Telefónica Reports Strong Q2 2024 Results with 12% Revenue Growth

Earnings call: Telefónica reports a a revenue increase of 1.2% year-over-year By Investing.com

Telefónica (BME: TEF) has reported a solid financial performance in the second quarter of 2024, with a revenue increase of 1.2% year-over-year (YoY) and a growth in EBITDAL minus CapEx of 11.5% YoY. The company has made significant strides in operational efficiency, network transformation, and customer-centric strategies. Telefónica is confident in achieving its financial goals for the full year 2024, driven by positive commercial momentum across all main markets and strategic agreements aimed at expanding their network and services. Telefónica's operational and financial strategy remains robust as it continues to expand its network and services through strategic partnerships and agreements. The company's focus on improving efficiency and customer experience, along with disciplined investment and capital allocation, positions it well to meet its financial targets for the year. With a solid Q2 performance and positive outlook for the remainder of 2024, Telefónica demonstrates its commitment to growth and value creation for its stakeholders. Telefónica's second quarter of 2024 results show a company on the move, with a revenue uptick and operational efficiency gains. The InvestingPro data and tips provide additional context to these developments. The company's market capitalization stands at $25.19 billion, reflecting its substantial size in the telecommunications sector. Despite a challenging environment, Telefónica has a high dividend yield of 5.03%, which is a testament to its commitment to returning value to shareholders, an aspect further reinforced by its history of maintaining dividend payments for 22 consecutive years. The InvestingPro Tips highlight that Telefónica is expected to see net income growth this year, which aligns with the company's own optimistic outlook for the remainder of 2024. Additionally, its valuation implies a strong free cash flow yield, suggesting that the company is generating ample cash relative to its share price. This is particularly relevant for investors looking for companies with the potential to fund their operations and return capital to shareholders efficiently. Investors interested in Telefónica's future prospects should note that analysts predict the company will be profitable this year, which could mean a turnaround from the previous twelve months. For those seeking more in-depth analysis, InvestingPro offers additional tips, with a total of 9 tips available at https://www.investing.com/pro/TEF that can provide further guidance on the company's financial health and investment potential. In summary, Telefónica's solid Q2 performance, coupled with a strong dividend profile and positive growth outlook, positions it as a prominent player in the Diversified Telecommunication Services industry. With InvestingPro's insights, investors can delve deeper into the company's fundamentals to make informed decisions. Operator: Good morning. Thank you for standing by, and welcome to Telefónica's January-June 2024 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Adrian Zunzunegui, Global Director of Investor Relations. Please go ahead, sir. Adrian Zunzunegui: Good morning, and welcome to Telefónica's conference call to discuss January-June 2024 results. I am Adrian Zunzunegui from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unaudited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the group. These statements may include financial or operating forces, and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that cause final developments and risks to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available 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 or London. Now let me turn the call over to our Chairman and CEO, Mr. Jose Maria Álvarez-Pallete. Jose Maria: Thank you, Adrián. Good morning, and welcome to Telefónica's second quarter conference call. With me today are Ángel Vilá, Laura Abasolo, Markus Haas, Lutz Schüler and Eduardo Navaro. As usual, we will first walk you through the slides, and we'll then be happy to take any questions. We are pleased to report solid Q2 results that demonstrate the continued success of our strategy. Our top line growth has accelerated, with revenue up 1.2% year-on-year, driven by sequential improvements in both our B2B and B2C segments. Notably, all our main markets are growing revenue. Our key markets are showing positive commercial momentum. In Spain, we are achieving annual growth across all main customer segments, Germany is expanding in all main access categories and Brazil is hitting record customer levels. This confirms our commitment to putting customers first. Importantly, we have seen robust growth in EBITDAL minus CapEx, which increased by 11.5% year-on-year. This impressive double-digit growth this quarter puts us year-to-date already trending above our full year guidance and position us well for the second half of the year. The strong performance was supported by the solid CapEx-to-sales ratio of 12.1% in the second quarter, reflecting our efficient capital allocation. This performance is also driven by our focus on operational efficiency. Our OpEx reflects the full impact of Spain's personal restructuring program and ongoing efficiencies for the decommissioning of legacy copper another legacy network within our portfolio. We continue seeking further efficiencies within our strategic goal to modulate exposure to Hispam while creating value for our shareholders, we have signed a nonbinding MOU with Medico for a potential corporate transaction of our operations in Colombia. In Spain, we have also signed a nonbinding MOU with Vodafone for the creation of a FiberCo that should bring further rationality and network optimization to the CTH market. Accordingly, we continue making good progress and remain confident in achieving our financial outlook for the full year 2024. Moving to Slide 5, we show how this strong momentum translate into tangible financial results. Starting with growth. Our top line growth accelerated to 1.2% on strong service revenue that grows by 2.2%. All main units showed revenue growth despite some weaker FX rates. This momentum is driven by high-quality customer addition across our fiber and mobile accesses, with premises passed by fiber to the [indiscernible] 13% year-on-year. Profitability remains core. This healthy top line expansion is driving profitability growth, with our EBITDA rising 1.8% year-on-year in the second quarter. We are seeing a virtuous cycle of growth and efficient outflows to operating cash flow. Our EBITDAL minus CapEx growth has elated by as much as 15 percentage points versus the first quarter, supported by our ongoing capital expenditure discipline. Our CapEx over revenue ratio stands at 12.1% for the quarter, demonstrating our commitment to efficient capital allocation. Importantly, this growth is slowing through to the bottom line. Adding facility, our second quarter free cash performance keeps us firmly on track to meet our full year targets. Excluding extraordinary tax payments in Peru, our free cash flow is growing by over 20%. We had a timing-related EUR 279 million payment in the second quarter. It was already factored into our guidance and doesn't affect our outlook. We remain confident in achieving our free cash flow objectives for the year. Laura will provide more details later. Going into greater detail on Slide 4. Our network transformation continues at pace. In the second quarter, we expanded our fiber-to-the-home footprint by an additional 2 million premises. Fiber coverage now reaches 66% of the population across our core markets, a 3 percentage point increase this quarter. Spain and Germany led the charge with average 5G coverage exceeding 90%. Our customers remain at the center of our transformation journey. We closed the second quarter with 392 million total accesses, adding 4 million new customers, which is an eight-fold increase from the previous quarter. Churn continues its downward trend, while our industry-leading NPS saw further sequential improvement. We are laser focused on operational simplification to profitable growth. The workforce restructuring program in Spain is already delivering full cost savings, fueling higher EBITDA growth as we have made significant progress in our nationwide copper net switch-off, with over 4,000 central offices closed since 2014. This strategic shift is a key driver in reducing CapEx, boosting our operational cash flow and free cash flow growth. And AI is embedded in our business and how we do business. Our networks are becoming more open and more intelligent through softwarization and automation. We are digitalizing to be closer to customers, enhancing offers with increased personalization. AI is also helping to streamline our CapEx deployment and boosting efficiency across the organization. We are fundamentally changing how we operate and deliver value to customers and stakeholders. In summary, our strategic initiatives, building next-generation networks, prioritizing customers and creating leaner future-fit operations are yielding tangible results. This progress reinforces our confidence in delivering on our ambitious goal for growth, profitability and sustainability. This quarter, Telefónica continues to consolidate its leadership sustainability, as shown on Slide 5. In June, we have published the annual update on our Climate Action Plan. It details our road map to net zero and the tangible steps we are taking to decarbonize across the value chain. With 392 million accesses worldwide, Telefónica continues to bridge the digital divide. We are connecting people and raising awareness about the responsible use of technology. Being a responsible technology company also means building a strong code of ethics with regards to artificial intelligence. Our pioneering AI code of ethics was first published in 2018. We have now updated it to include a new commitment to the environment while broadening responsibility and traceability across the value chain. Finally, on ESG, I'm very proud that Time Magazine has ranked Telefónica among the Top 10 World's Most Sustainable Companies. I will now hand over to Angel. Angel Vila: Thank you, Jose Maria. On Slide 6, we review our execution during the last quarter. At the time of the Q1 results, we shared with you near-term catalysts and positive opportunities we saw ahead of us in all of our core markets. In Spain, back in May, we said -- we have signed an MOU for a new long-term mobile network agreement with Digi, which we expected to complete in a few weeks. The full, final and definitive agreement, which spans over 16 years and includes both national roaming and running was announced 3 weeks ago. This confirms our ability to provide high-quality services over our infrastructure, which is further reaffirmed with the signing yesterday of a nonbinding MOU with Vodafone to enter into exclusive discussions to create a joint fiber code that would cover some 3.5 million premises with fiber-to-the-home, with a targeted take up higher than 40%. In Brazil, we said negotiations were underway to potentially migrate to an authorization regime. During May, we have reached the agreement with ANATEL and the Ministry of Communications, which we expect to complete in the coming months. In Germany, we expect the spectrum extension, and this was later confirmed by BNetzA. A 5-year extension is a step in the right direction. At the same time, we have progressed in the development of our wholesale agreement with Freenet. Finally, in the U.K., we anticipated the fiber will acceleration as projected, and the NetCo was receiving strong interest from intra-investors. Investor interest has continued during the second quarter and the fiber build continues to ramp up, with 5 million premises passed as of June, whilst the operational and financial network design remains well on track. In addition, in the U.K., the mobile network sharing agreement with Vodafone has been extended to 2030. We are delivering tangible and clear progress in all core markets. On Slide 7, we review the consistent positive performance of our Spanish operation. Progress across commercial KPIs and financials further increases the growth, profitability and visibility of our domestic business. We are in a well-segmented market with [indiscernible] positioning. Sound commercial momentum continued and translated into the fourth straight quarter of positive net adds in main services, with all customer bases showing year-on-year growth in the quarter. In convergent, the combination of increased net adds and superior NPS and ARPU, not only reflects the high value of the base but a right balance to sustain revenue growth. All of this resulted in revenue growth in Q2, with an acceleration in retail revenue, up to 2.6% year-on-year and improving EBITDA growth helped by the full contribution from the redundancy program savings. The inflection point of the EBITDAL trend is also noteworthy, showing a sequential improvement, which is expected to continue throughout the year. To highlight, as proof of our superior network in actual quality, we extended the valuable wholesale agreement with Digi, securing wholesale inflows beyond the next decade at an operating cash flow margin similar to the previous contract. And we continue to seek new win-win agreements with our existing wholesale partners. So we are very pleased to announce that yesterday, we signed a nonbinding MOU with Vodafone Spain to enter into exclusive discussions to create a 3.5 million premises passed FiberCo to add further visibility and stability to the broadband market, which we continue reshaping. On top of which, opportunities will open up from the ongoing deregulation process. On this slide, let me explain in a bit more detail our recent wholesale agreements, both [indiscernible] rationality in the wholesale market. The new contract with Digi has evolved to provide national roaming and partial range sharing for the next 16 years. Infrastructure sharing will boost the effective use of our mobile network, while Digi benefits from efficient use of its new spectrum. The range sharing agreement includes spectrum utilization in the 3.5 gigahertz band. This will be progressively deployed and help us to release own resources devoted to this high frequency band. Additionally, yesterday, we announced the signing of an MOU with Vodafone Spain to the joint FiberCo. In this fiber sharing agreement, Telefónica will contribute 3.5 million premises passed of its fiber to the home network, and joining with Vodafone Spain will connect an estimated base of around 1.4 million customers at closing. This model increases our fiber network returns and adds long-term visibility to wholesale revenue via long-term MSA agreements. As both parties will independently compete in retail and wholesale markets, network utilization will be optimized. We will also crystallize value to the valuation of part of our fiber at attractive terms, and further monetization may be realized with a potential sale of a stake in such FiberCo. Finally, optionality increases with the NetCo becoming a vehicle to share the fiber operating cost and a source to unlock additional funds in a potential market consolidation. All in, these 2 new agreements are value accretive for Telefónica Spain as they allow us to monetize our networks, increase the visibility and sustainability of our wholesale revenue function and also bring efficiencies. Regarding Brazil, Vivo maintains its leadership in both mobile and fiber-to-the-home business as a result of a very strong operating momentum. At the same time, our customer value increases, with contract ARPU growing 2.7% year-on-year, whilst churn is maintained at very low levels of 1%. Accordingly, mobile revenue grew 4.7% year-on-year, reflecting market rationalization and increasingly boosted by digital services, which are growing double digit. Whilst on the fixed business, fiber recap reached 24% and convergent customers more than doubled year-on-year. Strong execution helped main financial KPIs to continue posting near growth in euro terms even despite Brazilian real depreciation. In local currency, revenue and OIBDA posted a year-on-year addition to plus 7.4% and plus 7.3%, respectively, way higher than inflation growth. To note, the improved operating leverage margin to 15.3%, 1.2 percentage points increase year-on-year. Vivo continues also to reform its ESG commitments and has announced new targets for 2035. Finally, an important milestone was achieved during the quarter with the agreement with regulatory and administrative bodies to progress migration from concession to authorization, which is value accretive and will be finalized in the second half of the year. Our German operations maintained ongoing operational and financial momentum in Q2, as shown on Slide 10, driven by the focused execution of the accelerated growth and efficiency plan. Our core business continued to demonstrate robust commercial traction, with contract net additions increasing 37% quarter-over-quarter, supported by a low O2 contract or rate of 0.9%, which reflects our strong brand appeal and ongoing network enhancements. Revenue remained flat year-on-year, with growth in handset sales and fixed services, partially offset by decline in mobile service revenue, impacted by regulatory effects, changes in the parts business model and lower roaming. However, we achieved sustained EBITDA growth through ongoing momentum and effective cost management. In the first half of 2024, progress on 4G network densification and 5G deployment was significant, with over 550 new operational sites and approximately 3,400 expansion measures completed, resulting in our 5G population coverage reaching 96%. Other business fundamentals saw significant derisking as well during the quarter. The spectrum extension was not only already signaled by the regulator, but the position from the German government and its vendors was finalized. [indiscernible] that falls within our expected CapEx envelope, hence being neutral to our long-term guidance. Moving now to Slide 11 to review our U.K. JV, VMO2. In the U.K. we have remained committed to our strategy of being in key drivers for future success despite the competitive landscape. We continue to focus on delivering value to our customers while transforming and simplifying our business for long-term sustainability. We maintained our position with the highest fixed ARPU in the market, achieving 3.1% year-on-year growth driven by recent raising prices. Additionally, our combined consumer fixed and mobile revenue, excluding handset, remains stable, with O2 contract churn maintaining stability at 1.2%. Furthermore, fiber deployment has significantly accelerated with VMO2's full fiber footprint now reaching 5 million premises passed. Looking ahead, our [indiscernible] network sharing agreement with Vodafone UK totally strengthens our successful relationship but also strategically positions of VMO2 for the potential approval of the Vodafone VMO3 merger, including a prospective spectrum agreement. And finally, the NetCo is progressing well, perimeter established and we see continued interest from investors. Telefónica Tech on Slide 10 showed another strong quarter. Since Creation T Tech is delivering quarterly double-digit year-on-year revenue growth. In the last 12 months, TTech has generated EUR 2 billion of revenues, showing a 14% annual increase. Both funnels and bookings are showing good growth and revenue so far, mostly driven by the private sector with large contracts awarded. For example, 2 weeks ago, multinational financial player, BBVA (BME:BBVA), chose TTech to boost the cybersecurity of its operations on a global scale with incorporation of the most technologies in AI and process automation. We also recently closed large and relevant deals with Digi and Children's Health Hospital in Q2. Hence, this solid trend will continue to called into revenue growth, which we expect to accelerate throughout the remainder of the year. We have seen growth that is well balanced with increased completion from higher value-added services, longer-dated conducts, a wider customer base and better customer mix. We continue to gain relevance in higher growth markets, and our capabilities continue to be recognized by industry partners and analysts. This should allow TTech to continue growing ahead of its peers. Telefónica Infra on Slide 13 is driving profitable growth, leveraging a capital-efficient deployment of pure-proif infrastructure. Our fiber-to-the-home base continues its momentum after passing more than 1 million premises this quarter to 23 million. Telxius, our global connectivity provider that combines next-generation subsea cables with terrestrial backhaul systems and communication hubs, maintained considerably high profitability of around 50%, and is expanding colocation capabilities across U.S.A., Spain and Latin America. And as you may be aware, after looking at recent media comments, interest on Nabiax, the data centers business where we own 20%, is mounting. This provides us with optionality. I will now hand it over to Laura, who will guide you Telefónica's financial performance and the main financial topics. Laura Abasolo: Thank you, Angel. As for Hispam on Slide 14, we return to growth in main financial KPIs, service revenue, EBITDA and EBITDAL minus CapEx. As such, service revenue grew in Q2 year-on-year. EBITDA was up 2.7% year-on-year, driven by Argentina, Colombia and Mexico. To highlight, the 67% EBITDA growth of our operations in Mexico on very good contract performance and network efficiencies. EBITDAL minus CapEx accelerating on EBITDA evolution, stabilization and CapEx decline. CapEx to sales stood at 6.6% in the first half of the year. Lastly, Telefónica Hispam is making progress in achieving greater rationality market, avoiding network overlap through different agreements on fiber and mobile. To continue seeking market rationality, we entered into a nonbinding memorandum of agreement with Millicom for a potential corporate transactions of our operations in Colombia that may imply the sale of our stake take in Telefónica Colombia. Slide 15 shows free cash flow performance in the first half of the year. Our free cash flow performance remains strong and fully on track. We are confident on our trajectory and our ability to meet our full year guidance of more than 10% growth. Let me address that we've been managing a tax dispute in Peru for some time. In fact, December 2022, we made a full provision of EUR 0.9 billion for this tax litigation. The exact amount and timing of payments have been uncertain, but we're consistently incorporating our best estimates in our guidance. In Q2 of this year, we made a EUR 279 million tax payment to Peru. This amount was larger than initially expected for the quarter. However, this is primarily a timing issue. The payment was already contemplated in our full year guidance, which remains unchanged and 10% growth for the full year. With this behind us, we have taken greater clarity on our free cash flow generation outlook, putting us in a stronger position for the second half. Importantly, this situation is fully contemplated not just in our 2024 guidance, but also in our 2026 targets, wherein our control acquisition is strong and our commitment to deliver on our free cash flow performance remains unwavering, both for this year and through 2026. As of June 2024, as net financial debt stood at EUR 29.2 billion, translating to a net debt-to-EBITDA ratio of 2.78x. This anticipated increase from year-end 2023 was primarily driven by our strategic move to raise our stake in Telefónica Deutschland and, to a lesser extent, free cash flow seasonality in the first half. We are committed to reducing leverage and remain on track to meet our targets. We are delivering a strategic focus on 4 key areas. First, driving EBITDA growth for operational efficiencies and revenue expansion, starting with Spain, our highest cash conversion market that we'll see EBITDA growth acceleration from Q3. Operating cash flow measured as EBITDAL minus CapEx is already growing above the guidance range of between 1% and 2%. So we see the usual CapEx pacing implying higher intensity in the second half of the year, EBITDA should keep improving. Accelerating free cash flow generation, which, as usual, will be back-half loaded, even more this year. And continued disciplined capital allocation. You should also remember that in the second half of 2024, a couple of deleveraging events will take place. We received the proceeds from the stake in CTIL and expect regulatory approval for the FiberCo in Peru. All in all, both will help bring down debt by EUR 7.4 billion. And both are set line, close events, just waiting to receive the proceeds. Furthermore, we lowered our debt-related interest cost to 3.58% versus 3.80% in December last year, thanks to the active refinancing exercise undertaken in previous years, the robust position at fixed interest rate in a strong currency and the [indiscernible] interest rates in Brazilian real. I will now hand back to Jose Maria, who will wrap up. Jose Maria: Thank you, Laura. All operating metrics are either aligned with or exceeding full year guidance. Revenue growth of 1.1% aligns with our full year target of around 1%. EBITDA is growing [ 1.9% ] year-to-date at the high end of our 1% to 2% guided range. At the first quarter results, with EBITDAL minus CapEx would resume its -- our trajectory from the second quarter. Indeed, it grew 11.5% year-on-year in the second quarter, bringing first half growth to 3.1%, above our 1% to 2% full year guidance. This is driven by full benefits from Spanish workforce cost savings, [indiscernible] passed Q1 impact from lease inflation and accelerated IT deployment and excellent CapEx management. CapEx to sales stands at 11.3% year-to-date below our up to 13% full year guidance. [indiscernible] phasing should increase CapEx intensity in the second half. We are increasingly comfortable towards 2024 CapEx guidance. We'll provide more details on the next slide. As Laura mentioned, free cash flow generation is on track to meet full year guidance. It's back-end loaded as usual, so we expect acceleration in the remaining two quarters of 2024. This will allow us to resume our delivering trajectory. After the first year uptick from the Telefónica Deutschland offer and our second quarter dividend payment, we expect net debt and leverage ratio to decline, keeping us on track for our 2024 targets. Our strong first half performance supports our 2024 target and long-term strategic goals. As stated in previous slide and as we showed on Slide 18, CapEx is among the main drivers of our fixed as flow growth towards our 2026 targets. Let me give you a view of how we are approaching capital reach industry-leading levels of less than 12% capital intensity. Our strategy revolves around 3 key areas. First, business evolution. We grow more in low CapEx businesses, such as B2B and digital services within B2C, changing our CapEx profile. Legacy shutdowns, particularly copper decommissioning, significantly reduced our maintenance CapEx. This allows us to continue to invest in both, passing more premises with fiber-to-the-home and increasing 5G coverage. Both have high efficiency than legacy technologies. Second is network optimization. We are levered to open and disaggregated network virtualization, go-to-cloud strategies and AI and automation, increasing deployment efficiencies and flexibility to adapt to demand, open run and open broadband models are key to this transformation. And for strategic investments, we are passed the network [indiscernible] and now focusing tech cycle optimization. We are exploring ways to reduce capacity CapEx, such as our extended collaboration with Meta (NASDAQ:META) for video optimization, aiming for more responsible network use and reduced resource usage. No single initiative alone will be sufficient to achieve our ambitious targets. It's the combination of all 3 areas that creates a powerful synergy, driving us towards our goal. As such, this will take us from our '23 CapEx to sale ratio of 13.3% to our '26 guidance of less than 1%. This reduced capital intensity is an important lever to help achieve our target of more than 10% free cash flow growth CAGR through 2026. While the second half should see usual phasing with some higher CapEx allocation, our first half progress makes us more confident in our 2024 CapEx guidance than before. To summarize on Slide 19. Telefónica's second quarter 2024 performance demonstrated again solid execution as we continue to deliver against our strategic road map. We reported a solid set of results consistent with our full year 2024 guidance across all key metrics as well as our overall in CPS plan, which targets more than 10% free cash flow growth CAGR between 2023 and 2026. In fact, operational leverage improved significantly with EBITDAL minus CapEx standing above the guided range for the full year. Our core markets showed robust commercial and operational trends. In Spain, we are achieving annual growth across all main customer segments. Brazil and Germany maintained consistent profitability growth and Hispam showed sequential improvement. Our strategic has been in fiber and fiber infrastructure enhanced Telefónica's customer engages, positioning us for continued commercial momentum and top line expansion. CapEx intensity remains well contained, with legacy network shows free up resources for growth, which coupled the streamlined operations by digitally transforming processes and friendly focused capital allocation priorities, will allow us to deleverage going forward towards our target ranges and further sustaining our dividend. Finally, we continue seeing positive near-term catalysts in all our markets. Starting with deregulation, in Spain, we expect full FTTH wholesale deregulation and the renewal of certain rental obligation, which should result in increased commercial flexibility. At a EU level, we progress as well in 3 main key topics, including market definition, open Internet and fair share. As for the latter, we are starting to sign large commercial agreements with large traffic generators to optimize video for a more efficient use of network resources. In Hispam, we have entered into a nonbinding memorandum of understanding with Millicom for a potential corporate transaction of our operations there. And as said, we have signed a nonbinding MOU with Vodafone Spain to enter into exclusive negotiation for the creation of fiber co that should bring further rationality to the market, optimize never Operator: Please standby, your conference will resume shortly. [Technical Difficulty] Jose Maria: These, coupled with our focus on execution and combined with further wholesale and consolidation opportunities will allow us to keep building on our momentum and demonstrating the continued success of our strategy. Thank you very much for listening. We're now ready to take your questions. Operator: [Operator Instructions] Our first question comes from the line of Andrew Lee from Goldman Sachs (NYSE:GS). Andrew Lee: I had two questions, one on Spanish EBITDA growth and then the next on the group wholesale revenue growth outlook. On the Spanish EBITDA growth, you said you expect this to improve through 2024, but I think you delivered around 0.5% decline in the second quarter if we strip out the litigation effects. I might be wrong there, so happy to be corrected. While consensus still models FY '24 declines and investors are noting your negative ARPU trends in Spain. So I wondered maybe you now have better visibility to give us idea on your expected Spanish EBITDA growth run rate into the end of 2024, and what you think the structural sustainable EBITDA growth should be in Spain longer term? Any incremental color there you can give on that Spanish EBITDA outlook would be really helpful. And then on the wholesale revenue growth, how has your group wholesale revenue growth outlook changed in the medium term, given you've now -- as you stated through the call, you've now signed a new Digi wholesale contract. And I'm guessing there are positive externalities to your Spanish fiber wholesale business from the Vodafone Zegona MOU you've just signed. Any color you can give on your exit impact of that fiber MOU on wholesale revenues and the broader declining group wholesale revenue out would be really helpful there. Jose Maria: Thank you, Andrew, for your questions. The first one on Spanish EBITDAL. I got a similar question in the first quarter. And as I said, back then, EBITDA and EBITDA performance in Spain in the beginning of the year were to be the weakest you would see this year. The factors that affected leases in Q1 and partially in Q2, which were volume additions, inflation and rates affecting accounting of recurrent leases are starting to phase out. So even if we have some nonrecurring factor affecting the year-on-year EBITDA in Q2. EBITDA growth has been improving from, plus0.2% in the first quarter to plus 0.6% growth in the second quarter. And year-on-year EBITDAL performance has improved further by 1.8% -- 1.8 percentage points quarter-over-quarter moving from minus 3.5% in Q1 to minus 1.7% in Q2. We are expecting further EBITDA and EBITDAL sequential improvement in the following quarters already starting in Q3, not only a higher EBITDA growth but all on lower leases annual increase, which is going to help EBITDAL to stabilize in the second half of the year. Then regarding the evolution of Spanish wholesale revenues, given resources is going to be a drag in 2024, we have a reliable network, we are protected by solid commercial agreements, as proven by the deal -- the definitive deal with Digi and the MOU just announced with Vodafone. What are the drags that we're seeing as headwinds, mobile termination rates prices are having since the first part of 2024. By the way, this also affects our German operation. Some international traffic services were impacted by declining voice traffic. We don't resell Formula 1. It's a content that we don't own, although this was EBITDA neutral because we are selling it as per the cost that we had on it. Roaming prices also decreased. And then the pass-through that we have on energy to some of our clients that were colocated in our central office with the decline of energy prices is no longer supporting us. On the other hand, MVNO revenues are growing. So we have lots of moving parts here that are putting pressure on the wholesale revenues in Spain. There are agreements that we have signed with Digi, if you take into account the conditions of price and expected volumes should be going forward at least, the level of revenues that we had with the old contract and also at the level of operating cash flow. The MOU that we have signed with Vodafone would be accretive for additional to the wholesale revenues that we're getting with our partners. So lots of moving parts, but the two agreements that we have signed are supportive of the wholesale revenue function for Telefónica Spain at rational prices that would not necessarily or will not produce erosion in the conditions of the retail market. So supportive to the wholesale revenue line, but also to the retail revenue line. Andrew Lee: Can you give us any sense as to the materiality of the expected boost on the Vodafone MOU on wholesale revenues? Or is it too early to say? Jose Maria: It's too early to say. It's an MOU, so let us move to definitive agreements, and we will be able to give a bit more color. Operator: We will now take the next question from the line of Andre [indiscernible] from UBS. Unidentified Analyst: I have two, they are quite similar but from different ends. So maybe if I just look at the EBITDAL minus CapEx guidance for the year and where we've progressed thus far. So you're targeting more than -- or roughly 5%, and you are 3.1% year-to-date with CapEx to sales running below the kind of 2024 run rate about 2 percentage points. So if you can just maybe talk to us about the building blocks if CapEx goes up in the second half, where the acceleration, the material acceleration in the EBITDAL maybe across the group coming from to get to the 5% in EBITDAL minus CapEx guidance, please? Any clarity on that? And then just looking at the deals that you're signing in Spain specifically or maybe just to focus on staying from that perspective. Looking at just returns, because, obviously, you're enhancing the usage of your networks. You're avoiding some overbuild, your kind of finding partnerships to different operators. So just from a returns perspective, if you can kind of give us any color on midterm kind of return on capital or something improvement you expect from these deals side from there? They're pretty positive. Laura Abasolo: Thank you very much. We were not sure if the question was around Spain or in general. But if it's in general, we have a midterm guidance of EBITDAL minus CapEx of 5% in life of the plan. However, the guidance for the specific 2024 is more in the range of 1% to 2%. And at the moment, we are about 3%. So we are doing better versus guidance. The reason behind we explained when we gave the year guidance as part of the GPS plan, it improves leases though grows slightly throughout the life of the plan. And that growth is higher at the beginning of our plan because of the network growth impacts remaining CPI who is decreasing interest impact of the new contracts and new grow additions. So all of that in place that, that EBITDAL minus CapEx growth is back loaded in our long-term plan. Having said that, we are super focused on lease monitoring. We are working on all mitigation measures. We are serving, as you know, we are reducing the quantity. We are renegotiating the agreements, and you can see that it's basically linked to the 5G expansion being more acute in the first years. We have some regions like Spain where leases are completely on the downward trend. Spain, as Ángel explained at the beginning, the lease impact was higher. It was the highest in the first part of the year. So you should be comfortable with our long-term EBITDAL minus CapEx guidance, and with the guidance for '24 which is lower than the full year. I hope I answered the question with that. Jose Maria: And regarding your second question, you have to frame the deals that we are announcing within the restructuring of the Spanish market that has followed some consolidation or some M&A in our market. So this continues to be a very segmented market in which you have in B2C premium positioning like we have in the mid-high end of the market, which is very rational market, some more competition in the bottom end. In B2B, we continue growing very substantially with a very strong positioning. And in wholesale, which is where your question I understand was focusing on these deals, the whole market is reconfiguring. And under a principle of rationality that we are perceiving on the side of all the players. There is clearly, as you were saying, an objective to optimize the return on capital employed by avoiding overbuild risk. Also, at the same time, there is a need and there is a willingness from the different players to optimize network utilization. And doing this in such a way that the market retains a healthy level of competitiveness, but without putting undue pressure on the market. We have been -- and we were describing this on Slide #8, we have been very active in sharing not only on the mobile centers on the fiber side, our infrastructure, and we believe that these are win-win agreements for the different players. I don't know if this responds to your questions or you needed some additional detail. Unidentified Analyst: No, that is helpful. If I may, just maybe -- sorry for the confusion with the first question. I was maybe are basically trying to understand by which means does the growth in lease costs, especially in Spain, maybe moderate? And I was maybe going to follow up with asking or by asking in terms of the corporate shutdown that is happening over this year and next year maybe, is that a big part in terms of moderating leases? Jose Maria: Yes. Sorry, I'm not sure I understood exactly question because your third question was on group level, and now you're asking for some specific detail on Spain. Could you please repeat? Unidentified Analyst: Yes. So maybe just in terms of the lease moderation, because I guess a little of the growth, as Laura was already addressing, it's coming in Spain. So I was just trying to understand the growth rate in leases should therefore moderate, and I was going to follow up specifically on the copper shutdown over this year and next year as the big part of how containing the lease growth in the midterm as well. Laura Abasolo: As you are listening to my first answer, maybe you didn't -- maybe I want to explain in myself dealer, because I said exactly the opposite about the Spain. I said leases are under control. They are slightly increasing at a group level. We have certain places such as East Panera downward trend. Others, like Brazil, with the oil transaction and the 5G regulation maybe in the upside train, although very much under control. And in the case of Spain, it's exactly the opposite. We have the highest level in the first half of the year and should be annualizing during the year. So EBITDAL minus CapEx won't be a problem at Spain level. And the worst quarter has been actually Q1, and that could be annualized. Maybe now it's more clear. Otherwise, you can ask our Investor Relations and I can provide you full detail. But the message in Spain will just the opposite. Jose Maria: Yes. I said in a previous response, this growth in Spain should continue easing quarter-to-quarter to reach EBITDAL stabilization in the second half. Operator: We will now take the next question from the line of Mathieu Robilliard from Barclays (LON:BARC). Mathieu Robilliard: I had a question on the free cash flow. So as Laura pointed out, there is a one-off payment in Peru. And as you said, initially, there was a EUR 900 million for that item. I understand you may not want to share your expectations for what will be the final total payment [indiscernible]. But in case all the remainder of what you -- could have to pay was to be done in 2H 2024, and again, I'm not sure you have this in your numbers, but I think so far you've probably paid more than half of it. So if you have to -- theoretically on the rest in 2H 2024, would your full year guidance still be [indiscernible] for 2024? That's my first question. And then I had a second question on LatAm. Hispam America, so as you flagged, CapEx is very low. I think you said 5.6% of revenues. I understand that in a country like Mexico, you're essentially operating like a MVNO. But in countries like Peru, Chile, Colombia or even Argentina, you do have a network. So I was wondering how it was possible to maintain the quality of the network with such a low CapEx that, that number would spike back again in H2? Or you thought this was something sustainable? Laura Abasolo: Thank you, Mathieu, for the question. I'm very happy to talk to about Peru, so I can clarify. As you said and I said, there's a provision of around EUR 0.9 billion, specifically the very EUR 845 million are the specific ones to '98 to 2001 that have taken so long, and there's so much related to interest. Some of that is still under discussion. The payment, you were right. We have paid approximately half already because on top of the EUR 279 million payment we did in 2024, we had an outflow of around EUR 123 million in '23. But the remaining is going to be paid in 2024. The Peruvian law allows for fractioning, and the fractioning will start from 2025 beyond. So it will go then beyond the GPS plan. But we are fully in control on the situation. Obviously, the timing of the payments so far have been uncertain, with the fraction in the agreement with the Peruvian authority will be much more certain. But the punchline here is this has been included in our guidance and in our estimates, both for 2024, both for the midterm guidance. So it doesn't affect whatsoever the 10% growth in '24, nor the 10% growth all the way through 2026. I could give -- I mean, it has been much concentration in Q2, which is not ideal. But on the other hand, as I said, now we have certainty. And it does not put in jeopardy at all our free cash flow guidance. We are very confident on the free cash flow growth trajectory and completely on track to meet our full year guidance. On the Hispam situation regarding CapEx, usually, CapEx is also backloaded in the case of Hispam. So you shouldn't expect 6.6% of our revenue we have at the moment. We run Hispam within a 10% envelope approximately. We can be a little bit up and down, but that would be the figure you should have in mind. But that doesn't mean Hispam invest 10%. We invest in different ways. In the case of the fiber, this goes through the fiber costs. So we are addressing to the best ultra-broadband technology in the region through those vehicles instead of doing it through CapEx. We have just gone through a very, very successful run negotiations for 5G in region. And in some cases, we are sharing network, as we did in Colombia, and we are happy to share network elsewhere in the region. So you should expect us to do it in a very disruptive way asset-light, sharing through vehicles. But the 10% in that framework allows us to put a good technology at the service of our customers. Operator: We will now take the next question. From the lane of David Wright from Bank of America Merrill Lynch (NYSE:BAC). David Wright: Another two, please. So first of all, just on guidance, you chose to guide in moving currency, which I guess was always a risk that could perhaps be back-firing a little now with the Brazilian real just gapping out a little. And I guess if I just did a simple back of the envelope, Brazil is, give or take, 30% of your group EBITDA. I think the currency had been very stable around 5.5 to the euro. Looks to be now around 6 to the euro. So there's a 10% depreciation on something that contributes 30% of group EBITDA, which, I guess, math says 3% drag over time, given your group outlook is around 2% CAGR to 2026. I'm just wondering how that can be captured, that risk, or whether your guidance does assume that the Brazilian real winds back in a little. And then I guess just my second question, just a little bit of a mix-up from my understanding. You said that U.K. bill was all on track. That's not quite what was said in the Liberty Global (NASDAQ:LBTYA) call, where I think it was made clear that the Nexi (BIT:NEXII) fiber build had actually lagged our expectations a little and that the -- if I'm right, I still don't think -- I think you're behind the curve monetizing some of that fiber infrastructure. So contradicting messages there if might be one for loops to maybe resolve. Laura Abasolo: David, on the Brazilian real, I think it's soon to see how we'll finish the year, because we think the fundamentals are solid. Solid GDP growth, external accounts remain consistent. And I think it has to do with certain things regarding domestic fiscal and monetary policy, but it would definitely improve. In any case, we protect ourselves from the FX in different ways. I mean we protect the solvency and the ratio, the net debt to EBITDAL by putting debt in local currencies, as is the case in Brazil and some Hispam OBs. There's a natural hedge as the revenue impact is much higher, and it diminishes until it gets all the way to free cash flow. And on top of that, for the given year, we hedged 20% or above of the free cash flow that comes from Brazil. And this case has not been a -- this year has not been an exception. And we have hedged that free cash flow at better rates than the ones we have [indiscernible]. What is definitely true is that consolidating -- once we consolidate into euros, if -- it's not only the Brazilian real impacting, it's every currency. And up to June 2024, the FX impact has only been EUR 11 million in revenue and EUR 2 million in EBITDA. So our guidance, as you correctly said, is in euros, because we think we have to grow in euros. But it's also true that we gave the FX attached to that guidance. And sometimes, the FX in a given year may not reflect the fundamentals. So if that could divert in a huge amount, then we will need to reconcile a bit the effects of the guidance and the actual FX. But the punchline here again is that we think the fundamentals behind the reais are strong, and it will convert to the assumptions we use for when we gave the long-term guidance, and this is a long-term game. Jose Maria: Regarding your second question, I'll pass it to Lutz to make sure that we don't incur in any inconsistency in the messages. Lutz Schüler: Yes. Can you repeat the question? David Wright: Yes. No. The message from [indiscernible] was that U.K. fiber build is all on track, but I don't think that was the message on Friday's call. I thought that there was a bit of -- you were lagging targets perhaps a little with some of the conversion. I think it might have been more the nexfibre footprint. Lutz Schüler: No, we are on track with the build on nexfibre. We had a record quarter in Q2 with almost 300,000 homes released, right? And we are also on track with FiberUp. I think what I said on the call was that we are a bit behind our ambition in selling into the fiber homes with nexfibre, right? So because here, we are investing and we want to generate more customers in the second half of this year. But with the build, we are fully on track. David Wright: Okay. And maybe, Laura, just to double check. So I guess if the currency does remain a little weaker than the potential situation we're looking at, is that you could see sort of revenue EBITDA impact. The point you're making is that it's protected at free cash flow because of the variating mechanisms and CapEx. That's the point here, is the cash flow is secure? Laura Abasolo: Yes. That's exactly the point, David. Thank you. That's why we are so confident on our free cash flow guidance for the year and our ability to deliver the 10% growth. Adrian Zunzunegui: Yes, we have time for the last question, please. Operator: We will now take the last question from the line of James Ratzer from New Street Research. James Ratzer: I have two questions, please, both actually on your wholesale agreements that you've just signed. So the first one on the Digi contract. I'm intrigued by the line in your presentation where you say the revenue will also be driven by traffic-driven growth. I was wondering if we could just kind of go through the economics of the deal a little bit more. Predicting how data pricing is going to develop over a 1- or 2-year, let alone 16-year view is very difficult. So we saw in Germany when Vodafone signed an NRA was 1 and 1, it was actually linked to network costs to give a bit more security to the market. I mean how can you help to give us some confidence around the price that Digi get with this wholesale agreement that they can't be disruptive or more disruptive on market pricing? And then the second question I had, please, was you're announcing here today as well that you've expanded your wholesale agreement with [indiscernible] Germany, which I think is a new announcement today. Could you kind of run through a bit more of the economics on that in more detail? Are you expecting freenet now to bring more traffic over from Vodafone and Deutsche Telekom? Would just love to hear a bit more of the details of how that agreement will work. Angel Vila: Thank you, James. I'll take the first one on this, and I'll pass the second question to Markus Haas who's also connected. First thing I would like to say is that we move swiftly from an MOU to a full hedge definitive contract in 2 months with [indiscernible] because we have those of experience in wholesale contracts and a very long-standing relationship, I think. The case that you alluded to in Germany is taking a little bit more time. Another difference of the two cases is -- really is not a capacity deal whatsoever. We need to be very clear, we are expecting and we have expected some volumes and we have a pricing mechanism, which is structured with payments that depend on the number of subscribers, and their consumer traffic not based on the cost of our network. And regarding the rent sharing, it will depend on the number of sites that will be shared and there will be a payment on that one. Markus, if you can take the [indiscernible], please? Markus Haas: Thank you, Angel. Thanks, James, for the question. I think we renewed our agreement with Freenet. It's a 10-year deal with a steep customer increase, and we foresee the full run rate of this strong increase of customers on our network coming from Freenet already in 2026, clearly compensating some of the effects that we will see from 1 and 1. So while it's a win-win deal that we signed, it's long term and it's a substantial increase of the relationship and partnership that we have with Freenet going forward. James Ratzer: Markus, on that, I mean you mentioned the increase in customer numbers. I mean are you able to just quantify that a bit more? What are you expecting for customer growth from Freenet then on your network out to 2026 or future revenue growth from the deal? Markus Haas: It's a significant increase. I think we should respect that Freenet is also a listed company, and what we can share on this call. So from that perspective, is a significant increase of our partnership. This is what I can say. And it's a fast ramp-up, so we will see already the full run rate effect reflected in our 2026 numbers in Germany. James Ratzer: Okay. So that's a binding agreement from them to migrate more customers over to your network from Vodafone, Deutsche Telekom? Okay. Then Ángel, could I just follow up on -- just on the traffic growth point? I mean traffic growth is growing at kind of 30% to 40% per annum in Spain. But presumably, the Digi wholesale revenues aren't to grow in line with traffic growth. So there must be some price deflator baked into your contract. How does that work to just offset traffic is, please? Angel Vila: I'm afraid I cannot disclose commercially sensitive information, but the projection and the figures that we have is that the yearly revenues will be roughly in line with the current ones. And that is as much as we can say on this agreement. Operator: At this time, no further questions will be taken. Jose Maria: Thank you very much for your participation, and we certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relationship department. Good morning, and thanks. Operator: Telefónica's January-June 2024 Results Conference Call is over, you may now disconnect your lines. Thank you.

Telefónica, S.A. (TEF) Q2 2024 Earnings Call Transcript

Telefónica, S.A. (NYSE:TEF) Q2 2024 Earnings Conference Call July 31, 2024 4:00 AM ET Company Participants Adrian Zunzunegui - Global Director, Investor Relations Jose Maria - Chairman and CEO Angel Vila - COO Laura Abasolo - CFO Markus Haas - CEO, Telefónica Deutschland Lutz Schüler - CEO, Virgin Media O2 Conference Call Participants Andrew Lee - Goldman Sachs Mathieu Robilliard - Barclays David Wright - Bank of America Merrill Lynch James Ratzer - New Street Research Operator Good morning. Thank you for standing by, and welcome to Telefónica's January-June 2024 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Adrian Zunzunegui, Global Director of Investor Relations. Please go ahead, sir. Adrian Zunzunegui Good morning, and welcome to Telefónica's conference call to discuss January-June 2024 results. I am Adrian Zunzunegui from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under international financial reporting standards as adopted by the European Union. This financial information is unaudited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the group. These statements may include financial or operating forces, and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that cause final developments and risks to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available 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 or London. Now let me turn the call over to our Chairman and CEO, Mr. Jose Maria Álvarez-Pallete. Jose Maria Thank you, Adrián. Good morning, and welcome to Telefónica's second quarter conference call. With me today are Ángel Vilá, Laura Abasolo, Markus Haas, Lutz Schüler and Eduardo Navaro. As usual, we will first walk you through the slides, and we'll then be happy to take any questions. We are pleased to report solid Q2 results that demonstrate the continued success of our strategy. Our top line growth has accelerated, with revenue up 1.2% year-on-year, driven by sequential improvements in both our B2B and B2C segments. Notably, all our main markets are growing revenue. Our key markets are showing positive commercial momentum. In Spain, we are achieving annual growth across all main customer segments, Germany is expanding in all main access categories and Brazil is hitting record customer levels. This confirms our commitment to putting customers first. Importantly, we have seen robust growth in EBITDAL minus CapEx, which increased by 11.5% year-on-year. This impressive double-digit growth this quarter puts us year-to-date already trending above our full year guidance and position us well for the second half of the year. The strong performance was supported by the solid CapEx-to-sales ratio of 12.1% in the second quarter, reflecting our efficient capital allocation. This performance is also driven by our focus on operational efficiency. Our OpEx reflects the full impact of Spain's personal restructuring program and ongoing efficiencies for the decommissioning of legacy copper another legacy network within our portfolio. We continue seeking further efficiencies within our strategic goal to modulate exposure to Hispam while creating value for our shareholders, we have signed a nonbinding MOU with Medico for a potential corporate transaction of our operations in Colombia. In Spain, we have also signed a nonbinding MOU with Vodafone for the creation of a FiberCo that should bring further rationality and network optimization to the CTH market. Accordingly, we continue making good progress and remain confident in achieving our financial outlook for the full year 2024. Moving to Slide 5, we show how this strong momentum translate into tangible financial results. Starting with growth. Our top line growth accelerated to 1.2% on strong service revenue that grows by 2.2%. All main units showed revenue growth despite some weaker FX rates. This momentum is driven by high-quality customer addition across our fiber and mobile accesses, with premises passed by fiber to the [indiscernible] 13% year-on-year. Profitability remains core. This healthy top line expansion is driving profitability growth, with our EBITDA rising 1.8% year-on-year in the second quarter. We are seeing a virtuous cycle of growth and efficient outflows to operating cash flow. Our EBITDAL minus CapEx growth has elated by as much as 15 percentage points versus the first quarter, supported by our ongoing capital expenditure discipline. Our CapEx over revenue ratio stands at 12.1% for the quarter, demonstrating our commitment to efficient capital allocation. Importantly, this growth is slowing through to the bottom line. Adding facility, our second quarter free cash performance keeps us firmly on track to meet our full year targets. Excluding extraordinary tax payments in Peru, our free cash flow is growing by over 20%. We had a timing-related EUR 279 million payment in the second quarter. It was already factored into our guidance and doesn't affect our outlook. We remain confident in achieving our free cash flow objectives for the year. Laura will provide more details later. Going into greater detail on Slide 4. Our network transformation continues at pace. In the second quarter, we expanded our fiber-to-the-home footprint by an additional 2 million premises. Fiber coverage now reaches 66% of the population across our core markets, a 3 percentage point increase this quarter. Spain and Germany led the charge with average 5G coverage exceeding 90%. Our customers remain at the center of our transformation journey. We closed the second quarter with 392 million total accesses, adding 4 million new customers, which is an eight-fold increase from the previous quarter. Churn continues its downward trend, while our industry-leading NPS saw further sequential improvement. We are laser focused on operational simplification to profitable growth. The workforce restructuring program in Spain is already delivering full cost savings, fueling higher EBITDA growth as we have made significant progress in our nationwide copper net switch-off, with over 4,000 central offices closed since 2014. This strategic shift is a key driver in reducing CapEx, boosting our operational cash flow and free cash flow growth. And AI is embedded in our business and how we do business. Our networks are becoming more open and more intelligent through softwarization and automation. We are digitalizing to be closer to customers, enhancing offers with increased personalization. AI is also helping to streamline our CapEx deployment and boosting efficiency across the organization. We are fundamentally changing how we operate and deliver value to customers and stakeholders. In summary, our strategic initiatives, building next-generation networks, prioritizing customers and creating leaner future-fit operations are yielding tangible results. This progress reinforces our confidence in delivering on our ambitious goal for growth, profitability and sustainability. This quarter, Telefónica continues to consolidate its leadership sustainability, as shown on Slide 5. In June, we have published the annual update on our Climate Action Plan. It details our road map to net zero and the tangible steps we are taking to decarbonize across the value chain. With 392 million accesses worldwide, Telefónica continues to bridge the digital divide. We are connecting people and raising awareness about the responsible use of technology. Being a responsible technology company also means building a strong code of ethics with regards to artificial intelligence. Our pioneering AI code of ethics was first published in 2018. We have now updated it to include a new commitment to the environment while broadening responsibility and traceability across the value chain. Finally, on ESG, I'm very proud that Time Magazine has ranked Telefónica among the Top 10 World's Most Sustainable Companies. I will now hand over to Angel. Angel Vila Thank you, Jose Maria. On Slide 6, we review our execution during the last quarter. At the time of the Q1 results, we shared with you near-term catalysts and positive opportunities we saw ahead of us in all of our core markets. In Spain, back in May, we said -- we have signed an MOU for a new long-term mobile network agreement with Digi, which we expected to complete in a few weeks. The full, final and definitive agreement, which spans over 16 years and includes both national roaming and running was announced 3 weeks ago. This confirms our ability to provide high-quality services over our infrastructure, which is further reaffirmed with the signing yesterday of a nonbinding MOU with Vodafone to enter into exclusive discussions to create a joint fiber code that would cover some 3.5 million premises with fiber-to-the-home, with a targeted take up higher than 40%. In Brazil, we said negotiations were underway to potentially migrate to an authorization regime. During May, we have reached the agreement with ANATEL and the Ministry of Communications, which we expect to complete in the coming months. In Germany, we expect the spectrum extension, and this was later confirmed by BNetzA. A 5-year extension is a step in the right direction. At the same time, we have progressed in the development of our wholesale agreement with Freenet. Finally, in the U.K., we anticipated the fiber will acceleration as projected, and the NetCo was receiving strong interest from intra-investors. Investor interest has continued during the second quarter and the fiber build continues to ramp up, with 5 million premises passed as of June, whilst the operational and financial network design remains well on track. In addition, in the U.K., the mobile network sharing agreement with Vodafone has been extended to 2030. We are delivering tangible and clear progress in all core markets. On Slide 7, we review the consistent positive performance of our Spanish operation. Progress across commercial KPIs and financials further increases the growth, profitability and visibility of our domestic business. We are in a well-segmented market with [indiscernible] positioning. Sound commercial momentum continued and translated into the fourth straight quarter of positive net adds in main services, with all customer bases showing year-on-year growth in the quarter. In convergent, the combination of increased net adds and superior NPS and ARPU, not only reflects the high value of the base but a right balance to sustain revenue growth. All of this resulted in revenue growth in Q2, with an acceleration in retail revenue, up to 2.6% year-on-year and improving EBITDA growth helped by the full contribution from the redundancy program savings. The inflection point of the EBITDAL trend is also noteworthy, showing a sequential improvement, which is expected to continue throughout the year. To highlight, as proof of our superior network in actual quality, we extended the valuable wholesale agreement with Digi, securing wholesale inflows beyond the next decade at an operating cash flow margin similar to the previous contract. And we continue to seek new win-win agreements with our existing wholesale partners. So we are very pleased to announce that yesterday, we signed a nonbinding MOU with Vodafone Spain to enter into exclusive discussions to create a 3.5 million premises passed FiberCo to add further visibility and stability to the broadband market, which we continue reshaping. On top of which, opportunities will open up from the ongoing deregulation process. On this slide, let me explain in a bit more detail our recent wholesale agreements, both [indiscernible] rationality in the wholesale market. The new contract with Digi has evolved to provide national roaming and partial range sharing for the next 16 years. Infrastructure sharing will boost the effective use of our mobile network, while Digi benefits from efficient use of its new spectrum. The range sharing agreement includes spectrum utilization in the 3.5 gigahertz band. This will be progressively deployed and help us to release own resources devoted to this high frequency band. Additionally, yesterday, we announced the signing of an MOU with Vodafone Spain to the joint FiberCo. In this fiber sharing agreement, Telefónica will contribute 3.5 million premises passed of its fiber to the home network, and joining with Vodafone Spain will connect an estimated base of around 1.4 million customers at closing. This model increases our fiber network returns and adds long-term visibility to wholesale revenue via long-term MSA agreements. As both parties will independently compete in retail and wholesale markets, network utilization will be optimized. We will also crystallize value to the valuation of part of our fiber at attractive terms, and further monetization may be realized with a potential sale of a stake in such FiberCo. Finally, optionality increases with the NetCo becoming a vehicle to share the fiber operating cost and a source to unlock additional funds in a potential market consolidation. All in, these 2 new agreements are value accretive for Telefónica Spain as they allow us to monetize our networks, increase the visibility and sustainability of our wholesale revenue function and also bring efficiencies. Regarding Brazil, Vivo maintains its leadership in both mobile and fiber-to-the-home business as a result of a very strong operating momentum. At the same time, our customer value increases, with contract ARPU growing 2.7% year-on-year, whilst churn is maintained at very low levels of 1%. Accordingly, mobile revenue grew 4.7% year-on-year, reflecting market rationalization and increasingly boosted by digital services, which are growing double digit. Whilst on the fixed business, fiber recap reached 24% and convergent customers more than doubled year-on-year. Strong execution helped main financial KPIs to continue posting near growth in euro terms even despite Brazilian real depreciation. In local currency, revenue and OIBDA posted a year-on-year addition to plus 7.4% and plus 7.3%, respectively, way higher than inflation growth. To note, the improved operating leverage margin to 15.3%, 1.2 percentage points increase year-on-year. Vivo continues also to reform its ESG commitments and has announced new targets for 2035. Finally, an important milestone was achieved during the quarter with the agreement with regulatory and administrative bodies to progress migration from concession to authorization, which is value accretive and will be finalized in the second half of the year. Our German operations maintained ongoing operational and financial momentum in Q2, as shown on Slide 10, driven by the focused execution of the accelerated growth and efficiency plan. Our core business continued to demonstrate robust commercial traction, with contract net additions increasing 37% quarter-over-quarter, supported by a low O2 contract or rate of 0.9%, which reflects our strong brand appeal and ongoing network enhancements. Revenue remained flat year-on-year, with growth in handset sales and fixed services, partially offset by decline in mobile service revenue, impacted by regulatory effects, changes in the parts business model and lower roaming. However, we achieved sustained EBITDA growth through ongoing momentum and effective cost management. In the first half of 2024, progress on 4G network densification and 5G deployment was significant, with over 550 new operational sites and approximately 3,400 expansion measures completed, resulting in our 5G population coverage reaching 96%. Other business fundamentals saw significant derisking as well during the quarter. The spectrum extension was not only already signaled by the regulator, but the position from the German government and its vendors was finalized. [indiscernible] that falls within our expected CapEx envelope, hence being neutral to our long-term guidance. Moving now to Slide 11 to review our U.K. JV, VMO2. In the U.K. we have remained committed to our strategy of being in key drivers for future success despite the competitive landscape. We continue to focus on delivering value to our customers while transforming and simplifying our business for long-term sustainability. We maintained our position with the highest fixed ARPU in the market, achieving 3.1% year-on-year growth driven by recent raising prices. Additionally, our combined consumer fixed and mobile revenue, excluding handset, remains stable, with O2 contract churn maintaining stability at 1.2%. Furthermore, fiber deployment has significantly accelerated with VMO2's full fiber footprint now reaching 5 million premises passed. Looking ahead, our [indiscernible] network sharing agreement with Vodafone UK totally strengthens our successful relationship but also strategically positions of VMO2 for the potential approval of the Vodafone VMO3 merger, including a prospective spectrum agreement. And finally, the NetCo is progressing well, perimeter established and we see continued interest from investors. Telefónica Tech on Slide 10 showed another strong quarter. Since Creation T Tech is delivering quarterly double-digit year-on-year revenue growth. In the last 12 months, TTech has generated EUR 2 billion of revenues, showing a 14% annual increase. Both funnels and bookings are showing good growth and revenue so far, mostly driven by the private sector with large contracts awarded. For example, 2 weeks ago, multinational financial player, BBVA, chose TTech to boost the cybersecurity of its operations on a global scale with incorporation of the most technologies in AI and process automation. We also recently closed large and relevant deals with Digi and Children's Health Hospital in Q2. Hence, this solid trend will continue to called into revenue growth, which we expect to accelerate throughout the remainder of the year. We have seen growth that is well balanced with increased completion from higher value-added services, longer-dated conducts, a wider customer base and better customer mix. We continue to gain relevance in higher growth markets, and our capabilities continue to be recognized by industry partners and analysts. This should allow TTech to continue growing ahead of its peers. Telefónica Infra on Slide 13 is driving profitable growth, leveraging a capital-efficient deployment of pure-proif infrastructure. Our fiber-to-the-home base continues its momentum after passing more than 1 million premises this quarter to 23 million. Telxius, our global connectivity provider that combines next-generation subsea cables with terrestrial backhaul systems and communication hubs, maintained considerably high profitability of around 50%, and is expanding colocation capabilities across U.S.A., Spain and Latin America. And as you may be aware, after looking at recent media comments, interest on Nabiax, the data centers business where we own 20%, is mounting. This provides us with optionality. I will now hand it over to Laura, who will guide you Telefónica's financial performance and the main financial topics. Laura Abasolo Thank you, Angel. As for Hispam on Slide 14, we return to growth in main financial KPIs, service revenue, EBITDA and EBITDAL minus CapEx. As such, service revenue grew in Q2 year-on-year. EBITDA was up 2.7% year-on-year, driven by Argentina, Colombia and Mexico. To highlight, the 67% EBITDA growth of our operations in Mexico on very good contract performance and network efficiencies. EBITDAL minus CapEx accelerating on EBITDA evolution, stabilization and CapEx decline. CapEx to sales stood at 6.6% in the first half of the year. Lastly, Telefónica Hispam is making progress in achieving greater rationality market, avoiding network overlap through different agreements on fiber and mobile. To continue seeking market rationality, we entered into a nonbinding memorandum of agreement with Millicom for a potential corporate transactions of our operations in Colombia that may imply the sale of our stake take in Telefónica Colombia. Slide 15 shows free cash flow performance in the first half of the year. Our free cash flow performance remains strong and fully on track. We are confident on our trajectory and our ability to meet our full year guidance of more than 10% growth. Let me address that we've been managing a tax dispute in Peru for some time. In fact, December 2022, we made a full provision of EUR 0.9 billion for this tax litigation. The exact amount and timing of payments have been uncertain, but we're consistently incorporating our best estimates in our guidance. In Q2 of this year, we made a EUR 279 million tax payment to Peru. This amount was larger than initially expected for the quarter. However, this is primarily a timing issue. The payment was already contemplated in our full year guidance, which remains unchanged and 10% growth for the full year. With this behind us, we have taken greater clarity on our free cash flow generation outlook, putting us in a stronger position for the second half. Importantly, this situation is fully contemplated not just in our 2024 guidance, but also in our 2026 targets, wherein our control acquisition is strong and our commitment to deliver on our free cash flow performance remains unwavering, both for this year and through 2026. As of June 2024, as net financial debt stood at EUR 29.2 billion, translating to a net debt-to-EBITDA ratio of 2.78x. This anticipated increase from year-end 2023 was primarily driven by our strategic move to raise our stake in Telefónica Deutschland and, to a lesser extent, free cash flow seasonality in the first half. We are committed to reducing leverage and remain on track to meet our targets. We are delivering a strategic focus on 4 key areas. First, driving EBITDA growth for operational efficiencies and revenue expansion, starting with Spain, our highest cash conversion market that we'll see EBITDA growth acceleration from Q3. Operating cash flow measured as EBITDAL minus CapEx is already growing above the guidance range of between 1% and 2%. So we see the usual CapEx pacing implying higher intensity in the second half of the year, EBITDA should keep improving. Accelerating free cash flow generation, which, as usual, will be back-half loaded, even more this year. And continued disciplined capital allocation. You should also remember that in the second half of 2024, a couple of deleveraging events will take place. We received the proceeds from the stake in CTIL and expect regulatory approval for the FiberCo in Peru. All in all, both will help bring down debt by EUR 7.4 billion. And both are set line, close events, just waiting to receive the proceeds. Furthermore, we lowered our debt-related interest cost to 3.58% versus 3.80% in December last year, thanks to the active refinancing exercise undertaken in previous years, the robust position at fixed interest rate in a strong currency and the [indiscernible] interest rates in Brazilian real. I will now hand back to Jose Maria, who will wrap up. Jose Maria Thank you, Laura. All operating metrics are either aligned with or exceeding full year guidance. Revenue growth of 1.1% aligns with our full year target of around 1%. EBITDA is growing [ 1.9% ] year-to-date at the high end of our 1% to 2% guided range. At the first quarter results, with EBITDAL minus CapEx would resume its -- our trajectory from the second quarter. Indeed, it grew 11.5% year-on-year in the second quarter, bringing first half growth to 3.1%, above our 1% to 2% full year guidance. This is driven by full benefits from Spanish workforce cost savings, [indiscernible] passed Q1 impact from lease inflation and accelerated IT deployment and excellent CapEx management. CapEx to sales stands at 11.3% year-to-date below our up to 13% full year guidance. [indiscernible] phasing should increase CapEx intensity in the second half. We are increasingly comfortable towards 2024 CapEx guidance. We'll provide more details on the next slide. As Laura mentioned, free cash flow generation is on track to meet full year guidance. It's back-end loaded as usual, so we expect acceleration in the remaining two quarters of 2024. This will allow us to resume our delivering trajectory. After the first year uptick from the Telefónica Deutschland offer and our second quarter dividend payment, we expect net debt and leverage ratio to decline, keeping us on track for our 2024 targets. Our strong first half performance supports our 2024 target and long-term strategic goals. As stated in previous slide and as we showed on Slide 18, CapEx is among the main drivers of our fixed as flow growth towards our 2026 targets. Let me give you a view of how we are approaching capital reach industry-leading levels of less than 12% capital intensity. Our strategy revolves around 3 key areas. First, business evolution. We grow more in low CapEx businesses, such as B2B and digital services within B2C, changing our CapEx profile. Legacy shutdowns, particularly copper decommissioning, significantly reduced our maintenance CapEx. This allows us to continue to invest in both, passing more premises with fiber-to-the-home and increasing 5G coverage. Both have high efficiency than legacy technologies. Second is network optimization. We are levered to open and disaggregated network virtualization, go-to-cloud strategies and AI and automation, increasing deployment efficiencies and flexibility to adapt to demand, open run and open broadband models are key to this transformation. And for strategic investments, we are passed the network [indiscernible] and now focusing tech cycle optimization. We are exploring ways to reduce capacity CapEx, such as our extended collaboration with Meta for video optimization, aiming for more responsible network use and reduced resource usage. No single initiative alone will be sufficient to achieve our ambitious targets. It's the combination of all 3 areas that creates a powerful synergy, driving us towards our goal. As such, this will take us from our '23 CapEx to sale ratio of 13.3% to our '26 guidance of less than 1%. This reduced capital intensity is an important lever to help achieve our target of more than 10% free cash flow growth CAGR through 2026. While the second half should see usual phasing with some higher CapEx allocation, our first half progress makes us more confident in our 2024 CapEx guidance than before. To summarize on Slide 19. Telefónica's second quarter 2024 performance demonstrated again solid execution as we continue to deliver against our strategic road map. We reported a solid set of results consistent with our full year 2024 guidance across all key metrics as well as our overall in CPS plan, which targets more than 10% free cash flow growth CAGR between 2023 and 2026. In fact, operational leverage improved significantly with EBITDAL minus CapEx standing above the guided range for the full year. Our core markets showed robust commercial and operational trends. In Spain, we are achieving annual growth across all main customer segments. Brazil and Germany maintained consistent profitability growth and Hispam showed sequential improvement. Our strategic has been in fiber and fiber infrastructure enhanced Telefónica's customer engages, positioning us for continued commercial momentum and top line expansion. CapEx intensity remains well contained, with legacy network shows free up resources for growth, which coupled the streamlined operations by digitally transforming processes and friendly focused capital allocation priorities, will allow us to deleverage going forward towards our target ranges and further sustaining our dividend. Finally, we continue seeing positive near-term catalysts in all our markets. Starting with deregulation, in Spain, we expect full FTTH wholesale deregulation and the renewal of certain rental obligation, which should result in increased commercial flexibility. At a EU level, we progress as well in 3 main key topics, including market definition, open Internet and fair share. As for the latter, we are starting to sign large commercial agreements with large traffic generators to optimize video for a more efficient use of network resources. In Hispam, we have entered into a nonbinding memorandum of understanding with Millicom for a potential corporate transaction of our operations there. And as said, we have signed a nonbinding MOU with Vodafone Spain to enter into exclusive negotiation for the creation of fiber co that should bring further rationality to the market, optimize never Operator Please standby, your conference will resume shortly. [Technical Difficulty] Jose Maria These, coupled with our focus on execution and combined with further wholesale and consolidation opportunities will allow us to keep building on our momentum and demonstrating the continued success of our strategy. Thank you very much for listening. We're now ready to take your questions. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of Andrew Lee from Goldman Sachs. Andrew Lee I had two questions, one on Spanish EBITDA growth and then the next on the group wholesale revenue growth outlook. On the Spanish EBITDA growth, you said you expect this to improve through 2024, but I think you delivered around 0.5% decline in the second quarter if we strip out the litigation effects. I might be wrong there, so happy to be corrected. While consensus still models FY '24 declines and investors are noting your negative ARPU trends in Spain. So I wondered maybe you now have better visibility to give us idea on your expected Spanish EBITDA growth run rate into the end of 2024, and what you think the structural sustainable EBITDA growth should be in Spain longer term? Any incremental color there you can give on that Spanish EBITDA outlook would be really helpful. And then on the wholesale revenue growth, how has your group wholesale revenue growth outlook changed in the medium term, given you've now -- as you stated through the call, you've now signed a new Digi wholesale contract. And I'm guessing there are positive externalities to your Spanish fiber wholesale business from the Vodafone Zegona MOU you've just signed. Any color you can give on your exit impact of that fiber MOU on wholesale revenues and the broader declining group wholesale revenue out would be really helpful there. Jose Maria Thank you, Andrew, for your questions. The first one on Spanish EBITDAL. I got a similar question in the first quarter. And as I said, back then, EBITDA and EBITDA performance in Spain in the beginning of the year were to be the weakest you would see this year. The factors that affected leases in Q1 and partially in Q2, which were volume additions, inflation and rates affecting accounting of recurrent leases are starting to phase out. So even if we have some nonrecurring factor affecting the year-on-year EBITDA in Q2. EBITDA growth has been improving from, plus0.2% in the first quarter to plus 0.6% growth in the second quarter. And year-on-year EBITDAL performance has improved further by 1.8% -- 1.8 percentage points quarter-over-quarter moving from minus 3.5% in Q1 to minus 1.7% in Q2. We are expecting further EBITDA and EBITDAL sequential improvement in the following quarters already starting in Q3, not only a higher EBITDA growth but all on lower leases annual increase, which is going to help EBITDAL to stabilize in the second half of the year. Then regarding the evolution of Spanish wholesale revenues, given resources is going to be a drag in 2024, we have a reliable network, we are protected by solid commercial agreements, as proven by the deal -- the definitive deal with Digi and the MOU just announced with Vodafone. What are the drags that we're seeing as headwinds, mobile termination rates prices are having since the first part of 2024. By the way, this also affects our German operation. Some international traffic services were impacted by declining voice traffic. We don't resell Formula 1. It's a content that we don't own, although this was EBITDA neutral because we are selling it as per the cost that we had on it. Roaming prices also decreased. And then the pass-through that we have on energy to some of our clients that were colocated in our central office with the decline of energy prices is no longer supporting us. On the other hand, MVNO revenues are growing. So we have lots of moving parts here that are putting pressure on the wholesale revenues in Spain. There are agreements that we have signed with Digi, if you take into account the conditions of price and expected volumes should be going forward at least, the level of revenues that we had with the old contract and also at the level of operating cash flow. The MOU that we have signed with Vodafone would be accretive for additional to the wholesale revenues that we're getting with our partners. So lots of moving parts, but the two agreements that we have signed are supportive of the wholesale revenue function for Telefónica Spain at rational prices that would not necessarily or will not produce erosion in the conditions of the retail market. So supportive to the wholesale revenue line, but also to the retail revenue line. Andrew Lee Can you give us any sense as to the materiality of the expected boost on the Vodafone MOU on wholesale revenues? Or is it too early to say? Jose Maria It's too early to say. It's an MOU, so let us move to definitive agreements, and we will be able to give a bit more color. Operator We will now take the next question from the line of Andre [indiscernible] from UBS. Unidentified Analyst I have two, they are quite similar but from different ends. So maybe if I just look at the EBITDAL minus CapEx guidance for the year and where we've progressed thus far. So you're targeting more than -- or roughly 5%, and you are 3.1% year-to-date with CapEx to sales running below the kind of 2024 run rate about 2 percentage points. So if you can just maybe talk to us about the building blocks if CapEx goes up in the second half, where the acceleration, the material acceleration in the EBITDAL maybe across the group coming from to get to the 5% in EBITDAL minus CapEx guidance, please? Any clarity on that? And then just looking at the deals that you're signing in Spain specifically or maybe just to focus on staying from that perspective. Looking at just returns, because, obviously, you're enhancing the usage of your networks. You're avoiding some overbuild, your kind of finding partnerships to different operators. So just from a returns perspective, if you can kind of give us any color on midterm kind of return on capital or something improvement you expect from these deals side from there? They're pretty positive. Laura Abasolo Thank you very much. We were not sure if the question was around Spain or in general. But if it's in general, we have a midterm guidance of EBITDAL minus CapEx of 5% in life of the plan. However, the guidance for the specific 2024 is more in the range of 1% to 2%. And at the moment, we are about 3%. So we are doing better versus guidance. The reason behind we explained when we gave the year guidance as part of the GPS plan, it improves leases though grows slightly throughout the life of the plan. And that growth is higher at the beginning of our plan because of the network growth impacts remaining CPI who is decreasing interest impact of the new contracts and new grow additions. So all of that in place that, that EBITDAL minus CapEx growth is back loaded in our long-term plan. Having said that, we are super focused on lease monitoring. We are working on all mitigation measures. We are serving, as you know, we are reducing the quantity. We are renegotiating the agreements, and you can see that it's basically linked to the 5G expansion being more acute in the first years. We have some regions like Spain where leases are completely on the downward trend. Spain, as Ángel explained at the beginning, the lease impact was higher. It was the highest in the first part of the year. So you should be comfortable with our long-term EBITDAL minus CapEx guidance, and with the guidance for '24 which is lower than the full year. I hope I answered the question with that. Jose Maria And regarding your second question, you have to frame the deals that we are announcing within the restructuring of the Spanish market that has followed some consolidation or some M&A in our market. So this continues to be a very segmented market in which you have in B2C premium positioning like we have in the mid-high end of the market, which is very rational market, some more competition in the bottom end. In B2B, we continue growing very substantially with a very strong positioning. And in wholesale, which is where your question I understand was focusing on these deals, the whole market is reconfiguring. And under a principle of rationality that we are perceiving on the side of all the players. There is clearly, as you were saying, an objective to optimize the return on capital employed by avoiding overbuild risk. Also, at the same time, there is a need and there is a willingness from the different players to optimize network utilization. And doing this in such a way that the market retains a healthy level of competitiveness, but without putting undue pressure on the market. We have been -- and we were describing this on Slide #8, we have been very active in sharing not only on the mobile centers on the fiber side, our infrastructure, and we believe that these are win-win agreements for the different players. I don't know if this responds to your questions or you needed some additional detail. Unidentified Analyst No, that is helpful. If I may, just maybe -- sorry for the confusion with the first question. I was maybe are basically trying to understand by which means does the growth in lease costs, especially in Spain, maybe moderate? And I was maybe going to follow up with asking or by asking in terms of the corporate shutdown that is happening over this year and next year maybe, is that a big part in terms of moderating leases? Jose Maria Yes. Sorry, I'm not sure I understood exactly question because your third question was on group level, and now you're asking for some specific detail on Spain. Could you please repeat? Unidentified Analyst Yes. So maybe just in terms of the lease moderation, because I guess a little of the growth, as Laura was already addressing, it's coming in Spain. So I was just trying to understand the growth rate in leases should therefore moderate, and I was going to follow up specifically on the copper shutdown over this year and next year as the big part of how containing the lease growth in the midterm as well. Laura Abasolo As you are listening to my first answer, maybe you didn't -- maybe I want to explain in myself dealer, because I said exactly the opposite about the Spain. I said leases are under control. They are slightly increasing at a group level. We have certain places such as East Panera downward trend. Others, like Brazil, with the oil transaction and the 5G regulation maybe in the upside train, although very much under control. And in the case of Spain, it's exactly the opposite. We have the highest level in the first half of the year and should be annualizing during the year. So EBITDAL minus CapEx won't be a problem at Spain level. And the worst quarter has been actually Q1, and that could be annualized. Maybe now it's more clear. Otherwise, you can ask our Investor Relations and I can provide you full detail. But the message in Spain will just the opposite. Jose Maria Yes. I said in a previous response, this growth in Spain should continue easing quarter-to-quarter to reach EBITDAL stabilization in the second half. Operator We will now take the next question from the line of Mathieu Robilliard from Barclays. Mathieu Robilliard I had a question on the free cash flow. So as Laura pointed out, there is a one-off payment in Peru. And as you said, initially, there was a EUR 900 million for that item. I understand you may not want to share your expectations for what will be the final total payment [indiscernible]. But in case all the remainder of what you -- could have to pay was to be done in 2H 2024, and again, I'm not sure you have this in your numbers, but I think so far you've probably paid more than half of it. So if you have to -- theoretically on the rest in 2H 2024, would your full year guidance still be [indiscernible] for 2024? That's my first question. And then I had a second question on LatAm. Hispam America, so as you flagged, CapEx is very low. I think you said 5.6% of revenues. I understand that in a country like Mexico, you're essentially operating like a MVNO. But in countries like Peru, Chile, Colombia or even Argentina, you do have a network. So I was wondering how it was possible to maintain the quality of the network with such a low CapEx that, that number would spike back again in H2? Or you thought this was something sustainable? Laura Abasolo Thank you, Mathieu, for the question. I'm very happy to talk to about Peru, so I can clarify. As you said and I said, there's a provision of around EUR 0.9 billion, specifically the very EUR 845 million are the specific ones to '98 to 2001 that have taken so long, and there's so much related to interest. Some of that is still under discussion. The payment, you were right. We have paid approximately half already because on top of the EUR 279 million payment we did in 2024, we had an outflow of around EUR 123 million in '23. But the remaining is going to be paid in 2024. The Peruvian law allows for fractioning, and the fractioning will start from 2025 beyond. So it will go then beyond the GPS plan. But we are fully in control on the situation. Obviously, the timing of the payments so far have been uncertain, with the fraction in the agreement with the Peruvian authority will be much more certain. But the punchline here is this has been included in our guidance and in our estimates, both for 2024, both for the midterm guidance. So it doesn't affect whatsoever the 10% growth in '24, nor the 10% growth all the way through 2026. I could give -- I mean, it has been much concentration in Q2, which is not ideal. But on the other hand, as I said, now we have certainty. And it does not put in jeopardy at all our free cash flow guidance. We are very confident on the free cash flow growth trajectory and completely on track to meet our full year guidance. On the Hispam situation regarding CapEx, usually, CapEx is also backloaded in the case of Hispam. So you shouldn't expect 6.6% of our revenue we have at the moment. We run Hispam within a 10% envelope approximately. We can be a little bit up and down, but that would be the figure you should have in mind. But that doesn't mean Hispam invest 10%. We invest in different ways. In the case of the fiber, this goes through the fiber costs. So we are addressing to the best ultra-broadband technology in the region through those vehicles instead of doing it through CapEx. We have just gone through a very, very successful run negotiations for 5G in region. And in some cases, we are sharing network, as we did in Colombia, and we are happy to share network elsewhere in the region. So you should expect us to do it in a very disruptive way asset-light, sharing through vehicles. But the 10% in that framework allows us to put a good technology at the service of our customers. Operator We will now take the next question. From the lane of David Wright from Bank of America Merrill Lynch. David Wright Another two, please. So first of all, just on guidance, you chose to guide in moving currency, which I guess was always a risk that could perhaps be back-firing a little now with the Brazilian real just gapping out a little. And I guess if I just did a simple back of the envelope, Brazil is, give or take, 30% of your group EBITDA. I think the currency had been very stable around 5.5 to the euro. Looks to be now around 6 to the euro. So there's a 10% depreciation on something that contributes 30% of group EBITDA, which, I guess, math says 3% drag over time, given your group outlook is around 2% CAGR to 2026. I'm just wondering how that can be captured, that risk, or whether your guidance does assume that the Brazilian real winds back in a little. And then I guess just my second question, just a little bit of a mix-up from my understanding. You said that U.K. bill was all on track. That's not quite what was said in the Liberty Global call, where I think it was made clear that the Nexi fiber build had actually lagged our expectations a little and that the -- if I'm right, I still don't think -- I think you're behind the curve monetizing some of that fiber infrastructure. So contradicting messages there if might be one for loops to maybe resolve. Laura Abasolo David, on the Brazilian real, I think it's soon to see how we'll finish the year, because we think the fundamentals are solid. Solid GDP growth, external accounts remain consistent. And I think it has to do with certain things regarding domestic fiscal and monetary policy, but it would definitely improve. In any case, we protect ourselves from the FX in different ways. I mean we protect the solvency and the ratio, the net debt to EBITDAL by putting debt in local currencies, as is the case in Brazil and some Hispam OBs. There's a natural hedge as the revenue impact is much higher, and it diminishes until it gets all the way to free cash flow. And on top of that, for the given year, we hedged 20% or above of the free cash flow that comes from Brazil. And this case has not been a -- this year has not been an exception. And we have hedged that free cash flow at better rates than the ones we have [indiscernible]. What is definitely true is that consolidating -- once we consolidate into euros, if -- it's not only the Brazilian real impacting, it's every currency. And up to June 2024, the FX impact has only been EUR 11 million in revenue and EUR 2 million in EBITDA. So our guidance, as you correctly said, is in euros, because we think we have to grow in euros. But it's also true that we gave the FX attached to that guidance. And sometimes, the FX in a given year may not reflect the fundamentals. So if that could divert in a huge amount, then we will need to reconcile a bit the effects of the guidance and the actual FX. But the punchline here again is that we think the fundamentals behind the reais are strong, and it will convert to the assumptions we use for when we gave the long-term guidance, and this is a long-term game. Jose Maria Regarding your second question, I'll pass it to Lutz to make sure that we don't incur in any inconsistency in the messages. Lutz Schüler Yes. Can you repeat the question? David Wright Yes. No. The message from [indiscernible] was that U.K. fiber build is all on track, but I don't think that was the message on Friday's call. I thought that there was a bit of -- you were lagging targets perhaps a little with some of the conversion. I think it might have been more the nexfibre footprint. Lutz Schüler No, we are on track with the build on nexfibre. We had a record quarter in Q2 with almost 300,000 homes released, right? And we are also on track with FiberUp. I think what I said on the call was that we are a bit behind our ambition in selling into the fiber homes with nexfibre, right? So because here, we are investing and we want to generate more customers in the second half of this year. But with the build, we are fully on track. David Wright Okay. And maybe, Laura, just to double check. So I guess if the currency does remain a little weaker than the potential situation we're looking at, is that you could see sort of revenue EBITDA impact. The point you're making is that it's protected at free cash flow because of the variating mechanisms and CapEx. That's the point here, is the cash flow is secure? Laura Abasolo Yes. That's exactly the point, David. Thank you. That's why we are so confident on our free cash flow guidance for the year and our ability to deliver the 10% growth. Adrian Zunzunegui Yes, we have time for the last question, please. Operator We will now take the last question from the line of James Ratzer from New Street Research. James Ratzer I have two questions, please, both actually on your wholesale agreements that you've just signed. So the first one on the Digi contract. I'm intrigued by the line in your presentation where you say the revenue will also be driven by traffic-driven growth. I was wondering if we could just kind of go through the economics of the deal a little bit more. Predicting how data pricing is going to develop over a 1- or 2-year, let alone 16-year view is very difficult. So we saw in Germany when Vodafone signed an NRA was 1 and 1, it was actually linked to network costs to give a bit more security to the market. I mean how can you help to give us some confidence around the price that Digi get with this wholesale agreement that they can't be disruptive or more disruptive on market pricing? And then the second question I had, please, was you're announcing here today as well that you've expanded your wholesale agreement with [indiscernible] Germany, which I think is a new announcement today. Could you kind of run through a bit more of the economics on that in more detail? Are you expecting freenet now to bring more traffic over from Vodafone and Deutsche Telekom? Would just love to hear a bit more of the details of how that agreement will work. Angel Vila Thank you, James. I'll take the first one on this, and I'll pass the second question to Markus Haas who's also connected. First thing I would like to say is that we move swiftly from an MOU to a full hedge definitive contract in 2 months with [indiscernible] because we have those of experience in wholesale contracts and a very long-standing relationship, I think. The case that you alluded to in Germany is taking a little bit more time. Another difference of the two cases is -- really is not a capacity deal whatsoever. We need to be very clear, we are expecting and we have expected some volumes and we have a pricing mechanism, which is structured with payments that depend on the number of subscribers, and their consumer traffic not based on the cost of our network. And regarding the rent sharing, it will depend on the number of sites that will be shared and there will be a payment on that one. Markus, if you can take the [indiscernible], please? Markus Haas Thank you, Angel. Thanks, James, for the question. I think we renewed our agreement with Freenet. It's a 10-year deal with a steep customer increase, and we foresee the full run rate of this strong increase of customers on our network coming from Freenet already in 2026, clearly compensating some of the effects that we will see from 1 and 1. So while it's a win-win deal that we signed, it's long term and it's a substantial increase of the relationship and partnership that we have with Freenet going forward. James Ratzer Markus, on that, I mean you mentioned the increase in customer numbers. I mean are you able to just quantify that a bit more? What are you expecting for customer growth from Freenet then on your network out to 2026 or future revenue growth from the deal? Markus Haas It's a significant increase. I think we should respect that Freenet is also a listed company, and what we can share on this call. So from that perspective, is a significant increase of our partnership. This is what I can say. And it's a fast ramp-up, so we will see already the full run rate effect reflected in our 2026 numbers in Germany. James Ratzer Okay. So that's a binding agreement from them to migrate more customers over to your network from Vodafone, Deutsche Telekom? Okay. Then Ángel, could I just follow up on -- just on the traffic growth point? I mean traffic growth is growing at kind of 30% to 40% per annum in Spain. But presumably, the Digi wholesale revenues aren't to grow in line with traffic growth. So there must be some price deflator baked into your contract. How does that work to just offset traffic is, please? Angel Vila I'm afraid I cannot disclose commercially sensitive information, but the projection and the figures that we have is that the yearly revenues will be roughly in line with the current ones. And that is as much as we can say on this agreement. Operator At this time, no further questions will be taken. Jose Maria Thank you very much for your participation, and we certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relationship department. Good morning, and thanks. Operator Telefónica's January-June 2024 Results Conference Call is over, you may now disconnect your lines. Thank you.

Redeia Corporación, S.A. (RDEIF) Q2 2024 Earnings Call Transcript

Roberto García Merino - Chief Executive Officer Emilio Cerezo - Chief Financial Officer Good morning, ladies and gentlemen. We're starting our presentation for the results of the First Half of 2024. We welcome all those who follow us over the phone and on the website. With us are Roberto García Merino, Chief Executive Officer; and Emilio Cerezo, Chief Financial Officer. I now give the floor to our CEO, Roberto García Merino. Roberto García Merino Thank you, Sol, and good morning, everyone. Welcome and thank you for attending this presentation, where we're going to be sharing the most relevant milestones of the first half of the 2024 financial year with you, looking at Redeia's performance and the results of the group's performance over the period. We'll wrap up giving you our vision for this year and reviewing progress in achieving the targets under our current 2021-2025 strategy plan. Moreover, at the end of the presentation, we will open the floor to Q&A and we hope to answer any questions you might have. So, let me start the presentation by identifying the highlights of the period. Electricity grids are essential in the transformation towards a more efficient, more resilient and environmentally responsible system. And at Redeia, we know that we have a unique opportunity, leading the deployment of transmission grids to achieve an emission-free model. We continue to make progress, then, in our commitment to fight against climate change and proof of this is the percentage of renewables we've got in the first half of 2024 in our national generation mix. That's continued to increase to average levels of around 60%. Now, with this boost to renewables, 78.4% of the energy generated in the first half of the year came from emission-free sources. The mainland generation structure continues to be led by wind energy, although we've also seen a notable advance in photovoltaic solar energy, PV energy, that is. And I'd like to highlight that on the 21st of June, PV solar energy beat its daily production record, putting out 201 gigawatt-hours, which accounted for 26.8% of the total output of the day. And I should also note that we're observing a possible change in trend in the evolution of demand, with growth in the last six months of close to 1% after many months of flat performance, as well as a reduction in electricity prices in the spot market, with figures well below the average values of 2022, the year when Russia invaded Ukraine, thanks to the availability of hydro, wind and PV energy well above the usual levels. This success is underpinned by a sound electricity transmission grid and the flexibility measures implemented by the system operator, in which we are a world pioneer. Thus, the mainland grid has integrated around 98% of renewable production. Or, to put it another way, the level of spillage due to grid restrictions has been around 2%. That's well below the 5% established by European Regulations. From a global perspective, as a roadmap for a decarbonized economy and a country that's integrated and energy cohesive with Europe, we have the National Integrated Energy and Climate Plan, known as the PNIEC, whose update is expected to be approved very soon, with ambitious goals such as achieving a 32% reduction in greenhouse gas emissions against 1990, reaching 48% of renewable energy in the final use of energy or 81% of renewable energy in electricity generation, while reducing energy dependence to 51%. So, that's how Spain is moving forward on its path towards compliance with the Paris Accord, a historic milestone to combat climate change and accelerate actions and investments for a sustainable future. To meet the PNIEC targets and to incorporate the energy policy defined at state and European level, the Ministry for Ecological Transition and Demographic Challenge has initiated a new electricity planning process for 2025 to 2030. This planning will set out the development needs of the electricity transmission grid up until 2030, reinforcing existing infrastructures and promoting new facilities. The process is structured in six stages and we're currently in the stage of preliminary studies. Having gone through the initial stage of proposals, which will last until next October, when the initial development proposal will be finalized and actually sent to the Ministry. Final planning should be approved in 2025, we think. In a context in which the relevance of grids for the energy transition has become so important, we can say that Redeia's investment drive is and will be fundamental in the coming years. During the first six months of 2024, we have invested over €420 million in the TSO. That's 19% higher than the investment made in the same period of 2023. And that highlights the actions related to International interconnections, links between islands and energy storage, making progress towards meeting the goal of getting €1 billion investment by the end of the year. That's the largest investment ever made in the history of Red Eléctrica. I'd like to highlight that the recent approval of the modification of specific aspects of the current planning has increased investment by €489 million. That's yet another sign of the need for grid development, as this amount has been allocated to a set of urgent actions. 23 of which are intended to meet the requirements for new high-power demands, nine actions for storage and renewable generation, three to cover operational needs, and 38 to meet the needs arising in the execution of the planning itself. In addition, the addition to the Spanish Recovery, Transformation and Resilience Plan, which channels the European Next-Gen Funds, includes an item to finance the development of electricity infrastructures in the transmission grid of €931 million. The application of these funds has yet to be regulated under Royal Decree, but that Royal Decree should be published in 2024. In this context of heavy investment, the incorporation of improvements in the remuneration model for the next regulatory period starting in 2026 is essential to obtain a reasonable return on this deployment of essential infrastructures for the energy transition in Spain. During the first half of the year, we've seen numerous advances in the regulatory field, starting with the approval at the beginning of the year of a timeline set by the CNMC, which included the modification of Circular 2/2019 to make certain adjustments to the methodology for calculating the TRF, adapting it to the challenges of the energy transition and to enable efficient investment in networks. In addition, a set of public consultations on various regulatory issues were held between May and July, which established some changes between this year and 2025. First of all, the CNMC opened a specific public consultation on the financial remuneration rate for the next regulatory period, that's 2026-2031, and another specific consultation on the review of the methodology for calculating the remuneration of the electricity transmission activity for the next period. The purpose of this is to ensure that the methodology finally adopted will be properly adapted to changes stemming from the decarbonization process, ensuring a balance between the development of infrastructures, efficient use of existing grids and the incorporation of the new features expected of them, associated to digitalization and the new figures emerging in the electricity market. Also, the Ministry has opened a public consultation on the modification of the network investment limit. And finally, talking about regulatory developments, you should note that the public hearing has begun on the draft bill to re-establish the National Energy Commission, with the aim of having a specialist regulator and supervisor. This adds to the attempts of the Spanish energy system to decarbonize. As you can see, there have been many important milestones over this period and we expect the second part of 2024 to continue to be full of relevant events for the TSO. In coming months, we expect the final resolution of the transmission remuneration for the years 2022 and 2023, and the draft of the new planning for the period 2025 to 2030. Already, by the end of the year, the hearing process for the modification of the circular where the financial remuneration rate for the next regulatory period will be established. Moreover, from a group perspective, we have continued to strengthen our diversification businesses. At the International level, following the commercial operation of our latest projects in Peru, Chile and Brazil, we continue to consolidate our activity and promote our sustainable development outside Spain. In our Satellite business, as you know, the entry into operation of the new Amazonas Nexus Satellite put into service a year ago stands out. And we also made progress in the commercial deployment of the Único Rural Demand program, which guarantees access to broadband connection in the rural areas where there is limited access to traditional networks. So, to sum up our diversification businesses, to talk about our Fiber Optic business, we can say that it is maintaining its sound and stable business model in order to offer universal connectivity with a contractual structure that accompanies the current macroeconomic environment. And now, I would like to say that recently we have got the performance that is now going to be discussed with the earnings that we got for this first half of the year. As I was saying, I want to talk about the earnings that we got in the first half year, and these results have been, as you all know, marked by the end of the regulatory useful life of the pre-1998 assets. The yearly impact on revenues of this amounts to approximately €260 million and that generates a negative hit on all the different lines of the group's income statement. However, the results obtained in the first half of the year are in line with what we were expecting and in line with market expectations. CapEx in the first six months was also very high, with more than €457 million in investment, of which €421 million are for investment, TSO investment and that confirms our objective of exceeding €1 billion of investment by the end of the year. Also, following the approval of the General Shareholder Meetings, a final dividend was paid against the 2023 earnings of €0.7273 per share. It was paid out on the 1st of July, fulfilling our market commitments, reaching a total dividend against last year's earnings of €1 per share. If we look at the income statement as a whole, we can see the impact of what's been going on with the pre-1998 assets we already mentioned. However, if we get a like-for-like basis, that is, eliminating the effect of these assets in both years, that is, the investment remuneration obtained in 2023 and 2024, the income associated with the life extension incentive, which we call REVU or R-E-V-U, we can say that the performance of our business has been positive, with growth in all the key lines on the profit and loss account and a net profit of more than 5%. A breakdown of EBITDA in the first half of the year shows that, with the exception of the TSO, all businesses contributed positively, especially the International Transmission business, which grew by more than 12%. I would also like to highlight that 80% of the group's EBITDA comes from regulated businesses, both here in Spain and worldwide in the international markets. In short, if we disregard the adjustment of pre-1998 assets, which we already knew about from 2013 and had already included in all our estimates and plans, the results for the first half of the year are positive and allow us to foresee a year-end in line with the commitments made at the beginning of the year, which we will discuss later. So, I now hand over to Emilio Cerezo, who will analyze these earnings in more detail. Emilio Cerezo Thank you, Roberto. Taking a deeper look at the evolution of revenues, these declined by 10.9%, affected by the aforementioned pre-1998 effect, with a positive performance in the rest of businesses. On a like-for-like basis, excluding the effect of pre-1998 assets, we observed a growing performance of revenues by 1.6%. In International business, we can basically highlight the positive performance of Brazil, partially offset by lower revenues from projects for third parties and from 10 in Chile. In the Satellite business, I would highlight the contribution of the Amazonas Nexus Satellite, operational since July 2023, as well as the contribution of its investee, Hisdesat, which has shown positive results during the first half of the year. Also growing are revenues from the Fiber Optic business, favored by the positive effect of inflation-linked nature of their main contracts. If we focus on the evolution of other operating expenses, OpEx grew by 4.1%. However, excluding expenses that have a counterpart in other operating income, we do observe that operational expenses are contained and were reduced by 1%. As a matter of fact, the first thing we observe is a higher expenses with a counterpart in other operating income, such as Chira Soria and projects for third parties. Other external costs are reduced by €3.9 million due to a lower asset maintenance at the CEO, that's about €6 million, as a consequence of the completion of an extraordinary plan in 2023, partially offset by higher expenses for European projects of the system operator. During the second half of the year, further costs will be reduced, says the aforementioned plan, was mostly run during the second half of 2023. On the other hand, staff expenses grow by €0.8 million due to a higher average headcount and offset by the non-recurring effect of new collective bargain agreement during the first half of 2023. Revenues and expenses brings us to an EBITDA showing a reduction of 13.8% compared to the previous year. Without the impact of pre-1998 assets, this performance would have been 3.5% higher. The positive contribution of all group's businesses has enabled this performance. And to wrap up the income statement, our net profit was €269 million or 24% lower than the one recorded during the first half of the previous year and matching our estimates. Standardizing this figure, as we have done in the rest of the income statement, our growth would be 5.2%. This can be explained by several reasons beyond the EBITDA performance. On the one hand, the amortizations show an increase, mainly at Hisdesat due to the new satellite and service AMZ Nexus. And on the other hand, the financial result took a slight dip due to the higher average cost of debt, which went from 2.11% to 2.22% at the end of June 2024, partially offset by higher financial income coming from efficient financial management for placing existing liquidity. The corporate income tax went down due to lower profit before taxes and minority interests did increase by €1.9 million. Going into investments during the first half of the year, €457 million were invested, out of which €421 million are investments in the TSO, exceeding the investment made in the previous year by 19%, and consolidating the significant effort made by the company to accelerate investment in the transmission network. About strategic TSO projects, we can highlight the following. First of all, the electricity interconnection between Spain and France through the Bay of Biscay, which continues to progress with the aim of reaching the commissioning milestone for the first link in 2027. We also continue to make progress in the Peninsula-Ceuta interconnection. As a matter of fact, in June, we got the administrative authorization to authorize several works for said interconnection. As for the Galicia-Portugal interconnection access, during May, the Beariz station was commissioned and the rest of planned actions remain as planned for the rest of 2024 to complete the strengthening of the international connection with Portugal. And finally, about storage in the Canary Islands, civil works continue on the reversible hydroelectric plant to integrate renewable energies into the electricity system in Gran Canaria to store this energy so that it can be used at the appropriate times. The evolution of International business involved only €2 million investment, half of which were devoted to a control center in Chile, along with the Engie Group. Investment in the Satellite business totaled €7.8 million, mostly linked to satellite capacity leasing. I would like to insist that over 92% of our investments are eligible under the European taxonomy, thus reinforcing our commitment to sustainability. In addition, I would like to conclude this section on OpEx by adding that we do have long-term framework agreements with our main supplier, which allows us to move ahead on our scheduled plan to optimize and streamline the procurement process while minimizing risks in the supply chain. About our balance sheet, net financial debt for the group at the end of the first half stands at €5.1 billion, €130 million above December 2023. The operating cash flow generating during the first half of the year exceeded €460 million, mainly due to two factors. First, the generation of cash flow from operations of €693 million, including the collection of the 2022 income tax refund for €193 million, coming mostly from the capital gain after the sale of Reintel. And the second one is the increase in working capital for €230 million as a consequence of the refund of part of the excess tariffs collected in previous years. The outstanding amount at the end of the first half of the year reaches €166 million and is expected to be repaid in oncoming months. Considering all of the above and the investments made during the year, plus the payment of dividends, the net financial debt goes up by 2.7%, showing solid financial ratios and maintaining a credit rating of A- by Standard & Poor's and Fitch. On the makeup of our financial debt, I must highlight the diversification in terms of sources of finances, with 92% of it at fixed rate until maturity and with a clear predominance of euros over other currencies. Thanks to this structure, we have maintained a competitive average cost of debt in the present environment at 2.22%. During the next four years, we will face maturities of approximately €3.2 billion, mostly covered by our solid liquidity position, which was reinforced after the recent issue of a green bond for €500 million through Redeia Corporación, which contributes to linking 66% of our financing to sustainable criteria. Having analyzed at the end of the first half of the year, I will now give the floor back to our CEO for him to explain our vision for the end of 2024 and the progress of our strategic plan 2021-2025. Roberto García Merino Thank you, Emilio. As we've said in the past, 2023 was a turning point for our TSO business as we speeded up our investment plans and began to see the fruits of the company's effort to achieve a significant pace of investment. Now, in midway through 2024, we can affirm that we are maintaining this positive investment path, focused on reaching levels of around €1 billion. These levels have never ever been seen in the company before. Furthermore, I'd like to remind you that this CapEx commitment is not just a 2024 milestone, but that we're in a position to ensure that it will continue at these levels for years to come. As we've been observing, 2024 is a year mainly marked by the end of the useful life of the pre-1998 assets, which ceased to receive part of their remuneration. That gives us a net impact on our revenues of €260 million, and without a doubt, this aspect, which we already knew was going to happen, is a big negative hit, but it also means that 2024 will set the baseline for future growth of Red Eléctrica, where we predict a positive trend in earnings from this financial year onwards as the new projects come into service. Internationally, we're consolidating our activity after commissioning the last projects underway in 2023. In the Satellite business, Amazonas Nexus will continue to make a positive contribution, and the Fiber Optic business will continue to show stable revenues, contractually hedged against inflation. All of this allows us to confirm the guidance we gave at the beginning of the year, with an estimated EBITDA in 2024 of over €1.3 billion and a net profit of around €500 million. Debt will increase, taking into account the significant increase in investments we need to fund and will stand at around €5.7 billion by the end of the year. This level of debt is better than the approximately €6 billion we mentioned in our February earnings call, and that's due to a better collection path of the regulated tariff and the delay in the estimated return to the electricity system of certain collection items from previous years. And now, to wrap up, I'd like to talk about the progress made in meeting our strategy plan and on the status of our achievement of objectives for 2025. By 2025, our CapEx target is around €5 billion, after increases from the initial plan we originally presented in 2021, that accounts for an increase of over 15%. In terms of the roll-out of our plan, we can say that, in general terms, the development of investment is progressing according to plan, with the pace and volume committed in the case of the TSO increasing in all lines. To conclude, once again, we can reaffirm our financial targets until 2025, offering attractive shareholder remuneration and maintaining a sound financial structure. So, many thanks for your attention, and having finished this presentation as such, we're now happy to take any questions you might have. Thank you very much. [Operator Instructions] The first question comes from Javier Suarez from Mediobanca. Go ahead, please. Javier Suarez Yes. Hello. Good morning, everyone, and thanks for the presentation. Now, I've got various questions. The first one has to do with the timing of this update of your business plan. My question would be, when will the company feel itself in a position to update the market on its business plan, maybe extending the time horizon up to 2030? It's clear that there are certain elements that are still lacking, but I'd like to know, more or less, how you see the timing? What would be the perfect time to make that presentation to give us the visibility of the plan, which is currently ending in 2025? My second question has to do with your outlook for the new regulatory period. What kind of remuneration will you expect to get on invested capital? Some companies have been sharing their outlook with the market, talking about the possible return we could expect after 2026. And do you feel that you're in a position to talk about a range of appropriate returns that you might expect to give us an idea of what you get on the transmission grid and in the remuneration rate? And then CapEx, in the presentation, you mentioned that the minimum level of CapEx could be about €1 billion, but this minimum level of CapEx, is it realistic? It would be interesting not just to have the minimum, but to know what you really expect as the most probable scenario? Thank you. Roberto García Merino Javier, thank you very much for your questions. And yes, well, as to your first question about when we'll be ready to put out our strategy review? Well, I'd say over the next few, four months or five months we should have a couple of parameters which we really need before we can put out our new strategy plan. The scope of the investments and there in the first draft of the new planning, which we estimate should be announced around October, we'll already have a first point of reference. And obviously the second one would be the estimated TRF that the CNMC would give us for December this year. So in the current strategy plan, we have -- it goes up until the end of 2025, as you know, but I'd say that once we've got clear visibility of these two essential parameters, probably, over the first half of 2025, although this obviously depends on when we get access to the draft planning and the initial TRF review, we should be able, obviously, we have to have an internal debate in the Board, but I imagine it would be in the first half of next year. And then what we're expecting with respect to your second question, Javier, of the new regulatory model, well, in general lines something better than what we've currently got. I think the current regulatory model doesn't really match the kind of needs we currently have in the deployment of infrastructures, and that's true for us and for other agents within this sector. So we're having an ongoing talks with the CNMC and we expect to get a clear enhancement of the current 558 level, but there are other parameters, other criteria in the model as well, above all for the transmission grid that should also be analyzed, and in our opinion, improved on. So what we're expecting is clearly a significant improvement in the TRF within a range similar to other companies, but this I'd say is pretty clear. And then we are analyzing alternatives and talking to the CNMC to improve their remuneration standards, so we're thinking of bench lines in investment costs that we've had from 10 years back now. And other things are taken up in other regulatory frameworks at European level, like the remuneration of works in progress or the incorporation of inflation into the remuneration model, but in general lines what we're expecting is a significant improvement in TRF and a general improvement in the regulatory framework. And then CapEx, well, as you so correctly say, we are reckoning on getting record levels for the company, it's true, we've been preparing for this for some time now, so that we can really ratchet things up. I can remind you that we're pretty well trebling the level of annual CapEx that we've been reporting in the last few years and we're now getting ready to take on additional volumes over and above that billion, which would be an average that we're expecting for the future. We are getting the staff and resources we need, we've got the capacity to execute our plan, but we have to see the kind of thresholds that will be finally established for the plan. But the hard ground work's already been done, changing from €400 million to over a €1 billion makes us ready when the time comes for additional investments in our business. Next question from Fernando Lafuente from Alantra. Go ahead, please. Fernando Lafuente Hello. Good morning, Roberto, Emilio. I have two questions for you. The first one is about the funds you're expecting from the EU. What's your best estimate about when these funds might come in, and how serious are those funds for this year and next year? And the second part of the question is about your balance between investments and dividends for the next years, with the growth of investment, but also the growth of the company bottomline. How do you perceive that equilibrium to keep up your payout at some point of the next strategy period for perhaps a potential increase? Roberto García Merino Thank you, Fernando. About EU funds, those funds are validated, confirmed, €931 million that would go to funding, commissioning of investment assets until June 2026. We're still pending for the new regulation to see what happens, to see how access to those funds will be regulated and we expect those developments to be enforced before the end of this year. And I think this will come as an important support in terms of additional funds at a time when, as you correctly say, investment volumes will stress the company's financial position. So we expect those funds to be cleared this year so that we can bring them into our balance sheet structure for the next couple of years. To the second part of your question, I believe that it will all depend on the regulation framework that we use for our new strategy plan. Just as we remain consistent when drafting the present strategy plan and had to make a decision to reduce our dividend payout, because we needed to manage the adjustment of pre-1998 assets, we are also consistent now if the group's financial capability so allows in a growth scenario that's still demanding in terms of investment, we might consider accompanying that growth with dividends, RAP [ph] or EBITDA. So depending on the regulation framework, well, you know that we have remained a consistent company in our takes. Our starting point is a very strong, solid balance sheet. I believe we're one of the few companies with best balance sheet structure to tackle demanding years in terms of CapEx. So that will probably allow us to generate consistent scenarios in the growth of EBITDA dividends or RWAs that would be consistent with the company's philosophy. Thank you very much. The next question comes from Ignacio Domenech from JB Capital. Go ahead, please. Ignacio Domenech Hello. Good morning. Thank you for your explanations. I've got two questions. First of all about your CapEx plan. We will have the draft, I believe, when we come back from summer holidays and you talked about that €1 billion that you're going to be investing. Well, does this include some of the subsidies, basically? What kind of figure should we establish for the forthcoming strategy plan in net terms, netting out the subsidies? And then the dividend payout policy and this is related to what Fernando asked. There too, I'd like to know what we should think about in terms of payout FFO for the forthcoming strategy plan. Can you give us any idea of what might happen with your payout policy? Roberto García Merino Thank you, Ignacio. The CapEx plan, well, that €1 billion or more as an average investment level is what we are expecting and until we know in detail what the planning draft looks like, it's simply an order of magnitude that we're using. But we reckon it's valid and it's definitely a minimum level and we're expected to keep up this pace of investment over several years so that we have funding coming in and resources that we need and we are expecting success as we're already seeing it. So, I think it's a useful baseline. We set it as a minimum really and we'll just have to wait and see the what's going to happen to the EU funds to see how it affects the RAP in general. But until we actually know the details about the deployment of the fund, we won't actually know what kind of returns we'll be able to establish using these European funds. And you ask about the payout and there I think that we just have to wait, because obviously we really need to know what the investment plan is going to entail, and the remuneration and regulatory framework so we have concrete parameters to follow. It obviously has to be in line with the current payout policy and I think it would be a bad idea to think about talking about specific figures yet. Next question Manuel Palomo from BNP. Go ahead, please. Manuel Palomo I have three questions for you. Thank you for taking my questions. First, we observe that there are plenty of other operators preparing their balance sheet via capital increase, asset sales to face this new wave of CapEx which seems to be higher than many foresaw. So my question is, can you give us some update on any possible disinvestment not only in Hisdesat but also in the International business? Will you be doing this to focus more on the domestic business? That's the first question. The second, well, I'm sure you've heard a lot of noise about data centers. So could you give us an idea about the present demand or at least last year's demand for data centers in Spain? Are they doubling, tripling, growing in order of magnitude? What's the long-term impact if you know it? And third, rather than a question, it's an opinion. When I saw your slide about the national plan, Slide #5, I would like to know why approval has not come in yet as it was expected for June this year. And also, does it make sense from your perspective to talk about 76-gigabyte solar when the demand in Spain does not even reach 40 gigawatts an hour? Is that -- are you capacity agnostic and the bigger the better because that will probably imply more investment in networks? Is that your perspective? Roberto García Merino Copy that, Manuel. About the strength of the balance sheet. We have a very solid starting point. As you know, our starting point is A- with robust financials that will allow us to face any investment volume scenario reasonably without having to resort to disinvestment or capital increases. And beyond that, we have other levers we can play with if we have to. As you probably say, Redeia's priority requires deploying all the infrastructures needed for progress in Spain, for developing the plan and we have a robust plan to face those investments. We're already counting on the sale back of Reintel four years ago to put non-core assets in the market, and both Hisdesat and the International business would behave the same way if there were any firm signs of interest. We would analyze that in our Board of Directors considering our strategic approach and the generation of value to our shareholders. Those would be our basic assumptions for any non-core assets in the company. But as I said, beyond that, we have other drivers to support financial needs, like perhaps disposing of non-strategic assets and also the alternative that Emilio can describe to resort to hybrid funding, as we have done in the past. In that case, we have some surplus capacity that we could draw from. Emilio, would you like to say something about that? Emilio Cerezo Yes. Thank you for the question, Manuel, Roberto. Certainly, as additional drivers to finance our demanding CapEx plan for the next few years, there are several aspects we can draw from. European funds, as Fernando Lafuente mentioned in one of his questions. These will be approximately €930 million and are expected to work as subsidies, so in terms of the balance sheet, we would be reinforced. As Roberto also said, we can always do hybrid financing. Last year, we invested in €0.5 billion in hybrid bonds. In our next strategy plan, we were already contemplating issuing €1 billion bonds. We did not issue those this year. Perhaps we're not considering that option for 2025 either, but we will always have this possibility, issuing hybrid bonds, which would give us an extra capacity to the €0.5 billion we already have. And our issuing capacity rests around 1.2 to 1.3 to issue additional hybrid bonds that, as you know, is 50% equity in booking to reinforce our bottomline and our credit quality ratios in a scenario where investments will grow more tense, at least in Spain. But the credit qualification ratio aspires to a solid investment grade for our rating, and that's part of our strategic plan now and from now on. Roberto García Merino Yes. As Emilio was saying, our starting point is exceptionally solid in financial terms and we have other tools we can apply in terms of funding, so we are not considering too big a stress on our financial muscle to take on whatever comes our way. As for the second part of your question, data center demand, it doesn't look significant for us today. Perhaps as a reference point, we could go to the AI report from the Ministry of Digital Transformation, which estimates an equivalent demand of 2.5 gigabytes by 2030. That feels like the sole reference out there to look to the forecast from the Ministry of Digital Transformation. Also, as I said before, we're in the process of re-planning, and I am sure that in the proposal stage, which concluded in May this year, new applications were considered. So all we have to go by for now is that report from the Ministry of Digital Transformation. As for the national plan, PNIEC, it's government defined and our role is doing everything we can to reach the targets expressed in the national plan without challenging whether the references are more or less aggressive. We're not here to do that. We're here to meet the national plan defined by the government. Unidentified Company Representative There aren't any more questions then in Spanish, so let's open the line for questions coming in in English. Thank you. Our first question today comes from Arthur Sitbon from Morgan Stanley. Arthur, your line is open. Please go ahead. It appears we have lost Arthur's line, so we have no questions at this time. There are no more questions on the conference call. Unidentified Company Representative Okay, then. Let's take the questions we've got by mail, some of which have already been answered. So let's go with the others. Jose Ruiz from Barclays has got two questions. The first one is where are you seeing the most demand and dissatisfaction in your network? Is it related to which side? And for 2024, what kind of debt targets do you have and how much excess tariff will feed into that? Roberto García Merino Perfect. Okay. Thank you. Let's see. I think that in the grid, the transmission grid, that is, we should be very proud of the system we currently have in Spain. The infrastructure, I think, is one of the best systems worldwide. The system, in terms of its sizing, is able to cover current demand and the current request for access and connections, which is really based on the current system we have for transmission. So I don't have data on the volume of demand that isn't covered by distribution in transmission. I'd say the level of coverage, however, is going to be, well, maximum levels worldwide, I'd say. As I said, the quality of the management of our grid and the transmission system and the system operation is really excellent quality. And if we look at the integration of renewables as a percentage in the mix, let's remember, minus 2% spillage for a system of more than 50% renewable energy feed-in is well below the benchmark established of 5% at European level. So right now, I'd say that there aren't any problems in covering demand, nor do we expect to have problems with the kind of investment we're having for further deployment in the future. Well, the level of net financial debt we're estimating for year-end 2024 excluding hybrids is €5.7 million. I'd remind you that at the end of the first half, we're already at €5.11 million, so we can see that the increase is due to the payout we made in June and the increase in CapEx that we'll have in the second half of the year. So to answer your question, approximately, we're estimating that by the end of the year, we'll have about €100 million, which are pending in returns against the system because of the forward payments already made and we expect by the end of the first quarter of 2025 this will be regularized on a definitive basis so that this situation will come to an end, which is a situation that we've had to live through over the last few months. Unidentified Company Representative In the current budgeting, what's the impact in 2025 and in the future for Redeia? Roberto García Merino Indeed, that is one of the most relevant matters. We have been discussing that with the CNMC. The work in progress is always used in remuneration programs throughout Europe and in Spain, indeed. The Ministry considers it's appropriate to gather remuneration on work in progress for Chira Soria and the Canarias as well, and it makes sense that it should be incorporated into the new regulatory review, given the volume of investment that we're going to have to roll out in the next few years and the type of projects that we're deploying in our transmission grid. Normally, we're talking about long-term deployment and that requires disbursement of everything on long periods of five years, six years of preliminary financing, and we think it's more than reasonable, just in line with other European models and in line with the considerations of the Ministry regarding Chira Soria that we should include this in the next stage. And it's significant as well, as you know, if we look at the amount of work in progress we're talking about for 2025, for example, we're talking about levels, including Chira Soria of €1.5 billion required to have upfront funding of the whole CapEx plan required by the energy transition. And evidently, we consider it only makes sense to incorporate this with the measures approved by the Ministry under the new regulatory framework. [Foreign Language] A strategy that will allow us to face next cycle comfortably. Yes, actually, we do not have a specific rating target. Our objective is keeping a solid rating. That has always been Redeia's philosophy on the matter, particularly considering the serious CapEx we expect to deploy in the next few years and the new funds that will come our way. So, obviously, our pledge is maintaining a high rating. That's our commitment and our pledge for the next few years. And as for the next part of your question about the tax returns on the capital gains of €193 million after selling Reintel, it was perfectly within our forecasts and it had no additional impact on our financial debt estimates. It was fully factored in, and when we settled the corporate tax, we had to make some higher early payments, preliminary payments and we already knew that this tax return would come in in January for exactly the amount we had estimated. With this, we'll finish today's presentation. As usual, the RI team is available for any extra clarifications. Thank you very much, everyone, and have a good summer.