Slide 1: IFRS 16 & Finance Session
Telefónica IFRS 16 & Finance Session Telefónica Group 13 March 2019, London
Slide 2: Disclaimer
Disclaimer This document and the Q&A session may contain forward-looking statements and information (hereinafter, the “Statements”) relating to the Telefónica Group (hereinafter, the "Company" or "Telefónica") or otherwise. These Statements may include financial forecasts and estimates based on assu
Slide 3: Agenda
Agenda Pablo Eguirón Global Head of Investor Relations 3
Slide 4: Key Objectives
Key Objectives Laura Abasolo Chief Financial and Control Officer 4
Slide 5: Key Objectives: IFRS 16 and Capital Structure
Key Objectives Implications of IFRS 16 IFRS 16 Changes in lessor/lessee accounting Disclosure in financial statements Solid investment grade credit rating Capital Guarantee solvency and liquidity Structure Optimizing financing costs while managing key trade-offs: Average maturity; Floating vs Fixed;
Slide 6: IFRS 16
IFRS 16 Marta Soto Head of Accounting Policies 6
Slide 7: Major changes for lessees starting Jan 2019
MAJOR CHANGES FOR LESSEES STARTING 1 JAN 2019 • Lessees are required to account forChanges leases in the balance sheet Changes in in lessor accounting under a single accounting model with limited exceptions lease • No change on lessor side accounting • Additional disclosure requirements in financial
Slide 8: IFRS 16 at a glance: balance sheet ROU assets and lease liabilities
IFRS 16 AT A GLANCE | BALANCE SHEET: ROU ASSETS AND LEASE LIABILITIES BEFORE NOW Lessees initially recognize: IAS 17 IFRS 16 1 ✓ a lease liability for Finance Operating All leases(*) the NPV of future lease payments Assets --- ROU assets ✓ a right-of-use asset for the right to use the underlying Lia
Slide 9: IFRS 16 at a glance: P&L from opex to depreciation and interest
IFRS 16 AT A GLANCE | P&L: FROM OPEX TO DEPRECIATION AND INTEREST BEFORE NOW Impact in P&L due to IAS 17 IFRS 16 change in the nature of expenses Finance Operating All leases (*) 1 Lease costs replaced by: Income ✓ depreciation of right- Lease OpEx --- expense --- of-use assets OIBDA ✓ interest on l
Slide 10: IFRS 16 at a glance: cash flow statement, no impact on net cash
IFRS 16 AT A GLANCE | CASH FLOW STATEMENT: NO IMPACT ON NET CASH BEFORE NOW IAS 17 IFRS 16 Impact in cash flow Operating All leases (*) 1 statement Lease Cash paid from operations payments Payment of ✓ Shift from cash flows Net payments of interest interest from operating Net cash from operating act
Slide 11: Use of judgement and accounting policy elections
USE OF JUDGEMENT AND ACCOUNTING POLICY ELECTIONS CERTAIN ASSUMPTIONS ARE KEY IN THE MEASUREMENT OF ROU ASSETS AND LEASE LIABILITIES • Lease term and renewal/early termination options • Discount rate • Variable lease payments • Lease vs service INTANGIBLE ASSETS Out of scope RECOGNITION EXEMPTIONS SH
Slide 12: Transition impacts linked to operating lease commitments
TRANSITION IMPACTS | LINKED TO OPERATING LEASE COMMITMENTS 2018 Modified retrospective First-time adoption impacts approach Bn € Incremental liability by segment No restatement of 2018 and earlier periods Incremental Lease [7.4 – 8.1] Germany Liability [range] Brazil Practical expedients 1/1/19 • Gr
Slide 13: KPIs: what to expect in 2019
KPIs | WHAT TO EXPECT IN 2019 2019 is a Basis for 2018 2019 comparison transition year 2019 vs 2018 No restatement of 2018 Organic OIBDA ✓ ✓ 2019 adjusted figures will be Net Debt provided for comparative purposes excluding lease liabilities ✓ ✓ Net Debt adjusted by MTM cash Net Debt + flow hedging
Slide 14: Capital Structure Strategy Update
Capital Structure Strategy Update Jesús Romero Deputy Chief Financial Officer
Slide 15: Historical trend in financial payments and key management trade-offs
Historical trend in financial payments and key management trade-offs €bn Total interest payments (€bn) (LHS) Total financial payments cost (RHS) Rates 3,0 6,0% 5,4% 5,0% 5,0% 2,5 4,7% 2,5 2,4 2,4 3,9% 4,0% 2,0 2,1 3,3% 3,4% 3,0% 1,7 1,6 1,5 -€105m (∆ 18 mths) 2,0% -€809m (∆ 3YR) 1,0 1,0% 2013 2014 1
Slide 16: A stronger balance sheet: lower debt and longer maturity at lower rates
A stronger balance sheet: lower absolute debt and longer maturity at lower rates Net debt reduction since June 2016 to Dec 2018 (reported and including post closing events) ND Reported (€bn) 52.2 Var. 2Q16-18 48.6 (post-closing1) 44.2 41.8 -€11.8bn 40.4 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3
Slide 17: In January 2019 we issued first Green Bond in the telecoms sector globally
In January 2019 we issued first Green Bond in the telecoms sector globally Fiber is our carrier for the next 30-50 years Optical fiber is significantly Optical Fiber transformation Key Results more efficient than copper How we do it (until 2018) Energy Efficiency ▪ More than 7 times less energy per
Slide 18: Hybrids LM of €3.5bn extended average years to call and saved €75mn/year
Hybrids LM of €3.5bn extended average years to call and saved €75mn/year in coupons Hybrids Pre-LM (Mar 2018) Hybrids Post-LM3 (Mar 2019) 1st Call Date (Crncy) NOTIONAL (€m) Years to Call COUPON (%) 1st Call Date (Crncy) NOTIONAL (€m) Years to Call COUPON (%) Sep-18 (EUR) 1,125 0.49 6.50% Nov-20 (GB
Slide 19: Trade offs (1): increased average debt life
Trade offs (1) – increased average debt life, from 6.4Y to ~10Y considering YTD issues December 2016 (Liquidity1: €21.3 bn) Perpetual bonds % Over total debt 7.7 7.4 6.4 28% 1,1 5.8 1,9 6.1 €15.3bn debt maturities 5.4 0,6 0,9 1,0 3.7 2.6 3.0 6,2 5,8 5,8 5,1 2.2 4,9 1,0 1.3 1.3 0.6 0.3 0.3 2,0 In 2 y
Slide 20: Trade offs (2): increased fixed rate debt to 74%
Trade offs (2) – increased fixed rate debt to 74% limiting exposure to higher rates 2013 2014 2015 2016 2017 2018 Total financial payments 3.41% 4.68% 5.40% 4.96% 3.94% 3.32% cost (%) % of Debt in Fixed Rates 71% 70% ∆ -22 p.p. 48% ∆ +3 p.p. 51% ∆ +20 p.p. 71% ∆ +3 p.p. 74% Total financial payments
Slide 21: Trade offs (3): FX hedging strategy focused on FCF vs. net debt
Trade offs (3) – FX hedging strategy focused on FCF vs. net debt changes €0.85 Europe FCFS 2018 ex-financial Historic FX impacts on OIBDA, FCF and Net Debt (€m) payments Net Debt Net Debt OIBDA FCF (FX EoP) (Avg. FX) 56 (166) -91 (172) -213 (508) (427) (717) -639 (1.175) -1,133 (1.511) 2016 2017 201
Slide 22: BRL / EUR averages vs. end of period exchange rate
BRL / EUR averages vs. end of period (EoP) exchange rate (YoY comps) 2015 2016 2017 2018 2019 YTD y.o.y. y.o.y. y.o.y. y.o.y. y.o.y Avg. FX EoP FX Avg. FX: -14.4% Avg. FX: -5.0% Avg. FX: +6.6% Avg. FX: -16.2% Avg. FX: +0.9% ∆ Avg. vs EoP FX EoP FX: -24.1% EoP FX: +23.8% EoP FX: -13.4% EoP FX: -10.6%
Slide 23: FX hedging in 2016-2018: potential economic profit (loss)
FX hedging in 2016-2018 – Potential Economic Profit (Loss) Reported Theoretical impact under benchmark Theoretical FX Impact Economic Profit Financial impact of bringing Total theoretical on net debt Net Debt/OIBDA to benchmark (ex-VEB) Impact (Loss) (€m) Financial FX impact on A B Expenses1 C new d
Slide 24: Capital structure breakdown and pricing of debt vs. equity
Capital structure breakdown and pricing of debt vs. equity €bn – 2018 39,6 91.8 -0,9 43% Equity 7,5 41,8 3,8 57% 1 2 Reported Net Net Employee Hybrids Market Minorities EV Debt (Dec-18) Commit. (Dec-18) Capitalization (Dec-18) Interest & Dividend 1,6363 2,077 3291 outflows (€m) (€40c/share) FCF & Un
Slide 25: Main takeaways
Main takeaways 1. €12bn net debt cut and €32bn refinanced in 10 Qs; committed to BBB/Baa2 rating 2. Reduced exposure to rate increases with longer debt life and higher % of fixed rate 3. FX was a major headwind in a volatile 2018 Large difference in after tax cost of debt vs. implied equity yield 25
Slide 26: Key Takeaways
Key Takeaways Laura Abasolo Chief Financial and Control Officer
Slide 27: Key Takeaways: IFRS 16 and Capital Structure
Key Takeaways Limited impact on leverage ratio (~0.2x) IFRS 16 2019 Guidance has been defined and will be measured pre IFRS16 (under IAS17) Strong Net Debt reduction since June 16 Capital Diversified and successful financing program Structure Healthier and more flexible Balance Sheet 27
Slide 28: ‘Jelefontca
‘Jelefontca