Telefonica (TEF) Q2 2014 Results – Earnings Call Transcript

Telefonica, S.A. (NYSE:TEF)

Q2 2014 Earnings Conference Call

July 31, 2014 8:00 AM ET

Executives

Pablo Eguirón – Head, IR

Ángel Vilá – CFO and Corporate Development Officer

Analysts

Georgios Ierodiaconou – Citi

Giovanni Montalti – UBS

Akhil Dattani – JP Morgan

Paul Marsch – Berenberg Bank

Justin Funnell – Credit Suisse

Luis Prota – Morgan Stanley

Fabián Lares – JB Capital Markets

David Wright – Bank of America

Jean-Francois Paren – Credit Agricole

Jerry Dellis – Jefferies

Nick Brown – Goldman Sachs

Keval Khiroya – Deutsche Bank

Operator

Good day, ladies and gentlemen. Thank you for standing by and welcome to Telefonica’s January to June 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.

Pablo Eguirón

Good afternoon, and welcome to Telefonica’s conference call to discuss January-June 2014 results. I’m Pablo Eguirón, Head of Investor Relations.

And before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is valid [ph]. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties. 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 in 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 releases and the slides, contact Telefonica’s Investor Relations team in Madrid by dialing the following telephone number, 3(491)-482-8700.

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Now, let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.

Ángel Vilá

Thank you, Pablo. Good afternoon, and welcome to Telefonica’s first half 2014 results conference call. Today with me is Jose Maria Alvarez-Pallete, Chief Operating Officer. So during the Q&A session, you will have the opportunity to address to us any questions you may have.

Telefonica has released today a strong set of results based on the execution of the management priorities established for the year. First, the quarter evidenced a pickup in commercial activity with remarkable momentum in net add, especially Pay TV, mobile contract, smartphones and fiber. We are working on expanding customer value by reducing churn and improving ARPU.

Second, top line grew year-on-year for the fifth consecutive quarter boosted by Telefonica’s Hispanoamerica growing at double-digit and mobile data ongoing expansion.

Third, OIBDA was stable year-on-year. Financing increased their force in commercial expenses with cost savings from efficiencies. As such, OIBDA margins posted a limited decline year-on-year in organic terms both in the semester and in the quarter.

Fourth, spending for network differentiation continues to accelerate. If financial flexibility was sustained benefiting from a strong free cash flow of EUR1.7 billion in the six months to June while net debt stood at EUR43 million after the sale of Ireland closed in July.

Fifth, EPS posted an outstanding sequential improvement, EUR2.26 per share in Q2.

And finally, let me remark that these results are fully aligned with our expectations and therefore our guidance and dividend policy are confirmed.

Let me now start with a summary of key financials on Slide 3.

Reported first half evolution was impacted by negative FX and the deconsolidation of Telefonica Czech Republic. Although in Q2, both impacts slowed down slightly. The first factor, FX, is at 7.9 percentage points in the semester and 10 percentage points in the second quarter to revenue and OIBDA variation. But at the same time, reduced the payments in euros of CapEx, interest, taxes and minorities; therefore, the FX impact on OIBDA is virtually neutralized at free cash flow level.

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In organic terms, second quarter revenues posted a consistent performance versus the first quarter, growing 1.3% year-on-year to reach EUR25 billion in the first half, while OIBDA topped [ph] EUR8.1 billion and remained flat. OIBDA margins stood at 32.3%, 50 basis points lower than in the first six months of 2013.

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