Telefonica Sa · BME:TEF
Telefonica Sa — Telefonica S A — Investor Day (March 2018)
37 slides from Telefonica Sa's investor day presentation, Mar 23, 2018
Slide 1: Capital Structure Strategy and New IFRS for 2018
Capital Structure Strategy and New IFRS for 2018 Telefónica Group 23 March 2018
Slide 2: Finance and Accounting session
Finance and Accounting session Pablo Eguirón Global Director of Investor Relations
Slide 3: Key Objectives
Key Objectives Laura Abasolo Chief Financial and Control Officer
Slide 4: Key Objectives
4 Key Objectives Capital Structure Strategy New IFRS for 2018 Implications and main changes of new accounting standards Cost optimization across capital structure Interest rates and FX volatility management Guarantee Solvency and Liquidity
Slide 5: Capital Structure Strategy
Capital Structure Strategy Jesús Romero Deputy Chief Financial Officer
Slide 6: Long term financing strengthened our balance sheet in 2017 and YTD
6 5.6 15.5 4.4 1.2 3.3 1.0 USD Bonds € Bonds Latam Financing Hybrids Bank Financing Total (€bn) Sources of long-term financing (FY 17 & 2018 YTD) Long term financing strengthened our balance sheet in 2017 and YTD 7.3 20.913.5 Cash position Undrawn credit lines & synd. credit facilities Liquidity pos
Slide 7: Key Finance objectives – guarantee solvency and liquidity
7 Key Finance objectives – guarantee solvency and liquidity Meet key objectives while optimizing costs across our capital structure 1. Fully committed to a solid investment grade credit rating (BBB/Baa2) 2. Current liquidity covers debt maturities in excess of two years 3. Manage and hedge main risk
Slide 8: Capital structure breakdown and pricing of debt vs. equity
8 Capital structure breakdown and pricing of debt vs. equity 1. Hybrids valued at issuance date 2. Data as of 20/03/2018. Source: Bloomberg 3. FCF ex spectrum plus financial payments net of taxes and adjusted for minorities 4. Assuming TEF’s effective cash tax rate of 21.9% Source: Telefónica 44.2 9
Slide 9: Historical trend in financial payments and key trade-offs in costs
9 Historical trend in financial payments and key trade-offs in costs 2.4 2.5 2.4 2.1 1.7 4.7% 5.4% 5.0% 3.9% 3.3% 2.0% 3.0% 4.0% 5.0% 6.0% 1.6 1.9 2.2 2.5 2.8 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Total financial payments cost (RHS)Total interest payments (€bn) (LHS)
Slide 10: Current market value of senior bonds vs. notional
10 Current market value of senior bonds - €39bn vs. notional €37bn TEF inventory of listed fixed income instruments by currency Source: Bloomberg. Data as of March 20th Senior EUR GBP USD Bond issues in 2017-18 YTD Years to maturity -1 0 1 2 3 4 5 6 Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 11Y 12Y 13Y 14Y 1
Slide 11: Credit market depth is critical, specially in long tenors
11 Credit market depth is critical, specially in long tenors 0 25 50 75 100 125 <5yrs 5-7yrs 7-10yrs >10yrs 0 50 100 150 200 250 <5yrs 5-7yrs 7-10yrs >10yrs 0 5 10 15 20 25 <5yrs 5-7yrs 7-10yrs >10yrs Total Corporate IG issuance1 in 2017 – 300bn in EUR, 728bn in USD and 36bn in GBP Maturity breakdow
Slide 12: Derivatives – turn a 30Y USD coupon into euro
12 $1,250m Interest Rate Swap (IRS) to shift fixed USD debt to floating1 Derivatives – turn a 30Y USD coupon of 4.895% into 3.17% in € 1. Assuming FX USD/EUR=1.222 Same steps used to turn 20Y USD bond with a fixed coupon of 4.665% into a 20Y EUR “synthetic” bond with a fixed coupon of 2.87% $1,250m
Slide 13: Trade offs (1) – increased average debt life
13 Trade offs (1) – increased average debt life (6.4Y to 9.3Y in 5Qs) 1.Includes Cash position and undrawn credit lines & syndicated credit facilities Source: Telefónica Avg. Debt maturity was 6.4Y (Dec-16) vs. current 9.3Y (Mar-18 PF with 2018 YTD issues) - €bn 6.2 4.9 5.8 5.8 5.1 2.0 1.1 0.9 1.9 0
Slide 14: Trade offs (2) – increased fixed vs. floating rate debt
14 Trade offs (2) – increased fixed vs. floating rate debt 7.4 6.8 5.7 5.6 6.4 7.9 8.1 4.7% 5.4% 5.0% 4.6% 3.9% 3.5% 3.3% 0.2% 0.2% 0.0% -0.2% -0.3% -0.3% -0.3% 1.6% 2.2% 0.9% 0.5% 0.3% 0.7% 0.9% 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Total financial payments costs Avg
Slide 15: Trade offs (3) – FX hedging strategy produced positive results
15 Trade offs (3) – FX hedging strategy produced positive results Revenues (-€1,653m) OIBDA (-€717m) FCF (-€171m) Net Debt (-€639m) FX reduces OpEx FX reduces CapEx, Taxes & others FX reduces Net Debt FX impact in FCF is mitigated, “natural hedge” Debt structure more than offsets FCF impact (616) (1
Slide 16: Levels of FX debt constantly monitored relative to FX fair value views
16 Levels of FX debt constantly monitored relative to FX fair value views 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Fair Value (+/- 1 st. dev.) Illustrative case study: BRL/USD spot rates relative to equilibrium levels PPP: Purchasing Po
Slide 17: FX hedging in 2016 – decision making based on economic profit analysis
17 FX hedging in 2016 – decision making based on economic profit analysis FX Impact on net debt A (€m) GBP BRL Rest TOTAL -91 Financial impact of bringing Net Debt/OIBDA to benchmark B C Financial Expenses FX impact on new debt +380 +337 Theoretical impact under benchmark A CD + +B= +626 Economic Pr
Slide 18: Executed 1st large EU hybrid liability management
18 Executed 1st large EU hybrid liability management; annual savings >€60m 1St Call Date (currency) NOTIONAL (€m) Years to Call COUPON (%) Sep-18 (EUR) 1,125 0.49 6.50% Dec-19 (EUR) 850 1.70 4.20% Mar-20 (EUR) 750 2.02 5.00% Nov-20 (GBP)1 685 2.68 6.75% Sep-21 (EUR) 625 3.49 7.625% Mar-22 (EUR) 1,00
Slide 19: Implied costs of equity component of recently issued hybrid bonds
19 Implied costs of equity component of recently issued hybrid bonds NOTIONAL COUPON (%) COST (€m) Hybrid 1,000 2.625% 26.3 EUR senior 500 0.40% 2.0 Equity 500 4.85% 24.3 Implied cost of Equity (post tax1) 3.79% NOTIONAL COUPON (%) COST (€m) Hybrid 1,250 3.0% 37.5 EUR senior 625 0.95% 5.9 Equity 625
Slide 20: Main takeaways
20 Main takeaways Stronger balance sheet and solid track record of risk management Objectives – guarantee solvency and liquidity; solid investment grade credit rating (BBB/Baa2) Hedge interest rate and FX risks while optimizing capital structure costs In 2017 we strengthened our balance sheet ahead
Slide 21: New IFRS for 2018
New IFRS for 2018 Marta Soto Head of Accounting Policies
Slide 22: Overview
22 Overview
Slide 23: IFRS 15: The new revenue standard
23 23 EFFECTIVE DATE… … January 1st 2018 … Partial Retrospective approach adopted by Telefónica CORE OF THE STANDARD… … Revenue recognition is based on the contract with the customer and is not necessarily aligned with billing CHANGES IN REVENUE RECOGNITION… … New revenue mix … Variations in timing
Slide 24: IFRS 9: Financial Instruments
24 24 • Financial Assets Classification based on: o Business model o Contractual Cash Flow Characteristics • Financial Assets Measurement: o Fair Value through profit and loss (FVtPL) o Fair Value through other comprehensive income (FVtOCI) o Amortised Cost (AC) • We move from an incurred loss model
Slide 25: IFRS in detail
25 IFRS 15 in detail
Slide 26: Applying a Step Model to determine when and how to recognise revenue
26 26 Applying a 5 Step Model to determine when and how to recognise revenue IFRS 15: The model when a performance obligation is satisfied by transferring the good or service to the customer Recognising revenue To each performance obligation based on the relative standalone selling price Allocating
Slide 27: IFRS 15: Basic Adjustment
27 27 Before… …After R e ve n u e Months 200 150 150 150 150 150 Handset revenue Service revenue Revenue Billing Revenue Billing The difference is reflected in the Balance Sheet 740 Balance Sheet Impact Months Months C o n tr a ct A sse t P&L Impact Cash conversion over the contract term 120 120 120
Slide 28: IFRS 15: Cost Capitalisation
28 28 Before… …After Months Months Expen se s C a p italized co st s Expen se s Months 30 1.25 1.25 1.25 1.25 1.25 1.25 One shot recognition OPEX accrual in accordance with the pattern of transfer of the services P&L Impact IFRS 15: Cost Capitalisation Incremental costs have to be capitalised if the
Slide 29: IFRS 15: Opening equity impact 2018
29 29 IFRS 15: Opening equity impact 2018 30% 70% 5% 4% 38% 36% 5% 12% Areas of impact Segment Distribution Capitalised costs Contract Assets & Contract Liabilities UK North Hispam South HispamGermany Brazil Spain The following charts represent the estimated equity impact on a pre-tax basis of €+1.0
Slide 30: IFRS 15: Estimated contribution per region
30 30 1 North HISPAM: Colombia, Mexico, Costa Rica, El Salvador, Guatemala, Nicaragua, Panama, Ecuador and Venezuela 2 South HISPAM: Argentina, Peru, Chile and Uruguay IFRS 15: Estimated contribution per region OIBDARevenue South HISPAM 2 North HISPAM 1 Germany UK Spain Brazil Estimated P&L impact b
Slide 31: Key Takeaways
Key Takeaways Laura Abasolo Chief Financial and Control Officer
Slide 32: Key Takeaways
32 32 Key Takeaways Capital Structure Strategy New IFRS for 2018 No material impacts expected -0.1% Revenues and -0.5% OIBDA (estimated impact based on FY17) Healthier Balance Sheet Solid risk management track record Impressive refinancing exercise: €19bn Guidance not affected under new standards
Slide 33: Q&A Session
Q&A Session Laura Abasolo Jesús Romero Marta Soto Pablo Eguirón
Slide 34: Appendix
Appendix Telefonica
Slide 35: Transition approach
35 TRANSITION PORTFOLIO APPROACH FINANCIAL COMPONENT Telefónica Group will use portfolios as a method of clustering similar contracts. wherever possible Telefónica Group will not require the calculation of the financing arrangement for those commercial offers where the customer pays for the good or
Slide 36: Slide 36
Slide 37: Forward-looking statements 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 assumptions or