Understanding TSR and how we all contribute to it Corporate Strategy Telefónica, S.A. November 6 th, 2015
Key drivers of Total Shareholder Return (TSR) TSR Formula Key drivers that explain the TSR F FUNDAMENTALS Share Price appreciation REVENUE growth MARGIN improvement S SUSTAINABILITY TSR VALUATION MULTIPLE change CF CASH FLOW USE Dividend yield NET DEBT variation NUMBER OF SHARES change DIVIDEND payment 2
Telefonica s relative performance over the PIP cycles TEF Share Price ( ) PIP 2006 100% Paid 12.83 PIP 2007 100% Paid 16.54 PIP 2008 97.8% Paid 17.74 PIP 2009 0% Paid 15.41 PIP 2010 0% Paid 15.66 PIP 2011 0% Paid 17.85 CURRENT PIPs (as of Sep. 30 th ) Trailing 30 weekday average share price PIP 2012 77.0% Paid 9.53 PIP 2013 Current 85.5% 10.26 PIP 2014 Current 0% 11.99 11.83 1 11.78 (as of Sept. 30 th ) 3 1. Data as of 27/10/2015 Source: Bloomberg
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 CASH FLOW USE A ASSET purchases? (higher revenues) (depends on price) DEBT SHARES DIVIDEND (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) 4
TEF key consensus figures (1Y & 2Y Forward) Revenues 2007-15 1 EBIT Margin-EBIT 2007-15 1 ( Bn) 2011 2007 2008 2009 2010 2012 2013 1Y FWD 2Y FWD 2014 yoy 2Y vs. 1Y +0.7% -7.9% ( Bn) 2007 EBIT 1Y FWD 2008 2009 EBIT 2Y FWD 2010 2011 2012 EBIT Mg 2013 yoy 2014 2Y vs. 1Y +7.2% -15.8% -1.4pp EV/EBIT 2007-15 1 yoy Max. 14.7x (Jul-15) 2007 2008 2011 2010 2012 2009 2013 13.8x +2.6x Net Debt-Market Cap 2007-15 1 ( Bn) 2007 2008 2009 2010 2011 2012 2013 Mkt Cap Net Debt 2014 2014 Average 9.9x 57.6 Min. 7.2x (Oct-08) 40.0 5 1. Data as of 27/10/2015 Source: Bloomberg
Revenue growth & margins are key drivers in TSR, followed by sustainability and capital allocation TEF TSR Split (From 1 st Jan 2007 to 27 th October 2015) Near highest EV/EBIT of the period High 14.7x (20 th July, 15) Low 7.2x (28 th Oct, 08) Avg. 9.9x (Jan 07 - Oct 15) TODAY 13.8x EV/EBIT, 15.7x PE B Acquisition of PT s stake in Vivo A > 3bn in cash from the sale of C. Rep., IRE and 40% of Central America B Sale of Czech Republic, Ireland and FX negative impact A 8bn debt to fund Vivo acquisition + + = FUNDAMENTALS SUSTAINABILITY CASH FLOW USE TSR F S CF 6
TEF Valuation multiple evolution TEF earnings yield vs. Spanish 10yr Bond yield (%) INFORME VODAFONE CITIGROUP Multiple = 1 (k - g) PIP 2011 (10Y bond 5.4%) PIP 2012 (10Y bond 6.3%) PIP 2013 (10Y bond 4.7%) PIP 2014 (10Y bond 2.1%) 6.35 4.77 Oct-27 th (10Y bond 1.59%) g = perpetuity growth rate k = Cost of capital - It has a high correlation with the evolution of the 10Y bond interest - Therefore, a drop in the 10Y bond interest implies an increase of the multiple 7 Data as of 08/06/2015 Source: Bloomberg
Interesting case studies 8
Apple consensus estimates (1Y&2Y FWD) - Excellent fundamentals but concerns about sustainability Revenues 2007-15 1 EBIT Margin-EBIT 2007-15 1 (USD Bn) 1Y FWD yoy 2Y vs. (USD Bn) yoy EBIT 1Y FWD EBIT 2Y FWD EBIT Mg 1Y +4.7% 2Y FWD 2Y vs. 1Y +16.9% +0.7pp +4.4% +19.9% EV/EBIT 2008-15 1 Max. 26.0x (Oct-07) Net Debt-Market Cap 2008-15 1 (USD Bn) Mkt Cap Cash 7.4x -0.8x Avg. 10.1x 666 Min. 3.6x (Apr-13) -134 9 1. Data as of 30/10/2015 Source: Bloomberg
Apple - TSR drivers (+30.5% annualized, +954.4% total) Apple TSR Split (From 1 st Jan 2007 to 30 th October 2015) + + = FUNDAMENTALS SUSTAINABILITY CASH FLOW USE TSR F S CF 10
Amazon consensus estimates (1Y&2Y FWD) Stellar revenue increase, low profitability and high valuation multiple Revenues 2007-15 1 EBIT Margin-EBIT 2007-15 1 (USD Bn) 1Y FWD 2Y FWD yoy 2Y vs. 1Y +20.6% (USD Bn) EBIT 1Y FWD EBIT 2Y FWD EBIT Mg yoy 2Y vs. 1Y +2.3pp +21.3% +78.8% +358.6% EV/EBIT 2008-15 1 Max. 150.2x (Nov-14) Net Debt-Market Cap 2008-15 1 (USD Bn) Mkt Cap Cash 69.9x -77.4x 293 Avg. 51.0x Min. 9.8x (Nov-08) -17 11 1. Data as of 30/10/2015 Source: Bloomberg
Amazon TSR drivers (+36.7% annualized, +1,486.2% total) Amazon TSR Split (From 1 st Jan 2007 to 30 th October 2015) + + = FUNDAMENTALS SUSTAINABILITY CASH FLOW USE TSR F S CF 12
Disney consensus estimates (1Y&2Y FWD) Strong organic revenue and margin growth, low leverage level Revenues 2007-15 1 EBIT Margin-EBIT 2007-15 1 (USD Bn) 1Y FWD 2Y FWD yoy 2Y vs. 1Y +6.3% (USD Bn) EBIT 1Y FWD EBIT 2Y FWD EBIT Mg yoy 2Y vs. 1Y +8.4% +0.5pp +8.6% +10.3% EV/EBIT 2008-15 1 Max. 14.1x (Aug-15) 13.6x +1.5x Net Debt-Market Cap 2008-15 1 (USD Bn) Mkt Cap Cash Avg. 10.1x 192 Min. 5.9x (Mar-09) 11 13 1. Data as of 30/10/2015 Source: Bloomberg
Disney TSR drivers (+16.2% annualized, +275.6% total) Disney TSR Split (From 1 st Jan 2007 to 30 th October 2015) + + = FUNDAMENTALS SUSTAINABILITY CASH FLOW USE TSR F S CF 14
Comcast consensus estimates (1Y&2Y FWD) robust performance in fundamentals, specially after NBC purchase Revenues 2007-15 1 EBIT Margin-EBIT 2007-15 1 (USD Bn) 1Y FWD yoy 2Y vs. (USD Bn) EBIT 1Y FWD EBIT 2Y FWD 1Y 2Y FWD +3.9% EBIT Mg yoy 2Y vs. 1Y +8.1% -0.3pp +6.6% +6.7% EV/EBIT 2008-15 1 Net Debt-Market Cap 2008-15 1 Max. 20.3x (Jan-15) (USD Bn) Mkt Cap Cash 11.7x +0.3x Avg. 10.9x 154 Min. 7.0x (Aug-11) 45 15 1. Data as of 30/10/2015 Source: Bloomberg
Comcast TSR drivers (+11.2% annualized, +154.8% total) Comcast TSR Split (From 1 st Jan 2007 to 30 th October 2015) Acquisition of a 51% stake in NBC Universal A A $7bn debt to fund NBC s stake B $12bn cash paid to fund the purchase of the remaining 49% in NBC + + = FUNDAMENTALS SUSTAINABILITY CASH FLOW USE TSR F S CF 16
Current PIP plans 17
Current status of PIP Plans as of Sept. 30 th 2015 ( 11.78) PIP 2013 (27 months into 36 months cycle) PIP 2014 (12 months into 36 months cycle) 18 1. Trailing 30 weekday average share price
PIP 2013 19
TSR drivers for Top quartile Telcos Average TSR Top Quartile (Total Return) From 2013.07.01 to 2015.09.30 Revenue EBIT Margin EV / EBIT Multiple Cash Flow Use TSR (Cumulated) FUNDAMENTALS F S CF Average annual TSR from Orange, Deutsche Telekom, NTT, and BT. KPN and TI are not included to avoid deviations in the results (KPN due to the sale of E-Plus and BASE, TI due to the recent changes in its shareholders structure) 20 TSR is calculated considering the dividend yield and the share price appreciation/loss between the 1 st of July, 2013 and the 30 th of September, 2015. Source: Bloomberg
PIP 2013 - TSR formula breakdown and key drivers Average TSR (Total Return) From 2013.07.01 to 2015.09.30 1 st Quartile 2 nd Quartile 3 rd Quartile 4 th Quartile TSR (Total Return) +25.1% Ranked #14 out of 28 F S CF -60.0% Ranked #25 +64.2% Ranked #4 +20.9% Ranked #7 #6 F FUNDAMENTALS S SUSTAINABILITY CF CASH FLOW USE 1 st 2 nd 3 rd 4 th 1 st 2 nd 3 rd 4 th 1 st 2 nd 3 rd 4 th 21 The 28 companies analyzed, are equally distributed in quartiles according to their TSR ranking in the period (TSR is not weighted by average market capitalization)
Most of the best 3Y TSRs were due to improved Fundamentals and Sustainability (10 out of 28 companies) PIP 2013 Fundamentals + Sustainability contribute positively to TSR 21 Fundamentals + Sustainability + 10 Fundamentals Sustainability + 11 TSR > 0 24 F + S >0 Fundamentals + Sustainability All analyzed companies 28 F + S + CF >0 Financial mgmt drives TSR in spite of negative fundamentals + sustainability 3 F + S <0 0 TSR < 0 4 22 TSR is calculated considering the dividend yield and the share price appreciation/loss between the 1 st of July, 2013 and the 30 th of September, 2015. Source: Bloomberg
Outlook 2015-16 23
Improving fundamentals and lower net debt will drive positive TSRs in the future - must focus on execution!!! Positive Contribution to TSR Negative Contribution to TSR F S CF FUNDAMENTALS SUSTAINABILITY CASH FLOW USE DEBT SHARES DIVIDEND A ASSET purchases (D+, GVT & EPlus) (Stronger in core markets) (financed with debt and/or equity) B ASSET divestitures (O2 UK) (Pragmatic and value driven) (cash lowers debt) C Δ EQUITY (# shares) (treasury stock) D DIVIDEND payment (cash dividend) E Δ FX (local vs ) (Weaker LatAm currencies) (Lower debt in ) F Δ INTEREST RATES (low and stable) 24
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Glossary Capital Gain / (Loss) Capital Gain = (Share price end Share price begin ) / Share price begin Dividend yield Dividend Yield = Dividend paid / Share price begin Revenue growth Revenue or turnover is the income that a company receives from its normal business activities, usually from the sale of goods and services to customers Revenue growth = (Revenue end Revenue begin ) / Revenue begin EBIT Margin Earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all expenses except interest and income tax expenses EBIT Margin = (Revenue Operating Expenses) / Revenue Net debt change Net debt is calculated by adding short-term and long-term debt and subtracting all cash and cash equivalents Net Debt change = Net Debt end Net Debt begin Share change Share change = (Total Shares end Total Shares begin ) / Total Shares begin Valuation Multiple EV/EBIT Enterprise Value (EV) is defined as market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents EV / EBIT = ((Total Shares * Share price) + Net Debt) / EBIT 26