Telefonica Sa · BME:TEF
Telefonica Sa — Telefonica S A — Third Telefónica Investor Conference 2003
44 slides from Telefonica Sa's conference presentation, Oct 14, 2003
Slide 1: Third Investor Conference
César Alierta Executive Chairman and CEO Telefonica, S.A. THIRD INVESTOR CONFERENCE | MapRip 2 OO 3 Felefontca
Slide 2: Safe harbor
Safe harbor “This presentation contains statements that constitute forward looking statements in its general meaning and within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this document and include statements regarding the int
Slide 3: Enhancing cash returns through growth and transformation
Enhancing cash returns through growth and transformation October 9, 2003
Slide 4: Contents
Contents "= A strong position allowing for improved shareholder returns = Our strategy going forward will enable us to continue enhancing cash returns through growth and transformation
Slide 5: Since our last meeting early in 2002, we have managed through a tough environment
Since our last meeting early in 2002, we have successfully managed the company through a tough environment Strengthened position in our core markets to capture customer growth o Proactively managed the challenging LatAm environment Driving strong free cash flow generation * Anticipation of market tr
Slide 6: Spanish wireline: managing revenue pressure and cash generation
Telefonica, S.A. Bundled traffic offers Recurring retention and loyalty campaigns Launched advanced VAS (SMS service, innovative handsets, PBX solutions) Managing revenue challenges in wireline voice through innovation and loyalty management... DSL lines and gross margin over DSL over total revenues
Slide 7: In wireless, our Spanish operation is performing
outstandingly... Sustained customer growth Growing monthly usage per customer Subscribers Inter-annual MoU growth (End of Year; Million) 18.4 18.9 16.8 13.7 2902 3Q02 4Q02 1903 2903 ARPU decline trend reversed Inter-annual ARPU growth 2000 ©2002. 2002 1H2003 Attracting and retaining most valuable cu
Slide 8: Brazil and Mexico wireless momentum
-»Launch of JV's Vivo brand and acquisition of TcOin Brazil... .-While gaining momentum in Mexico * Integration of all TEM and PT operators into a single company * Leading nationwide offer with the broadest coverage ° 17.5m active customers (3.3 m from TCO): 60% average market share in current areas
Slide 9: LatAm's economic downturn has impacted our operations
LatAm’s economic downturn has negatively impacted can, our operations ..with significant impact on .-but lower impact in 2002 financials recent months Adverse environment... Real and Peso FX vs, Euro” Impact of LatAm currencies’s FX on Impact of FX on Telefonica’s rev. January 2001 to June 2003 [ele
Slide 10: Limiting the impact through proactive management
Despite this, we have limited the impact through can, our proactive management of this challenging environment T.LatAm shows healthy organic ; growth in local curren ¥ Tight control of OpEx and CapEx Interannual growth across all operations: (Figures exclude FX effects) -Workforce reduction and 10%
Slide 11: Continued improvement in operational efficiency and capital intensity
Ambitious efforts to improve OpEx efficiency and flexibility across business lines Sustained CapEx rationalisation to decrease asset intensity Operating leverage* 00 on 02 + Fixed costs a % of total costs Total Capex as % of revenues a0 44.8 1HO3 We have continued to improve operational efficiency a
Slide 12: Decisively restructured under-performing operations to focus on core businesses
We have decisively restructured under-performing oy operations to focus on core businesses © Closure of UMTS operations outside Spain to prevent further cash outflows European UMTS with little upside operations * First mover to recognise the benefits of withdrawal * Savings of €2.4bn in net income o
Slide 13: Organic revenue and margin growth in constant exchange rates
As a result, we have delivered organic revenue and — margin growth in constant exchange rates ... Strong organ evolution in constant FX revenue growt! Group Revenues EBITDA EBIT €bn €bn €bn > > 311 5g 4327 ee ~@>.. 12.07 8 8 : 5.6 5.4 5.0 25 2.834 2001 2002 4Hoz 1Ho3 2001 2002 1HO2 1HO3 [Constant ex
Slide 14: Stable and growing cash flow generation
Telefénica, S.A. ..and boosted stable and predictable growing cash flow — generation Growing, better balanced operating cash ..leading to outstanding flows from core businesses... free cash flow evolution Operating cash flow by business line Free cash flow €m €m Mh Wirelinatatam = Wireline Spain i W
Slide 15: Contents
Contents = Successful management through a difficult environment: progress over the past 18 months = Our strategy going forward will enable us to continue enhancing cash returns through growth and transformation 14
Slide 16: Very strong competitive and strategic position
Telefénica, S.A. Today, we enjoy a very strong competitive and strategic position in the industry... 93m customers* worldwide (+15m since } Seville 02) d a ee Leading player in Spanish and : Track record of strong Portuguese speaking 1 ¢ If fon \, a markets: both in j Cle CA Sere ee wireline and wir
Slide 17: Comparing favorably to our peers
..comparing favorably to our peers Leadership in Spanish/ Portuguese [img High share of profit coming from markets non-domestic markets Leading DSL penetration in Europe| Total market share % of total consolidated EBITDA fromnon- _DSL connections over 2002 domestic markets Internet households 2002 W
Slide 18: Significantly better risk profile
Telefonica, S.A. Sound investments Divesting and restructuring operations of uncertain profitability or strategic fit Improved macroeconomic outlook Tight CapEx and OpEx management Proactive hedging of financial risk Business portfolio LatAm Services and technology Risk management Regulatory 17 Also
Slide 19: Solid financial position beyond that of our peers
First-class cash flow generation The best credit rating Operating cash flow’ as % of revenues 1HO3 32.6%. 33.0% TEF DT FT BT Tl * Operating cash flow = EBITDA. Capex Source: IP Morgan Intangible assets over equity Net debt‘/EBITDA Net debt"/Market Cap FY 2002 2002 (As of 30/09/03) 0.39 [oT 102 22 Mo
Slide 20: Sustained and secure dividend commitment
Telefénica, S.A. This strong position has enabled us to make a sustained and secure dividend commitment... Dividend increased toa Asustained ts ‘ Scope for further competitive amount per + commitment + ' share* overtime Fem Uneratio’ * Dividend * €0.40/share * €0.40/share per * Acommitted dividend r
Slide 21: Transformation of the company's returns profile
and, more importantly, reflects the transformation of the company’s returns profile into a better one © Strong position in key growth areas: wireless, broadband, LatAm © Enhanced commercial aggressiveness to support top-line growth © Financial and operational resources to exploit growth opportunitie
Slide 22: Contents
Contents = Successful management through a difficult environment: progress over the past 18 months = Strong position now allowing for improved shareholder returns 2a
Slide 23: Clear strategy to grow cash flows and improve returns
Telefonica, S.A. Looking ahead, we have a clear strategy to grow cash flows and improve returns Objectives Sustainable cash Improved returns flow growth on capital ET Customer orientation Lines of action Growth Transformation Leaner, more efficent business model Latam Commercial Broadband Wireline o
Slide 24: The customer is the starting point of this strategy
Telefénica, S.A. The customer is the starting point of this strategy, the CUSTOMER ORIENT. tne at) center of everything we will be doing in the near future Individuals < + Full mobility + Ubiquitous broadband + Premium services Households S + Basic communications + Digital home services: broadband a
Slide 25: Revenue growth through three key levers
Telefonica, S.A. We will make revenue growth happen through three key levers Objectives Sustainable cash Improved returns flow growth on capital x ‘ Customer orientation Lines of action Growth Transformation Commercial yesnenimere, Broadband param oriented au Wireline business company model 24
Slide 26: Broadband: continuing to develop the market
the market... ‘a has been a successful massive/ profitable broadband deployment © First to recognise potential and invest in top 5 European countries DSL over total lines (percentage as of June 03) Th TH 5% 4% TEF DT FT Tl BT © Maximum coverage achieved with limited CapEx © Positive contribution in
Slide 27: Innovating to make broadband a mass-market service
Telefonica, S.A. Households and Individuals SMEs and Corporations 2006 ASPIRATIONS .. innovating to make broadband a truly “mass-market” service Broadband as a truly “mass-market” product + Cooperate Broadband as a with service “must-have” for providers to businesses stimulate market growth = Over 6
Slide 28: Terra's role in residential broadband-internet demand
Telefénica, S.A. GROWTH Terra will play a critical role developing the Residential Broadband-Internet demand Improving use of narrow and broadband-internet Commercial aie strategy Differentiating a complementary access offer Providing e-mail and other internet communications services Households Terr
Slide 29: Wireless: further growth in Spain
In wireless, we GROWTH stand to capture substantial further aa growth, both in Spain... Short term growth: VOICE UPSIDE | Increased penetration: — Intra-company and residential niches Tariff and service innovation Prepaid-to-contract migrations Loyalty schemes 2002 2006E © Offer customized data serv
Slide 30: Wireless growth in LatAm given huge market potential
GROWTH teenie ..and in LatAm, given the huge market potential aa Potential for strong Our strategy to grow “ee pst | | eco | —v 380-83%) Leverage on largest mobile Accelerate GSM network ~~ 4 community to lead market deployment growth and customer usage Build up a strong Growing focus oncustomer com
Slide 31: LatAm wireline business will keep growing
organically Retain and grow customer base while stimulating usage and ARPU * Maximise penetration by income level * Accelerate internet mass penetration (reaching over 2 million DSL in 2006) © Retain customers through bundling and further segmentation * Anticipate and minimise churn from high-value,
Slide 32: Transforming the company to support growth and cash returns
Telefonica, S.A. At the same time, we are transforming the company to support growth and cash returns Objectives Sustainable cash Improved returns flow growth on capital x Lines of action Growth Transformation Commercial Lesneninere) Broadband pian oriented au Wireline business company model 34
Slide 33: A transformation centered around the customer
Telefonica, S.A. TRANSFORM. A transformation centered around the customer and focused on two key aspects: Commercial Leaner, oriented company oe more efficient business model = Transition towards most Corporations & Individuals Less capital intensity commercially oriented Government through CapEx or
Slide 34: Developing commercial excellence across business lines
Telefonica, S.A. , . TRANSFORM. We are developing commercial excellence across our business lines in order to stimulate growth Moving wireline management towards the best commercial practices of our wireless and corporate data businesses Management Innovative of distribution product design channels
Slide 35: Customer driven organization
customer driven organization ° “Improving the value proposition to advertisers... * Innovative and more specialized editorial products * Capturing and monetizing the internet opportunity * Transfer and implementation of best practices (LatAm) .. through a commercial oriented organization... * 70% he
Slide 36: Deep workforce transformation in our wireline operation
Deep workforce transformation in our wireline operation E.g. Telefonica de Espafia * Aggressive net headcount reduction plans of 14,700 employees in five years (36% of total workforce) * Increase of 25% in commercial staff until 2007 * Launch commercial capabilities building programs wy Commercial s
Slide 37: Evolving the economic model towards a leaner one
TRANSFORM. We are quickly evolving the Group’s economic model towards a leaner one Leaner business model going forward * Simpler, more empowered organisation © CapEx optimisation ° Significant reduction of *Highehassetturnaver: indirect costs * Real estate rationalization * Less workforce intensive
Slide 38: Wireline transformation to set new industry standard
The transformation of our wireline businesses will set up a new industry standard among large European telcos Telefonica de Espafia Telefonica LatAm 40,659 ~ 41% ~ % of commercial 27% P 27% staff ~ 1,270 ~ 780 836 aan 2002 2007E 2002 2006E
Slide 39: CapEx optimization without sacrificing growth potential
CapEx optimization without sacrificing growth potential or customer * Gradual deployment of new technology — No commitment to one single technology, benefiting from further innovations © Maintaining investment flexibility — Avoidance of large upfront investments * Leveraging cost reduction from tech
Slide 40: Becoming a much less capital intensive business
TRANSFORM. ..and becoming a much less capital intensive business CapEx significantly below amortisation Significantly decreasing our total reflecting less capital intensity asset base in absolute terms Depreciation and CapEx over Revenues Total assets én “=== Deprec. to Revs. 31.9% — Capex to Revs.
Slide 41: Increasing asset turnover, EBIT margins, ROCE and free cash flow
Increasingly high As: set Turnover... Total Group revenues/Total average assets 34.7% 2001 36.8% 40.3% a 2002 1Ho3* “tHosresults annualized mounting EBIT margins... Group EBIT/revenues 17.5% 2001 17.7% 2002 208% 1Ho3 56%-59% 2006E 28%-31% 2006E Our ultimate aim is to deliver “best-in-class” returns
Slide 42: Best combination of short-term results, risk profile and upside
Telefonica, S.A. ..and to deliver to our shareholders the best combination of short-term results, risk profile, and medium-term upside Business upside, \ growth capability y jon + Customer-centred, commercially oriented + One integrated telecom Group, lean business model - Transparent and consistent
Slide 43: Clear priorities unfold in multiple initiatives
Our clear priorities towards cash flow growth and improved capital returns unfold in multiple initiatives in the different business lines Agenda October 9th 10:30 Mr.Julio Linares Executive Chairman Telefonica de Espafia 12:15 Mr.José Maria Alvarez-Pallete Executive Chairman Telefonica Lationamérica
Slide 44: Signatures
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Telefónica, S.A. Date: October 13 th , 2003 By: /s/ Antonio Alonso Ureba Name: Antonio Alonso Ureba Tit
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