Vivo Investor Day David Melcon Chief Financial Officer New York March 12 th 2018
Disclaimer This presentation may contain forwardlooking statements concerning future prospects and objectives regarding growth of the subscriber base, a breakdown of the various services to be offered and their respective results The exclusive purpose of such statements is to indicate how we intend to expand our business and they should therefore not be regarded as guarantees of future performance Our actual results may differ materially from those contained in such forwardlooking statements, due to a variety of factors, including Brazilian political and economic factors, the development of competitive technologies, access to the capital required to achieve those results, and the emergence of strong competition in the markets in which we operate For a better understanding, we are presenting pro forma numbers combining Telefônica Brasil and GVT results for all financial and operational indicators for every period as of January, 2015 2
10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Vivo has outperformed the market and grew consistently in revenues even during economic downturns CAGR 14-17 A C C U M U L A T E D N E T R E V E N U E G R O W T H V S. 2 0 1 4 +2.4% Competitors Avg. 4.8% 5.7% 7.4% -3.0% NET REVENUE SHARE¹ 2017-3.5% -7.3% -8.7% 36% 2015 2016 2017 Vivo Competitors Average +3.7 p.p. vs 2014 Vivo Competitors 1 Considers main competitors in the Brazilian telecom market 3
18.0% 13.0% 8.0% 3.0% -2.0% with stronger EBITDA expansion due to an improved cost structure CAGR 14-17 A C C U M U L A T E D R E C U R R I N G E B I T D A G R O W T H V S. 2 0 1 4 +5.4% Competitors Avg. 17.2% +2.3% 9.2% RECURRING EBITDA SHARE¹ 2017 5.9% 7.1% 1.8% -0.1% 39% 2015 2016 2017 Vivo Competitors Average +2.1 p.p. vs 2014 Vivo Competitors 1 Considers main competitors in the Brazilian telecom market 4
sustaining solid investment over the years to create a unique combination of network, IT and service platforms C A P E X ¹ / R E V E N U E S Vivo Vivo + Capex Synergies 20.9% 19.6% 20.1% 19,7% R$8.3Bn 18.8% 18.5% R$8.0Bn R$8.0Bn 2015 2016 2017 4G _>2.6k cities _85% of population covered Fiber _18.4 million FTTx HPs _7.0 million FTTH HPs _64 IPTV cities IT _Full Stack IT platform 1- Capex ex-licenses 5
15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 3.0% while generating unrivaled Operating Cash Flow CAGR 14-17 +17.5% O P E R A T I N G C A S H F L O W ( E B I T D A C A P E X ) M A R G I N Competitors Avg. 15.4% +4.2% 10.5% 13.3% OPERATING CASH FLOW SHARE¹ 2017 9.2% 5.4% 6.9% 49% 2015 2016 2017 Vivo Competitors Average Vivo Competitors 1 Considers main competitors in the Brazilian telecom market 6
In 2017, we presented real growth across all lines 2 0 1 7 N O M I N A L G R O W T H Y o Y % Service Revenues¹ +3.6% Recurring EBITDA +7.3% >2.9% Inflation (IPCA) A new cycle of real growth across all lines Net Income +12.8% Consecutive cost reduction in the last 8 quarters Operating Cash Flow Free Cash Flow +17.8% +20.1% Recurrent operating costs reduced almost 3% in the last two years vs. accumulated inflation of more than 9% 1- Ex-regulatory effects. Note: All figures presented are recurring 7
EBITDA Margin When we compare ourselves with the main global telecom companies it s clear that we still have room to improve 50% 40% 2017 More efficient companies _Customer centric _Integrated brand _Convergent portfolio 30% 2015 _Digital mindset _Focused on simplification 20% 0% 10% 20% 30% OpCF/Revenues Telecom companies 8
in a market with ideal conditions for growth boosted by economic recovery 4G _Less than half of our customers have 4G smartphones _Large data monetization opportunity as 4G customers data consumption is substantially higher 4G penetration over our customer base 46% 4G smartphones 83% smartphones 75mn Mobile customers UBB _Robust demand for UBB while less than 10% of Brazilian municipalities have connections >10Mbps _Vivo FTTH connections grew 45% YoY in 2017 Brazilian broadband demographics Total Premises¹ 46% BB Connections 7% UBB² connections TV Pay TV penetration B2B/DIGITAL Cloud Revenues 2016 2017 +1.8x _Vivo IPTV connections growing 51% YoY in 2017 in a low penetrated market with high potential for cross-selling _New consumption patterns create space for disruptive video offers and interactive platforms (IPTV) 28% _Revamped B2B value proposition in order to capture the increasing demand for digital services _Absolute leader in M2M with 41.4% market share, paving the way for the launch of massmarket IoT solutions Security Revenues +2.1x 1- Potential market: ABC households + B2B. 2- UBB considers connections >34Mbps 9
Profitability Looking forward, we should continue to expand margins and cash flow by leveraging on new waves of efficiency SYNERGIES FROM GVT INTEGRATION contributed to the reduction of recurring Opex for eight consecutive quarters, despite high inflation in the period DIGITALIZATION AND BIG DATA are a catalyst to accelerate the transformation of the Company, control costs and improve capital allocation Synergies run rate 2015 2016 2017 2018 2019 2020 10
We have successfully integrated GVT and executed sizeable synergy initiatives in the last two and a half years Integrated customer base with single brand Network unification Organizational restructurings Improved TV content cost structure Call center and field services optimization Improved Capex allocation 11
with expected full run rate in 2019, exceeding the NPV guidance of the Best Case scenario of R$22 billion S Y N E R G I E S R U N R A T E E V O L U T I O N ¹ ( R $ B n ) 80% of Run Rate 2.4 3.0 Full Run Rate 3.1 _80% of run rate already achieved _Full run rate now expected for 2019 (vs. 2020 announced during the last Investor Day) _Vast majority of initiatives already secured 0.6 1.4 75% of Run Rate is Direct Cash Flow R$ Bn Total Best Case 22 2015 2016 2017 2018 2019 Cash Flow Achievement Target Vivo Day 2016 Natural build-up of customer base and efficiency initiatives should continue to improve synergy evolution, leading us to exceed the Best Case scenario Already Secured 19 % Secured 85% 1- Does not include tax synergies. Note: Trending NPV of R$25 billion 12
On top of that, we also have significant opportunities in digitalization and efficiency Digitalization and efficiency as main levers for margin growth 1/3 Proportion of annual Opex with potential to be impacted by digitalization initiatives At least R$1.2bn of annual gross Opex Savings by 2020 arising from digitalization In addition to the digitalization initiatives, we also have significant simplification opportunities, which will further improve our savings potential 13
In the digital space, we already achieved promising results and have ambitious targets for the future Fronts KPIs 2017 2020 Fostering sales and top-ups through digital channels _Online hybrid plan activations _% of digital top-ups x5 _Online FTTH B2C sales 24% >50% 19% >30% Enhanced customer care experience _Unique users of Meu Vivo _Call center calls 14 million ~45 million -15% YoY -30% vs 2017 14
In the digital space, we already achieved promising results and have ambitious targets for the future Fronts KPIs 2017 2020 More efficient and friendly payments & collection _Penetration of e-billing 43% >80% _Collections through digital channels ~50% >75% _Digital credit scoring ~55% >65% Robust IT and improved technical support _IT legacy systems (B2C customers in Full Stack) <5% >90% _Incidents solved remotely ~50% >70% 15
We have been developing projects that will guarantee a more efficient, leaner structure benefiting EBITDA and Cash Flow Simplification and G&A efficiencies Portfolio simplification: 84% reduction of our mobile plans and further rationalization Consolidation of IT platforms, data centers and applications Continuous zero-waste approach to all processes and initiatives Network modernization Switch-off of legacy technologies (2G, copper) Network virtualization reducing core network, generating savings Automatize network operation Optimization of energy costs and facilities 60% of energy coming from renewable sources by 2020 (vs. 26% in 2017) Leveraging on distributed generation to optimize cost structure Optimization of occupancy rate of buildings to create a leaner real estate structure and unlock opportunities Leveraging on the Group s capabilities Lower handset and equipment costs due to Telefónica s global scale Reduced unitary cost of fiber deployment based on Spain s experience Improved access to content and innovations Use of Big Data and AI (Aura) to differentiate our offer and improve customer experience 16
And to support our leading stance, we will invest accordingly in the next three-year period to further improve quality, customer experience and accelerate revenue growth New Capex Guidance for the 2018-2020 Period Up to R$24 billion Recurring Capex focused on 4G, Fiber expansion and IT transformation R$2.5 billion Incremental, non-recurring Capex for the execution of the Fiber Acceleration Project (2018-2020) aiming to speed up our already successful expansion of FTTH Non-recurring Capex envelope does not change long-term downward trend in Capex/Sales 17
with an envelope of R$2.5bn (2018-20) for a Fiber Acceleration Project, which will be cash flow accretive from year 3 CLEAR GUIDELINES AND OBJECTIVES INVESTMENT CORRELATED TO REVENUE GENERATION FUNDING _Cities with >50k inhabitants _Cherry-picking of highpotential homes _Additional 3.0 million FTTH HPs _Threshold of IRR >17% _>R$1bn in additional UBB revenues in 2020 _90% of incremental revenues coming from new fixed customers _60% on Network Expansion _40% on Installation and CPEs (variable to access growth) _Leveraging on the Telefónica Group s global scale and expertise and synergies on existing infrastructure _Increased Capex efficiency and smart allocation _Maintaining solid capital structure and flexibility _Self-funding contribution Maintain strong shareholder remuneration benefiting from growth profile 18
Total Capex is clearly focused on capturing growth opportunities Investing in higher return growth projects while reducing investments in legacy Lower unitary cost of growth technologies 2 0 1 6-2 0 1 8 3G -27% Copper -38% DTH -53% 2/3 of R$24bn Capex plan oriented for growth 2 0 1 6-2 0 1 8 4G +44% FTTH +174% IPTV +108% IT +8% _Cost of FTTH deployment 32% lower vs. 2015 _Cost of 4G expansion optimized with 700MHz roll-out Spectrum and larger technological cycles in mobile are behind us _Vivo already has a superior spectrum portfolio in Brazil Additionally, the Fiber Acceleration Project Capex will be fully directed to growth in FTTH _Optimization with 1.8GHz refarming and 700MHz roll-out 19
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% As a result, Vivo s ROCE should expand at a premium to the expected risk-free rate RETURN ON CAPITAL EMPLOYED¹ EVOLUTION ABOVE RISK-FREE RATE 13.75% 10% 8% 7.00% 6.75% 8.00% 8.00% 2016 2017 2018 2019 2020 Vivo ROCE Risk-Free Rate 1- ROCE ex-goodwill 20
A strong financial discipline guarantees solid conversion of Operating Cash Flow into Free Cash Flow CONVERSION OF OpCF TO FCF¹ (R$ Bn) 88.0% 84.4% 86.1% 4.4 3.9 5.7 4.8 6.7 5.7 2015 2016 2017 OpCF FCF from Business Activities Cash Conversion C A G R 1 5-17 OpCF +22.9% FCF +21.5% 1- FCF after taxes and interest 21
- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 allowing Vivo to sustain a solid capital structure and boost shareholder remuneration LOW LEVERAGE RESULTING IN STRONG RATINGS Net Debt/EBITDA YE2017 0.26x _Rating Ba1, Negative Outlook _One notch above sovereign rating _Rating braaa, Stable Outlook _One notch above sovereign rating IMPROVED PROFITABILITY AS A FOUNDATION OF OUR SOLID SHAREHOLDER REMUNERATION 2016 2017 2018 Payment of Dividends¹ (R$ Bn) 3.3 4.1 4.6 + 17. 6 % C A G R 16-18 R$20.5 billion distributed as dividends¹ since 2013 1- Includes Interest on Capital 22
0% Dividend Yield¹ >6% supporting our unique position as a value and growth player V I V O V S. L I S T E D C O M P A N I E S ( B R A Z I L ) Utilities Oil and Gas Construction & Real Estate Agribusiness Metal and Mining Telecom² Retail & Consumer Goods 0% EBITDA CAGR 2018-2020¹ >10% 1- Source: Bloomberg. 2- Ex-Vivo 23 1- Source: Bloomberg. 2- Ex-Vivo.
Past execution positions Vivo with a strong present and a brilliant vision for the future TODAY TOMORROW (2018-20) Absolute leader in REVENUES in the Brazilian telco space (70% share of incremental revenues in the last 3 years) _Acceleration of Total Revenues _Sustaining solid Mobile Service Revenue growth _Resuming Fixed Revenue growth _>R$1bn in additional UBB Fixed Revenues in 2020 from the Fiber Project, further improving evolution _Sustainable margin increase, maintaining the current pace of EBITDA growth The most efficient Company with the largest OpCF in the sector (+5.0 p.p. in OpCF margin since 2015) Second to none SHAREHOLDER REMUNERATION in the industry (Dividend Yield ~6% in 2017) _Annual gross Opex savings of >R$1.2bn from digitalization by 2020 _2018-20 Capex: up to R$24bn + R$2.5bn envelope for the Fiber Acceleration Project _OpCF margin, excluding the Fiber Project, consistently above 20% as of 2020 _At least +2 p.p. already in 2018 (vs. 2017) _Continuous ROCE expansion _Strong FCF and Net Income evolution with double-digit growth in 2018 (vs 2017) _R$4.6bn to be paid as dividends¹ in 2018 (+13% YoY) _Unmatched shareholder remuneration 1- Includes Interest on Capital. 2- Based on gross dividends of R$2.82 per preferred share declared during 2017. Note: Trends excluding eventual non-recurring items. 24
For further information: Investor Relations +55 11 3430.3687 ir.br@telefonica.com www.telefonica.com.br/ir