José María Alvarez - Pallete CFO of Telefónica Group...Source: Annual Reports, SSSB, ABN Amro 6.9...

José María Alvarez - Pallete

CFO of Telefónica Group

Second Investor Conference

March 2002, Seville

1

This presentation contains statements that constitute forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. These statementsappear in a number of places in this presentation and include statements regarding theintent, belief or current expectations of the customer base, estimates regarding futuregrowth in the different business lines and the global business, market share, financialresults and other aspects of the activities and situation relating to the Company .Such forward looking statements are not guarantees of future performance and involverisks and uncertainties, and actual results may differ materially from those in the forwardlooking statements as a result of various factors.Analysts and investors are cautioned not to place undue reliance on those forward lookingstatements, which speak only as of the date of this presentation. Telefónica undertakes noobligation to release publicly the results of any revisions to these forward lookingstatements which may be made to reflect events and circumstances after the date of thispresentation, including, without limitation, changes in Telefónica´s business or acquisitionstrategy or to reflect the occurrence of unanticipated events. Analysts and investors areencouraged to consult the Company´s Annual Report on Form 20-F as well as periodicfilings made on Form 6-K, which are on file with the United States Securities and ExchangeCommission.

Safe harbour

2

Building value: financial performance and flexibility

3

Key messages

Strong financial performance in 2001

Sound financial management and flexibility

Commitments to build value

4

General economic slow down

Exchange rate evolution

Change in expectations for telecom sector

Difficulties refinancing corporate debt

0

1

2

3

4

5

1998 2002E200019991997 2001

80%

110%

140%

170%

Jan -01

ARS

BRL

EUR/US$

0%

200%

400%

600%

Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01

“5 year” Industry* credit spreads evolution in Euros (rebased)

Mar -01 Jun -01 Sept-01 Dec-01

* Weighted average credit spread over 5yr IRS (interest rate swap) of DT 6/7/2005, TEF 21/9/2005, FT 10/11/2005, BT 15/2/2006** Average EV/EBITDA ratios of Deutsche Telekom, Telecom Italia, France Telecom and British Telecom

Source: Datastream, Multex Estimates

SPAIN

USA

EV/ EBITDA**

Telecom sector is facing a tougheconomic environment

7x10x

Dec. 2000 Dec. 2001

%GDP Growth

Rebased

5

… Telefónica has overcome thissituation based on …

+

Diversified revenue streams

Optimize efficiency and Strong

EBITDA margins

Capital allocation and Capex

discipline

Develop new growth platforms

4 drivers of operational performance

Manage risk proactively

Solid balance sheet

Optimize cost of capital

(funding strategy)

Efficient support

processes

4 principles for financial excellence

6

… and has delivered strong fundamentals Euro Billion

% Change

9.0

7.4-0.6 p.p.

9.50.1

n.a.

68.1n.a.

(29.1)

(15.9)

Operating revenues

EBITDAEBITDA margin

Operating profitNet interest expenseArgentinean peso devaluation to 1.7ARS per USDAmortization of goodwillOther income (expense)

Income before taxes

Net income

2001

31,053

12,80441.2%

5,430(1,862)

(529)

(842)(163)

2,034

2,107

2000

28,486

11,91941.8%

4,958(1,860)

-

(501)271

2,868

2,505

7

Telefónica enjoys a sound financialstructureEuro Billion

Tangible fixedexceed net debt

Tangible fixed assets

36.6

Shareholdersequity25.9

Net Debt28.9

8

Telefónica has achieved a positivestrong operating cash flowEuro Million

EBITDA

Capex

% of operatingrevenue

Operating cash flow

2000

11,919

(9,096)

2,823

41.8% 41.2%

2001

(7,923)

4,881

12,804

9

Key messages




10

Telefónica consistently pursues excellencewithin its financial management

Manage riskproactively

Continuous evaluation of macroeconomic situation

Expertise in risk management

Address different hedging needs with different tools

11

Risk management has been a key elementto weather the current Latin Americanenvironment …

Use accounting hedges to reduce FX balance sheetexposure

Match FX cash flow exposures with cash hedges

Top class hedging

capabilities

Evaluate macroeconomic trends through a global team ofmacroeconomists supported by local experts

Use Telefónica’s deep network in Latin America to gaininsight on economic situation and future developments

Periodic top management and board reviews of situationin key geographies

Launch “deep reviews” when needed (i.e. early 2001) tomodify local business plans and prepare hedging plans

Continuousevaluation of

macroeconomicsituation

Geographic diversification limits overall portfolio volatility

Equity financed acquisitions share FX risk with seller

Telefónicahas a diversified

portfolio

12

… based on our geographic diversification …

100

34

66

Stand-aloneLatinAmericaassets

Telefónica’sLatinAmericaportfolio

Telefónica’sLatinAmerica +Spainportfolio

US$ EBITDA Standard Deviation*(rebased)

EBITDA 2001

42%

Spain

Other

Brazil

Chile

Other

Argentina

Peru

22%

6%

-2%

11%

6%

58%

*1990-2001

13

NDF* ARS 1Y

1.00

1.20

1.40

1.60

1.80

2.00

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

Vol

um

e (R

ebas

ed)

0

1

2

3

4

5

6

7

8

Du

rati

on (m

onth

s)

NDF ARS Options ARS Proxy Hedge Average duration

… and timely accessing imperfect hedgingmarkets …

0%

10%

20%

30%

40%

50%

60%

70%

80%

100%

90%

* Non delivery forwards

Pric

e

14

-2,076

-1,424

652

369

2206062

208674

… we managed to mitigate the effectsof the crisis in Argentina in 2001 …Euro Million

Loss dueto USDdebt

Income statement effect* Net Worth effect*

Hedging Increasein Capex

Taxshieldandmino-rities

After taxlosses dueto devalua-tion

Devaluationeffect

Tax shield Total NetWorth directeffect

* ARS/USD = 1.7

Increasein baddebtprovi-sions

15

…and we have protected our exposure in therest of the region although markets do believein decoupling

0

50

100

150

200

250

31/12/01 8/01/02 16/01/02 24/01/02 1/02/02 11/02/02 19/02/020

50

100

150

200

250

ARG BRL

0

50

100

150

200

250

31/12/01 8/01/02 16/01/02 24/01/02 1/02/02 11/02/02 19/02/020

50

100

150

200

250

ARG BRL

3.22.0

3.41.5

Argentina Brazil Mexico Chile Peru

Source: Bloomberg and Market consensus

2002 GDP GrowthExchange rates indexed

Brazilian Real is notcorrelated with

Argentinean Peso

Economic crisis inArgentina is not

expected to affectthe rest of the region

16

We have used different hedging tools tocover both accounting and cash risksEuro Billion

Argentina Latin-America

TotalInvestment

TotalInvestment

Equity bookvalue +intragroupdebt afterdevaluation

Equity bookvalue +intragroupdebt

Equity bookvalue +intragroupdebt before

devaluation

Net Worth

Intra-group debt

17.1

40.5

4.421.5

3.0

9.8

0.63.03.0

6.0

3.6

17

…and we benefit from sound investments madein recent years (case study: Telesp)US dollar Billion

Telebrasprivatization

Telesp Tenders

Debt payment

Transaction

Total**

Shares buy-back

18.5 x

TelespRestructuring

18.5 x

13.4 x

10.0 x

7.8 x

8.3 x

Implicit EV/EBITDA*MultipleTelefónica investment

Other acquisitions 14.0 x

8.3%

0.8%

5.1%

5.1%

62.6%

82.6%

Stake acquired

0.7%

12.8

3.1

0.3

0.4

8.9

0.1

* 2001 EBITDA** 87.4% after equity swap with Portugal Telecom

Equity book value$ 7.8 Billion

18



Manage accountingquality



Cover different hedging needs with different tools

Quality of assetsRestructuring effort in previous yearsTransparency

19

Our healthy asset base sets us apart in asector whose assets are under scrutiny …

* Under proportional consolidation method** Telecom Italia (incl. Olivetti), France Telecom, British Telecom (incl. MM02), Deutsche Telekom

Source:ABN AMRO

Lower proportion of intangibleassets on balance sheet

Telefónica* Selectedintegratedoperatorsaverage**

28%34%

86 123

Total assets(Euro billion)

Restatement to fair valueof several tangible assetsboth in Spain and abroad

Write off goodwill arosewithin several acquisitions

Accounting hedging ofacquisitions financed withequity

Impact(Euro billion)

2.2

1.5

16.5

20.2

Restated asset base to fairvalue since 1998

20

Spain GAAP is based on the principle of prudence: accountfor all eventual losses and all foreseeable risks when known- We record provisions to reflect a decrease in the fair value

of assets; but account for profits only when materializedWe do not record the increases in the fair value of assets

Conservativeaccountingprinciples(Spain GAAP)

All subsidiaries are consolidated in the Group accounts,including all SPV’s

In accounting for IRU’s (Indefeasible Right of Use of CapacityAgreements), we recognize the income over the period ofthe contracts in an accrual basis

Transparentaccounting andreporting

… and we follow prudent accountingpractices and total transparency

21








Manage thebalance sheetefficiently

Best financial profile in spite of turmoilNo refinancing risk in 2002Debt level at the “efficient frontier”: strong single “A”

22

Telefónica enjoys the best financial positionamong the large integrated European operators

Debt capacity position

Net Debt / EBITDA 2001

* Moody's/Standard and Poors** Including Olivetti net debt

Source: Annual Reports, SSSB, ABN Amro

6.9

3.7 3.04.7

Deutsche Telekom

Telefó-nica

FranceTelecom

BritishTelecom

Net debt position and rating* (Euro billion)

We are committed to maintainingour current credit rating

A2/A A3/A- BAA-/BBB+

BAA1/A-

BAA1/BBB+

EBITDA / Interest expenses 2001

2.3

4.1 5.1

2.5 2.7

Deutsche Telekom

Telefó-nica

FranceTelecom

BritishTelecom

TelecomItalia**

28.9

62.162.5

24.0

36.9

Deutsche Telecom

Telefó-nica

FranceTelecom

BritishTelecom

TelecomItalia**

23

… with a single “A” rating that we consideroptimal within the current economiccontext…

AAA AA A BBB BB B

WACC

****Optimal considering tax

shield and financial distress(i. e. access to capital

markets, step-up clauses incontracts)

Optimalconsidering onlytax shield effect

24

… and a balanced debt structure …Total debt. Euro Billion. Percentage

1% other

By fixed/variableinterest rate

28.9 28.9 28.9

59%Variable

23%Short term

41%Fixed

77%Long term

45%EUR

36%USD

18%Latin

America

By maturity* By currency

7%

5%

4%

2%

UFC

BRL

PEN

ARS

100% =

* Average maturity of 5.5 years

25

… that we manage to refinance even withincurrent difficult market conditionsEuro Million

Telefónica’s short term debt refinancing

100% =

*Net maturity until 31/12/2002Source: Bloomberg

Bonds

Commercialpaper

Credit lines1,598

947

1,5541,554

Short termdebt 2001*

Refinancingoptions for2002

4,099 4,099

Commercial paperrenewal/ back-uplines

Credit linerenewal /freecash flowgeneration

“5 year” credit spreads evolution in EurosSpread over IRS in B.P.

Dec-01

Eurobond Euro 2.0 BnOctober 2001

Global bondissuance twotranches:Euro 1.0 BnUSD 5.0 BnSeptember 2000

02040

6080

100

120140160180

200

Sep-00 Mar-01 Sep-01

FT10/11/05

DT06/07/05

TEF21/09/05

2,545

26










Manage costs

Optimize cost of capital

Efficient support processes

27

Telefónica has achieved significantsavings in financial expenses

7.65%

Intragroup financing

• Helps to maintain rating in the“A” level by reducingstructural subordination

• Allows privileged access tocash flows from subsidiaries

• Reduces FX accounting risk inthe income statement (not innet worth)

• Average financing balance ofUSD 2,382 million

Interest rate management

Effectiveinterest rate

AverageNet Debt (Euro Billion)

26.9

31.228.9

6.34%

Dec.2000

June2001

Dec.2001

Savings of approx.€ 500 million in

2001

28

We have obtained remarkable efficiencyimprovements in support processes in the financearea through several initiatives

Sharedservices

Description Savings

Reduced costs and investments throughconcentration of support activitiesFor the units swap a fixed cost tovariableFree up management time and providecommon tools

NPV USD 850 million

InsuranceManage centrally corporateinsurance

Quality coverage and savings

Investorrelations

Provides transparency (2nd in Europe asper Reuters Institutional Investor Survey 2002)

Treasurymanage-ment

Cash pooling for all business units inSpainCorporate treasury: finance short termneeds of the Group and manageworking capital for non-Spanishoperators

Implicit savings of Euro 21 millionin 2001

Implicit savings of Euro 65million in 2001

29

In summary, our strong operating performance andfinancial management provides unique flexibilitywhen considering opportunities …2002-2007. Cumulative cash flow. Euro Billion

Repay alldebt outstanding

(28.9 billion euros)before maturity

Acquire or build one “Telefónica Brazil” every2 years or 3-4 European

small operators

Workingcapital, netinterest, taxesand other

Cash available to shareholder

EBITDA Capex*

90.2 42.6

29.9

17.7

Capex excluding UMTS licenses

Source: Analysts estimates

30

EBITDA

Leverage capacity

EBITDA/Net Debt

T3 T4T1 T2TEF

Equity purchasing power index

High multiple*

High liquidity**

No overhang

… and makes Telefónica the European largeoperator with more degrees of freedom …

* High multiple defined as higher than 7x EV/EBITDA trading multiple** High liquidity defined as more than € 300 Million daily equity turnover

Source: Telefónica estimates, Multex estimates, Bloomberg, ABN Amro

T3 T4T1 T2TEF

EBIT

DA

/ N

et D

ebt

Telco 3Telco 4

Telefónica Telco 1

Telco 2

Equity purchasing power index

31










Manage additionalaspects andprocesses

Optimize cost of capitalEfficient support processes

32

Key messages




33

We have made good progressagainst the commitments shared in Rio

Solid and well diversified revenue growth

Well balanced growing EBITDA margin

Reinforcing capital discipline: Capex/Revenue

Enhancing free cash flow margins

Improving asset turnover: revenue/capital employed

34

Concrete actions have been taken toreach cash flow margin targets

Key actions to improve CF

Improving operationalefficiencies

Monitoring interest expense

Generating more value incentralized functions

Optimizing tax planning

Reducing minority losses

Cash flow* margins

2.5%

13-15 %

2000

2001

Average2002-05 Target

7.3%

* Operating cash flow – financial expenses - taxes

35

… and to continue optimizing asset turnover

* Revenues/capital employed

Asset turnover*

2000

2002-2005target

2001

0.46

0.50 – 0.55

0.50

•Telefónica has launched anumber of actions to reducecapital employed while creatingvalue– Real estate divestitures to

reduce capital employed byone billion euros in threeyears

– Factoring– Divestiture of financial stakes

36

Going forward we have set specific commitmentsto increase our profitability …

Well diversifiedoperating profit

growth

Optimized capitalemployed

Solid and well diversified revenue growth

01 02-05

01 02-05

Well balanced growing EBITDA

01 02-05

Reinforcing capital discipline

01 02-05

Improving asset turnover

01 05

Improve return over capitalemployed

7.9%

• Commitmentsbuilt intobusiness plansof the differentunits andtrackedregularly toensurecompliance

• Continuoustracking andreporting ofROCE bybusiness

XX.X

8-11%

9-12%

26%

12-16%

0.5-0.550.5

37

… while continuing to enhance our cost of capitalPercentage

Efficient cost of equity

Limit operational and financial riskShare price standard deviation

Optimised

cost of debt

Optimize capital structure at efficient frontierNet debt/total assets

Improve cost of debtEffective interest rate

Telefónica

Selected Peers’average*

1997 1998 1999 2000 2001

1.8 2.0 2.6 2.5 2.1 2.6 2.9 3.4 3.12.6

* Average of Deutsche Telekom, Telecom Italia, France Telecom and British TelecomSource:Datastream, analyst estimates

1997 1998 1999 2000 2001

37 39 38 29 3334 31 3146 37

Long term sustainable EBITDAmarginDiversified regulatory riskGeographically diversified cashflow sources

Optimal position at efficientfrontier for debt

Tax managementMonitoring interest rate and FXmanagementTreasury management

1997 1998 1999 2000 2001

9.2 9.4 8.97.7

6.47.1 7.2

5.4 6.57.9

1997 1998 1999 2000 2001

38

Finally, we are committed to continueoffering a unique investment propositionwith a clear focus on value creation

We have a strong position . . .

Strong operational performance in2001

Solid and transparent balance sheet

Flexibility to capture organic and nonorganic growth opportunities

Better financials than the peer group

. . . that we commit to improve further . . .

Five clear commitments from “Rio”

Maximize ROCE

Optimize Cost of Capital

Use cash generated in value creatingopportunities

. . . counting on the competitive advantage that represents our financial expertise

Efficient shared services (horizontal initiatives)

Intra group “debt market”

Top class risk management integrated with thebusinesses

Financial innovation

Commitment to value creation

Date post:	17-Oct-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

José María Alvarez - Pallete CFO of Telefónica Group...Source: Annual Reports, SSSB, ABN Amro 6.9...

Documents