Yahoo Finance Telefónica, S.A. (NYSE:TEF) Q1 2024 Earnings Call Transcript
Telefónica, S.A. (NYSE:TEF) Q1 2024 Earnings Call Transcript May 9, 2024
Telefónica, S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Adrian Zunzunegui: Good morning, and welcome to Telefonica's conference call to discuss January-March 2024 results. I'm 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 the Telefonica Group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements.
We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant 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. Angel Vila.
Angel Vila: Thank you, Adrian. Good morning, and welcome to Telefonica's first quarter results conference call. With me today are Laura Abasolo, Markus Haas, Lutz Schuler 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 a solid start to the year with accelerating revenue and EBITDA growth momentum. Our performance demonstrates the continued strength of our operating model and our strategic execution. Across our key markets, Commercial dynamics remained favorable. In Spain, we saw further improvement in EBITDA as our growth and efficiency efforts continue to bear fruit. Meanwhile, our operations in Brazil and Germany sustained consistent profitable growth, reaffirming the solid fundamentals and our execution in these important markets.
Notably, we achieved record low churn levels in both Spain and Brazil, reflecting our superior value proposition and helping maintain robust commercial momentum across the business. In Germany, contract churn stands at a remarkable 1%. On the network front, we are deploying fiber and 5G as per our plans. We continued to invest significantly in next-generation networks to support best customer experience, helping maintain commercial momentum. In Spain, we are on the verge of a significant milestone by nearing the completion of the copper network switch off. We will be the first European Union operator to do so. We are making good progress and we remain confident in achieving our financial outlook for the full year 2024. And in addition, we see near-term catalysts and positive opportunities in all our core markets.
In Spain, we have already signed an MOU for a new long-term mobile network agreement with DiGi, which we expect to complete in a few weeks. In Brazil, negotiations are underway to potentially migrate to an authorization regime. In Germany, spectrum extension is the expected scenario. And in the U.K., fiber build is accelerating as projected, NetCo receives strong interest from infra investors. Going into greater detail on slide 3, we continue building a stronger Telefonica. We accelerated the rollout of our fixed infrastructure, passing an additional 9 million premises with fiber to the home in the last 12 months. Telefonica Infra played a key role here, contributing around 7 million of these new premises. Our 5G coverage continues to progress rapidly with coverage now extending to 63% of the population across our core markets with Spain and Germany above 90%.
Our customers remain at the center of our transformation journey. By evolving a long winter needs through AI power tools and over 650 use cases, we are reshaping our revenue mix towards higher value, digital services, and connectivity solutions. This customer-centric approach is paying off with a group Net Promoter Score of 31. Wider and better networks allow us to continue expanding our global customer base. We ended Q1 with 388 million total accesses, adding 0.5 million new customers. Simplifying our operations and corporate structure is another integral part of our transformation. We successfully concluded the delisting process for Telefónica Deutschland achieving an ownership stake of nearly 97% to enable full operational integration going forward.
Profitable growth remains our key priority. The workforce restructuring program in Spain now complete will start yielding further cost savings from Q2 onwards, fueling higher EBITDA growth in Spain. In parallel, we continue the nationwide switch off of our legacy copper network with more than 4,000 central offices now closed since 2014. This is a process that is almost completed and another source of past and future efficiencies. In summary, our strategic initiatives around building next-generation networks, putting customers first and creating leaner future feed operations are bearing fruit. This bodes well for delivering on our growth profitability and sustainability ambitions. Moving to slide 4. We show how all of this translates into tangible financial results.
Growth. Our commercial momentum is underpinned by high-quality customer additions across our fiber and mobile accesses. This allowed us to accelerate our top line growth to 0.9% year-over-year, increasing by 1.4 percentage points sequentially from the fourth quarter. Revenue growth was fueled by robust service revenue performance as well as our market-leading B2B segment, which typically sees further uplift in the coming quarters due to seasonality. Profitability. Importantly this healthy top line expansion drove profitable growth with our EBITDA rising 1.9% year-over-year. We continued enhancing our operating leverage through diligent cost management initiatives mentioned previously. This future cycle of growth and efficiency flows through to operating cash flow.
Our EBITDA minus CapEx margin remained stable year-on-year supported by our ongoing capital expenditure discipline with CapEx over revenue ratio of just 10.4% for the quarter. Sustainability. Under the new free cash flow definition, our Q1 performance was growing year-on-year once adjusted for a €75 million positive nonrecurring received in Brazil working capital in Q1 2023. As anticipated, Q1 free cash flow is seasonally the lowest but we expect it to ramp up through the remainder of 2024 to achieve our full year guidance. Laura will provide more details on this later. Our growth and profitability factors reinforce the sustainability of our financial model and we remain fully focused on our commitment to enhance ESG standards across the organization.
Our Spanish operations, which we review on slide 5, again, showed a solid commercial performance during this quarter. We grew the main accesses, and now for three quarters in a row have been adding customers in all segments. In fact, during the last nine months, we have turned around customer losses in conversions and Pay TV. In the latter case, we went from 130,000 customers lost in the prior nine months to positive net adds of 16,000 in the last three quarters. In convergence, we posted net adds, thanks to an all-time low churn rate of 0.9%. This within a quarter of tariff upgrades and returned to gross ads growth for the first time since the second quarter of 2021. All this resulted in growing revenue despite declining handset sales and wholesale and improving EBITDA growth.
While we still saw limited contribution from the redundancy program savings, we expect to see further positive impact from this initiative starting in Q2. Accordingly, you should expect Q1 EBITDA growth to be the lowest in the year. Finally, and as a proof of the superior quality of our nationwide network infrastructure and confirming the confidence partners have in our ability to provide high-quality services over such infrastructure, we can confirm that we have made very substantial progress through the negotiation of a new long-term network agreement with DiGi. We have already signed a non-binding MOU with DiGi, under which terms and conditions are agreed in principle. We expect to conclude this agreement, subject to definitive, final long-form documentation in the next few weeks.
Brazil, on Slide 6, maintains its very strong performance in all lines. A rational marketplace allows for sustained growth in accesses 12% more fiber-to-the-home customers and ARPU where we continue growing our digital ecosystem and OTT subscriptions raised 14% year-on-year. With outstanding results in mobile contract where we simultaneously show double-digit growth in ARPU and our lowest churn rate ever at below 1%. Accordingly, our revenue grew well above inflation with service revenue growth in the quarter of more than 10%. As for EBITDA growth, once again, OpEx growth remained below top line growth. Despite rising costs in digital services, resulting in double-digit EBITDA increase year-on-year. Operating cash flow also continues to expand nearing an 18% EBITDA minus CapEx margin.
Our German operations saw a solid start into the year, as shown on Slide 7, supported by executing well on the accelerated growth and efficiency plan with front-loaded efficiencies and growth in outer years contributing to GBS strategy. Our core business continued to perform strongly, adding more than 150,000 in the quarter, leveraging on improved 5G coverage within a quarter of repricing action resulted into ARPU growth year-on-year. Hence, solid mobile service revenue momentum with above 2% growth was temporarily offset by decline in handset sales on a tough comparison base effect. Nevertheless, this flattish top line growth translated into a 5% EBITDA growth, showing improved operating leverage. In fact, the retail minus CapEx grew more than 14% year-on-year with more than 1 percentage point improvement in margin.
Moving to Slide 8 to review our U.K. JV VMO2. The growth of the U.K. telco market remains subdued, but we have been able to show improved service revenue growth across both mobile and consumer fixed with ARPU stabilization for the latter and low levels of churn in mobile contract. Furthermore, and despite short-term pressures, we remain committed and we continue deploying fiber with field base up 80% year-on-year in the quarter. Telefonica Tech on Slide 9, again showed strong double-digit growth in sales. Usual business seasonality and phasing means year-on-year growth will accelerate throughout the year, supported in addition by a strong backlog with bookings showing growth higher than 30% during the first quarter of the year. Bookings growth was driven by the private sector, with large contracts awarded in the financial, health care and manufacturing sectors.
Growth is also coming in a more balanced way with increased contribution from higher value-added services and a better currency mix. We continue to gain relevance in higher growth markets, a performance that continues to be recognized by industry leaders. Telefonica Infra remains a key driver for our improved CapEx intensity with adding coverage that results into revenue growth. The FTTH base accelerates as much as 60% from last year contributing to increased network differentiation and capabilities under optimal investment models. In parallel, Telxius, our best-in-class international connectivity infrastructure maintained a high profitability above 50% and is opening a new route connecting to the Dominican Republic. I will now hand over to Laura, who will guide you through brand performance, main financial topics and ESG.
Laura Abasolo: Thank you, Angel, and good morning, everyone. Before reviewing this quarter's financials and ESG performance, let's go through each brand performance. As shown on Slide 11, we continue taking steps towards a more rational environment. We are consistently delivering growth in accesses both in mobile contract and FTTH cable connections, leading the market with more than 17 million fiber-to-home premises passed. Back in 2021 and 2022, we set up neutral wholesale FTTH carriers in Chile and Colombia. In Chile, three years later, we have been able to incorporate first and dell and now ClaroVTR, fostering a more rational environment and a boiling overlap. This together with a cooling down approach in terms of commercial activity seems to be finally translated into healthier competition in which we are starting to see early signs.
In the meantime, we remain focused on cash generation and the Q1 financials so large hits both from FX and handset sales with stable underlying trends, we expect a marked improvement in the second half of the year. Moving on to free cash flow on Slide 12, we think it's important to provide some context, even we have now moved to the new stricter free cash flow definition. In the first quarter free cash flow came in at minus €41 million, slightly below the minus €9 million during the same period last year on an apples-to-apples basis. However, this year-over-year comparison is impacted by one-time €75 million benefit related to the monetization of the tax asset in Brazil, which boosted our free cash flow in the first quarter of 2023. Excluding these non-recurring items as third quarter 2024 free cash flow could actually show an increase year-over-year of as much as €43 million.
This free cash flow seasonality in the opening quarter, is very much in line with our expectations and what we have said during our fourth quarter call, we expect free cash flow to ramp up as we progress through 2024 consistent with prior years. And most importantly, we remain fully on track to deliver our communicated target of more than 10% free cash flow growth for the full year. Moving to our capital structure on Slide 13, Telefonica maintains a robust balance sheet position to navigate any market environment. As of March 2024, our net financial debt stood at €28.5 billion, translating to a net debt-to-OIBDA ratio of 2.71 times. This anticipated increase from year-end 2023, was primarily driven by a strategic move to raise our stake in Telefonica Deutschland and to a lesser extent free cash flow seasonality in the first quarter.
Despite this temporary up-tick in leverage, we remain firmly on track to align with a outlining target range for 2026. We continue optimizing our debt stack and tapping diverse funding sources. We maintain ample liquidity covering debt maturities, through 2026. Furthermore, over 80% of our debt is insulated for rising rates by being long-dated fixed rate and primarily euro denominated. Our proactive liability management has partly reduced the average cost of debt to 3.51% through timely refinancing exercises, allowing immunization to, raise in rates environment. We have demonstrated our excellent market execution this year have been active in the capital markets raising €3.2 billion long-term financing at the group, mainly through a €1.75 billion Dual Transgene green bond and in new green hybrid amounting to €1.1 billion, reinforcing our position as one of the leading issuers of ESG capital market financing in the International Telco Sector.
Ultimately, we are managing our balance sheet to fuel our capital allocation priorities. We remain focused on investing for sustainable growth, putting our Board in a great position to pay the dividend with €0.30 per share as a floor, steadily deleveraging towards our target range of 2.2 times to 2.5 times net debt to EBITDAaL by 2026 and evaluating all opportunities including share buybacks to create shareholder value with any excess cash. We believe that by progressing across the pillars of ESG, we can advance our GPS agenda. On the environmental side, we are seeing growth opportunities via our EcoSmart portfolio which has been recently recognized by the ITU. We are also working to review Scope 3 emission and as a result CDP has included us in the Supplier Engagement Leaderboard for the fifth consecutive year.
On the social side, we see the importance of diversity in attracting and retaining talent and our progress is evidenced by our results. Since last year we have 858 additional people with disabilities working with us and a third of our executives are women. Finally, with regards to governance, All Board of Directors propose solutions were approved at the AGM and the issuance of the two-tranche senior green bond and green hybrid this quarter reaffirms our commitment to sustainable financing. I will now hand back to Angel, who will, wrap up.
Angel Vila: Thank you, Laura. Moving to slide 15. We are well on track to achieve our 2024 guidance. We had a solid start to the year, delivering accelerating revenue and EBITDA growth in Q1. Looking ahead we expect the EBITDAaL minus CapEx to resume its upward trajectory from Q2 onwards. This will be driven by two main factors; realizing the full benefits of cost savings from the Spanish workforce program and moving past the big impact from lease inflation and accelerated 5G deployment that impacted Q1. Consistent with prior years our free cash flow generation is back-end loaded. And as such we anticipate acceleration over the remaining three quarters of 2024 and we are confident in our full year guidance. This will translate into a resumption of our deleveraging trajectory.
After the anticipated Q1 uptick, we expect both net debt levels and leverage ratios to resume the declining path, keeping us firmly on track towards our 2026 targets. Importantly this free cash flow growth allows us to more than cover our dividend. Overall, our Q1 performance reinforces our confidence in delivering our full year guidance across the board. To summarize on slide 16, Telefonica's first quarter 2024 performance demonstrated solid execution as we continue delivering against our strategic road map. We reported a solid set of results to start the year, keeping us firmly on track to achieve our full year 2024 guidance across all key metrics, as well as our overarching GPS plan targeting more than 10% free cash flow growth CAGR between 2023 and 2026.
Across our core markets, we witnessed robust operational trends starting with an altered good commercial momentum. Our growth and efficiency efforts in Spain drove an EBITDA recovery while Brazil and Germany maintained consistent profitability growth. Our strategic investments in fiber and 5G infrastructure elevate Telefonica's customer experience proposition further, positioning us for continued commercial momentum and top line expansion. In parallel, we continue to streamline our operations by digitally transforming processes, optimizing our workforce and shutting down legacy networks. Our capital allocation priorities remain firmly focused on deleveraging towards our target ranges, sustaining our dividend by growing free cash flows and investing in focused growth areas.
And finally we see positive near-term opportunities ahead in all our core markets as mentioned at the beginning of the presentation, including a mobile network MOU agreement within Spain, potential change in regime to authorization in Brazil, expected extension of spectrum in Germany, and in the UK whilst fiber build and NetCo about progress, interest from infra investors is mounting. Thank you very much for listening. We are now ready to take your questions.
Operator: Thank you. [Operator Instructions]
Adrian Zunzunegui: Excuse me, operator and all audience, I mean we will take the usual two questions per participant as always. Thanks.
Operator: The first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.
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