Telefonica SA (TEF) 2024 Q2 法說會逐字稿

Good morning. Thank you for standing by and welcome to Telefónica's January-June 2024 results conference call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Adrian Zunzunegui, Global Director of Investor Relations. Please go ahead, sir.

Good morning and welcome to Telefónica's conference call to discuss January-June 2024 results. I am Adrian Zunzunegui from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited.

This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to Telefónica group. These statements may include financial or operating forecast and estimates or statements regarding plans, objectives, and expectations regarding different matters.

All forward-looking statements involve risks and uncertainties that could cause final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid or London. Now, let me turn the call over to our Chairman and CEO, Mr. José María Álvarez-Pallete.

Thank you, Adrian. Good morning, and welcome to Telefónica's second-quarter conference call. With me today are Ángel Vilá, Laura Abasolo, Markus Haas, Lutz Schüler, and Eduardo Navarro. As usual, we will first walk you through the slides and we'll then be happy to take any questions.

We are pleased to report solid Q2 results that demonstrate the continued success of our strategy. Our top-line growth has accelerated, with revenue up 1.2% year on year, driven by sequential improvements in both our B2B and B2C segments. Notably, all our main markets are growing revenue.

Our key markets are showing positive commercial momentum. In Spain, we are achieving annual growth across all main customer segments. Germany is expanding in all main access categories and Brazil is hitting record customer levels. This confirms our commitment to putting customer first.

Importantly, we have seen robust growth in EBITDAaL minus CapEx, which increased by 11.5% year on year. This impressive double-digit growth this quarter puts us year to date already trending above our full-year guidance and position us well for the second half of the year. The strong performance was supported by the solid CapEx-to-sales ratio of 12.1% in the second quarter, reflecting our efficient capital allocation.

This performance is also driven by our focus on operational efficiency. Our OpEx reflects the full impact of Spain's personal restructuring program and ongoing efficiencies for the decommissioning of legacy copper, another legacy network within our portfolio.

We continue seeking further efficiencies. Within our strategic goal to modulate exposure to Hispam while creating value for our shareholders, we have signed a non-binding MOU with Medico for a potential corporate transaction of our operations in Colombia.

In Spain, we have also signed a non-binding MOU with Vodafone for the creation of a FiberCo that should bring further rationality and network optimization to the FTTH market. Accordingly, we continue making good progress and remain confident in achieving our financial outlook for the full year 2024.

Moving to slide 5, we show how this strong momentum translate into tangible financial results. Starting with growth, our-top line growth accelerated to 1.2% on strong service revenue that grows by 2.2%.

All main units showed revenue growth in euro terms despite headwinds from weaker FX rates. This momentum is driven by high-quality customer addition across our fiber and mobile accesses, with premises passed by fiber-to-the-home growing 13% year on year.

Profitability remains core. This healthy top-line expansion is driving profitability growth, with our EBITDA rising 1.8% year on year in the second quarter. We are seeing a virtuous cycle of growth and efficient that flows to our operating cash flow.

Our EBITDAaL minus CapEx growth has accelerated by as much as 15 percentage points versus the first quarter, supported by our ongoing capital expenditure discipline. Our CapEx-over-revenue ratio stands at 12.1% for the quarter, demonstrating our commitment to efficient capital allocation. Importantly, this growth is flowing through to the bottom line.

Adding sustainability, our second-quarter free cash performance keeps us firmly on track to meet our full-year targets. Excluding extraordinary tax payments in Peru, our free cash flow is growing by over 20%.

We had a timing-related EUR279 million payment in the second quarter. It was already factored into our guidance and doesn't affect our outlook. We remain confident in achieving our free cash flow objectives for the year. Laura will provide more details later.

Going into greater detail on slide 4, our network transformation continues at pace. In the second quarter, we expanded our fiber-to-the-home footprint by an additional 2 million premises. Fiber coverage now reaches 66% of the population across our core markets, a three percentage point increase this quarter. Spain and Germany led the charge with average 5G coverage exceeding 90%.

Our customers remain at the center of our transformation journey. We closed the second quarter with 392 million total accesses, adding 4 million new customers, which is an eight-fold increase from the previous quarter. Churn continues its downward trend, while our industry-leading NPS saw further sequential improvement. We are laser-focused on operational simplification to drive profitable growth.

The workforce restructuring program in Spain is already delivering full cost savings, fueling higher EBITDA growth as we have made significant progress in our nationwide copper network switch-off, with over 4,000 central offices closed since 2014. This strategic shift is a key driver in reducing CapEx, boosting our operational cash flow, and free cash flow growth.

And AI is embedded in our business and how we do business. Our networks are becoming more and more open and more intelligent through software-ization and automation. We are digitalizing to be closer to customers, enhancing offers with increased personalization. AI is also helping to streamline our CapEx deployment and boosting efficiency across the organization. We are fundamentally changing how we operate and deliver value to customers and stakeholders.

In summary, our strategic initiatives, building next-generation networks, prioritizing customers, and creating leaner future-fit operations are yielding tangible results. This progress reinforces our confidence in delivering on our ambitious goal for growth, profitability, and sustainability.

This quarter, Telefónica continues to consolidate its leadership in sustainability, as shown on slide 5. In June, we have published the annual update on our Climate Action Plan. It details our roadmap to net zero and the tangible steps we are taking to decarbonize across the value chain. With 392 million accesses worldwide, Telefónica continues to bridge the digital divide. We are connecting people and raising awareness about the responsible use of technology.

Being a responsible technology company also means building a strong code of ethics with regards to artificial intelligence. Our pioneering AI code of ethics was first published in 2018. We have now updated it to include a new commitment to the environment while broadening responsibility and traceability across the value chain.

Finally, on ESG, I'm very proud that Time Magazine has ranked Telefónica among the Top 10 World's Most Sustainable Companies. I will now hand over to Ángel.

Thank you, José María. On slide 6, we review our execution during the last quarter. At the time of the Q1 results, we shared with you near-term catalysts and positive opportunities we saw ahead of us in all of our core markets. In Spain, back in May, we said we have signed an MOU for a new long-term mobile network agreement with Digi, which we expected to complete in a few weeks.

The full, final, and definitive agreement, which spans over 16 years and includes both national roaming and RAN sharing was announced three weeks ago. This confirms our ability to provide high-quality services over our infrastructure, which is further reaffirmed with the signing yesterday of a non-binding MOU with Vodafone to enter into exclusive discussions to create a joint fiber code that would cover some 3.5 million premises with fiber-to-the-home, with a targeted take-up higher than 40%.

In Brazil, we said negotiations were underway to potentially migrate to an authorization regime. During May, we have reached the agreement with ANATEL and the Ministry of Communications, which we expect to complete in the coming months.

In Germany, we expect the spectrum extension, and this was later confirmed by BNetzA, a five-year extension is a step in the right direction. At the same time, we have progressed in the development of our wholesale agreement with Freenet.

Finally, in the UK, we anticipated the fiber build acceleration as projected, and the NetCo was receiving strong interest from intra-investors. The investor interest has continued during the second quarter and the fiber build continues to ramp up, with 5 million premises passed as of June, whilst the operational and financial network design remains well on track.

In addition, in the UK, the mobile network sharing agreement with Vodafone has been extended to 2030. We are delivering tangible and clear progress in all core markets.

On slide 7, we review the consistent positive performance of our Spanish operation. Progress across commercial KPIs and financials further increases the growth, profitability, and visibility of our domestic business.

We are in a well-segmented market with a premium positioning. Sound commercial momentum continued and translated into the fourth straight quarter of positive net adds in main services, with all customer bases showing year-on-year growth in the quarter.

In convergence, the combination of increased net adds and superior NPS and ARPU not only reflects the high value of the base but also the right balance to sustain revenue growth. All of this resulted in revenue growth in Q2, with an acceleration in retail revenue, up to 2.6% year on year and improving EBITDA growth helped by the full contribution from the redundancy program savings.

The inflection point of the EBITDAaL trend is also noteworthy, showing a sequential improvement, which is expected to continue throughout the year. To highlight, as proof of our superior network infrastructure quality, we extended the valuable wholesale agreement with Digi, securing wholesale inflows beyond the next decade at an operating cash flow margin similar to the previous contract. And we continue to seek new win-win agreements with our existing wholesale partners.

So we are very pleased to announce that yesterday, we signed a non-binding MOU with Vodafone Spain to enter into exclusive discussions to create a 3.5 million premises passed FiberCo to add further visibility and stability to the broadband market, which we continue reshaping. On top of which, opportunities will open up from the ongoing deregulation process.

On slide 8, let me explain in a bit more detail our recent wholesale agreements, both supporting rationality in the wholesale market. The new contract with Digi has evolved to provide national roaming and partial RAN sharing for the next 16 years. Infrastructure sharing will boost the effective use of our mobile network, while Digi benefits from efficient use of its new spectrum.

The RAN sharing agreement includes spectrum utilization in the 3.5 gigahertz band. This will be progressively deployed and help us to release own resources devoted to this high-frequency band.

Additionally, yesterday, we announced the signing of an MOU with Vodafone Spain to create the joint FiberCo. In this fiber-sharing agreement, Telefónica will contribute 3.5 million premises passed of its fiber-to-the-home network, and joining with Vodafone Spain will connect an estimated base of around 1.4 million customers at closing.

This model increases our fiber network returns and adds long-term visibility to wholesale revenue via long-term MSA agreements. As both parties will independently compete in retail and wholesale markets, network utilization will be optimized. We will also crystallize value to the valuation of part of our fiber at attractive terms, and further monetization may be realized with a potential sale of a stake in such FiberCo.

Finally, optionality increases with the NetCo becoming a vehicle to share the fiber operating costs and a source to unlock additional funds in a potential market consolidation. All in, these two new agreements are value-accretive for Telefónica Spain as they allow us to monetize our networks, increase the visibility and sustainability of our wholesale revenue function, and also bring efficiencies.

Regarding Brazil on slide 9, Vivo maintains its leadership in both mobile and fiber-to-the-home business as a result of a very strong operating momentum. At the same time, our customer value increases, with contract ARPU growing 2.7% year on year, whilst churn is maintained at very low levels of 1%.

Accordingly, mobile revenue grew 4.7% year on year, reflecting market rationalization and increasingly boosted by digital services, which are growing double digit. Whilst on the fixed business, fiber recap reached 24% and convergent customers more than doubled year on year.

Strong execution helped main financial KPIs to continue posting year-on-year growth in euro terms, even despite Brazilian real depreciation. In local currency, revenue and OIBDA posted a year-on-year acceleration to plus 7.4% and plus 7.3%, respectively, way higher than inflation growth. To note, the improved operating leverage margin to 15.3%, 1.2 percentage points increase year on year.

Vivo continues also to reform its ESG commitments and has announced new targets for 2035. Finally, an important milestone was achieved during the quarter with the agreement with regulatory and administrative bodies to progress on the migration from concession to authorization, which is value-accretive and will be finalized in the second half of the year.

Our German operations maintained ongoing operational and financial momentum in Q2, as shown on slide 10, driven by the focused execution of the accelerated growth and efficiency plan. Our core business continued to demonstrate robust commercial traction, with contract net additions increasing 37% quarter over quarter, supported by a low O2 contractual rate of 0.9%, which reflects our strong brand appeal and ongoing network enhancements.

Revenue remained flat year on year, with growth in handset sales and fixed services, partially offset by decline in mobile service revenue, impacted by regulatory effects, changes in the partner's business model and lower roaming. However, we achieved sustained EBITDA growth through ongoing momentum and effective cost management.

In the first half of 2024, progress on 4G network densification and 5G deployment was significant, with over 550 new operational sites and approximately 3,400 expansion measures completed, resulting in our 5G population coverage reaching 96%. Other business fundamentals saw significant derisking as well during the quarter. The spectrum extension was not only already signaled by the regulator, but the position from the German government on Chinese vendors was finalized, an outcome that falls within our expected CapEx envelope, hence being neutral to our long-term guidance.

Moving now to slide 11 to review our UK JV, VMO2. In the UK, we have remained committed to our strategy of investing in key drivers for future success despite the competitive landscape. We continue to focus on delivering value to our customers while transforming and simplifying our business for long-term sustainability. We maintained our position with the highest fixed ARPU in the market, achieving 3.1% year-on-year growth driven by recent raising prices.

Additionally, our combined consumer fixed and mobile revenue, excluding handset, remains stable, with O2 contract churn maintaining stability at 1.2%. Furthermore, fiber deployment has significantly accelerated with the VMO2's full fiber footprint now reaching 5 million premises passed.

Looking ahead, our new network-sharing agreement with Vodafone UK totally strengthens our successful relationship but also strategically positions VMO2 for the potential approval of the Vodafone-Three merger, including a prospective spectrum agreement. And finally, the NetCo carve-out is progressing well, perimeter established and we see continued interest from investors.

Telefónica Tech on slide 10 showed another strong quarter. Since creation, T. Tech is delivering quarterly double-digit year-on-year revenue growth. In the last 12 months, T. Tech has generated EUR2 billion of revenues, showing a 14% annual increase.

Both funnel and bookings are showing higher growth and revenue so far, mostly driven by the private sector with large contracts awarded. For example, two weeks ago, multinational financial player, BBVA, chose T. Tech to boost the cybersecurity of its operations on a global scale with incorporation of the most advanced technologies in AI and process automation.

We also recently closed large and relevant deals with Segittur and Children's Health Hospital Ireland in Q2. Hence, this solid trend will continue to translate into revenue growth, which we expect to accelerate throughout the remainder of the year.

We have seen growth that is well balanced with increased contribution from higher value-added services, longer-dated conducts, a wider customer base, and better customer mix. We continue to gain relevance in higher-growth markets and our total delivery capabilities continue to be recognized by industry partners and analysts. This should allow T. Tech to continue growing ahead of its peers.

Telefónica Infra on slide 13 is driving profitable growth, leveraging a capital-efficient deployment of future-proof infrastructure. Our fiber-to-the-home base continues its momentum after passing more than 1 million premises this quarter to 23 million.

Telxius, our global connectivity provider that combines next-generation subsea cables with terrestrial backhaul systems and communication hubs, maintained considerably high profitability of around 50%, and is expanding colocation capabilities across USA, Spain, and Latin America. And as you may be aware after looking at recent media comments, interest on Nabiax, the data centers business where we own 20%, is mounting. This provides us with optionality. I will now hand it over to Laura, who will guide you through Hispam performance and the main financial topics.

Thank you, Angel. As for Hispam on slide 14, we return to growth in main financial KPIs, service revenue, EBITDA, and EBITDAaL minus CapEx. As such, service revenue grew 4.9% in Q2 year on year. EBITDA was up 2.7% year on year, driven by Argentina, Colombia, and Mexico, to highlight, the 67% EBITDA growth of our operations in Mexico on very good contract performance and network efficiencies.

EBITDAaL minus CapEx accelerating on EBITDA evolution is destabilization and CapEx decline. CapEx to sales stood at 6.6% in the first half of the year. Lastly, Telefónica Hispam is making progress in achieving greater rationality market, avoiding network overlap through different agreements on fiber and mobile. To continue seeking market rationality, we entered into a non-binding memorandum of agreement with Millicom for a potential corporate transactions of our operations in Colombia that may imply the sale of our stake in Telefónica Colombia.

Slide 15 shows free cash flow performance in the first half of the year. Our free cash flow performance remains strong and fully on track. We are confident on our trajectory and our ability to meet our full-year guidance of more than 10% growth.

Let me address that we've been managing a tax dispute in Peru for some time. In fact, December 2022, we made a full provision of EUR0.9 billion for this tax litigation. The exact amount and timing of payments have been uncertain, but we're consistently incorporating our best estimates in our guidance.

In Q2 of this year, we made a EUR279 million tax payment to Peru. This amount was larger than initially expected for the quarter. However, this is primarily a timing issue. The payment was already contemplated in our full-year guidance, which remains unchanged and more than 10% growth for the full year.

With this behind us, we have taken greater clarity on our free cash flow generation outlook, putting us in a stronger position for the second half. Importantly, this situation is fully contemplated not just in our 2024 guidance, but also in our 2026 targets. We're in control, acquisition is strong, and our commitment to deliver on our free cash flow performance remains unwavering, both for this year and through 2026.

As of June 2024, our net financial debt stood at EUR29.2 billion, translating to a net debt-to-EBITDA ratio of 2.78 times. This anticipated increase from year-end 2023 was primarily driven by our strategic move to raise our stake in Telefónica Deutschland and, to a lesser extent, free cash flow seasonality in the first half. We are committed to reducing leverage and remain on track to meet our targets.

I'm delivering the strategic focus on four key areas: first, driving EBITDA growth for operational efficiencies and revenue expansion, starting with Spain, our highest cash conversion market that we'll see EBITDA growth acceleration from Q3. Operating cash flow measured as EBITDAaL minus CapEx is already growing above the guidance range of between 1% and 2%, so we'd see the usual CapEx pacing implying higher intensity in the second half of the year, EBITDAaL should keep improving. Accelerating free cash flow generation, which, as usual, will be back-half loaded, even more this year, and continued disciplined capital allocation.

You should also remember that in the second half of 2024, a couple of deleveraging events will take place. We received the proceeds from the stake in CTIL and expect regulatory approval for the FiberCo in Peru. All in all, both will help bring down debt by EUR7.4 billion. And both asset lines, close events, just waiting to receive the proceeds.

Furthermore, we lowered our debt-related interest cost to 3.58% versus 3.80% in December last year, thanks to the active refinancing exercise undertaken in previous years, the robust position at fixed interest rate in a strong currency, and the reduction of interest rates in Brazilian real. I will now hand back to José María, who will wrap up.

Thank you, Laura. All operating metrics are either aligned with or exceeding full-year guidance. Revenue growth of 1.1% aligns with our full-year target of around 1%. EBITDA is growing 1.9% year to date at the high end of our 1% to 2% guided range.

At the first quarter results, with EBITDAaL minus CapEx would resume its -- our trajectory from the second quarter. Indeed, it grew 11.5% year on year in the second quarter, bringing first half of growth to 3.1%, above our 1% to 2% full-year guidance.

This is driven by full benefits from Spanish workforce cost savings, moving past Q1 fixed impacts from lease inflation, and accelerated 5G deployment, and excellent CapEx management. CapEx to sales stands at 11.3% year to date, below our up to 13% full-year guidance.

While usual phasing should increase CapEx intensity in the second half, we are increasingly comfortable towards 2024 CapEx guidance. We'll provide more details on the next slide.

As Laura mentioned, free cash flow generation is on track to meet full-year guidance. It's back-end loaded as usual, so we expect acceleration in the remaining two quarters of 2024.

This will allow us to resume our delivering trajectory. After the first-half-of-the-year uptick from the Telefónica Deutschland offer and our second-quarter dividend payment, we expect net debt and leverage ratio to decline, keeping us on track for our 2026 targets. Our strong first half performance supports our 2024 target and long-term strategic goals.

As stated in the previous slide and as we showed on slide 18, CapEx is among the main drivers of our fee cash flow growth towards our 2026 targets. Let me give you an inside-out view of how we are approaching CapEx to reach industry-leading levels of less than 12% capital intensity.

Our strategy revolves around three key areas; first, business evolution. We grow more in low CapEx businesses, such as B2B and digital services within B2C, changing our CapEx profile. Legacy shutdowns, particularly copper decommissioning, significantly reduced our maintenance CapEx. This allow us to continue to invest in growth, passing more premises with fiber-to-the-home and increasing 5G coverage. Both have higher efficiency than legacy technologies.

Second is network optimization. We are leveraging to open on disaggregated network virtualization, go-to-cloud strategies, and AI and automation, increasing deployment efficiencies and flexibility to adapt to demand. Open run and open broadband models are key to this transformation.

And for strategic investments, we are past peak network spending and now focusing tech cycle optimization. We are exploring ways to reduce capacity CapEx, such as our extended collaboration with Meta for video optimization, aiming for more responsible network use and reduced resource usage.

No single initiative alone will be sufficient to achieve our ambitious targets. It's the combination of all three areas that creates a powerful synergy, driving us towards our goal. This approach will take us from our '23 CapEx-to-sale ratio of 13.3% to our '26 guidance of less than 1%.

This reduced capital intensity is an important lever to help achieve our target of more than 10% free cash flow growth CAGR through 2026. While the second half should show usual phasing with some higher CapEx allocation, our first-half progress makes us more confident in our 2024 CapEx guidance than before.

To summarize on slide 19, Telefónica's second-quarter 2024 performance demonstrated again solid execution as we continue to deliver against our strategic road map. We reported a solid set of results consistent with our full-year 2024 guidance across all key metrics as well as our overall GPS plan, which targets more than 10% free cash flow growth CAGR between 2023 and 2026. In fact, operational leverage improved significantly with EBITDAaL minus CapEx standing above the guided range for the full year.

Our core markets showed robust commercial and operational trends. In Spain, we are achieving annual growth across all main customer segments. Brazil and Germany maintained consistent profitability growth and Hispam showed sequential improvement.

Our strategic investment in fiber and fiber infrastructure enhanced Telefónica's customer experience, positioning us for continued commercial momentum and top-line expansion. CapEx intensity remains well contained, with legacy network shutdowns freeing up resources for growth, which, coupled with the streamlined operations by digitally transforming processes and firmly focused capital allocation priorities, will allow us to deleverage going forward towards our target ranges and further sustaining our dividend.

Finally, we continue seeing positive near-term catalysts in all our markets. Starting with deregulation, in Spain, we expect full FTTH wholesale deregulation and the renewal of certain rental obligation, which should result in increased commercial flexibility. At a EU level, we see progress as well in three main key topics, including market definition, Open Internet, and fair share. As for the latter, we are starting to sign large commercial agreements with large traffic generators to optimize video for a more efficient use of network resources.

In Hispam, we have entered into a non-binding memorandum of understanding with Millicom for a potential corporate transaction of our operations in Colombia. And as detailed by Angel, we have signed a non-binding MOU with Vodafone Spain to enter into exclusive negotiation for the creation of a FiberCo that should bring further rationality to the market, optimize --

Please stand by. Your conference will resume shortly.

This, coupled with our focus on execution and combined with further wholesale and consolidation opportunities, will allow us to keep building on our momentum and demonstrating the continued success of our strategy. Thank you very much for listening, We are now ready to take your questions.

(Operator Instructions) Andrew Lee, Goldman Sachs.

Good morning. Well, I had two questions, one on Spanish EBITDA growth, and then, the next, on the group's wholesale revenue growth outlook. On the Spanish EBITDA growth, you said you expect this to improve through 2024, but I think you delivered around 0.5% decline in the second quarter if we strip out the litigation effects. I might be wrong there, so happy to be corrected.

Well, consensus still models FY24 declines and investors are noting today your negative ARPU trends in Spain. So I wondered, maybe, you now have better visibility to give us a better idea on your expected Spanish EBITDA growth run rate into the end of 2024, and what you think the structural, sustainable EBITDA growth should be in Spain longer term? Any incremental color you can give on that Spanish EBITDAal outlook would be really helpful.

And then, on the wholesale revenue growth, how has your group wholesale revenue growth outlook changed in the medium term, given you've now, as you stated through the call, signed a new Digi wholesale contract. And I'm guessing there are positive externalities to your Spanish fiber wholesale business from the Vodafone Zegona MOU you've just signed. Any color you can give on your expected impact of that fiber MOU on wholesale revenues and the broader declining group wholesale revenue out would be really helpful there. Thank you.

Thank you, Andrew, for your questions. The first one on Spanish EBITDAaL, I got a similar question in the first quarter, and as I said back then, EBITDA and EBITDAaL performance in Spain in the beginning of the year were to be the weakest. You would see this year. The factors that affected leases in Q1 and partially in Q2, which were volume additions, inflation. and rates affecting accounting of recurrent leases are starting to phase out.

So even if we have some non-recurring factor affecting the year-on-year EBITDA in Q2, EBITDAal growth has been improving from, plus 0.2% in the first quarter to plus 0.6% growth in the second quarter. And year-on-year EBITDAaL performance has improved further by 1.8% -- 1.8 percentage points quarter over quarter, moving from minus 3.5% in Q1 to minus 1.7% in Q2. We are expecting further EBITDA and EBITDAaL sequential improvement in the following quarters already starting in Q3, not only a higher EBITDA growth, but also on lower leases annual increase, which is going to help EBITDAaL to stabilize in the second half of the year.

Then regarding the evolution of Spanish wholesale revenues, this revenue source is going to be a drag in 2024. We have a reliable network. We are protected by solid commercial agreements, as proven by the deal, the definitive deal with Digi and the MOU just announced with Vodafone. What are the drags that we're seeing as headwinds? Mobile termination rates prices are having since the first part of 2024. By the way, this also affects our German operation.

Some international traffic services were impacted by declining voice traffic. We won't resell Formula 1. It's a content that we don't own, although this was EBITDA-neutral because we are selling it as per the cost that we had on it. Roaming prices also decreased. And then the pass-through that we have on energy to some of our clients that were co-located in our central offices with the decline of energy prices is no longer supporting us. On the other hand, MVNO revenues are growing.

So we have lots of moving parts here that are putting pressure on the wholesale revenues in Spain. There are agreements that we have signed with Digi, if you take into account the conditions of price and expected volumes should be going forward at least, the level of revenues that we had with the old contract and also at the level of operating cash flow. The MOU that we have signed with Vodafone would be accretive for additional to the wholesale revenues that we're getting with our partners. So lots of moving parts, but the two agreements that we have signed are supportive of the wholesale revenue function for Telefónica Spain at rational prices that would not necessarily or will not produce erosion in the conditions of the retail market, so supportive to the wholesale revenue line, but also to the retail revenue line.

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

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

Thank you.

[Andre Kavages], UBS.

Hi, good morning and thank you for the presentation and taking my questions. I have two. They are quite similar but from different ends. So maybe, if I just look at the EBITDAaL-minus-CapEx guidance for the year and where we've progressed thus far, so you're targeting more than -- or roughly 5%, and you are 3.1% year to date with CapEx to sales running below the kind of 2024 run rate about two percentage points. So if you can just maybe talk to us about the building blocks if CapEx goes up in the second half, where the acceleration, the material acceleration in the EBITDAaL maybe across the group coming from -- to get to the 5% in EBITDAaL minus CapEx guidance, please? Any clarity on that?

And then, just looking at the deals that you're signing in Spain specifically, or maybe just to focus on staying from that perspective, looking at just returns, because, obviously, you're enhancing the usage of your networks. You're avoiding some overbuild. You're kind of expanding that -- the partnerships to different operators. So just from a returns perspective, if you can kind of give us any color on midterm kind of return on capital or something, improvement that you expect from these deals closing there? They're pretty positive. Thank you very much.

We were not sure if the question was around Spain or in general. But if it's in general, we have a midterm guidance of EBITDAaL minus CapEx of 5% in life of the plan. However, the guidance for the specific 2024 is more in the range of 1% to 2%. And at the moment, we are about 3%. So we are doing better versus guidance.

The reason behind we explained when we gave the year guidance as part of the GPS plan, everything improves. Leases, though, grows slightly throughout the life of the plan. And that growth is higher at the beginning of our plan because of the network growth impacts remaining CPI who is decreasing interest impact of the new contracts and new grow additions. So all of that in place, that EBITDAaL minus CapEx growth is back-loaded in our long-term plan.

Having said that, we are super focused on lease monitoring. We are working on all mitigation measures. We are serving, as you know. We are reducing the quantity. We are renegotiating the agreements. And you can see that it's basically linked to the 5G expansion being more acute in the first years. We have some regions like East Pan where leases are completely on the downward trend.

Spain, as Angel explained, at the beginning, the lease impact was higher. It was the highest in the first part of the year. So you should be comfortable with our long-term EBITDAaL minus CapEx guidance, and with the guidance for '24, which is lower than the full year. I hope I answered the question with that.

And regarding your second question, you have to frame the deals that we are announcing within the restructuring of the Spanish market that has followed some consolidation or some M&A in our market. So this continues to be a very segmented market in which you have in B2C. Premium positioning, like we have in the mid-high end of the market, which is very rational market, some more competition in the bottom end. In B2B, we continue growing very substantially with a very strong positioning.

And in wholesale, which is where your question, I understand, was focusing on these deals. The whole market is reconfiguring, and under a principle of rationality that we are perceiving on the side of all the players. There is clearly, as you were saying, an objective to optimize the return on capital employed by avoiding overbuild risk. Also, at the same time, there is a need and there is a willingness from the different players to optimize network utilization, and doing this in such a way that the market retains a healthy level of competitiveness, but without putting undue pressure on the market.

We have been -- and we were describing this on slide number 8, we have been very active in sharing, not only on the mobile centers on the fiber side, our infrastructure, and we believe that these are win-win agreements for the different players. I don't know if this responds to your questions or do you needed some additional detail.

No, that is helpful. Thank you very much. If I may, just -- sorry for the confusion with the first question. I was maybe basically trying to understand by which means does the growth in lease costs, especially in Spain, may be moderate? And I was maybe going to follow up with asking or by asking in terms of the corporate shutdown that is happening over this year and next year maybe, is that a big part in terms of moderating leases?

Yes. Sorry, I'm not sure I understood exactly the question because your third question was on group level and now you're asking for some specific detail on Spain. Could you please repeat?

Yes. So maybe, just in terms of the lease moderation, because I guess a little of the growth, as Laura was already addressing, it's coming in Spain. So I was just trying to understand that the growth rate in leases should therefore moderate, and I was going to follow up specifically on the copper shutdown over this year and next year. Is that a big part of how you contain the lease growth in the midterm as well?

As you are referring to my first answer, maybe you didn't -- maybe I was not explaining myself clearer, because I said exactly the opposite about the Spain. I said leases are under control. They are slightly increasing at a group level. We have certain places such as East Pan, we are in a downward trend; others, like Brazil, with the oil transaction and the 5G regulation maybe in the upside train, although very much under control.

And in the case of Spain, it's exactly the opposite. We have the highest level in the first half of the year and that should be annualizing during the year. So EBITDAaL minus CapEx won't be a problem at Spain level. And the worst quarter has been actually Q1, and that could be annualized. Maybe now it's more clear. Otherwise, you can ask our Investor Relations and they can provide you full detail. But the message in Spain will just be opposite.

Yes. I said in a previous response, this growth in Spain should continue easing quarter on quarter to reach EBITDAaL stabilization in the second half.

Thank you very much.

Mathieu Robilliard, Barclays.

Yes, good morning. Thank you for the presentation. I had a question on the free cash flow. So as Laura pointed out, there is a one-off payment in Peru. And as you said, initially, there was a EUR900 million for that item. Now, I understand you may not want to share your expectations for what will be the final total payment because that's still not settled, but in case, all the remainder of what you could have to pay was to be done in 2H 2024, and again, I'm not sure what is in your numbers, but I think, so far, you've probably paid more than half of it. So if you had to pay, theoretically, on the rest in 2H 2024, would your full-year guidance still be (technical difficulty) for 2024? That's my first question.

And then I had a second question on LatAm, Hispam America. So as you flagged, CapEx is very low. I think you said 5.6% of revenues. I understand that in a country like Mexico, you're essentially operating like a MVNO. But in countries like Peru, Chile, Colombia, or even Argentina, you do have a network. So I was wondering how it was possible to maintain the quality of the network with such a low CapEx and whether that number would spike back again in H2? You thought this was something sustainable? Thank you.

Thank you, Mathieu, for the question. I'm very happy to talk to -- about Peru, so I can clarify. As you said and I said, there's a provision of around EUR0.9 billion, specifically the very EUR845 million are the specific ones to '98 to 2001 that have taken so long, and there's so much related to interest. Some of that is still under discussion.

But the payment, you are right. We have paid approximately half already because on top of the EUR279 million payment we did in 2024, we had an outflow of around EUR123 million in '23. But the remaining is not going to be paid in 2024.

The Peruvian law allows for fractioning, and the fractioning will start from 2025 beyond. So it will go even beyond the GPS plan. But we are fully in control on the situation. Obviously, the timings of the payments so far have been uncertain, with the fraction in the agreement with the Peruvian authority will be much more certain.

But the punchline here is this has been included in our guidance and in our estimates, both for 2024, both for the midterm guidance. So it doesn't affect whatsoever the 10% growth in '24, nor the 10% growth all the way through 2026.

I could give -- I mean, it has been much concentration in Q2, which is not ideal. But on the other hand, as I said, now we have certainty. And it does not put in jeopardy at all our free cash flow guidance. We are very confident on the free cash flow growth trajectory and completely on track to meet our full-year guidance.

On the Hispam situation regarding CapEx, usually, CapEx is also back-loaded in the case of Hispam. So you shouldn't expect 6.6% of our revenue we have at the moment. We run Hispam within a 10% envelope. Approximately, we can be a little bit up and down, but that would be the figure you should have in mind.

But that doesn't mean we spend -- invest 10%. We invest in different ways. In the case of the fiber, this goes through the fiber costs. So we are accessing to the best ultra-broadband technology in the region through those vehicles instead of doing it through CapEx.

We have just gone through a very, very successful run negotiations for 5G in region. In some cases, we are sharing network, as we did in Colombia. We are happy to share network elsewhere in the region. So you should expect us to do it in a very disruptive way, asset-light, sharing through vehicles. But the 10% in that framework allows us to put a good technology at the service of our customers.

Thank you very much.

David Wright, Bank of America.

Yes, thank you for taking my questions. Another two, please. So first of all, just on guidance, you chose to guide in moving currency, which I guess was always a risk that could perhaps be back-firing a little now with the Brazilian real just gapping out a little. And I guess, if I just did -- simple back of the envelope, Brazil is, give or take, 30% of your group EBITDA.

I think the currency had been very stable around 5.5 to the euro, looks to be now around 6 to the euro. So there's a 10% depreciation on something that contributes 30% of group EBITDA, which, I guess, dirty math says 3% drag over time, given your group outlook is around 2% CAGR to 2026. I'm just wondering how that can be captured, that risk, or whether your guidance does assume that the Brazilian real winds back in a little.

And then, I guess, just my second question, just a little bit of a mix-up from my understanding, you said that UK fiber was all on track. That's not quite what was said in the Liberty Global call, where I think it was made clear that the Nexfibre build had actually lagged our expectations a little and that the -- if I'm right, I still don't think you're actually -- I think you're behind the curve monetizing some of that fiber infrastructure, so contradicting messages there. It might be one for loops to maybe resolve. Thank you.

David, on the Brazilian real, I think it's soon to see how we'll finish the year, because we think the fundamentals are solid, solid GDP growth, external accounts remain consistent. And I think it has to do with uncertainties regarding domestic, fiscal, and monetary policy, but it could definitely improve.

In any case, we protect ourselves from the FX in different ways. I mean, we protect the solvency and the ratio, the net debt to EBITDAaL by putting debt in local currencies, as is the case in Brazil and some Hispam OBs. There's a natural hedge as the revenue impact is much higher, and it diminishes until it gets all the way to free cash flow. And on top of that, for the given year, we hedged 70% off or above of the free cash flow that comes from Brazil. And this case has not been a -- this year has not been an exception. And we have hedged that free cash flow at better rates than the ones we have at the moment.

What is definitely true is that the consolidating -- once we consolidate into euros, it's not only the Brazilian real impacting. It's every currency. And up to June 2024, the FX impact has only been EUR11 million in revenue and EUR2 million in EBITDA. So our guidance, as you correctly said, is in euros, because we think we have to grow in euros. But it's also true that we gave the FX attached to that guidance.

And sometimes, the FX in a given year may not reflect the fundamentals. So if that could divert in a huge amount, then we will need to reconcile a bit the effects of the guidance and the actual FX. But the punchline here again is that, we think the fundamentals behind the reais are strong. And it will convert to the assumptions we use for when we gave the long-term guidance, and this is a long-term game.

Regarding your second question, I'll pass it to Lutz to make sure that we don't include in any inconsistency in the messages.

Yes. Can you repeat --

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

No, we are on track with the build on Nexfibre. We had a record quarter in Q2 with almost 300,000 homes released, right? And we are also on track with fiber up. I think what I said on the call was, that we are a bit behind our ambition in selling into the fiber homes with Nexfibre, right? So -- because here, we are investing and we want to generate more customers in the second half of this year. But with the build, we are fully on track.

Okay, thank you. And maybe, Laura, just to double check, so I guess, if the currency does remain a little weaker than the potential situation we're looking at, is that you could see sort of revenue EBITDA impact. The point you're making is that it's protected at free cash flow because of the various mechanisms and CapEx. That's the point here. Is the cash flow is secure?

Yeah. That's exactly the point, David.

Okay, thank you so much, guys.

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

Thank you.

Yeah, we have time for one last question, please.

James Ratzer, New Street Research.

Ah, yes. Thank you very much, indeed. Good morning. Two questions, please, both actually on your wholesale agreements that you've just signed. So the first one on the Digi contract, I'm intrigued by the line in your presentation where you say the revenue will also be driven by traffic-driven growth. I was wondering if we could just kind of go through the economics of the deal a little bit more, because predicting how data pricing is going to develop over a 1- or 2-year, let alone 16-year view is very difficult.

So we saw in Germany when Vodafone signed an NRA with 1&1, it was actually linked to network costs to give a bit more security to the market. I mean, how can you help to give us some confidence around the pricing that Digi get with this wholesale agreement that they can't be disruptive or more disruptive on market pricing?

And then, the second question I had, please, was you're announcing here today as well that you've expanded your wholesale agreement with Freenet in Germany, which I think is a new announcement today. Could you kind of run through a bit more of the economics on that in more detail? Are you expecting Freenet now to bring more traffic over from Vodafone and Deutsche Telekom? Would just love to hear a bit more of the details of how that agreement will work. Thank you.

Thank you, James. I'll take the first one on Digi and I'll pass the second question to Markus Haas, who is also connected. First thing I would like to say is that, we move swiftly from an MOU to a full-fledged definitive contract in two months with Digi because we have those of experience in wholesale contracts and a very long-standing relationship. I think, the case that you alluded to in Germany is taking a little bit more time.

Another difference of the two cases is, our deal is not a capacity deal whatsoever. We need to be very clear. We are expecting and we have projected some volumes and we have a pricing mechanism, which is structured with payments that depend on the number of subscribers and their consumer traffic not based on the cost of our network. And regarding the RAN sharing, it will depend on the number of sites that will be shared and there will be a payment on that one. Markus, if you can take the Freenet, please.

Thank you, Angel. Thanks, James, for the question. I think we renewed our agreement with Freenet. It's a 10-year deal and with a steep customer increase, And we foresee the full run rate of this strong increase of customers on our network coming from Freenet already in 2026, clearly compensating some of the effects that we will see from 1&1. So while it's a win-win deal that we signed, it's long term, and it's a substantial increase of the relationship and partnership that we have with Freenet going forward.

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

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

Okay. So that's a binding agreement from them to migrate more customers over to your network from Vodafone, Deutsche Telekom? (technical difficulty) Angel, could I just follow up just on the traffic growth point? I mean, traffic growth is growing at kind of 30% to 40% per annum in Spain. But presumably, the Digi wholesale revenues aren't to grow in line with traffic growth. So there must be some price deflator baked into your contract. How does that work to just offset traffic growth, please?

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

Correct. Many thanks indeed.

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

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