Telefonica S.A. — Investor Presentation 2020

Oct 29, 2020

Results

January - September 2020

Disclaimer

This document and any related conference call or webcast (including any related Q&A session) may contain forward-looking statements and information (hereinafter, the "Statements") relating to the Telefónica Group (hereinafter, the "Company" or "Telefónica"). These Statements may include financial forecasts and estimates or statements regarding plans, objectives and expectations regarding matters, such as the customer base and its evolution, growth of the different business lines and of the global business, market share, possible acquisitions, divestitures or other transactions, the Company's results and other aspects related to the activity and situation of the Company.

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Highlights

Mr. Ángel Vilá COO

Q3 2020 in a nutshell

• Q3 improving trends from Q2

• ‒ Strong commercial activity across the board
• ‒ Spain showing recovery trends and solid commercial performance
• ‒ Germany outperforming the market, once reduced the quality gap
• ‒ Progressing on the regulatory approval for the National Connectivity Champion in UK
• ‒ Brazil multi-year record high in commercial activity, FCF generation growing at double digit in € (>50% in BRL)
• ‒ Sequential improvement in spite of COVID-19 and FX headwinds
• Advancing on technological leadership in infrastructure (5G launched in 4 core markets/fibre expansion) and digitalisation
• Accelerating the carve-out of high growth Tech vehicles
• Strong FCF generation €1.6bn in Q3 (+13.2% y-o-y, €0.30/share. In 9M 20 €2.8bn; €0.53/share)
• Net debt reduced to €36.7bn; liquidity risen to €22.4bn; net debt maturities reduced to €1.9bn for 2020-2022
• Proposing cancellation of 1.5% of treasury stock

Progress against our 5 strategic pillars during Q3 2020

		✓ Strong recovery of operating trends; reinforcing market position
	Focus on our four core markets:	✓ SPAIN: Launch of 5G with ambition to reach 75% nationwide coverage by year-end; sound recovery in commercial activity with controlled churn and margin expansion; Infrastructure leader, +795k premises passed with FTTH in Q3 to 24.4m
1	• Spain • UK	✓ GERMANY: Early extension of agreement with DT (10-year wholesale agreement, which includes FTTH); (1st tranche execution) Launched 5G in the largest German cities; 6k towers transferred to Telxius
	• Germany • Brazil	✓ UK: Progress in in-market convergent consolidation, O2/VMED formally requested regulatory approval and £5.7bn recapitalisation process was completed; customer base growth in every segment
		✓ BRAZIL: progress in in-market consolidation via joint offer for Oi ("preferred bidder" status achieved); 5G launched in 8 cities; FTTH leadership, +1.5m homes passed in Q3 to reach 14.6m
2	Reduce exposure to Hispam	✓ Filed for regulatory approval of Costa Rican business sale to LLA ✓ Portfolio review underway; spin-off and inorganic alternatives
3	Launch T. Tech	✓ All 3 companies (Cyber, Cloud, IoT & Big Data) already incorporated and fully functional ✓ Acquisitions completed to enhance Cyber offering (Govertis –consultancy- / iHacklabs- professional training-)
4	Develop T. Infra	✓ Announced JV with Allianz in Germany to develop fibre in underserved areas ✓ tower portfolio through German deal (26.6k sites after 1st tranche; 33k sites full deal, Expanded Telxius including 2.4k BTS plan)
5	New operational model	✓ MoU signed with Rakuten to cooperate on a shared vision to advance OpenRAN, 5G Core and OSS ✓ Restructuring costs re-skilling, tangible savings on digitalisation and focus on fostering agility ✓ Growing cash generation capacity; Q3 OIBDA-CapEx margin +0.7 p.p. y-o-y organic

Revenue performance

9M 2020 y-o-y

• ✓ -3.9 p.p. impact of COVID-19
• ✓ -2.5% organic in our 4 core markets

Q3 2020 y-o-y

• ✓ Improving from -5.6% organic in Q2.
• ✓ -4.9 p.p. impact of COVID-19
• ✓ -3.9% organic in our 4 core markets

OIBDA performance

9M 2020 y-o-y

• ✓ -5.2 p.p. impact of COVID-19
• ✓ -3.1% organic in our 4 core markets

Focus on incremental cost efficiencies

Q3 2020 y-o-y

• ✓ Improving from -10.0% organic in Q2
• ✓ -6.8 p.p. y-o-y impact of COVID-19
• ✓ -3.3% organic in our 4 core markets

Group OIBDA

Q3 y-o-y -8.3% y-o-y organic; +175 bps vs. Q2

Strong cash flow generation; robust operating leverage

Financial update

	9M 2020			Q3 2020
€ in millions	Reported	Reported y-o-y	Organic y-o-y	Organic y-o-y aggregated 4 core markets	Reported	Reported y-o-y	Organic y-o-y	Organic y-o-y aggregated 4 core markets
Revenues	32,167	(10.7%)	(3.7%)	(2.5%)	10,461	(12.1%)	(4.3%)	(3.9%)
OIBDA	9,747	(14.9%)	(6.7%)	(3.1%)	2,672	(2.8%)	(8.3%)	(3.3%)
OIBDA margin	30.3%	(1.5 p.p.)	(1.1 p.p.)	(0.2 p.p.)	25.5%	2.4 p.p.	(1.5 p.p.)	0.2 p.p.
OIBDA-CapEx (ex-spectrum)	5,680	(9.2%)	(1.8%)	3.4%	1,326	44.4%	(0.8%)	5.2%
OIBDA-CapEx / Revenues (ex-spectrum)	17.7%	0.3 p.p.	0.4 p.p.	1.4 p.p.	12.7%	5.0 p.p.	0.7 p.p.	2.1 p.p.
Net Income	671	(50.1%)			(160)	(63.9%)
Underlying Net Income	2,052	(20.7%)			734	(8.9%)
FCF (incl. leases principal payments)	2,801	(32.5%)			1,579	13.2%
Net Financial Debt ex- leases	36,676	(4.2%)

COVID-19 impacts (estimated and aprox.)	FX impacts
--------------------------------------------	------------

€ (m)	Q3	9M
Revenues	(591)	(1,397)
OIBDA	(315)	(687)

€ (m)	Q3	9M
Revenues	(959)	(2,135)
OIBDA	(358)	(806)

Argentina impairment
€ (m)	Q3	9M
OIBDA	(785)	(894)

Q3 19; €1.9bn restructuring costs (€1.7bn in Spain)

Improved revenue trends in Q3

Revenue in 4 core markets

Contribution to stable q-o-q performance from

• ✓ UK -1.1 p.p. y-o-y
• ✓ Brasil +0.8 p.p.
• ✓ Spain +0.3 p.p.
• ✓ Germany flat

Solid sequential improvement in OIBDA and OIBDA-CapEx

4 core markets OIBDA

y-o-y organic

Contribution to the 3.3 p.p. q-o-q improvement

• ✓ Spain +1.6 p.p.
• ✓ Germany +1.0 p.p.
• ✓ UK +0.6 p.p.
• ✓ Brazil +0.1 p.p.

4 core markets OIBDA-CapEx

Contribution to the 3.3 p.p. q-o-q improvement

• ✓ Germany +3.7 p.p.
• ✓ Brazil +1.9 p.p.
• ✓ UK +1.0 p.p.
• ✓ Spain -3.4 p.p.

OIBDA-CapEx margin expansion in Q3 y-o-y; improved cash conversion

• ✓ UK +2.6 p.p. to 19.5%
• ✓ Germany +2.0 p.p. to 17.4%
• ✓ Spain -0.4 p.p. to 29.7%

COVID-19 impacts | Steady improvement vs. Q2 2020

• Lower impact vs. Q2 20
• Significant impact of roaming
• B2C: Discounts/Promos; new business delays, mainly Hispam in Q3
• B2B: Discounts, deferred projects, lower demand from SMEs

OIBDA

• Significant cost cutting efforts; commercial expenses, improvement in bad debt q-o-q
• Deepening customer engagement; churn -0.3 p.p. y-o-y; NPS 23% (+3 p.p. y-o-y)
• Accelerated digitalisation; digital channel sales in our 4 core markets up +36% y-o-y
• Increasing demand for cloud & cyber services

Confirming FY 2020 dividend and outlook

Stable and sustainable dividend

Managing cost base and operational flexibility without jeopardising investment priorities

Financial targets (organic ex-contribution to growth from ARG)	2020E	9M	On track to meet 2020 outlook
OIBDA-CapEx	Slightly negative to flat	(1.8%)

Q3 2020 Results

Ms. Laura Abasolo CFCO

Spain | Sound recovery in commercial activity

Performance

• ✓ Best FBB net adds since Q3 18; more than 100k in fibre
• ✓ Proven competitive and segmented offering, focused on value
  • Growing Premium TV; M+ Lite higher churn (due to Q2 peak adds)
• ✓ Resilient convergent base (+17k net adds) in a competitive market
  • Sequential q-o-q ARPU improvement; improving churn
• ✓ Differentiation; quality network and new services
  • FTTH network (24.4m, 29% uptake), 5G switch on (75% cov. YE 20)

Growth across the board Convergent KPIs

Spain | Sequential improvement in revenue and OIBDA

Performance

• ✓ Revenue trend +0.9 p.p. q-o-q, despite tougher comps
  • Retail price upgrade in Q3 19
  • Wholesale impacted by roaming
• ✓ OIBDA +4.1 p.p., benefitting among others from efficiencies in content costs
• ✓ Cash conversion benchmark
  • CapEx reactivation; in line with trading
  • OIBDA-CapEx/Revenue at record high levels

CapEx/Revenues

y-o-y organic

Strong Cash generation

Germany |Solid commercial performance and financials

Q3 trading dynamics driven by O² brand Key milestones

Accesses (m, net adds)

• ✓ Core business momentum intact; OIBDA back to growth
• ✓ COVID impacts (-1.6 p.p. revenue; -3.9 p.p. OIBDA) on travel restrictions
• ✓ CapEx back-end loaded deployment due to COVID-19
• ✓ 5G network active in 15 cities

Key financials

OIBDA-CapEx margin improvement

OIBDA-CapEx/Revenues

UK | #1 network in the UK

Performance

• ✓ Customer base growth in every segment
• ✓ Enhanced focus on direct distribution proving a value accretive move
• ✓ Revenue trend affected by roaming, handset release delay, increase in direct trading and SMIP
• ✓ CapEx focus on areas of growth and customer experience
• ✓ Market Leading NPS

Brazil | Significantly improved performance across the board

Growing value accesses, improved mix

Reinforced leadership

• ✓ Record mobile market share (33.3%)
• ✓ Strong recovery in all growth segments:
  • Highest level of prepaid net adds in 8 years
  • Record level of FTTH connections
  • Lowest contract churn (1.2%) in 5 years
• ✓ Continued digitalisation boosting OIBDA margin
• ✓ Growth CapEx 70% of total (fibre +20.3%; legacy -53% y-o-y)
• ✓ FCF grows 50% y-o-y in 9M (mid-to-high teens growth in €)

Key financials

Profitability and cash generation

Infra| Expanding Telxius' towers portfolio

Revenues, OIBDA & Profitability: Telxius

• Accelerated revenue growth in Tower due to higher colocation revenue and acquisitions

• Contract extensions in Cable (Net FCV \$324m) with negative impact in the short-term

Tenants

Revenues & OIBDA: Tower business

(1) Ex-capacity sale in H1 19 in Cable (Marea)

(2) Excluding M&A CapEx from inorganic operations (acquisition of towers in Brazil, Peru and Germany, DAS and real estate)

Tech| Essential services driving growth

IoT & Big Data

• 22.9M IoT lines (+8% y-o-y); revenue growth despite lockdown

Hispam | Marked commercial recovery

Above pre-COVID-19 levels

Substantial q-o-q improvement in Q3

• ✓ Accelerating fibre connections
  • Progressing in the process of creating a vehicle to deploy FTTH
  • Progressing co-investments deal with ATC & ATP in region
• ✓ MEX: Contract accesses +5%; OpCF +133%; benefits of new model
• ✓ Recovery in revenues vs Q2 20

Key Financials

✓ OIBDA y-o-y significantly impacted by temporary duplicate network costs in MEX. Larger savings expected from 2021.

Fixed Net additions (k) FTTH IPTV

FX headwinds | Neutralised at FCF level

Structurally neutralised; effective hedging strategy

Impacts on main metrics 9M 20 currency effect

OIBDA CapEx Taxes

Interest + Others FCF

Net debt

Debt | Ongoing debt reduction

Strong liquidity position coupled with smoother maturity profile and lower financial payments

Sources of long-term financing (2020 YTD)

Liquidity position

Average Debt Life and Interest payment costs

1

Conclusion

Mr. Ángel Vilá COO

Fully committed to ESG excellence

DIGITALISATION:

Greening the economy through telecom networks

1. We will reduce our GHG emissions aligned with 1.5º scenario and compensate the remaining emissions

• ✓ Efficient network transformation ✓ Renewable electricity
• ✓ Carbon capture

2. Telefónica's B2B customers in Spain avoided more GHG emissions through our digital services during 3 months COVID-19:

2.2m CO2 tons avoided in 3 months

AWARDS INDEXES

1. Telefónica was awarded the 'Sustainable Procurement Award' at the Amazon Business Exchange Awards for promoting sustainability in its supply chain

2. Telefónica is one of the top 25 more diverse and inclusive companies in the world, according to Refinitiv

• ✓ Ranking verifies over 450 environmental, social and governance metrics for more than 9k listed companies
• ✓ 24 diversity and inclusion metrics assessed (diversity, inclusion, personal development and disputes)

1. Revalidated our presence in the FTSE4good sustainability Index

Improved Score to 4.3 (exceeding sector average)

2. Joined Moody's Euronext Vigeo-Eiris Europe 120, recognising Telefónica's sustainability strategy

Wrap-up | Sustainable long-term business strategy

• Ongoing support to all stakeholders and economic recovery post COVID-19
• Proven resilience in the face of COVID-19, FX depreciation and GDP contraction
  • ‒ Improved trading dynamics and financial trends, continuing to invest in strategic growth areas

• Strong execution across strategic priorities

• ‒ Further market focus across our 4 core markets; improved churn, NPS, advancing in consolidation
• ‒ Network reliability; 5G launched in Germany, Brazil, Spain; Open RAN cooperation with Rakuten
• ‒ Strengthened capabilities in T. Tech, Telxius completed first tranche of towers deal, FibreCo in Germany
• ‒ Generating cost savings through restructuring, simplification, higher digitalisation and reskilling

• Proactive balance sheet management; net debt reduced

• ‒ Ongoing portfolio review, monetisation of assets, scrip dividend
• ‒ Proactive refinancing policy executed YTD; €22.4Bn liquidity, almost 11yrs of avg. debt maturity; historical minimal refinancing needs

• 2020 OIBDA-CapEx outlook and dividend (0.4€/sh.) confirmed

Results presentation and Q&A Session

The management will host a webcast to discuss the results on 29th October at 11:30am (CET), 10:30am (BST), 06:30am (EST)

Participants from Telefónica: Ángel Vilá (COO), Laura Abasolo (CFCO), and Pablo Eguirón (Global Head of IR).

• To access the webcast: click here
• The webcast recording will be available on Telefónica IR's website after the event

Webcast Q&A Session

• To participate in the Q&A session, join the call using the following link (available 15 minutes before the call): click here
• No need to dial in(1)

(1) From any device, click the link above, then simply enter your details and phone number and the system will call you back If you have further questions, please contact the Investor Relations team at ir@telefonica.com or +34 914 828 700

For further information, please contact: Investor Relations Pablo Eguirón (pablo.eguiron@telefonica.com) Isabel Beltrán (i.beltran@telefonica.com) Adrián Zunzunegui (adrian.zunzunegui@telefonica.com) Tel. +34 91 482 87 00 ir@telefonica.com www.telefonica.com/investors

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