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Safe Harbour: Delivering Profitability and Growth

This presentation discusses Telefónica's strong strategic position and fundamentals, focusing on key aspects for profitable growth. The company aims to capture opportunities, manage key performance metrics, and crystallize value to increase profitability and growth.

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Safe Harbour: Delivering Profitability and Growth

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  1. Safe Harbour This presentation contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this presentation and include statements regarding the intent, belief or current expectations of the customer base, estimates regarding future growth in the different business lines and the global business, market share, financial results and other aspects of the activities and situation relating to the Company . Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those in the forward looking statements as a result of various factors. Analysts are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation. Telefónica undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telefónica´s business or acquisition strategy or to reflect the occurrence of unanticipated events. Analysts and investors are encouraged to consult the Company´s Annual Report on Form 20-F as well as periodic filings made on Form 6-K, which are on file with the United States Securities and Exchange Commission.

  2. A value growth company: Delivering results

  3. WE ARE CONFIDENT THAT BY BUILDING ON OUR FUNDAMENTALS WE WILL DELIVER ON PROFITABILITY AND GROWTH Profitability: • Strengthen focus on earnings • Strong emphasis on efficiency and execution Growth: • Multiple growth dimensions • Building business models that are profitable and sustainable AS A CONSEQUENCE, OUR COMPANY’S VALUE WILL INCREASE

  4. DELIVERING RESULTS: PROFITABILITY AND GROWTH We will capture opportunities based on our strong strategic position and fundamentals We manage key performance metrics Management priorities to crystallize value Our Group model enables delivery

  5. Strong fundamentals Strong strategic position along growth engines Telefónica is in a good position to simultaneously capture profitability and growth • Large client base • Strong operational skills • Unmatched intangibles • Balanced and flexible business structure • Internet • Broadband • Mobility • Content Current market environment forces management more than ever to focus on key metrics and on delivery of results OUR STRONG FUNDAMENTALS AND SOLID STRATEGIC POSITION PUT US IN A SUPERIOR SITUATION TO CAPTURE PROFITABILITY AND GROWTH

  6. DELIVERING RESULTS: PROFITABILITY AND GROWTH We will capture opportunities based on our strong strategic position and fundamentals We manage key performance metrics Management priorities to crystallize value Our Group model enables delivery

  7. Focus on key aspects 13-15% 24% • Manage customer profitability and market share • Marketing effectiveness to enhance usage • Cross-selling TOP LINE 28 Leverage client base 22 99 00 04 10% 9-12% EBITDA 12 • Cost efficiency • Operational leverage • Quality 11 Operational excellence 99 00 04 4% 8-12% EBIT* • Asset turnover • Capex allocation and control • Reducing asset base 5.0 4.8 Focus on ROCE 99 00 04 * Calculated exc. goodwill WE FOCUS ON KEY ASPECTS TO ENSURE PROFITABLE GROWTH... billion, in constant exchange rates. Current business perimeter CAGR

  8. WE FOCUS ON LEVERAGING OUR CLIENT BASE, ... We have a growing client base... …which we expect to expand... …and leverage to extract its full potential >100 million • Manage client profitability and market share • Accelerate marketing initiatives and effectiveness • Push cross-selling across the Group’s businesses 25% 65 52 1999 2000 2004

  9. …ON RAISING OUR OPERATIONAL PERFORMANCE ... This is alreadya clear strength ... …but it is an on-going priority... …and we will raise our performance by: Cost efficiency* • Accelerate e-business implementation • Tighten performance parameters • Monitor improvements with further developed cost accounting tools -7% 18,6 16,8 12,6 1999 2000 2004 Operational leverage** -4% 53,9 <40 47,5 • Turn fixed costs into variable • Externalize functions, transparency • Outsourcing of non-core functions 1999 2000 2004 90-95% Quality*** 70-75% • Monitor quality with customer centric perspective • Reduce cost of non-quality 1999 2000 2004 * Personal expenses (exc. Atento)/revenues ** Fixed cost/total cost (estimates) *** Residential + business satisfaction index in TdE

  10. … AND ON IMPROVING OUR RETURN ON CAPITAL We are success-fully improving our capital expenditure... …but with growing uncertainty, the environment asks for improving EBIT... …by being more selective Net fixed asset turnover 120% • Capex allocation and control • Disposal of non-core assets (de-assetization) • Seek opportunities for non-investing 73.6% 64.2% 1999 2000 2004 Capex*/ revenues 31% 31% 20% 1999 2000 2004 * Ex-UMTS

  11. DELIVERING RESULTS: PROFITABILITY AND GROWTH We will capture opportunities based on our strong strategic position and fundamentals We manage key performance metrics Management priorities to crystallize value Our Group model enables delivery

  12. MANAGEMENT PRIORITIES Continue improving results in consolidated businesses 1 Continue the expansion in Latin America 2 “Achieve sustained superior earnings growth” Drive developing businesses towards profitability leveraging the Group 3 Continue business building 4 Capture inter-business and Group synergies

  13. MANAGEMENT PRIORITIES Leverage existing client bases and maximize cash generation short and long term: we cannot fail Continue improving results in consolidated businesses • Telefónica de España • Telefónica Móviles España • TeleSP and other Latam wireline operators 1 Continue the expansion in Latin America 2 “Achieve sustained superior earnings growth” Drive developing businesses towards profitability leveraging the Group 3 Continue business building 4 Capture inter-business and Group synergies

  14. TELEFONICA DE ESPAÑA • Winning the broadband battle • Push ADSL deployment • Deepen customer segmentation • Continuing to increase efficiency • Transform into e-business • Control/manage capex intensity • Quality improvement • More cash-flow • More stable • More business opportunities for TdE and rest of the Group

  15. TELEFONICA MOVILES ESPAÑA • Monitor client profitability & traffic share • Loyalty programs • Product portfolio • Contract/prepaid mix • Get the 2.5G offering right • Contribute to the development of applications and services • Develop, launch and promote appealing services • Speed-up time-to-market and customer migration • More cash generation • Improve customer mix • Build solid know-how on 2.5G business and market approach

  16. TELESP • Accelerate “Metas” accomplishment • Key for roll-out to Brazilian telecom market • Continue to build on solid operational fundamentals • Ensure additional capex meets strict return criteria • Tighten metrics and bring efficiency to the next level • Sharpen the marketing approach and broaden product catalogue • More cash flow, exceeding organic growth needs • Maintain outstanding competitive position • Platform to leverage Telefonica’s Brazilian opportunity

  17. MANAGEMENT PRIORITIES Leverage existing client bases and maximize cash generation short and long term: we cannot fail • Telefónica de España • Telefónica Móviles España • TeleSP and other Latam wireline operators Continue improving results in consolidated businesses 1 • Brazil • Mexico • Argentina • Rest of Latam Continue the expansion in Latin America Profit from a natural extension of our leadership 2 “Achieve sustained superior earnings growth” Drive developing businesses towards profitability leveraging the Group 3 Continue business building 4 Capture inter-business and Group synergies

  18. EXPANSION IN LATIN AMERICA • Launch Brazilian wireline operations outside Sao Paulo in 2002 (“Brazil 2002”) • Consolidate TEM-PT JV as the #1 player in Brazilian mobile markets • Successfully develop recently entered markets, e.g., northern Argentina, Mexico • Complete the Latin-American portfolio profiting from a natural extension of our leadership

  19. BRAZIL CONTINUES TO BE A BIG OPPORTUNITY TEM-PT JV to lead the Brazilian mobile market Brazil 2002 as a first priority project • Integrated offering of voice and data services for large businesses • Long distance national and international services • Transport (carriers’ carrier) • 9.3 million controlled customers, and potential market over 93 million POPs • 60% of average market share and single player operating in Sao Paulo & Rio de Janeiro • Leadership in 4 of 5 wealthiest areas in Brazil

  20. MANAGEMENT PRIORITIES Leverage existing client bases and maximize cash generation short and long term: we cannot fail Continue improving results in consolidated businesses • Telefónica de España • Telefónica Móviles España • TeleSP and other Latam wireline operators 1 • Brazil • Mexico • Argentina • Rest of Latam Continue the expansion in Latin America Profit from a natural extension of our leadership 2 “Achieve sustained superior earnings growth” Drive developing businesses towards profitability leveraging the Group • Terra Lycos • Telefónica Data • Telefónica Media • Europa UMTS 3 Anticipate break-even leveraging the overall group position Continue business building 4 Capture inter-business and Group synergies

  21. TERRA-LYCOS • Building a strong organization in business and geographic fronts • Adapting the business model to the current market context • Extract the full potential of and for the Group: collaboration of Terra-Lycos with other Lines of Business to exploit the Internet opportunity • Become one of the top four world leaders • Work with other Lines of Business to capture the Internet opportunity • Accelerate breakeven

  22. TELEFONICA DATA AND EMERGIA • Telefónica Data: • Relationship with largest corporate customers and NEPs • Support Telefónica’s WLOs business customers’ data needs • Strengthen position from selective expansion in new markets • Leverage infrastructure/presence to serve multi-national clients • Emergia: • Aggregate and manage the Group’s bandwidth needs • Strengthen our position in corporate and NEP’s segments • Develop a strong VAS as a client loyalty and revenue enhancing tool • Bring forward Emergia’s cash generation

  23. TELEFONICA MEDIA • Improve operational performance • Capturing existing synergies within current businesses • Making T.Media cash neutral for the Group • Complete the portfolio to lead in our natural market • Extract the full potential of its position within the Group • Improve return on investments • Contribute content to other Lines of Business

  24. MANAGEMENT PRIORITIES Leverage existing client bases and maximize cash generation short and long term: we cannot fail Continue improving results in consolidated businesses • Telefónica de España • Telefónica Móviles España • TeleSP and other Latam wireline operators 1 • Brazil • Mexico • Argentina • Rest of Latam Continue the expansion in Latin America Profit from a natural extension of our leadership 2 “Achieve sustained superior earnings growth” Drive developing businesses towards profitability leveraging the Group • Terra Lycos • Telefónica Data • Telefónica Media • Europa UMTS 3 Anticipate break-even leveraging the overall group position Continue business building • Atento • Katalyx • Develop related businesses leveraging our franchise Push current businesses under development and open new options 4 Capture inter-business and Group synergies

  25. CONTINUE BUSINESS BUILDING • We have launched several initiatives: eg., Atento, Katalyx • Clear progress • Still improvements/adjustments to make • Focus on performance and clear value potential with a flexible approach • We will continue to develop opportunities and build new businesses: • Leveraging our customer base and franchise • Creating a competitive advantage by building on our strengths and intangibles • Adjacent businesses with low asset intensity and short pay-backs

  26. DELIVERING RESULTS: PROFITABILITY AND GROWTH We will capture opportunities based on our strong strategic position and fundamentals We manage key performance metrics Management priorities to crystallize value Our Group model enables delivery

  27. TELEFONICA’S GROUP MODEL IS THE KEY TO SIMULTANEOUSLY ACHIEVE PROFITABILITYAND GROWTH Our group model... • Focused, transparent, accountable complementary Lines of Business operating as good specialists in each business • Owned by a company, Telefónica, that manages across businesses and articulates the group … puts us at an advantage... • Allows to lead at a pure play development • Allows, whenever suitable, to integrate efforts to leverage our client base • Facilitates new options … and we are working continuously to sharpen it • Still young structure, started two years ago and boosted after the completion of “Operación Verónica” • Achieved significant progress in several areas, but working hard to continuously improve

  28. IN THIS MODEL, HIGH VALUE ADDING ACTIVITIES ARE PERFORMED AT GROUP LEVEL • Manage across businesses • Assist to and demand strong business performance • Achieve functional articulation for effectiveness and efficiency • Shape the development of the group

  29. WE HAVE PROGRESSED SIGNIFICANTLY IN SEVERAL ACTIVITIES TO BE PERFORMED AT GROUP LEVEL AND ARE WORKING HARD TO ADVANCE ON THE REST Examples Manage across businesses • Plan Futurnet to extract maximum potential of broadband across businesses • Shared distribution channels • ... Assist to and demand strong business performance • Strategic reviews and budgeting process • Common management information systems • Coherent reward schemes • ... A process of continuous development and improvement • Lowest cost of funding through centralized management of cash and finance • Strong brand management • Development of Shared Service Centers • ... Achieve functional articulation for effectiveness and efficiency • Adaptiveness in partnerships/alliances • Launch of dedicated Real Estate Management Unit • ... Architect and shape the development of the group

  30. WHAT WE’VE SAID SO FAR • Telefónica’s performance is based on solid, lasting business fundamentals • This fundamentals underpin our financial results • Building on our fundamentals and our solid financial position, we are confident that we will deliver on profitability and growth • We focus on four management priorities to crystallize our value • Our group model is a key enabler that puts us at an advantage to deliver value and growth

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