Telefónica, S.A.

Q2 2011 Earnings Call

July 28, 2011 10:00 am ET


María García-Legaz - Head, IR

Santiago Fernández Valbuena - CSO

Julio Linares - COO

Guillermo Ansaldo - Head, Telefónica España

José María Alvarez-Pallete - Head, Telefónica Latin America

Matthew Key - Head, Telefónica Europe

Miguel Escrig - CFO


Tim Boddy - Goldman Sachs

Fabián Lares - JB Capital Markets

Jesús Romero - Merrill Lynch

Georgios Ierodiaconou - Citi

Luis Prota - Morgan Stanley

Torsten Achtmann - JPMorgan

Matthew Robilliard - Exane BNP Paribas

Ivón Leal - BBVA

John Keith - Stanford Bernstein

Jonathan Dann - Barclays Capital

Stanley Martínez - Legal & General Investment


María García-Legaz

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Good afternoon, ladies and gentlemen, and welcome to Telefónica's conference call to discuss January-June 2011 results. I am María García-Legaz, Head of Investor Relations. Before proceeding, let me mention that this document contains financial information that has been prepared under international financial reporting standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website.

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 Telefónica's Investor Relations team in Madrid by dialing the following telephone number, +34-91-482-8700.

Now, let me turn the call over to our Chief Strategy Officer, Mr. Santiago Fernández Valbuena, who will be leading this conference call.

Santiago Fernández Valbuena

Thank you, María, and good afternoon, ladies and gentlemen. And thank you for attending Telefónica's 2011 first half results conference call. Today I have here with me Julio Linares, Chief Operating Officer; Guillermo Ansaldo; Head of Telefónica España; José María Alvarez-Pallete, Head of Telefónica Latin America; Matthew Key, Head of Telefónica Europe; and Miguel Escrig, our Chief Financial Officer. During the Q&A session you will have the opportunity to ask questions directly to any of them.

Telefónica has released today a set of strong earnings, despite economic challenges and headwinds from regulation. First half business trends are consistent with 2011 targets and therefore we confirm our full year guidance. We have posted strong topline growth, driven by the robust performance at Telefónica Latin America, excluding Mexico and solid mobile data growth.

We continued to deliver benchmark profitability, expanding margins quarter-on-quarter, and limiting OIBDA year-on-year decline in Spain to levels similar to those of the first quarter. Latin America already accounts for over 45% of consolidated figures, from revenue to operating cash flow, driven by the stellar performance of Brazil. And that shows the benefits of our high diversification.

I would also like to highlight the significant progress made in several areas, since our last call in May, which proves Telefónica's strong execution skills. We have reached a new social agreement with the unions in Spain. We are announcing higher than anticipated integration synergies in Brazil. And we have launched our Partnership Program, which proves scale is a differential in valuable asset. All these initiatives will have a positive impact in cash generation. And finally, let me stress that we fully reaffirm our dividend commitments.

Looking at financials, and starting with a summary on the P&L, please go to Slide 3. Reported year-on-year growth rates were positively impacted by the full consolidation of Vivo since October 2010. Revenue increased 6.3% year-on-year in nominal terms to almost €31 billion, and grew by close to 1% purely organic.

Six months OIBDA topped €11 billion, up close to 4% in reported terms, and declining around 2% in organic terms. Profitability remained robust, with OIBDA margin up sequentially to 36.6% in the first half and limited year-on-year erosion. As a proxy to cash flow generation, operating cash flow ended close to €7.5 billion, which is equivalent to a 6% organic decline compared to 2010 first half figure.

Our first half net income exceeded the €3 billion mark, with second quarter profit negatively impacted by Telco's revision of the value of its stake in Telecom Italia, which reduced net income by €353 million. Please notice that this is a non-cash item.

In addition, cumulative D&A grew at double digit, driven by the full consolidation of Vivo and the amortization of Vivo's purchase price allocation, leading to a 9% year-on-year increase in total PPAs. Profit attributable to minority interests continues to drag net profit as a result of the change of consolidation of Vivo, and higher earnings from this company. All things considered, EPS stood at €0.70, but stripping out the impact from purchase price allocation and the revision of value of Telco's stake in TI, EPS would reached €0.88.

Slide number 5, shows the results from our value over volume commercial strategy, being mobile contract and mobile data our key focused areas. Our total access base grew 6% year-on-year to €295 million. With superior growth in the mobile contract segment, which already represents more than 30% of our mobile customer base.

Contract net adds were strong across regions, accounting for 47% of mobile net adds in the first half, and over 100% at Telefónica España and Telefónica Europe. At the same time, demand for smartphones and other data devices continued to be strong, driving up mobile broadband penetration across all markets. By region, mobile broadband penetration reached 28% in Europe and 23% in Spain, while the still low figure for Latin America shows the huge opportunity going forward.

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