Telefónica, S.A. Price & Performance (TEF)

Now let me turn the call over to our Chairman and CEO, [indiscernible] CEO of Telefonica Telefónica. Have prioritized the conduction of a tour across our operations I see both significant strengths and opportunities to enhance our execution and our long term shareholder value creation. Our position in high quality core markets reflects both our heritage and potential.

The market leadership we've achieved in Spain and Brazil combined with our strategic positions in Germany and The UK gives us a relevant reach and scale. We have built strong operational capabilities, I see opportunities to deploy these more effectively across our footprint. I will share with you more when ready. But my vision is to accelerate the performance of this great company raise the level of ambition, simplify it where prudent and ultimately drive the corporate valuation higher over time. Year performance contemplates the fundamental strengths of our business model. Despite a dynamic macro environment, we've delivered growth across our key metrics, including free cash flow. Today's rapidly evolving landscape we must adapt rapidly to capture our full potential. Our strength as iSeed rests on three pillars: First, scale customer relevance. With increasing customer satisfaction and growing NPS over a total customer base of three ninety million.

Second, we are world class infrastructure company. Leaders in fiber and in copper shutdown in Europe. And third, our strong and proven know how with senior and experienced management in place. Looking ahead, I believe it is time to elevate our ambition and boost our strategic plan in a new time in Europe. I see opportunities to accelerate execution across our business, from our core connectivity service to our growing B2B technology solution under an industrial rationale, [indiscernible] should further intensify our focus on core markets and activities through and portfolio optimization whilst maintaining efficient capital allocation. European telecom industry should move in more Eurocentric decisions. The pace of technological disruption and investment requires demand that we move faster and more decisively with consolidation driving future growth. Telefonica is uniquely positioned to lead in this evolving landscape. Given our operational excellence and technical capabilities. We within what I believe to be a more favorable regulatory framework. [indiscernible] My immediate focus is on increasing our operational velocity evaluating all options for shareholder value creation and enhancing speed to market whilst building on Telefonica's strong foundations. We have significant opportunities to drive business performance and accelerate value creation through financial discipline. And with free cash flow as the key metric to focus.

You will learn more later this year as I plan to share findings from the strategic that we will conduct during the next few months before the year end. I am committed to making Telefonica the best that it can be controlling what is within our control and more. Once we have the right assets and the right knowledge, we will continue executing but with greater speed and decisiveness to deliver. I will now hand over to Angel who will guide you through Q4 and the financial year 2024 results as well as the performance of our core operating businesses. Thank you, Mark. Let me start by highlighting that we have fully delivered within our 2024 guidance ranges across all metrics. Looking at free cash flow, we generated €2,600,000,000 representing 14% growth year on year.

Above our more than 10% guide.

The momentum in our core markets has been a key driver of these results.

We are seeing healthy commercial trends across our core markets with improved customer metrics that validate our strategy, an example, Spain had full year on year growth in all accesses for the first time since 2018 and the best conversion churn since 2013. Our network deployment continues at pace. But importantly, with industry leading capital efficiency. While extending our fiber footprint and five gs coverage, we've maintained a CapEx to revenue ratio of just 12.9% The successful decommissioning of legacy networks is further enhancing our operational efficiency. These operational achievements have translated into a stronger financial position with leverage now reduced to below 2.6 times while maintaining strong dividend coverage. So strong momentum going into 2025.

Let me now highlight our key achievements for 2024, which demonstrate substantial progress across three core areas of transformation. Our customer focused strategy delivered strong results for the full year. We grew our base by 2,000,000 customers while further improving our net promoter score. Throughout 2024, our initiatives have significantly enhanced our commercial performance. Driving sales efficiency, increasing customer lifetime value and delivering meaningful churn [indiscernible] In network deployment, we delivered significant expansion of our next generation infrastructure. We passed an additional 10,000,000 premises with fiber during the year. While extending our five gs coverage by 10 percentage points across core markets. A particular highlight has been our Pioneering Working Network Autonomy. Where we're seeing tangible benefits from AI implementation. [indiscernible] 2024 was also a year of important operational milestones. Our team successfully progressed with our copper shutdown program in Spain, marking a significant step our network modernization. At the group level, we continue achieving efficiency gains particularly in areas like technical customer care. Whilst in Istanbul, we advanced with our portfolio optimization efforts, we the filing of an ordinary insolvency procedure in Peru, and the sale of our operations in Argentina. Following a competitive process that allows us to optimize proceeds whilst avoiding execution risk.

Our performance remains strong as shown on Slide six. Revenue was up 5.4% in the quarter reflecting solid commercial momentum across our footprint. Service revenue maintained its trajectory with B2B continuing to be a growth driver and B2C showing resilience across our core markets. On profitability, we delivered reliable operating leverage. While maintaining EBITDA flat year on year in Q4. While CapEx increased 5.7% in Q4 due to Argentine FX, and some phasing effects we achieved our full year target with CapEx to sales below %. Most importantly, our free cash flow generation showed strong progression throughout the year. Demonstrating the effectiveness of our operating model and natural hedging policy. This performance translated into reduced leverage and improved dividend coverage. I will now guide you through our core operating [indiscernible] Moving to Slide seven, Telefonica Spain delivered an [indiscernible] with a leading growth profile based on strong commercial and operational momentum. For the first time since 2018, all main accesses grew year on year simultaneously. Relentless focus on superior assets, customer care, quality offering and a smart commercial approach, our strategy proved successful amidst changing market dynamics. Moreover, an industry leading ARPU and the lowest churn in more than a decade resulting to the best combination of KPIs in B2C.

Together with our premium IP proposal for B2B and extended wholesale agreements, it makes us the most sustainable player in the Spanish telco space. Commercial success fueled revenue growth of 1.3% year on year in Q4.

And as we anticipated, we full year EBITDA was back to year on year growth. Driven by improving return revenue growth and further efficiencies in personnel, network transformation and digitalization. Meanwhile, EBITDA for leases increased year on year for a second consecutive [indiscernible] Noteworthy this operational improvement was achieved while springing down CapEx. Leading to stable EBITDA minus CapEx compared to the previous year. Telefonica Spain faces 2025 from a stronger and better position continue capturing growth and further adding operational [indiscernible] [indiscernible] Telefonica Brasil continues to build a sustainable future by enhancing the quality of its service mix thanks to steady growth in contract and fiber accesses. During the quarter, revenue increased by close to 8% in local currency With the fixed lane business reaching a new record high and sustained strong performance in mobile. Despite this strong commercial momentum and the higher contribution from digital services, the EBITDA and minus CapEx margin grew year on year by as much as 0.5 percentage points to 18% in the last quarter of twenty twenty four. Finally, the agreement for the migration from concession to authorization was completed. A move that will transform our business and operations. [indiscernible] in Q4. With sustained auto brand appeal and enhanced B2B momentum momentum driving strong commercial traction.

As for our platforms, GeoTwo network was recognized for its quality once again. Receiving a very good rating [indiscernible] For the fifth consecutive year with the strongest improvement among German MNOs. Five gs population coverage expanded further. Now exceeding 97%. While O2 contract churn remained low and stable at 1.1% reflecting strong customer loyalty. Financially, revenue declined by 3.7% year on year in Q4 impacted by NTR headwinds tough handset comps and the shift in the one on one business model. However, disciplined execution and cost efficiencies supported EBITDA growth of 5.3% year on year with a sequential improvement in operating leverage and further EBITDA margin expansion. Moving to Slide 10, where we'll review our UK operations at VMO2. In Q4, we maintained our strategic focus on expanding our fixed network and enhancing customer value. Our fixed business continued to grow. Supported by higher ARPU. Which increased by 2% year on year. Fiber rollout progressed at a record pace. With 1,300,000 premises passed in 2024 expanding our total fiber reach to 6,400,000 homes.

On the mobile side, contract churn remains stable at 1.1%. As initiatives such as inclusive Europe roaming and the auto priority loyalty program continued to strengthen customer retention. Additionally, five gs population coverage reached 75% an improvement of as much as 24 percentage points year on year. From a financial perspective, revenue was flat year on year in Q4. Showing improved momentum While EBITDA declined mainly reflecting ongoing investment in IT, and digital efficiency programs. B2B fixed headwinds and tough prior year comparisons. Despite these, we achieved £540,000,000 in annualized synergies delivering on our five year target nearly eighteen months ahead of schedule. Slide 11, we use the performance of Telefonica Tech. A driving engine for the superior growth of Telefonica's B2B revenue. Telefonica Tech has completed 2024 as a fully integrated tech consistently outperforming its market and revenue exceeding the €2,000,000,000 mark Revenue growth accelerated in the last quarter to 10% year on year in 2024 supported by a highly skilled workforce and widely recognized capabilities for delivering advanced high services for B2B digitalization. Main driver behind this performance is the operating leverage of the new organizational model. Which expanded capabilities across the footprint and allowed us to improve the revenue mix.

The larger size and value of the new projects are increasing the weight of professional managed services which translate into more recurrent and more profitable revenue flow. Furthermore, the strong sales pipeline with both commercial funnel and bookings growing faster than revenues further increased revenue visibility. Thus the business sustainability increases. Moving to Slide 12, Telefonica infra is driving growth and accelerating digital inclusion through the deployment of state of the art next generation infrastructure. We passed 25,000,000 fiber premises by year ending our fiber Progressing towards our target of €30,000,000 by 2026, approximately 30% Telefonica Group's future fiber deployment. Telesios, our best in class international connectivity structure is expanding its international network by adding another new generation subsea cable connecting Puerto Rico and The U. S. Expected to go live in Q3 twenty twenty seven. At sustained profitability levels close to 50% in 2024. And the agreement to sell our stake in Navios at attractive multiples is a further successful step In our asset recycling strategy, to generate significant gains and unlock value. Closing conditional upon receiving regulatory approvals. I will now hand over to Laura who will give who will guide you through its performance and the main financial topics.

Thank you, Angel. In Ispan, as we saw on Slide 13, have recently taken relevant steps in the execution of our strategy. Firstly, in Peru, where Telefonica del Peru has filed for the ordinary insolvency procedure. This is the right decision to fulfill a fiduciary duty of protecting Telefonica shareholders' interest. In addition, new limited financing of approximately €390,000,000 has been granted to Telefonica del Peru subject to strict conditions. On top of that, last Monday, we announced the sale of our operations in Argentina for close to €1,200,000,000 as a result of a highly competitive sale process which has allowed us to optimize the proceeds significantly exceeding market expectations. This deal will have certain accounting impacts in Q1 twenty twenty five. Around €1,000,000,000 FX translation impact that reflects the accumulated devaluation since the acquisition back in 1991. It is a noncash impact and moreover it has already been reflected in an equity This is just a reclassification. But I would like to highlight again how these and conditions sale were signing and closing took place simultaneously allows us to avoid execution risk whilst cashing in close to €1,200,000,000 We believe this demonstrates our execution focus taking steps to continue with our portfolio simplification exercise.

Under very attractive terms. You should expect from us to continue exploring value creation alternatives to our East Pan operations. We continue to work towards a more efficient and rational industry by sharing infrastructure and optimizing resources as shown on Slide 14. In Colombia, We announced the integration of Movistar Antigos mobile app access infrastructure into a journey owned company. To expand coverage to new locations and offering greater capacity and speed to customers. Our FTTH transformation progresses as planned, and 96% of our fixed broadband access are connected through FTTH networks. This is a plus five percentage points year on year.

Q4 twenty twenty four results were impacted by a more favorable comparative base driving by the depreciation of the Argentinian peso in Q4 'twenty three and the adoption of the new exchange rate in Venezuela. Revenue, EBITDA and EBITDA increased by 7.8%, 3.42.4% year on year. Moving to our capital structure.

Telefonica maintains a robust balance sheet position. As of December 2024, our net financial debt stood at €27,200,000,000 translating to an EBITDA to OBITDA ratio of 2.58 times. During this year, net financial debt declined by €200,000,000 and net debt to EBITDA was reduced from 2.6 to 2.58 times, mainly due to the solid free cash flow generation, which accommodated a strategic move to raise our stake in Telefonica Deutschland. We are committed to reduce leverage. Meanwhile, Telefonica maintains a solid liquidity position of €20,900,000,000 that together with a light maturity profile allows us to cover them at maturities over the next three years.

A debt is above 80% linked to fixed rates an average life of eleven point three years.

Which places us in a comfortable position to face any market environment. It is to highlight that in January 25, Telefonica completed the refinancing of its main syndicated facility €5,500,000,000 and extended its maturity due to five years.

With two annual extension option up to a maximum maturity of seven years. Furthermore, we lowered our debt related interest cost to 3.32 percentage versus 3.8 in December.

Thanks to the active refinancing exercise undertaken in previous years the robust position of fixed interest rates in strong currencies, a lower interest rates in Brazilian reais. [indiscernible] On Slide 16, free cash flow. On free cash flow, we delivered exactly what we promised last quarter. Q4 saw significant sequential improvement in line with typical historical plus 68% quarter on quarter driving to a remarkable 14.1% free cash flow growth in 2024 overachieving guidance.

In absolute terms, and from what we shared with you in November 2023, has grown by €500,000,000 25% growth in only thirteen months. Levels of this performance has been the solid operations underlying business driven by a strong operational leverage and lower capital intensity.

Additionally, we've seen reduced dividend leakage following the Telefonica Deutschland we optimized financial items benefiting from FX hedges. Moving to Slide 17. At Telefonica, responsible digitization is fundamental to our strategy and operational excellence. We are working to provide greener, more accessible and trustworthy products and services. In 2024, we have demonstrated our commitment to our net zero targets by reducing our carbon emissions across all scopes. We with 89% of our power or electricity now coming from renewable sources. On the social front, we are providing wider coverage for our customers while mobile broadband reaching 84% of the rural population in Bras '95 and over 99% in Germany. We have a diverse and motivated workforce with an employee NPS, of 75 and a growing number of women executives.

Our governance remains robust with sustainably embedded across the business and value chain. For example, we have provided anti corruption training to over 70,000 employees.

We have carried out more than 20,000 audits related to sustainability risk, [indiscernible] 37% of our financing is now linked to sustainability indicators. These efforts have not gone unnoticed. With Telefonica receiving recognition from prestigious organizations including Time Magazine, Newsweek, and being awarded leading ESG scores for the sector by ISS ESG and Bloomberg among others.

I will now hand back to Marc, who will wrap up. Thank you, Laura. On Slide 18, we show our guidance for 2025. As discussed, we will conduct a strategic review that will end during the second We do not want to foreclose any specifics it will be in line with what Telefonica is and has been and will of course focus on our know how, industry rationale and will be financially disciplined.

The meantime, we we provide you with our 2025 guidance. For the sake of comparability, we decided to guide on unchanged consolidation perimeter as of 12/31/2024. [indiscernible] [indiscernible] are offering organic guidance to avoid FX distortions. 2025, we expect organic growth in both revenue, EBITDA and EBITDA minus CapEx.

CapEx intensity to continue declining to less than 12.5% over sales by year end. And free cash flow generation similar to the one posted in 2024. More than enough to pay a €0.3 dividend per share and continue deleveraging.

Whilst we conduct our strategic review, our priority for 2025 is [indiscernible] [indiscernible] So to recap the key takeaways for the year. In 2024, we delivered on our guidance.

As such, we are preparing to adapt to changes in Europe as we announce our 2025 guidance and the dividend of €0.3 per share in cash.

Spain Brazil Germany maintained momentum in Q4. At the same time, we deliberated on capital allocation reducing our exposure to Ispan. Strengthening our balance sheet.

It is a new time in Europe as we see it. And we will conduct a strategic review out of this new context. Review that will be concluded in the second half of the year 2025.

We are now ready to take your questions. Thank you.

Our first question comes from the line of Andrew Lee from Goldman Sachs. Please go ahead.

Good morning and welcome to the firm market. I look forward to meeting you We I had two questions, both bigger picture. The first one was just, I guess, a few people were a little bit broadsided on the decision to put the midterm guidance on hold today. I wonder if you could just help us understand the decision behind that Normally, what we see is new management comes in and does a strategic review and then adjust mid term guidance. Did you decide to put the mid term guidance on hold because you don't believe it's achievable? And any help you can give us just in kind of in terms of reassuring on the underlying delivery of the firm right now Prior to that strategic review, it would be really helpful. And then second question, there's been I think you're in the press overnight talking about potential ambitions for broader consolidation across Europe. One of the things that a lot of investors are talking about right now and probably more excited about in the near term is in market mobile consolidation. Do you see scope for Telefonica's ability to pursue and drive consolidation in any of your markets in the near to medium term?

Thank you for your kind welcome and your words. So with regards to your first question, [indiscernible] We are focusing on the 2025 guidance. And not on the midterm guidance not because we don't think it's achievable, not because we think there's any changes to what we have said, [indiscernible] to give us the necessary strategic flexibility [indiscernible] go around conducting our strategic review. So let me be very, very clear. Nothing has changed with that regards. But we do see changes in what is going to happen in Europe. And that takes me to your second question. I know you've asked regarding in market.

But on a broader European situation, we see We believe there are going to be drastic changes in Europe. It is very difficult to announce or to be very specific with regards to the speed at which that is going to happen. And that is something we are going to analyze in our strategic review. With regards to end market consolidation, We do think there's going to be a bit more there is going to be more flex [indiscernible] at this stage, to be rigorous and specific, I would need to leave it at at that.

Okay. Thank you very much. That's helpful. Thank you.

We will now take the next question. From the line of Matthieu Robillard from Barclays. Please go ahead.

Yes, good morning and thank you for the presentation.

And welcome also from my side. To Mark. Mark, thanks for sharing your thoughts your initial thoughts and I realize it's very early days. But I was trying to get a bit more detail on Nuance notably based on what you said on your introduction remarks, about the priorities You did mention Spain and Brazil as core businesses. You mentioned the stakes your presence in Germany and The UK is strategic states I don't know if that's a new or not patterns. If you were suggesting something here, if you could clarify more broadly, when you look at the portfolio of assets, what will be the driving elements to assess each market? Is it the scale that you have today and you could have tomorrow? Is it going to be is it profitable? Is it earning its cost of capital? Or not? If you could give just a little bit of more details in terms of the the concepts and the driving elements for your analysis. And then I had a question on the free cash flow guidance for 2025. I just wanted to clarify what was included in that compared to what you had said in the past And from memory, I think Laura, you had mentioned that in the [indiscernible] there is going to be a tax payment to Peru of a hundred €300,000,000 I just wanted to confirm whether that was in the guidance or not anymore.

And also, I think you made it clear now that you don't include anything coming from [indiscernible] but I just wanted to make that super clear. And lastly, if there's any FX hedging for Brazil that is taking into your guidance. Thank you. Thanks Matthias for your welcome and your four questions. [indiscernible] so there is no nuance and there's no No suggestion We are where we are. We see Great opportunities in Europe, driven by what is happening [indiscernible] [indiscernible] I think and we think everybody can read and listen to. And we have, as I was saying, very strong position in very large markets within Europe. There's no more to that what I've said. Regarding the driving elements, we are going to conduct the strategic review but haven't I mean, this is something we're announcing [indiscernible] But I think I can say very clearly [indiscernible] the analysis is going to be driven by operation rationale by improving our margins, consolidating our market so that scale can give us a better position mid term and long term. We think that and we're not alone in this of course. That the European market is fragmented And therefore, inefficient. And this is different to other markets We can all see in Asia, in The Middle East and The U. S. And we think [indiscernible] the winds are changing.

That respect. And that is why we're going to conduct our strategic review to analyze that and to be ready for that. Thanks. Laura?

Yes. Thank you, Matthias, for your question. I'm happy to give more clarity.

Free cash flow 2025 guidance, is with perimeter equal to 2024.

So you can see comparability. Therefore, we have not included the recent impact of the sale of Argentina, we have not included the recent [indiscernible] on Monday.

That means we have Peru business as usual.

I don't recall guiding on tax payments because we always say in the case of Peru, we always say timing is uncertain, but I can confirm that in 2024, we have paid $3.00 €1,000,000 of tax contingency in Peru. And whatever we estimate we have to pay in 2025 and 2026, is included in our guidance. Having said that, perimeter is definitely going to change and we will have to give you the proper explanation, but there's going to be more changes.

I remind you that Colombia is also for sale and we have to wait for regulatory approval. And then again, timing is an uncertain. Argentina we just did. More deals could come as portfolio optimization in the case of Ispan is not finalized yet, and we still need to get the authorization of the process of Peru that we just filed. [indiscernible] also confirmed that the favorable filing of Colombia is not included in 2025. We had the positive P and L impact in 2024. But the proceeds are expected to be collected in 2026. And regarding FX hedging, we continue with our strategy, which has proven successful And I can tell you that by now, we have approximately 60% of the Brazilian free cash flow hedge.

We have benefited from the more favorable real FX for the first two months, but now we have hedged approximately 60%. So again, that will be very much shelter And on top of that, as you know, and I always emphasize, there's a natural hedge on top of these financial hedge. So I hope I provide you enough detail on happy to give you offline. More if needed. Thank you very much. I'm sorry, Marc, was hoping you were not counting the questions.

Thank you. We will now take the next question. From the line of Akhil Datani from JPMorgan. Please go ahead.

Yes. Hi, good morning. And Mark, welcome from MIND as well. I've got two questions, if I can, please.

Firstly, there was a very interesting interview with you yesterday in the Financial Times.

Where you talked about some of the things you've already raised this morning. But I guess more broadly, talking about the tech space. And I guess I was looking to get comments from you on that and just to understand better exactly what you're thinking. The comments in the Feet and I don't know how accurate they are, were that your comments were that you felt there was an important role for Europe and Telefonica to play in tech you said you wanted to focus in areas that you thought you had natural right to play. I guess I'd love to understand what you think that is and how you think about it. Obviously, appreciating its early days and so any comments will be high level. Is this about scaling up Telefonica Tech? Is this transformational? Is it just bolt ons? Any sort of flavor you can give us on that would be super interesting. And then the second one is, again, just referencing back to your comments on the consolidation, I guess, more cross border. Than in market. You talked about scale being important. What do you think are the main benefits of bigger players in Europe? I mean, you talk a lot about fragmentation, but I guess what do you think being bigger across Europe as a whole really offers And why do you think that's so important?

That would be really interesting as well. Thanks a lot. Thanks, Akhil.

So regarding regarding your first question, What is relevant is what is relevant for us with regards to the conducting of our strategic review is that we're going to focus on areas where we have proven know how and in markets that we know well or very well. [indiscernible] and those would have to do, of course, with Telefónica, infrastructure, and areas where we already operate. So we will conduct a strategic review and do not want to foreclose conclusions, but that strategic review is going to be where things where Telefonica exists and is There aren't going to be no market adventures in two areas or technological areas where we do not operate. [indiscernible] And at this stage, this is all we can really say.

But markets where we operate in means markets where we have clients, where we have revenues and where we have EBITDA. With regards to consolidations, and advantages that consolidation brings. So I want to be cautious, but it is true that European markets are local markets where consolidation has very clear advantages when we're discussing [indiscernible] But we think [indiscernible] this is something we need to look into very carefully. But we think that having scale having more investment capacity, having a more solid balance sheet and having a proper number of clients one can eventually leverage on is an advantage. Is an advantage. We're not expecting to discover any sort of chest the beginning of a rainbow. And with regards to that, there's a lot of know how in the telecoms market and we can see what happens when there are large operators in large markets like in The U. S. Or elsewhere. So recapping a bit, Akhil, let's say, there are clear advantages in intra market consolidation and we think we think Things are going to move in Europe but before they move things will be silent also.

So that's what we need to concentrate and analyze very carefully. And we think the tendency in Europe or the direction in Europe is to have large European telecom operators And when that happens, because we think it is going to happen, we want to play a leading role. And here, just referring to my previous answers, always from a disciplined looking into cash, looking into generating cash value for our shareholders within areas we know well, [indiscernible] Thank you, Mark. And just one super quick clarification on your first answer. When you think about the areas where you said Telefonica Telefónica [indiscernible] And you think about targeting growth in those areas, do you have any bias in terms of M and A versus organic investments or is that [indiscernible] undecided.

That's a good question.

In this, I am completely agnostic with going to look into net present value. In every single one of our investments. So it will have to do with opportunity, priorities, but always under a net present value analysis.

Great. Thanks very much.

Thank you. Thank you. We will now take the next question. From the line of David Wright from Bank of America.

Hello, guys. I hope you can hear me. Guess, around the balance sheet. You just said having a strong balance sheet. The leverage metrics you give [indiscernible] unrepresentative of the way the agencies look at you. I think had at least a turn with their adjustments. And you talk about deleveraging leverage seen any deleverage in 'twenty four or from February to 02/1958 is minimal.

You are selling last time asset three or so times, which is not making any difference. And you're guiding to no change in free cash flow So I'm not really sure how this ongoing deleverage accelerates and your leverage is on a thousand at the higher end of European telco that is undoubtedly lowering leverage targets. So I'm wondering how you're thinking about leverage in general, where it should be and the dividend which is obviously 7%, nothing your cost of debt is only 3%. That's question number one.

And then I guess question number two. Your strategic review be completed by the end of the year.

And I say this with the greatest respect, that seems an awfully long time.

Why would it take so long? The assets and the portfolio reasonably defy the core assets. Your infrastructure is reasonably defined in terms of Telxius and what has been sold, etcetera. Spain is well invested. Brazil is in good shape. [indiscernible] I'm just wondering why it takes so long and I hope I question doesn't seem disrespectful. Thank you.

Arna, if you want to go ahead with the first one, I'll answer the second one.

Sure. Hello, David. Thank you for your question. In terms of deleverage in 2024, we are very satisfied with the reduction you've it's 0.02, but please take into account that we have included all the purchase of the minority shareholders of Telefonica Deutschland. So if you include that, deleveraging pass has been much more positive. Free cash flow has been very strong 2.63414% growth remind you as well the high amount of contingencies we included in Peru in that figure. And free cash flow continues being the main deleveraging driver and which is a more structural way to to deleverage. Having said that, and if we talk about the credit rated agencies, you're absolutely right. Do their own calculations. Those are public. Our improvement in terms of the credit rating calculations are better than the reported ratio we disclosed. It's going to be disclosed pretty soon. We are going to have the meetings with them on end of this month beginning sorry, end of March, April. I think they will welcome our strong free cash flow will welcome core, non core strategy, the steps we are taking in portfolio optimization. So we are pretty confident and hopefully you can see there in the reports when those are public.

Going forward, on 2025, for the time being, we are setting a target of stabilized free cash flow. You have to look at that in the light of where we started in 2023. So if you look at the growth in those years accumulated is pretty strong. Free cash flow will continue to be the driver. Free cash flow is driven by growing operating cash flow on top of the very granular management we do of every single financial line below the operating cash flow. But the sale of [indiscernible] in Ispant is going to benefit probably more than what you think because you to take into account that Colombia is a highly leveraged country. So when that transaction happens, the impact in deleverage is going to help on the deleveraging path. For the time being, we are sticking to 2025 targets. The targets of deleveraging is reduced. The deleveraged part in 2025, we are absolutely committed to our investment grade and continue reducing the deleverage. And for the dividend that you mentioned, we are confirming the 2025 dividend of Everything else will be part of the strategic review that Mark has been So David, I think your question with regards to the strategic review is respect unfair.

And I agree or would agree with you if we announced that it would be ready by the end of twenty twenty five, And what I think I said or in any case what I meant is before 2025. Don't want to set a specific date to have the strategic review concluded and to share it appropriately before the teams are finally set and the planning agreed. So the reason we leave it in open is so that we don't artificially put a date that is not the right date. So the objective is before 2025, before the end of 2025 and if it were by the end of twenty twenty five with the information I have and I think you've made a good analysis My knowledge today would mean that we've taken a long time. [indiscernible] Thank you. We will now take the next question. From the line of Fernando Cortero from Banco Santander. Please go ahead. Ahead.

Hello. Good morning and thanks for taking my two questions. The first one is for Marc. And first of all, welcome Marc to the story. My question is also on capital allocation and you have been quite clear on the two factors that you would be included in your decisions. That would be industrial rational and financial discipline. In that sense, I understand this is still also early days, but do you see industrial synergies in order to understand this industrial rationale? To increase your exposure to IT services and particularly I'm talking about an asset that you will you will know quite well, which is Minsight. And also I would like to expand the discussion too. Not only to services on top of connectivity in the B2B segment, but also in the B2C segment. And at which extent do you see the current exposure of Telefonica to the media business? For example, Mondelez that Blues is also relevant one in your current portfolio? And the second question is for Angel and particularly on Spain. I'm willing to understand a little bit what is your outlook for the OpEx in Spain.

Considering that we'll have a tailwind in cost in 2024. I mean, from the personal restructuring that is still having some impact in 2025, would like to understand first how do you see the whole OpEx at least qualitatively performing? And also what kind of revenue growth would you be requiring in Spain in order to maintain the EBITDA flat? Many thanks.

Thank you for your welcome, Fernando.

Regarding IT services, [indiscernible] we can say is that you know our strategy well. And we will see what our strategic revision concludes with regards to IT services. With regards to Insight, which is an asset I do think I do know well or very, very well. There could be a fit, there may not be a fit, It will depend on what our focus is, what our strategic conclusions are. What I can say is that if there is any M and A, within the IT sector or whatever sector, we will always maintain strategic flexibility to decide the last moment if that is the right deal or not. And it will always look at what the the NPV is. So there is no and will be no for ground conclusion after we review strategy with regards to IT, and with regards to all our businesses, based on the changes we see that are happening and we think happening in Europe and are going to happen in Europe. Fernanda, I would say the same with regards to B2 or any related services. We need with regards to the future, we always need to be very, very precise and analytical.

To see where we do actually have know how not only from a theoretical and strategic point of view, but how we bring that know how down to operations and how we enhance that value specifically. So that would certainly include Telefonica Tech. But any potential with regards to B2C, we would be very, very careful and have to be very sure. I do have to postpone anything further than these generalities, which are very strong and very important, to when we conclude our strategic revision.

And thank you, Fernando, for your second question. The outlook for Spain that we see for 2025 On revenue, we are expecting to sustain year on year growth. Slightly above what we've seen in 2024. This will be fostered by retail with growth both on B2C and B2B. On B2C, we had January 2025 price increase. We have a very solid mix of converging KPIs. The ARPU that churned the NPS, the net adds supporting a customer lifetime value which is double the next competitor of ours. In B2B, we continue to grow above the market differentially But in contrast, wholesale and others will decline. We'll have a decline with the transition of the new wholesale contracts, which stabilize and give visibility long term but have a slight deflation. The combination of retail and wholesale revenues will result in growth. Revenue in Spain, again above what we've seen in 2024. Regarding OpEx that you were asking or the translation of this into EBITDA, we're expecting EBITDA to grow by low single digit above revenue growth in Spain. This is on the back of the revenue trajectory that I spoke about. And continuous efficiencies. Still have some tailwinds from the rightsizing of staff of last year.

We have automatization, simplification, the full impact of switching off the copper So as a result, EBITDA margin should be in line with what we had this year. [indiscernible] which was in the positive territory in the second half of the year, 2024 should grow in full year 2025 and CapEx wise we can continue to reduce CapEx to sales towards the target that we have shared with you. So, in all, very supportive outlook for the cash flow generation of our Spanish operation.

Okay.

Many thanks for all these questions.

From the line of Luigi Minerva from HSBC. Please go ahead.

Yes. Good morning. Thanks for taking my two questions and welcome to Mark also from my side. So the first question is, Mark, just a follow going back to your comments on the case for [indiscernible] European markets are local. And I think that's the key hurdle to deliver cross border synergies in case of combinations across markets. I guess my question is from your discussions both at the local government level and perhaps in Brussels Brussels. Do you sense appetite from the policymakers for a drastic change [indiscernible] basically going beyond the national markets more toward single market. I'll just make a very obvious example. Spectrum, a Spectrum is national and has always been very strong resistance from the local countries to give up any sovereignty on spectrum. And until that's the case, it's very difficult to think about single markets for telecoms and therefore very difficult to think about cross border synergies. And the second question is on Germany. And I guess what we noticed in this quarter is clearly a very strong acceleration of migration to of the iNz and i's customer.

A big step up in Q4. So we'll be interested to see what kind of phasing you expect through the quarters in 2025? Secondly, we see ARPU dilution, and I think you referred to the family plans. So again, if we should extrapolate what we see in Q4 into 2025? And then more generally, comment about competitive dynamics in Germany, which clearly seems to deteriorate. Thank you, Luigi, for your welcome. And your questions. I'll answer the first one. You were asking if do I sense a change regarding drastic change? I would say this is my analysis and the conclusion of my conversation and my reading and our reading of the situation. I would take it further than sense. I would say we detect a determination [indiscernible] I would Yes. I would encourage you and other listeners to use other sources and reach your own conclusions. We detect a determination for drastic change in Europe with regards to strategic autonomy. And I would say, I agree with the way you share the difficulties ahead regards to European level consolidation, And I agree or I'd say we would agree that that those exist and the speed and the level of the execution of that determination is something that we need to see happen.

And this is I'd say, one of the major issues We need [indiscernible] analyze in our strategic review. But it is my opinion that things have changed drastically to use Luigi, your expression with regards to Europe. And that strategic autonomy with regards to what is going on in the world. With The U. S. With regards to the war in Ukraine, and with the strategic importance of what our communications are. There's a lot of people on this call and I would bet a lot of money that every single one of us has a mobile very near us that has all our information exactly where we are, who we discuss, what bank accounts are, everything. And in this context, that we think there is going to be change and that before there's a storm in Spain we say that before the storm, is the most calm moment. And this is the sort of thing we need to analyze very careful our strategic review.

And regarding your questions on Germany, I will make high level comment initially and then I'll hand over to Markus to elaborate in more detail. With the one on one migration, it's taking place broadly in line We expect it to be completed on time with the BENESA Deadline And On The Competitive Dynamics In Germany, I would like to say that wholesale contract that was granted by one of our competitors to one and one change the dynamics in the market for instance have players offering something similar to unlimited at very low prices. Last year, we also tried to increase [indiscernible] movements in the market and it was not followed by the other players. So we had to adjust. We had to adjust in order to continue having the best mix of value versus price to our customers in Germany.

So yes, there is more competitive intensity but it should be It should be it's a competitive market and we have a very strong asset I said in my previous presentation, we have quality, which is improving and exceeding the one off our peers in the German market and we are having a very good commercial traction. Marcos, if you can elaborate please, on the details.

Thank you, Ancel. I think overall, the German market outlook in six and mobile is growing as for 2025. And clearly, it's a segmented market. I think our strategy last year will be continued this year is a mix of retail and wholesale.

In retail, we have been able to add more than 800,000 postpaid net adds. And we are now going into all segments. So clearly also the ARPU mix is different. So we go from discount into premium segment. So clearly the contribution of the segmented approach also allows us to gain this momentum. So overall, the segmentation and the mix that we currently see from our perspective is very balanced We also have been able to add new wholesale partners. So overall, to achieve our 2025 target a very balanced approach between retail and wholesale. And clearly by leveraging all segments. So the ARPU mix from that instance on the one hand driven by the family offers, but on the other side also of a different composition of postpaid gross adds that we add to the P and L is a natural development.

Thank you very much.

We have time for one last question, please.

Thank you. Thank you. Our last question comes from the line of James Ratzer from New Street Research. Please go ahead.

Yes. Good morning. Thank you very much indeed for taking the question.

So I'd like to add my welcome to Mark as well and add two questions, please. The first one, Mark, on your strategic review, I've heard comments about kind of potentially building scale and also deleveraging the balance sheet. Which I mean building scale in particular to me could involve potentially more M and A in future.

So I was just trying to think about the third element of this, which was returns to shareholders, and in particular, how you saw that element of the capital allocation over the next say two to three years and particular with asset disposals coming in, do you see the scope for any increase in shareholder distributions above the 0.3 dividend that's already being paid out? And then the second question, maybe this is more one for Laura, but is on the free cash flow guidance you've given for this year.

So I was wondering if we could dig into that a bit more specifically because I understand obviously it's on the same perimeter basis as 2024. At the same time, the facts have changed. You have now sold Argentina And given Peru is in the insolvency proceedings, my understanding is you won't be paying interest on the Peruvian bonds and also you won't be making those tax payments or the extraordinary tax payments in Peru. So therefore, I was wondering if you could give us kind of restated guidance for 2025 free cash flow to specifically take into account the known impacts for this year, I. E. Argentina being sold and and none of those extraordinary payments in Peru? Thank you.

Thank you, James, for your welcome. With regards to the strategic review, one of the the I'd say one of the essential elements will be what is our financial strategy that accompanies our strategic [indiscernible] and the financial strategy will have a lot to do with of course capital allocation dividend distribution and the other elements you mentioned. It is way, way too early for me to share any specifics because we are going to conduct the capital review. What I will say is that I am very, very respectful with regards to our strengths our history and our way of doing things. We are course, going to continue improving and I come with with ambition, but but I think I come with a humble ambition and very, very respectful with regards to our markets, our know how, and what is achievable. And within this context, we will conduct our strategic review and that will include what our financial strategy is But unfortunately, I can't really say much more at this stage, James.

Hello. Yes. As you say, consolidation perimeter is changing as we speak. So guidance will need to be revisited for free cash flow with these impacts But having said that, let me give you as a broad picture that East Pan geographies are as a whole positive free cash flow contributors. Some are not, some are. And they are they have been contributing positively in free cash flow prior to contingencies. So therefore, I touch on that point. For the time being, we included Peru business as usual. And as you say, if the process we have filed on Monday is authorized. We will not be paying in the short term [indiscernible] As you rightly mentioned, will be other uncertainty related to the business under filing process. There will be some working but we will update you at the due time also Argentina has just happened on Monday, I mean, literally three days ago. There's going to be probably more portfolio optimization coming but please take as a whole that free cash flow is positive to neutral contribution contributor prior to contingencies. And in any case, let me focus on 2025 from things that are not changing. Which is the core businesses.

And the core businesses are being very strong in 2024 as you have been in the delivery of the results and the guidance delivery. And that moving parts for 2025, we are guiding for growing operating cash flow in organic terms. And that's going to come from the Spain growing EBITDA and declining CapEx Germany has stable EBITDA and declining CapEx. Brazil, definitely growing operating cash flow. Working capital has been rather new into 2024 when it usually has a positive contribution. So we should expect a positive contribution 2025 Lease payments is going to be less effective [indiscernible] [indiscernible] increase in volume, also lower inflation interest costs super stable as the case is been. We will continue optimizing taxes. So I'm very aware that Spain brings some uncertainty, We will give you update as soon as this settles because we are we are also in the process of Colombia, some things may come, but I also want to stress the strength of the core free cash flow as pillar and the strength of the other financial items that we will continue managing in the right way.

Thank you. So does that mean if just thinking about the free cash flow guidance for this year. If Argentina sale is probably broadly neutral with cash deconsolidated, but some interest payments saved. But I mean, if Peru could be I don't know what you had in the budget for this year, but maybe negative one or $200,000,000 outflow for these tax payments and interest on the bonds there. So does that mean free cash flow could be close to €2,800,000,000 if the Peruvian insolvency goes through?

As you are asking me for giving you a new guidance, so I rather stick to our guidance of €2,600,000,000 perimeter equals We haven't provided in the past detail of every OB in Istanbul. Free cash flow. So we are not going to do that at the moment. There will be moving parts and we will update you as soon as as we can and we settle the portfolio, we have the authorization of the process in Peru. Many things have to happen. But we didn't provide specificities on free cash flow of Argentina or Peru in the past And we plan to do the same and treat Ispan as a whole and revisit the guidance But please take into account the strong pillars I mentioned on the other part of the business and and the neutral to positive impact from Ispan as a whole pre contingencies.

Got it. Thank you very much.

At this time, no further questions will be taken.

We hope that we have provided some useful insights for you I look forward to our continuing working relationship. Should you still have any further questions, we kindly ask you to contact our Investor Relations department.

Good morning and good Thursday to you all.

Telefonica's January, December twenty twenty four results conference call is over. You may now disconnect your line. Thank you.