter. On top of that, the reduction in CapEx led to a 2% improvement in operating cash flow generation. Let me say that our best practice CapEx to sales does not come at the expense of network coverage or quality.

Emilio Rodríguez
COO at Telefónica

We have passed 1,300,000 premises with fiber in the last year, and we have already activated standalone across the five gs network. All this means advanced functionalities to our customers. In summary, a strong performance with an outstanding set of commercial and financial KPIs. Turning to Slide six. Telefonica Brasil again showed solid commercial momentum, remaining a leader in both postpaid and fiber.

Emilio Rodríguez
COO at Telefónica

Reached the largest customer base in its history. Vivo Total, our market leading full bundle, grew 77% in accesses year on year. In addition, digital services penetration accelerated, reaching more than 11% of total revenue, thanks to our ecosystem of services. Revenue rose 6% above inflation due to a double digit growth of our flagship services. This was driven by higher ARPU, growth in mobile contract and fewer accesses, acceleration in digital services and a strong B2B performance.

Emilio Rodríguez
COO at Telefónica

Prepare to postpaid 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% increase in EBITDA minus CapEx, with margin expansion. Finally, in April, we formalized agreement with Hanatel 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 copper customers, OpEx reduction and asset sales.

Emilio Rodríguez
COO at Telefónica

In summary, Brazil is performing solidly and we expect to maintain these results throughout the year. Moving to Slide seven. Telefonica Deutschland maintained a robust commercial momentum in mobile with year on year growth in contract net adds. This was achieved with B2B customer wins and stronger B2B partnerships, as well as the attractiveness of the O2 brand. Both RPO and Churn in O2 contracts remained stable as we continue to focus on operational leverage in a market with increased commercial and promotional activity.

Emilio Rodríguez
COO at Telefónica

In the fixed segment, ARPU increased by 5% year on year based on improved value mix 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 in line with market trends. EBITDA also faced difficult year on year comps. Nevertheless, efficiency gains combined with successfully implemented growth initiatives in both the consumer and partner businesses helped maintain a stable EBITDA margin year on year.

Emilio Rodríguez
COO at Telefónica

EBITDAaL minus CapEx grew by 4.8% year on year. I also like to highlight that German regulator confirmed the five year spectrum prolongation until 02/1930. In summary, Telefonica Deutschland remains focused on operational improvement, while at the same time increasing efficiency. Moving to Slide eight. Now I'd like to update you on Virgin Media two.

Emilio Rodríguez
COO at Telefónica

In Q1, despite a tougher trading environment, we remained focused on delivering fast and reliable connectivity while protecting customer value. We continue to invest in our UK networks and services, ensuring we remain in a good position for the future. Our five gs population coverage reached 77%, and we expanded our fixed network footprint to over 18,400,000 premise passed, of which 7,000,000 are fiber homes. In mobile, contract churn remained stable at a low 1.1% year on year, proving that our efforts to increase customer retention are working. The key event to just express its portfolio with better air times rates and multi SIM offerings.

Emilio Rodríguez
COO at Telefónica

In our fifth consumer business, ARPU grew, once again supported by our value strategy. Revenue has begun to grow again, excluding handsets and xFiber, which reflects the successful phasing of price increases into service revenue. This contributed to EBITDA growth, further supported by cost efficiencies. EBITDAaL minus CapEx grew by 15.2% 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.

Emilio Rodríguez
COO at Telefónica

And NextFibre will build towards a cumulative 2,500,000 homes in 2025. In summary, in The UK, the team is focused on value while continues to progress in NextFibre and five gs rollout to capture growth opportunities. Next slide, please. In Istan, we have accelerated execution of our strategy in the last three months. We completed the sale of Telefonica Argentina for €1,200,000,000 in February with simultaneous signing and closing, eliminating execution risk.

Emilio Rodríguez
COO at Telefónica

We have also signed a binding agreement to sell Telefonica Colombia, pending regulatory approval and agreements with minority shareholders. Finally, just last month, we completed the sale of Telefonica Peru, which help 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 a 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.

Emilio Rodríguez
COO at Telefónica

We record positive net adds in mobile contracts, the first in five quarters, thanks to better results in Chile and the launch of Mobistar, Antigo'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 twenty twenty four. However, this drop was partially offset by a 5% growth in service revenue in Mexico. EBITDAaL minus CapEx fell 31% due to lower EBITDA and higher lease costs due to the single network launch in Colombia.

Emilio Rodríguez
COO at Telefónica

Summary, in Spain, 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, Telefonica Tech and Infra. Firstly, Telefonica Tech, the engine of our B2B segment. We help our customer 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 Telefonica Tech has increased revenue 6.6% year on year.

Emilio Rodríguez
COO at Telefónica

Commercial activity continued to grow, led by the private sector with bookings up 7%. The 15% expansion in the commercial funnel and Telefonica Tech's strong market recognition as a global leader position it well to capture further growth. Secondly, Telefonica Infra. Our fiber cost footprint reached 29,000,000 premise passed, including fiber passed in Spain. We recently closed the sale of our stake in NaviAx.

Emilio Rodríguez
COO at Telefónica

And finally, our submarine cable company, Telxius, continues to show a strong profitability. I will now hand over to Laura, who will guide you through the main financial topics.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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 totaled minus $2.00 €5,000,000 versus minus 13,000,000 in the same period of 2024.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

The higher year on year decline is explained by higher seasonality in working capital, leases and financial payments. The year on year average depreciation of the Brazilian real also affected, but we continue with our hedging strategy, which has 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 continued to be key for driving business performance. Net financial debt has decreased by €100,000,000 in the first three months of the year, While our net debt to EBITDA ratio has increased to 2.67x due to free cash flow seasonality in this quarter, as the year progresses, free cash flow will gain traction heading to our stated free cash flow target. Furthermore, our net debt will be reduced to €25,800,000,000 after the sale of Peru and the signing of the binding agreement of Colombia and just the consolidation of net debt.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

We maintain an ample liquidity, which together with a smooth maturity profile, allows us to cover debt maturities over the next three years. And the average cost of debt has been reduced year on year from 3.64% in March 2024 to 3.49% in March 2025. Moving to Slide 14. At Telefonica, we have a pragmatic approach to ESG. We work exclusively on those levers that reduce risk and deliver value.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

For example, on the environmental front, we are hedging our 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, we blocked 7,800,000 cyber threats in Spain. In terms of governance, all resolutions were approved at the last AGM demonstrating shareholder confidence.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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.

Emilio Rodríguez
COO at Telefónica

Thank you, Laura. So to conclude my presentation and before we open for questions, in the first quarters, we continued delivering and executing our strategy. Core units showed a solid performance. We keep on reducing our exposure to Hispam. This allows to relocate capital to core markets and core business while reducing leverage.

Emilio Rodríguez
COO at Telefónica

In just three months, we execute the sales of Argentina and Peru and the signing of Colombia. We expect to persist on exploring option 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 expected 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 in our strategic profession.

Emilio Rodríguez
COO at Telefónica

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.

Emilio Rodríguez
COO at Telefónica

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.

Operator

Thank Once again, that is 11 to register a question. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. We will kindly ask you to ask a maximum of two questions per participant. There will be a short silence while questions are being registered.

Operator

Our first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

Yes. Good morning, everyone. Cliche comments, Angel, about not asking around the strategic review. So I'm going to try and tread the wire on that a little bit. First question was just on to Lutz and VMO2.

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

You did the Daisy deal this week, but you've hit pause on the Netco process ahead of the strategic review. On that Netco decision to pause, obviously, you need to get going with fiber expansion plans. And so 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, you acquiring alt nets? And how quickly can we see you starting to execute on that?

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

And then my second question was just on Spain. Again, 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 TEF's position. In Spain, you're raising prices and growing, but not to the levels of incumbents in concentrated markets elsewhere in Europe. So the question is, do you see that changing? Or is further inorganic effort required on your effort required on your part?

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

And don't expect any specific comments. But can we assume that your thinking on consolidation in Spain would have to be limited to fixed line, given 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.

Lutz Schüler
Chief Executive Officer of Virgin Media O2 at Telefónica

Should I go ahead, Emilio, with The UK?

Emilio Rodríguez
COO at Telefónica

Andrew, thank you very much for your question. Remain the Spain consolidation, we don't comment 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 matters and core capabilities with financial and industrial rationale. We will focus on what we know how to do as an industrial operator.

Emilio Rodríguez
COO at Telefónica

We have already been an active player consolidation in our core markets. Remember, DTS, GBT, E plus, VNO2. 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.

Emilio Rodríguez
COO at Telefónica

Any consolidation is positive, especially for the seasonality 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 on executing our strategic plan. I will let Lutz address to VNO to a question.

Lutz Schüler
Chief Executive Officer of Virgin Media O2 at Telefónica

Yeah. Thank you, Emilio. Well, so first of all, the J. T. Deal, a very important step for us.

Lutz Schüler
Chief Executive Officer of Virgin Media O2 at Telefónica

And with that, we are creating what what we call a b to b surfco, and that is obviously operating on our mobile and our fixed network. But it is completely independent from this NATCO approach. The NATCO as you have heard, right, this approach is paused for now, and I think it's it's linked to the timings 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.

Lutz Schüler
Chief Executive Officer of Virgin Media O2 at Telefónica

And of course, there are conversations going on with possible consolidations with AUT NETs, which is not really dependent on creation of a netcode. Back to you, Emilio.

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

You. That's really helpful.

Emilio Rodríguez
COO at Telefónica

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

Andrew Lee
Andrew Lee
Managing Director at Goldman Sachs

Thank you. Just a follow-up to your comments on Spain. Obviously, I appreciate you can't comment too much. But have you 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?

Emilio Rodríguez
COO at Telefónica

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

Torsten Achtmann
Director of Investor Relation at Telefónica

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

Operator

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

Mathieu Robilliard
Director at Barclays Investment Bank

Yes, good morning. Thank you for the presentation, and welcome, Emilio, to the call. I had two questions, please. The first one was on your free cash flow guidance. So you've twisted a bit in the sense that you're now guiding for free cash flow excluding discontinued operations.

Mathieu Robilliard
Director at Barclays Investment Bank

And the base to which we should compare it is a bit higher than it was including those operations. I think it's 02/1983 or something around that. So it does suggest that Peru and Argentina were very dilutive. And I was wondering, is it because in '24, there were some one offs, Or was it just generically dilutive? And if we think about the disposal of Colombia and potentially Chile, should that have also a potential accretive impact on free cash flow when that happens.

Mathieu Robilliard
Director at Barclays Investment Bank

And if I may, say it should be similar, the free cash flow, 2025 to 2024. Obviously, I'm not a native English speaker. It's similar. Does similar mean flattish or is it a bit more broader than that in terms of variation? And then lastly, on Germany, One On One continues to insist that they will get some low spectrum.

Mathieu Robilliard
Director at Barclays Investment Bank

I don't know if you can give us any update on your thoughts on that one. Thank you.

Emilio Rodríguez
COO at Telefónica

Matthew, thank you for your question, and thank you for your warm welcome. Related to 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Thank you, Matija, 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 dilutive or not. No?

Laura Abasolo
Chief Financial and Control Officer at Telefónica

So on the guidance, first question 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 flattish if you want, but I think, similar stable will be is what we said is what is what we stick to at the moment. No?

Laura Abasolo
Chief Financial and Control Officer at Telefónica

We also set under the same consolidation perimeter, and perimeter has indeed changed. As you know, Argentina and Peru are now reported as discontinuing operations. Argentina has already been deconsolidating since the February 24, and Peru will be deconsolidated on April 1. So the free cash flow of Peru has gone through the free cash flow of Telefonica in Q1 under the discontinued operations line. We are focusing indeed on the free cash flow generated from continuing operations.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

And if we do that, the base for 2024 would have improved €200,000,000 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 payment related to Sunat. So there was more negative from Peru that offset it, the positive contribution from Argentina. On the changing tweeting theme, I'm very happy to go through full free cash flow as well.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

I would 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 free 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 $153,000,000 negative you have on Slide 12. And under that perimeter 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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 asked about Colombia and Chile. Chile, there's nothing to report on Chile.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

They are just rumors, and we won't say anything about deals until 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 02/2025 is going to create free cash flow of Colombia in any way. No? So so it's too soon to talk about that because regulatory process will be longer, and we are expecting an outcome around q four, late q '4. So I hope I answered your question, Matthieu.

Emilio Rodríguez
COO at Telefónica

Yeah. The question about Go ahead. Regarding the question about Germany, let me hand over to Markus to give you more details.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

Thank you. Good morning, Matthieu. 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, Benetz, our decisions to grant 2.5 megahertz in the low bond spectrum to one and one is directed to all the pre established MNOs.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

As we all know, Telefonica Germany is already granting a spectrum sublease to one and one of 2x10 megahertz in the 2.6 band. This obligation will be extended, and Telefonica clearly will deliver against this request. On the low band, BNET R reflects in its decision that one and 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.

Mathieu Robilliard
Director at Barclays Investment Bank

Very clear. Thank you very much all.

Operator

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

Fernando Cordero
Fernando Cordero
Head of European TMT Equity Research at Banco Santander

Hello. Good morning, and thanks for taking my two questions. Also, welcome, Emilio, to the call. The first question is on Spain. And 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.

Fernando Cordero
Fernando Cordero
Head of European TMT Equity Research at Banco Santander

In that sense, that growth is allowing all the players to to push net adds. And in that sense, also to understand, which is your 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 finance structure. We have seen the disposals of Argentina and Peru more likely to come.

Fernando Cordero
Fernando Cordero
Head of European TMT Equity Research at Banco Santander

I want to understand the impact of those disposals on your balance sheet flexibility, particularly on the impact on the credit rating. Should we expect that you can just directly reallocate the capital via strat from from, from this plan to 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 this bank? Just to understand if, there is a a qualitative increase, flexibility on your on your balance sheet from exiting from this bank. Thank you.

Emilio Rodríguez
COO at Telefónica

Emmanuel, thank you very much for your question. And again, you for your warm welcome. Talking about Telefonica Spain, first of all, to remind that Telefonica Spain, this Q1 has a really excellent performance with all main services accelerating in the year over year growth. We expect in the next quarters to follow with this performance. We don't see relevant change in the market with a similar trends in terms of competition.

Emilio Rodríguez
COO at Telefónica

In the case of our revenues, 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 our base in structural advantage. We are talking about our brands. We are talking about our customer care policies. We are talking about our networks.

Emilio Rodríguez
COO at Telefónica

This advantage permit us to to to see ahead the same kind of trends in in b two c. Remember that we maintain the lowest ARPU on the the highest NPS of the on the market. In terms of b two b, we we realize that we are performing very well too. We we see growth ahead. The the the funnels are increasing, and our capabilities, both in Telefonica Tech and Telefonica Spain, permit us to to be very positive in the in the performance in the next, quarters.

Emilio Rodríguez
COO at Telefónica

In terms of wholesale that you know are declining is something that is was predicted. It was based long term agreement that give us a sustainability at what it was included in our guidance. Then, we can see that the the we we see a a strong performance ahead, and we are pretty sure about the and confident in the performance of Telefonica Spain.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Fernando, thank you for your question. Let me explain the impacts of the announced and executed sales. The sale of Argentina reduced leverage by 0.02x. In the case of Peru, it will reduce leverage by approximately 0.01x 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Colombia has a further deleveraging impact. We have accounted in the post closing. You can see we have included the deconsolidation of the Colombian net debt as of March, and the whole lot will bring our net debt as of today post closing at €25,800,000,000 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

They also welcome the strict capital allocation, which can be deleveraged, 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 three 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 concern whatsoever.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Just the opposite. We ended the year better than expected, and all these strategic capital allocation around Spain is being very clear positive. Obviously, the strategic review is pending, and we will announce on on the second half of the year on that. And we will definitely do an special focus on the financial policy and the capital structure supporting that plan.

Fernando Cordero
Fernando Cordero
Head of European TMT Equity Research at Banco Santander

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

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Absolutely. Yeah. That's right, Fernando.

Fernando Cordero
Fernando Cordero
Head of European TMT Equity Research at Banco Santander

Perfect. Thank you.

Operator

Thank you. We will now take the next question from the line of Akhil Dattani from JPMorgan.

Akhil Dattani
Akhil Dattani
Managing Director at JP Morgan

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 wonder 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.

Akhil Dattani
Akhil Dattani
Managing Director at JP Morgan

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 CEO and a and a need to or desire to create some change or the other specific, initiatives in terms of, you know, what you're hoping to bring into the group through these changes? That's 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.

Akhil Dattani
Akhil Dattani
Managing Director at JP Morgan

It's just more about the philosophy behind it. But you've probably seen there've 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 understand is could those sorts of major capital allocation changes end up being part of this, or should we and so therefore, you know, any 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.

Emilio Rodríguez
COO at Telefónica

Akhil, thank you. Thank you very much for the for your question. Talking about the the organization, we we have done some change related to some movement that has produced in the in the company. The rationale is to assure that we execute in the in the same way, and we execute our plan and deliver our our budget. This is the main rationale of, all changes that we we we have done.

Emilio Rodríguez
COO at Telefónica

Regarding there are there will be more changes during after the the strategic plan, I will not comment anything because it depends on the on the on the strategic review. We will see the the results, and we share 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Akhil, thank you for the question. On the on the part of the transformational versus evolutionary movements on the capital structure, as everything else is really too soon to say anything or 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 that will support, best the plan. And we will present our conclusions as everything else in the second half of twenty twenty five.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Maybe let me let me share some points on the flexibility we start this strategic review with. I think the fact we are we are reducing our exposure to to Eastbound and the new group much more focused on core operations could support higher leverage than the previous configuration of of the group. We continue with a very strict capital allocation policy. Leverage ratio needs to be also in combination with a quantum quality of free cash flow, liquidity, life and cost of debt, as I always emphasize, asset recycling into EBITDA and free cash flow generating business is also part of the of the debate. We have plenty of options.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

And as as I said at the beginning, a strategic review will include the most suitable capital structure to support this plan, and you can be sure that we will always look to finance anything in the most efficient way to maximize shareholder value. You know? 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.

Akhil Dattani
Akhil Dattani
Managing Director at JP Morgan

Great. Thanks so much.

Operator

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

James Ratzer
European Communication Services Research at New Street Research

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 $2,850,000,000 as the base for 2024, you're saying that would be flat or stay similar on an organic basis.

James Ratzer
European Communication Services Research at New Street Research

So I'm estimating you'll have around 100,000,000 to $150,000,000 of FX weakness this year, assuming current FX rates are broadly stable. So that would mean you should report around 2,700,000,000.0 to $2,750,000,000 of continuing operations free cash flow. Consensus, though, on the sheet you sent around is at 2,400,000,000.0. 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?

James Ratzer
European Communication Services Research at New Street Research

There's a 300 to 350,000,000 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 o two contract ARPU has recovered very strongly to being stable, having been down 3% in Q4. And I know there's a bit of an MTR boost in there, maybe about 140 basis points of that recovery.

James Ratzer
European Communication Services Research at New Street Research

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'd 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.

Emilio Rodríguez
COO at Telefónica

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

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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. Most important is the growing organic EBITDAL minus CapEx, which is embedded in our guidance in 2025. It's true that FX could affect somehow negatively.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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 a 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 impact from Peru.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Below that, we will continue managing every line. There's a gap versus consensus, but let me tell you that last year, we also overperform on consensus, and we overperformed on our guidance. So we have a good track record on managing every line below EBITDA minus the 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 cost, very proactively managed, continue to optimize taxes.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

Dividends from BMO two, as we already announced, will be slightly lower, but we also have normalized hybrids and personal payments, which are now part of the of the free cash flow, but but nothing I mean, just the the very granular management of of every single line. No? Hispanel 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.

Laura Abasolo
Chief Financial and Control Officer at Telefónica

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.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

James, your question on Germany? Yes.

James Ratzer
European Communication Services Research at New Street Research

Thank you.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

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, in on our commercial strategy, we remain committed to profitable growth on the back clearly of a fair share of available gross adds in all channels.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

Having said that, I think you mentioned the point, we drive in the mix profitable growth, and we have been able to stabilize our ARPU maybe as the only player in the German market, even taking into account the ex MTR effect that you mentioned. So overall, we drive in the mix of high value, mid value and low value a profitable growth and see a good momentum with our own offers. So we are not worried about the market structure. It's the first message. Second message, clearly, yes, there are promotional activities, but in the mix, and that clearly shows the stable O2 postpaid ARPU, that's the key revenue source.

Markus Haas
CEO of Telefónica Deutschland at Telefónica

And we clearly see that we are able to drive profitable growth. And we have time for one more question, please.

Operator

Thank you.

Operator

Our

Operator

last question comes from the line of the line Keval Kiroia from Deutsche Bank. Please go ahead.

Keval Khiroya
Keval Khiroya
Director, Telecoms Equity Analyst at Deutsche Bank

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 stand alone path after you've evolved your strategy post one on one leaving your network?

Keval Khiroya
Keval Khiroya
Director, Telecoms Equity Analyst at Deutsche Bank

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 still accelerate? And if so, would you be able to elaborate on the source and magnitude of those, please? Thank you.

Emilio Rodríguez
COO at Telefónica

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 Markus mentioned before, leveraging our network of brands. But it's true that we believe Europe needs large telecommunication and technology companies. The market consolidation is needed to have a strong European telco sector.

Emilio Rodríguez
COO at Telefónica

In Germany, there are already three very good mobile networks. We don't see too much space for, for one. We have a responsibility to consider all option, of course, but let me stress that our priority in Germany is organic growth. Regarding the question about the redundancy plan in Spain, our expectation is 2025 EBITDA to show higher year over year growth than in 2024. This is based on retail revenue growth.

Emilio Rodríguez
COO at Telefónica

Remember that our revenue growth is even in retail revenue growth is even above the inflation. And we have some tailwinds coming from the redundancy plan that we launched the last year. The technological transformation, both in IT networks and the center of the copper permit us to see more efficiency. At the same time, all the simplification that we are doing in in Spain, both in in network system processes permit us to see again more efficiencies. The artificial intelligence, and automation permit us to see, commercial commercial efficiencies too.

Emilio Rodríguez
COO at Telefónica

We see a lot of, examples and permit us to to to see the sufficiency. And then with the with all of that all of that, we we we we believe that we are able to maintain the the our EBITDA level, our performance, and financial KPIs.

Keval Khiroya
Keval Khiroya
Director, Telecoms Equity Analyst at Deutsche Bank

That's clear. Thank you.

Operator

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

Emilio Rodríguez
COO at Telefónica

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

Operator

Telefonica's January March twenty twenty five results conference call is over. You may now disconnect your line. Thank you.

Analysts
    • Torsten Achtmann
      Director of Investor Relation at Telefónica
    • Emilio Rodríguez
      COO at Telefónica
    • Laura Abasolo
      Chief Financial and Control Officer at Telefónica
    • Andrew Lee
      Managing Director at Goldman Sachs
    • Lutz Schüler
      Chief Executive Officer of Virgin Media O2 at Telefónica
    • Mathieu Robilliard
      Director at Barclays Investment Bank
    • Markus Haas
      CEO of Telefónica Deutschland at Telefónica
    • Fernando Cordero
      Head of European TMT Equity Research at Banco Santander
    • Akhil Dattani
      Managing Director at JP Morgan
    • James Ratzer
      European Communication Services Research at New Street Research
    • Keval Khiroya
      Director, Telecoms Equity Analyst at Deutsche Bank
Powered by Quartr
Earnings Conference Call
Telefónica Q1 2025
00:00 / 00:00

Transcript Sections