Telefonica Sa · BME:TEF
Telefonica Sa — Telefonica S A — Investor Day (October 2003)
60 slides from Telefonica Sa's investor day presentation, Oct 14, 2003
Slide 1: Third Investor Conference: Telefónica Latinoamérica
José Maria Alvarez-Pallete Executive Chairman Telefonica Latinoamérica THIRD INVESTOR CONFERENCE | maprip 2 O O 3 Telefonica
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: Capturing LatAm's opportunity
Capturing LatAm’s opportunity
Slide 4: Telefonica: the right partner to exploit Latam's opportunity
+ Telefonica: the right partner to exploit Latam’s opportunity Latam is a large market with relevant growth opportunities. T Latam’s solid track record and demonstrated management flexibility will allow us to extract the most from them Overall Latam priorities T Latam operators share common objectiv
Slide 5: Telefonica is the right partner to exploit Latam's opportunity
Telefonica is the right partner to exploit Latam’s opportunity T Latam’s opportunity Key requirements + Alarge market: more than 240 million people in the four T Latam’s countries + Significant economic growth: GDP to grow ata yearly average rate of 3.5% until 07 + New businesses (e.g. Internet and
Slide 6: Latin America is a large market with significant growth opportunities
Latin America is a large market with still significant opportunities for growth Good economic perspectives Estimated Latam’s GDP CAGR 04-07* elefénica, fonicade Sao del Pera 3.3% Telefénica CTC, Chil ne fefonica de rgentina Europe Asia Remaining growth in core businesses New businesses are already g
Slide 7: Telefonica Latam: market knowledge through long presence
Telefonica Latam Market knowledge developed through a long history of presence in the Region + Argentina's crisis, Changes in Launch of the Change of First tariff New tariff decree in “pesification”, tariff freeze the privatization tariff decree in Chile Chile: price decrease fund jee dlevellneiien
Slide 8: Management flexibility: when we had to grow, we grew
Management flexibility: “S When we had to grow... we grew Lines in service Net operating revenues Millions R$ Millions 9, 10.6 7,310 8.3 6.4 98 99 00 01 Source: TeleSP annual reports
Slide 9: Argentine economic indicators and crisis management
Argentine economic indicators 2001-02 change Invest- GDP ment -48.2% Base 100 December 02 71. Purch: Parca power "S 1? 29 Sithange rate Dec-o1 Dec-02 * Inverse of CPI ** EBITDA - CAPEX Management flexibility: When we faced a dramatic crisis... we overcame it Argent - —#— Constant P$'00 Key levers —
Slide 10: When our commercial environment changed, we transformed it
dlegiste tu plan? Hazlo ya, como miles, loestan haciendo SUBEN PASAJES Y BAJAN TELEFONOS a Correo, February 22nd, 2003 Management flexibility: When our commercial environment changed... we transformed it into a growth opportunity New lines ~118,000 (Accumulated) Migration of ~474,000 existing lines
Slide 11: In any environment Telefonica has achieved compelling results
In any environment Telefonica has achieved compelling results and a growing cash flow in local currency... TELESP —4— EBITDA + EBITDA ~ cAPEX —™ op. FCF * Including Cable Magica
Slide 12: Positive results in euros despite currency volatility
Telefonica Latam ..and despite currency and economic volatility, flexible management has also allowed positive results in euros Evolution of T Latam currency portfolio* Operative hedging EBITDA US$. Base 100 year 2000 Improve flexibility to illion euros 100 mitigate adverse \ 88 \ 1g59_ 3808 environ
Slide 13: Met Seville's FCF commitments
As a result we met Seville’s FCF commitments even in the worst year and in 2003 we have recovered the promised growth path Seville's commitments Delivery to date 2001-2002 2002-2005 2001-2002 1H02-1HO3 * Revenues 1% ips 8% * 2002 crisis 1% | | tougher than — expected * Back on track in EBITDA* 2003
Slide 14: Facing the future from a #1 position in the region
the region 2002 Market leadership Lines in service Market share Million % US Telefonica Telemar Telmex Brasil 9 Telecom Verizon 5 Telecom Argentina Others 21 Source: Company Reports; ITU 2002 13 And we now face the future from a #1 position in Solid operational base Strong OPEX improvement Million e
Slide 15: Content
Content + Telefonica: the right partner to exploit Latam’s opportunity Latam is a large market with relevant growth opportunities. T Latam’s solid track record and demonstrated management flexibility will allow us to extract the most from them Overall Latam priorities T Latam operators share common
Slide 16: All T Latam operators share several key priorities
All T Latam operators share several key priorities v Customer- oriented organization * Develop competitive intelligence * Segmented approach to customers 1. Commercial excellence * Rebuild sales force and rebalance channel mix ey * Improve customer service badier te ‘ee beoiend ¥ Defend and grow tra
Slide 17: Commercial Excellence: key to capturing existing growth
1. Commercial Excellence: our key to capturing existing prowth opportunities and succeeding in a complex environmen The traditional growth model in lines is ..and demands a new commercial focus and a running out of steam... new approach to leverage customer base Four T Latam markets Increasing ARPU
Slide 18: Flexible and efficient operations: a lean company
2. Flexible and efficient operations: a lean company prepared for uncertainty CAPEX regional COMEX, ATIS Techn ological management Commercial harmonization Excellence * CAPEXmanagement * Sales&Marketing * Commercial * Network planning & ey management operations design mip * 2003-2004 * 2002-2005 * 2
Slide 19: Flexible and efficient operations: anticipating market trends
Latam trends OPEX, Operational Excellence Improve network operation and maintenance: Process homogenization and automation Roll out best practices Outsourcing Resources management (GAUDI) Objectives for 2005 2. Flexible and efficient operations: anticipating market Work force costs vs. Lines in serv
Slide 20: A modern plant and remaining network capacity
Amodern plant... % of equipment installed in the last 10 years Telesp TASA cTc TdP as 7 88% | 32% | 20% | 25% Sea 100% 68% 100% 83% fiber s1% | 99% | 78% | 99% Local loop 64% | 61% | 43% | 64% % Digitalized @QOoo * Installed in the last 7 years plant 19 2. Flexible and efficient operations: leverage
Slide 21: Regulatory management: building a new regulatory environment
Regulatory models are being reviewed in all countries. + Regulators are increasingly recognizing the importance of Telecommunications for the development of their countries : —Direct impact in telecommunications -Indirect impact in other sectors + Additional development requires further investments
Slide 22: Telefonica led wireline development in Sao Paulo
in Sao Paulo Illustrative achievements Telefonica has led the development of the wireline sector Form 1998 to 2001 TeleSP invested 8,054 million euros to install 6.2 million new lines Increased penetration especially in low income level households TeleSP was the first operator in Brazil to achieve p
Slide 23: Telefonica led wireline development in Argentina
in Argentina Illustrative achievements 8,655 million euros invested up to 2001 to double penetration from 12% in 1990 to 24% 100% of the network digitalized in 1998, enabling the richest service offering New line installation fee down to US$50 from US$2,500 in 1990 As of 2000, all villages over 80 i
Slide 24: Telefonica led wireline development in Chile
in Chile Illustrative achievements CTC invested 3,832 million euros from 1989 to 1999 to boost penetration from 6% to 16% Chile was the first country in the world to digitalize 100% of the network in 1991 New line provisioning lead time has decreased from 540 to 10 days CTC has played a key role in
Slide 25: Telefonica led wireline development in Peru
in Peru Illustrative achievements Telefonica has led the development of the wireline sector Total investment of 2,790 million euros up to 2001 to install almost 800 thousand new lines 94 thousand new payphones: + Covering the entire country and allowing communications in rural areas + Offering inter
Slide 26: Content
Content + Telefonica: the right partner to exploit Latam’s opportunity Latam is a large market with relevant growth opportunities. T Latam’s solid track record and demonstrated management flexibility will allow us to extract the most from them Overall Latam priorities T Latam operators share common
Slide 27: Priorities for Telesp
Priorities for Telesp id
Slide 28: Key priorities for TelesP
Key priorities for TelesP Traditional wireline business Broadband and new services v Sustain customer base and v Lead the NB internet access market shares in key Commercial excellence Y Accelerate Internet mass segments penetration v Increase traffic and IM wireline RGR ee laa ¥ Exploit TdE know-how
Slide 29: Retain high-value customers and increase revenues
Para Sua Casa Produtos para faclitr seu diaadia Para Seus Negécios Selugbes em telecomunicagbes para pequenos negdcios % Para Empresas Ors Solugbes completas em Voz, DDades e internet para empresas usiness Retain key customers Product bundling Cross selling Anticipate high-value/high-risk customers
Slide 30: Maintain positions gained in LD
Maintain positions gained in LD Leverage our recognized brand “Super 15” to slightly increase our market share: + Segmented approach launching traffic bundles and intensive marketing Complete offer inside and outside SP Competitive offer to manage VoIP Special products for SMEs in LD Tailored offers
Slide 31: Tele-emergency, BLEC, Wi-Fi and new businesses
Tele- emergency Project BLEC Ki-Cartao Increase revenues, reducing dependence on regulation Strong demand for household security solutions Forecast of 400 M in 2006 (less than 10% of A/B/C HHs) Integrated telecom solutions for commercial buildings Forecast of 100 million R$ of new revenues in 2 year
Slide 32: Lead narrowband Internet access in Sao Paulo
Lead narrowband Internet access in Sao Paulo 7 jarrowband ISP’s market share 100% + Afree ISP in Sao Paulo: itelefonica Aevolucdo da Prandin — Facilitate BB migration — Increase local traffic (good trend shown after launch) - Promote internet penetration 80% Pay ISPs 60% + itelefonica has the object
Slide 33: Sao Paulo the most advanced area in the region
We have managed to make Sao Paulo the most advanced area in the region... ADSL accesses/100 lines December 2002.% S. Paulo 8% 6.0% 5 19 K 5.1% 4.0% | | ol Bo 7% 46% 1.2% 1.1% ) oe Latin. boas america Number one ADSL provider in the Region... wy ..and plan to continue this trend in the future, profit
Slide 34: Tailoring our offer to each segment
..tailoring our offer to each segment 7 Residential segment Business segment + Develop a complete and competitive BB + Reduce access cost: offer adapted to SMEs: B2B, accounting — Modular access for low income HHs on-line, etc. — “Dynamic band width" + Leverage TdE experience and Telefonica’s + Main
Slide 35: CAPEX ratios and rebalancing investment
ratios + Reduce investments in traditional business, leveraging network modernity Exploit scale economies to reduce marginal CAPEX/ADSL line (50% reduction from 2003 to 2006) Increase flexibility to face potential risks of currency devaluation Rebalancing CAPEX while maintaining low investment 34 wy
Slide 36: We face the future from a strong position
We face the future from a strong position 7 2002 Revenues/lines in service EBITDA margin R$/LIS. End of year Percentage 814 51.4% TeleSP Telemar Brasil TeleSP Telemar Brasil Telecom Telecom Net income/revenues %lines with ADSL Percentage Percentage 10.6% 2.7% 6.0% 6.2% 0.3% TeleSP Telemar Brasil Tel
Slide 37: Priorities for TASA
Priorities for TASA id
Slide 38: Key priorities for Argentina
Key priorities for Argentina raditional wireline business Y Defend traditional voice business: Commercial excellence * Increase traffic with new products i Households Broadband * Increase ARPU (VAS) business LS My SclectiveeOwtn progam Ecoverment ndividuets focused on prepaid lines and cards Operati
Slide 39: Tariff recovery the main regulatory issue
Tariff recovery continues to be the main regulatory issue Fr TASA tariffs evolution Base 1 (Index 1 = Dec. 01) Existing contract (Expected tariffs evolution according to transfer contract) TASA tariffs (fixed pricing since macroeconomic downturn) > Dec-01 Dec-02 Dec-03 Dec-04 Dec-05, Dec-06 Source:
Slide 40: Defend traditional business and capture Internet growth
Defend traditional business and capture Internet growth opportunity Main activities * Segmented value propositions: Flat rates Loyalty program -High-value segments: Loyalty offers adding value 0610 to fixed line and increase of usage (voice flat Programa Traditional rates, VAS and loyalty programs),
Slide 41: High discipline on operational and capital expenditures
High discipline on operational and capital expenditures @ vce * Opex and Capex growth OPEX*/Line conditioned by demand and P$ revenue evolution to ensure profitable growth * Special focus on bad debt control * Top-notch efficiency as a major company goal: —Improve operational efficiency (centralizat
Slide 42: Operating trend improving after tariff freezing impact
reezing negative impact freer [Ei o P &@ Ama Variation Our operating trend is getting better after tariff i Millions 4.00 ee 3.67 EBITDA ssa) a4 1,174 Jun-01 Dec-o1 Jun-02-Dec-02— Jun-03 7838 Local traffic per line and day* Minutes 17.2 Net profit NA 16.8 336 221 oe Jun-01 Dec-01 Jun-02 Dec-02 —Jun-
Slide 43: Priorities for CTC
Priorities for TCTC
Slide 44: Key priorities for CTC
ional wireline business Intensive users: adding value to fixed line through flat rates, VAS and innovative handsets v Low income segments: growth based on prepaid line offer to enhance competitive position vs. mobile Speranenal efficiency Maintain current effort in network efficiency v Leverage netw
Slide 45: Products tailored to different customer needs
tailored to different customer needs Defend local business through new products and services { * Sustain and extract more value * Capture growth opportunity in through a loyalty program low-income segments through focused on adding value to fixed ruuver prepaid line offers (e.g. TLP): line: -Voice f
Slide 46: Significant efficiency goals achieved and continuing
OPEX*/line $Ch thousand Operating efficiency 2001 2002 Capex/Revenues Percentage Capex reduction * Without interconnection cost, We have already achieved significant goals... Efficiency improvement translated into workforce reduction +Reduce capex level by 5 pp. + Shift investment mix towards growth
Slide 47: Chilean telecom industry needs a new regulatory environment
Industry net profit 247 Mobile | Fixed “31 Industry investment Average price per minute Us$ MM Ch$ constant 98 i Ba 1998 2002 Note: All figures include Fixed and Mobile Regulatory decree of 1999 has been very unfavorable to overall telecor dustry and consumers Total traffic Us$ MM Billions of minute
Slide 48: Priorities for TdP
Priorities for TdP id
Slide 49: Key priorities for TdP
Traditional wireline business Vv Increase penetration in low-income segments v Retain current customer base v Strengthen leadership in payphone market Operational efficiency v Increase operations outsourcing and automation Key priorities for TdP Commercial excellence Traditional wireline Households
Slide 50: Penetration driven by prepaid offers
Penetration driven by prepaid offers paid line offers specially addressed to low- income HHs (more than 50% of total): - 6 tailored prepaid offers (line rental + bundle minutes included) - selective marketing + Capture of telephone penetration potential while controlling bad debt and ensuring profit
Slide 51: TdP: maintain leadership in payphone market
Telefonica Latam TdP: Maintain leadership in payphone market 4 GD cacr a % of total revenues Main activities Payphone revenues S$Million Enable public telephones to 16.7% support SMS and e-mail features Increase Launch loyalty programs to revenues stimulate traffic per phone Increase the number of s
Slide 52: TdP: accelerate migration to broadband services
Households eS + Develop a * Launch of modular offerto bundled offers stimulate BB (ADSL + local & growth LD traffic) + ABroadband SME-oriented portal and local contents (virtual content servers hard disk, virtual (Game Zone, office services) Streaming) Broadband VAS . House- + Targetto heavy * Stimu
Slide 53: Select and prioritize investments by profitability
Select and prioritize investments by profitability 4 Upgrade our network based on market .. by rebalancing Capex towards more needs... profitable businesses * Increasing capacity up to 482 Capex/revenues thousand new lines (%) * Reduction of marginal investment per line using selective growth Great
Slide 54: Content
Content + Telefonica: the right partner to exploit Latam’s opportunity Latam is a large market with relevant growth opportunities. T Latam’s solid track record and demonstrated management flexibility will allow us to extract the most from them Overall Latam priorities T Latam operators share common
Slide 55: T Latam 2003: results to date
T Latam 2003: results to date Million euros. Constant exchange rates as of 2002 & 6,954 19%” 02-03 annual variation Revenues EBITDA 2,659 Op. FCF* 2002 * EBITDA - CAPEX
Slide 56: T Latam transformation commitments (1/2)
More customer oriented % of commercial employees Stron, 6 ial ~ 38% commercial 30% focus 2003E 2006E Increase share of wallet Total ARPU. Constant € ‘03/month T Latam: Transformation commitments (1/2) Percent % commercial expenses/operating expenses* ~ 39% ~ 34% 2003E 2006E % non-regulated revenues*
Slide 57: T Latam transformation commitments (2/2)
T Latam: Transformation commitments (2/2) Percent A03tLines (thousand) Reduce assets 2003 assets=Index100 % CAPEX in ADSL and new services Asset light and selective westment 2003E 2006E 2003E 2006E OPEX/Revenues Decrease operating leverage Percentage % Outsourcing** Opex Percentage reduction ~53% ~5
Slide 58: T Latam: economic commitments
T Latam: economic commitments Qa Million euros. Constant exchange rates as of 2002 a > EBITDA > 954 | 7 i: a 2002 2006E 2002 2006E Lines in , EBITDA a service 2427 a wagin Qe SS (millions) (%) CAPEX/revenues Operating free Cash Flow* (%) 10-11 2002 2006E * EBITDA - CAPEX Note Constant exchange rates
Slide 59: From our privileged starting point, we commit to
From our privileged starting point, we commit to: 58 Continue delivering attractive financial and operating results Quickly progress towards the transformation of the group
Slide 60: 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