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Telefónica, S.A. (TEF)

H1 2012 Earnings Call

July 26, 2012 8:00 am ET


María García-Legaz Ponce - Head of Investor Relations

Cesareo Alierta Izuel - Executive Chairman, Chief Executive Officer and Chairman of Executive Commission

Ángel Vilá Boix - General Manager of Finance and Corporate Development

Julio Linares Lopez - Chief Operating Officer, Executive Director, Member of Innovation Committee and Member of Executive Commission

Santiago Fernandez Valbuena - Chairman of Telefónica Latinoamérica and Director of Telefónica Latinoamérica

Guillermo Ansaldo Lutz - General Manager of Global Resources


Torsten Achtmann - JP Morgan Chase & Co, Research Division

Luigi Minerva - HSBC, Research Division

Georgios Ierodiaconou - Citigroup Inc, Research Division

Mathieu Robilliard - Exane BNP Paribas, Research Division

Timothy Boddy - Goldman Sachs Group Inc., Research Division

Will Milner - Arete Research Services LLP

Sean Johnstone

Paul Marsch - Berenberg Bank, Research Division

James Ratzer - New Street Research LLP

James McKenzie

Luis Prota - Morgan Stanley, Research Division

Frederic Boulan - Nomura Securities Co. Ltd., Research Division

Jonathan Dann - Barclays Capital, Research Division

Stanley Martinez

Jeremy A. Dellis - Jefferies & Company, Inc., Research Division



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Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January-June 2012 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Ms. María García-Legaz, Head of Investor Relations. Please go ahead, madam.

María García-Legaz Ponce

Good afternoon, ladies and gentlemen, and welcome to Telefónica's conference call to discuss January-June 2012 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. These 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 and market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica Investor Relations team in Madrid by dialing the following telephone number, +34-91-482-8700.

Now, let me turn the call over to our Chairman and CEO, Mr. César Alierta, who will be leading this conference call.

Cesareo Alierta Izuel

Thank you, María. Good morning to everybody. As you can see, our second quarter results saw a significant improvement quarter-on-quarter. We delivered the performance across all the metrics from OIBDA to net income in underlying terms. OIBDA in absolute level rose on a quarterly basis, and profitability enhanced sequentially, with quarter-on-quarter growth across the board. This result today show the benefit of our diversification or key strengths to face very different realities, with a positive revenue growth on the part of further commercial push and a very solid evolution in Latin America. On top of that, we have been taking broad actions to improve market dynamics and enhance our business model through efficiency gains, like the removal of fast handset subsidies in Spain and the gradual reduction in the U.K., and the network sharing agreement reached in U.K. and in Mexico. In addition, the recent news of our regulation in Europe, points to a drastic change in the way this telco industry has been regulated in recent years and had very, very positive signal for the sector as a whole.

On the financial side, we have taken decisive actions to improve the balance sheet and diffuse potential risk, including an exceptional use demand of remuneration policy, which allow us to have a full year refinance maturity behind the end of 2013. We are managing productively our portfolio of assets, with visible results year-to-date. And we have decided next actions, including preparation for an IPO of Telefónica Germany in the fourth quarter. And we continue making significant progress to enhance our growth profile and capture the significant growth opportunities arising in the digital space.

Let me now review, with more detail, our first half performance starting with the summary of the key financials on Slide #4. In the first half of both 2012 and 2011, we look at several significant exceptional items. So to better understand the underlying performance of the company, we are providing a P&L, excluding those nonrecurring effects and noncash impacts.

January-June revenue grew 0.3 year-on-year to reach almost EUR 31 billion euros, while underlying OIBDA to EUR 15 billion, with a better performance in the second quarter. OIBDA-CapEx operating cash flow gained close to EUR 7 billion. Underlying net income was over EUR 2.8 billion and earnings per share is EUR 0.62 in the first half. Let me mention that those metrics significantly improved the year-on-year performance in the second quarter. CapEx to sales was 12%.

The emerging highlight of the second quarter results is the quarter-on-quarter increase in OIBDA across the main ratios and key operations, as you can see clearly on the Slide #5. As a result, the consolidated OIBDA margin stood at 34.6 in the second quarter and expanded 180 basis points sequentially, leaving a significant lower year-on-year erosion versus the previous quarter. In my opinion, EBITDA reached the bottom in the first quarter of the year, and I want to underline that. It is my total condition that the OIBDA reached the bottom in the first quarter of this year. And improved trends will consolidate in the second half of the year. And I'd like to highlight the better performance in Spain, where OIBDA was up 3% versus the first quarter of the year.

Slide #6 outlines how we are finally enhancing our geographical diversification. We have increased our exposure to Latin America significantly in the last 12 months, represent [indiscernible] 50% of key financial metrics of our results, with significant contributions from the individual markets. And as you can see, we have not only highly diversified in terms of regions, but also in currency terms, with the risk exception that is totally decoupled with the fundamentals of our business. Our exposure to Southern Europe or even to the euro is well below the exposure of other European carriers, [indiscernible] are not in Spain. And importantly, our operating cash flow in Spain remains pretty stable quarter-on-quarter.

Our revenues' results in operating cash flow and clearly one with the March spread and diversified of the whole industry, and it's shown very clearly in this slide.

And we are not talking only about the diversification, but also about performing our business model for an additional telco, to a digital telco, where growth opportunities are very, very large.

Clearly, in the upcoming transformation or why they're part of the economy, including security, education, public administration, sales, financial service and other areas, that represent between 75% and 40% of GDP, within other several markets to products of up to 2%, which is nearly double the market today of the telco industry represent a tremendous opportunity, and I can assure you, Telefónica will not miss this huge opportunity.

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