Long Term Incentive Plan (LTIP):

Transcription

1 Long Term Incentive Plan (LTIP): Understanding FCF & TSR as key indicators and how we all contribute TEF Razón Finance social th July 2018 We choose it all 1

2 Index 1. THE BASICS P&L, FCF, BALANCE SHEET and NET DEBT 2. KEY PERFORMANCE INDICATORS FCF & TSR 3. UNDERSTANDING TSR and MAIN VALUE DRIVERS 4. ANNEX PIP/TFSP 2015 PLAN 2 2

3 1.#1: The basics: understanding P&L, FCF, Balance sheet and Net Debt 3

4 TEF Group 2017 key financial and operational metrics 1 P&L TEF FY 2017 m Reported Reported y-o-y Organic y-o-y Reported vs. Organic (organic variations assume no changes in FX and consolidation perimeter) Revenues 52,008 (0.1%) +3.4% OIBDA 16, % +5.3% Underlying OIBDA 16, % Revenues less operational expenses (OpEx) OIBDA excluding extraordinary items (e.g. tower sales, PSI/EREs) OIBDA margin 31.1% +2.1 p.p p.p. 2 CapEx (ex-spectrum) 8,159 (4.9%) OpCF (ex-spectrum) 8, % +12.2% Net Income 3, % EPS % FCF 4, % Investment in infrastructure deployments (e.g. FTTX, 3G/4G, service platforms) & intangible assets (patents, concessions, brand) OIBDA less Capital Expenditures excluding spectrum costs (CapEx ex-spectrum) Final profit after tax attributable to TEF s shareholders Earnings Per Share is the net income divided by total TEF number of shares outstanding (it is the profit attributable to each TEF share) Revenues, OpEx and CapEx amounts are adjusted considering cash criteria (collection & payments dates) 3 Total Assets (Balance Sheet) 115,066 (6.9%) Total Assets = Total Equity + Total Liabilities 4 Net Financial Debt 44,230 (9.0%) Total debts (short & long term) less cash and other liquid assets 4 4

5 1 Profit & Loss Account (P&L) m 52,008 (35,821) Amount depends on useful life of asset base and long term should be similar to Reflects financial cost of our debts and annual capex (ongoing business) also accrued tax expenses linked to 16,187 6,791 profits generated in the year (9,396) (3,418) (241) 3,132 Revenues OpEx 1 OIBDA Depreciation & Amortization EBIT Financial & Taxes expenses Minorities & Others Net Income Broadband Connectivity Voice and Access Services over connectivity Others 39% 39% 12% 10% Supplies Other operating expenses Personnel costs 41% 40% 19% Minorities are related to OBs where TEF does not own a 100% stake (Germany, Brazil, Colombia, CAM) 1. OpEx also include other operating and extraordinary expenses and capitalized expenses in fixed assets 5

6 2 Free Cash Flow (FCF) Selected as new KPI to deliver the LTIP m 16,187 Cash balance generated from all the collections from clients vs. our payments to employees and suppliers 8, % y-o-y (8,159) (1,726) (1,005) (783) 4,947 OIBDA CapEx (ex-spectrum) OpCF (ex-spectrum) Working capital Net debt interest payment Tax payments Minorities, spectrum & others FCF Reflects the annual change in balance in net working capital (see definition below and balance sheet on next page) WORKING CAPITAL CURRENT ASSETS (EX CASH) = - CURRENT LIABILITIES (EX ST DEBT) Dividend paid to minorities Spectrum payments FCF uses: Debt reduction Shareholders remuneration (Dividend) Share buybacks Financial investments Others 6

7 3 Balance sheet m 115, ,066 Property, plant and equipment Intangible assets Goodwill NON-CURRENT ASSETS EQUITY 26,618 Equity attributable to TEF s equity holders Non-controlling interests Long term financial assets Deferred tax assets 95,135 NON-CURRENT LIABILITIES Long term financial debt Non-current trade and other payables 59,382 Deferred tax liabilities Long term provisions Inventories Trade and other receivables Tax receivables Short term financial assets Cash and cash equivalents CURRENT ASSETS 19,931 Net Working Capital CURRENT LIABILITIES 29,066 Current trade and other payables Current tax payables Short term provisions Short term financial debt TOTAL ASSETS TOTAL EQUITY & LIABILITIES 7

8 4 Net Debt Evolution ND/OIBDA 2.95x - 4.4bn ND/OIBDA 2.66x m 48,595 2, ,230 (4,947) (1,269) (1,000) (109) Net Debt Dec-16 FCF Remuneration to TEF shareholders ( 40c/share) Hybrids coupons Dividend Net financial investments Sale of 40% stake in Telxius Hybrid issue Cash received from new hybrid bonds Preretirement commitments FX & MTM & Others Yearly cash payments from ex employees (EREs, PSIs, ) Net Debt Dec-17 Adjustments due to FX changes in net debt foreign currencies Mark-to-market value (MTM) of derivatives instruments Other adjustments 8

9 1.#2: Key performance indicators Free Cash Flow (FCF) & Total Shareholder Return (TSR) 9

10 Key performance indicators of the Long Term Incentive Plan (LTIP) The LTIP will have a total duration of 5 years and will be divided into 3 independent cycles of 3 years each. The first cycle will be considered as initiated from January 1, 2018 and will end on December 31, 2020 The number of Shares to be delivered at the end of each Plan will be the following: - 50% of the shares will be delivered when achieving specific target of annual FCF generation - 50% of the shares will be delivered when achieving a TSR target (total shareholder return) of the Telefónica share in relation to a defined basket of comparable companies in the sector A 50% on a FCF GENERATION target NUMBER of SHARES to be DELIVERED + B 50% on ACHIEVING a TSR goal 10 10

11 Free Cash Flow (FCF) generation target A KEY PERFORMANCE INDICATOR (KPI) Free Cash Flow (FCF) DESCRIPTION Measure with a financial KPI Free Cash Flow according to the formula approved in the Annual Budget. New indicator included for the new cycles. DELIVERY CONDITIONS % delivery 100% 75% 50% 25% 0% Threshold Target Stretch FCF targets and awards will be measured annually (1/3rd for each year) and not over the 3-year cycle Degree of achievement of the FCF Target FULFILLMENT OF PREVIOUS CYCLES YEAR % FULFILLMENT (Ex-spectrum) % DELIVERY % 0% % 100% % 100% % 98.25% 11 11

12 Total Shareholder Return (TSR) target B KEY PERFORMANCE INDICATOR (KPI) TOTAL SHAREHOLDER RETURN (TSR) DESCRIPTION Measure of the total return (with dividends) of Telefonica in relation to a basket of comparables 1. Closest competitors (Weighting): VOD (10%), AMX (10%), DT (10%), BT (10%), ORA (10%), TI (10%) and SWISSCOM (10%) Other Telcos: TELENOR (5%), TELIA (5%), KPN (5%), TIM BR (5%), BELGACOM (5%) and MILLICOM (5%) DELIVERY CONDITIONS % delivery 100% 75% 50% 25% 0% 0% 20% 40% 60% 80% 100% TSR percentile of TEF over the basket The TSR target has to be met at the end of the 3-year cycle FULFILLMENT OF PREVIOUS CYCLES 100% 100% 97.8% 0% 0% 0% 77% 0% 0% 0% One update against the comparator group used for previous PIP. Oi has been removed from the comparator group and Swisscom adds the 5% weighting so it is now 10% 12 12

13 Telefonica s relative performance over the PIP cycles TEF Share Price ( ) Trailing 30 weekday average share price PIP % Paid PIP % Paid PIP % Paid PIP % Paid PIP % Paid PIP % Paid PIP % Paid 9.53 PIP % Paid PIP % Paid PIP 2015 Currently 0% Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan Data as of 09/07/2018 Source: Bloomberg 13 13

14 1.#3: TSR and main value drivers Fundamentals and sustainability matter most 14

15 Key drivers of Total Shareholder Return (TSR) TSR Formula F Key drivers that explain TSR FUNDAMENTALS Share Price appreciation REVENUE growth OpCF MARGIN improvement S SUSTAINABILITY TSR VALUATION MULTIPLE change CF FREE CASH FLOW USE Dividend yield NET DEBT variation NUMBER OF SHARES change DIVIDEND payment 15 15

16 Long term fundamentals are the key drivers of TSR but portfolio and financing decisions plus macro also matter Positive Contribution to TSR Negative Contribution to TSR F S CF FUNDAMENTALS SUSTAINABILITY FREE CASH FLOW USE DEBT SHARES DIVIDEND A ASSET purchases? (higher revenues) (depends on price) (financed with debt and/or equity) B ASSET divestitures (lower revenues)? (depends on price) (cash lowers debt) C Δ EQUITY (# shares) (buybacks vs new issues) D DIVIDEND payment (cash dividend) E Δ FX (local vs ) ( lower vs. higher) ( lower vs. higher) F Δ INTEREST RATES (lower or higher) 16 16

17 Telefonica key historical consensus figures ( ) Revenues ( Bn) Δ 1Y FWD ( Bn) 2Y FWD 2Y vs. 1Y +0.3% 1Y FWD 1Y LTM -5.2% OpCF Margin OpCF ( Bn) Δ 1Y FWD ( Bn) OpCF 1Y FWD OpCF 1Y LTM -6.9% OpCF 2Y FWD OpCF 2Y vs. 1Y +7.3% OpCF Mg Mg. LTM -0.3 p.p 30% 25% 20% 15% 10% 5% 0% EV/OpCF Min. 7.4x (Feb-09) Δ yoy EV/OpCF Max. 15.0x (Nov-15) 1Y LTM x +0.1x -0.2x +1.2x +2.0x +1.9x -0.9x -0.9x 0.0x Avg. 10.5x 12.4x Jul x EV ( Bn) Δ 1Y FWD ( Bn) EV Mkt Cap Hybrids Net Emp Comm Net Debt (1Y FWD) Data as of 09/07/ Source: Bloomberg

18 From a valuation perspective, improving long term OpCF growth is a must to increase our valuation and share price MULTIPLIER EFFECT FUNDAMENTALS X SUSTAINABILITY = - ENTERPRISE NET DEBT VALUE = EQUITY VALUE OpCF EV / OpCF Net Debt + Hybrids + Employee Commit. 7.8 bn 12.4x 96.7 bn 56.6 bn 40.1 bn / share REVENUES EBITDA margin CAPEX intensity OpCF margin INTEREST RATES GDP growth EXPECTATIONS of long term OpCF Financing and CAPITAL STRUCTURE Active PORTFOLIO MANAGEMENT Total NUMBER of SHARES 1. Bloomberg as of 09/07/ EV uses 1Y FWD consensus net debt and it is adjusted for hybrids and net employee commitments 18 18

19 Summary of key takeaways Financial statements are crucial for company management and investors Strong fundamentals (measured as OpCF long term sustainability) are the critical driver of Total Shareholder Return (TSR) Delivering or exceeding our FCF generation target has not only a positive impact on TSR but also increases investors confidence on TEF s share performance From a valuation perspective, short term growth and margin improvement matter less than long term OpCF sustainability 19 19

20 1.#4: Annex: 2.PIP/TFSP 2015 plan 20

21 Current status of PIP/TFSP 2015 Plan as of July 15 th, 2017 PIP/TFSP

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