STRATEGY, TARGETS AND GROWTH DRIVERS

Comments of José María Álvarez-Pallete, Chairman and Chief Executive Officer:

"The COVID-19 crisis has deeply affected the societies in which we operate. Telefónica's mission to “make our world more human by connecting people's lives" has become more relevant than ever. In an extraordinary and totally unexpected situation, telecommunication networks have become essential.

Our priority during this social emergency has been people: protecting the health of our teams – with 95% of the workforce teleworking - while ensuring connectivity for customers, businesses, public administrations and ultimately for society. I would like to thank the enormous effort and commitment of our employees. It's hard to imagine this situation without connectivity. Over the past few weeks, our teams have worked closely with the health authorities and social partners to provide a responsible response to all our stakeholders. We will continue to support our suppliers and the communities we serve in this unprecedented crisis.

Telefonica is not immune to this crisis, but it is resilient. The crisis has had a limited impact on our first quarter financial results. Our four key markets have performed well in a unique and challenging environment. Lower revenues from roaming, prepaid and business customers were partially compensated by lower commercial costs and lower customer churn.

It is too soon to assess the extent of the effects of the pandemic, but we have several levers to mitigate potential negative impacts. We will continue managing investments and costs, focusing on operating cash flow stability. We also have a solid balance sheet and a strong cash position. Moreover, the resilience and flexibility of our business model and the strength of our company, allow us to maintain an attractive dividend for our shareholders, of €0.40 per share. Also, we continue to work on our five strategic decisions announced at the end of 2019, to make our company even more resilient in the future. All this, in combination with the corporate operations already announced or in process, allows us to handle the uncertainty from a position of strength.

This crisis will irreversibly accelerate the rate of digitalisation in our society. Our analogue and digital lives are becoming one. The world has already changed and will never be the same again. In this new world, Telefónica will play a key role as a catalyst for this digitalisation".

 

GUIDANCE

Due to the significant changes in the guidance scenario and context; and the current level of uncertainty, 2020 financial guidance is withdrawn. Nevertheless, the company will closely monitor the evolution of our businesses and will manage CapEx and OpEx accordingly to focus on OIBDA-CapEx stability. In the current context the outlook for 20201 OIBDA-CapEx is to be slightly negative to flat year-on-year in organic terms. As for the mid-term, 2022 guidance1 of Revenue growth and 2 percentage points improvement in (OIBDA-CapEx)/Revenues is reiterated.

Confidence in our business flexibility to weather current environment, coupled with a solid liquidity position and the expected resiliency of business performance, allow us to confirm the announced €0.40 dividend for 2020. The proposal to the AGM is that the payment for the second tranche of 2019 dividend (€0.2, to be paid in June 2020) and the first tranche of 2020 (€0.2 to be paid in December 2020) will be done through voluntary scrip dividend. Second tranche of 2020 dividend (€0.2) will be paid in June 20212.

 

1 2019-2022 guidance and 2020 ambition:

  • Assumes constant exchange rates of 2019 (average in 2019).
  • Excludes the contribution to growth from T. Argentina and T. Venezuela.
  • Excludes the results from Central America's operations.
  • Considers constant perimeter of consolidation.
  • Does not include write-offs, capital gains/losses from the sale of companies and asset sales (material), material non-recurring impacts and restructuring costs.
  • CapEx excludes investments in spectrum.
  • Both 2019-2022 guidance and 2020 ambition include UK business consolidated by global integration.

2019 adjusted bases: Revenues (€47,875m), OIBDA (€16,762m), OIBDA-CapEx (€9,526m) and (OIBDA-CapEx)/Revenues (19.9%).

  • Considers average exchange rates in 2019 with the exception of Venezuela and Argentina (exchange rate of the end of the period). Excludes T. Centroamérica. Considers constant perimeter of consolidation. Excludes: write-offs, capital gains/losses from the sale of companies and asset sales (material), material non-recurring impacts and restructuring costs. CapEx excludes investments in spectrum.

2 The adoption of the corresponding corporate resolutions will be proposed in due course, announcing the specific payment dates.

 

TREND EVOLUTION

In the context of our industry, we operate in a highly dynamic sector with sustained growth and the forecast is that 'Industry 4.0' will generate billions of euros in value, unstoppable progress and increasingly intelligent societies thanks to:

Tendencias
  • An unprecedented accumulation of technology that changes the way we do things (the so-called ‘smart spaces’).
  • Everything and everyone are connected, or even hyper-connected (cars, cities, people, …)
  • Exponential growth of digital data describing what things and people are and do. New technologies such as cognitive and artificial intelligence to predict their behaviour.

At the same time, inequality in the world is increasing, the demographic, labour and environmental challenges are multiplying and there is growing concern about fake news and privacy, etc. For the first time in ten years, the top five global risks in terms of probability of occurrence have to do with the environment. They are followed by fraud, data theft and cyberattacks (Source: Global Risks 2020 - World Economic Forum).

The digital revolution is at the root of some of these challenges and involves major ethical dilemmas that demand unavoidable responsibility for the sector. At the same time, new technologies can help solve problems that have so far remained unanswered and ensure fair, inclusive progress. These societies must be able to address the above-mentioned economic, social and environmental challenges and, to do so, people turn to enterprise.

This requires an evolution of the current models towards "stakeholder capitalism" in which the purpose of businesses is to engage a central, cross-functional approach focused on collaboration with all stakeholders to create shared and sustained value as outlined in the Davos 2020 manifesto (Source: Davos 2020 Manifesto: The Universal Purpose of Business in the Fourth Industrial Revolution) in the framework of Industry 4.0.

Tendencias

As universal providers of connectivity and technology, telecommunications companies are called upon to play a key role in this revolution. We will have to complete a metamorphosis towards new generation networks with a change to fibre in their fixed networks and the evolution to 5G in their mobile networks, at a time when the sector is also subject to stiff competition As a result, we are at a moment in time when our industry’s status quo is changing at an increasingly rapid pace; this brings with it the challenge to find new models that adapt to the new rules of the game.