Telefonica SA (TEF) 2002 Q2 法說會逐字稿

Good morning and good afternoon ladies and gentleman and welcome to Telephonic conference hour conference call. I would now like to hand over to Mr. of Investor Relations. Please go ahead sir, and I will be sending back the questions.

: Good afternoon ladies and gentleman, and welcome to Telephonica conference call to discuss such 2002 results. I am with Mr. President of Customer Relations. Before proceeding, let me mention that for what looking the statements are being made under the safe harbor of the litagations reformed part of 1996. October four months could be fail materially from those anticipated in any forward looking comment as the result of micro conditions, market risk, and other factors.

As in first quarter, all must commence including the presentation, effect of the financial performance of Telefonica's safe with International subsidiaries from which we loop up to March we incurred by full consolidation.

Looking at the percent of financial results I'm not going to comment, by global business line, assigning all Latin American businesses to their correspondent global business line. Independently of the 60 transfers of these assets.

Now I turn the call over to our Executive Chairman Mr. who will be leading this conference call.

: Good afternoon ladies and genteleman, I thank you for attending Telephonica first half the year results. Today with me is the Chief Operating Officer and Maria I will start the call by explain to the with the fully gist and the reason behind, and then when it was time to go to Mr. Brown of for the revision of .

Telephonica has been actively working to exact to a sector in the earlier months that has remained difficult and challenging for the last two years, through the good intention of set of businesses we presented you at the beginning of the year in .

From the business perfect ease, we have focused on that amazing the several months of the . Within a fort on dsl roll out, on caption in the company has a group of incidents by which opportunities in Mexico, and on turning around non-performing business to reduce the capitol for the group. In our decision with the fine period of oriented to prove the free tax flow, and control. Our local value of non-corrected, and we committed to revise our share holder policy in line, we are selective services. We've seen discontent with Telefonica will focus on in two top priorities. One improving the cash flow inter rations, and the other with a clear focus of shareholders revenge. Improving cash flow origination's we continue to be the very Telephonica that you should make it perfect. With these just in mind, we have run a large for key business area. Namely UNP's in Europe especially and .

In the last operations in Germany we have witnesses significant as the ration of market growth, corporate cost on delays in the UMCA's of leaving the market with Madrid. the potential market for new interest is reduced to roll worsening the profitability first. In our regions, you remain unchanged in the median sense in the composition opportunities we have review with no deal affective presents. Our position Telephonica Board of Director will publicly stop operations in Germany and to reduce in little the . Group will complete this goal at the year end, and on our approach, we're de-applying to the Austrian and Swiss branches. With respect to that operations, we believe in continue to have a solid growth potential, looking for this different integration with six land difference, with a gross efficiency and customer satisfaction. New entry markets and longer to Telefonica in the nearer term, and we will reduce significantly the speed of operations in all these markets.

The Board of Directors has agreed to partially write-down Mediaways to volume by 550 million euros. And finally, media, where Telefonica is exploring alternatives to the , and will continue to rationalize cost and assets, and we believe that full ownership is not necessary to have a safe to differences. To start the full volumes from the group decision during the month, we believe that the right strategy needs to be built around the basic pillars. A focus on our core activities, a focus on leverage in our leading position in our markets. In addition numbers four to restructure key numbers for main business.

Turning to the Nextel alliance, for review in the financial impact of write-downs, UN gives provision for write-downs put them for point, for when you have and I said the seven million euros. Mediaways, one will are reduce it by a further 550 million euros, keeping it to value of 645 million euros post write-downs, as . Telefonica's reporting in 574 million euros net loss for the first half of the year. A figure that we have been close to minus 200 million euros, excluding provisions for write-downs.

I would like to highlight the provision for write-downs have no cash impact on Telefonica , and are not affecting Telefonica capacity even and retain is a strong credit provide. On the contrary, as thicken, we'll see significant the company, future cash flow generation by the second, expected losses and capital expenditures. One these of this restructuring costs that have been implemented to amount to 287 million euros, .

Improvements on free cash flow will strengthen Telefonica high quality balances. Following the location of the provision to the rest like this assets, which will take place in the third quarter of this year. in fact they will drop significantly at the present dates of total assets, while keeping key rate metrics skillfully unchanged. This is from balance sheet, it's a clear competitive advantage of Telefonica.

First half results have been by a sense of a strong . On top of and Mediaway results, the income has been affected by similar things. First Argentina. With the exchange rate loss exceeding 445 million euros for the period. Second grosses on the same of number assets, namely assets as . This saw our commitment to a restructured number coming in business, and good for . Third, as provision for stock will reflect the different , purchased rights and market price until June of this year.

And finally all extraordinary notably provisions related to layoffs in Brazil and Peru impact the write-down for minor assets, namely made a part in to adjust for to foreign business . It's during this effect net income will have reached 978 million euros. With all these matters, Telefonica is ensuring the base for recurring net income and return on investment capital improvement.

Turning to Telefonica second we have imagine of the use of tax law. Telefonica has a proven track record of gross tax organization, on service of wire land and wireless business, grow potential growth in Latin America, a focus on what familiar thing, and a sound financial policy aimed at preserving the quality of the group on assets. alternative exist to allocate the group across the floor. First, . With Telefonica adopting a very conservative approach to our position based on a clear strategy, in its and we think this very .

Despite the poor return evaluation, no potential have met our operating and financial . And we do not expect Telefonica to play an active role the field under the current sector prospects. Second, prospects to drive organic growth. With a group so in the steady cap ex control on a quarterly basis. We expect a 65 to 70 percent decrease by the year end, driven by Latin America, and better efficiencies of Telefonica . Third, debt reduction. Ending June with an asset of 55.8 billion euros, we .

We are comfortable with current levels and are fully committed to a single A rating at the right balance between assets to financial markets and the growth of capital. And fourth, buying treasury stock while market prices differs materially from the company from that intervals. Treasury stock stands around 157 percent of sale capital. We are two percent cap to be amortized in the future. The were these stock dividends in the last of the to figure of sectors .

We are still wait, we reconsidered Telefonica shares for hold and policy, based on the reduction of growth expectations for , and Telefonica lower cap ex, first in that level and construct this . This will provoke the annual shareholders meeting, the approvals, the amortize, all the treasury stock and the state and statement and .

As you can see in the , Telefonica has full capacity to pay times dividends. On the one hand, Telefonica free cash flow for a six month of the year almost reached two billion euros. Despite the difficult and demand the company is facing in Latin America. I would like to highlight what all the operators in Latin America are supposed to be using prohibiting to the good free cash flow generation. On the other hand, if they were of Telefonica but on is down 9.6 billion euros at the end of June, permitting ten billion.

Telefonica is at the top of the sector by free cash flow generation both in absolute terms and the to figure though this. It is worth mentioning that the facility of Telefonica to up demand produce of excesses with a restrictions related to a debt . To conclude, we are setting the bases for a solid cash flow growth, and by your we will take . We are freezing European phone all operations. The savings will reach 1.8 billion euros of EBITDA losses, and do bring four million euros of comparative net losses for the 2002, 2005 .

We are now checking that operations in new interim markets. We are making progress on immediate restructuring to unlock value. And we are assets to improve our asset base. In terms of 2002 financial commitment, while we expect revenue growth as likely below guidance, we continue to work to form at year end inside the targets we set for EBITDA and EBIT, and expect to come from capital. And now I will turn over to , who is present Telefonica first half results.

Thank you very much Cesar. Good afternoon ladies and gentlemen. Telefonica posted revenues and EBITDA decreases of 4.4 percent for the first six months of the year. Two key elements that I would like to highlight are first the aggregate impact on the first half of '02 results of both the depreciation of Latin currencies with products driving ten percentage points to first half goals to revenues and EBITDA, and also the Argentinean crises.

First half revenues, Telefonica Argentina revenues and EBITDA for the first six months of the year were down by 12 percent and 15 percent versus January, June '01 in local currency, a drop that stands at 65 percent in euros, and explain a significant proportion of Telefonica Latin America's drop in revenues and EBITDA, both around 25 percent. In addition, Telefonica's net income reflects a 445 million euros exchange rate losses, related to the dollar denominates the external debt of our Argentina subsidiaries.

Excluding these effects, revenues, EBITDA and EBIT have grown at nine percent, eight percent and four percent rate respectively. The second element I would like to highlight is, especially on the line operating performance in the second quarter of the year, with no great excluding , improving sequentially during the year. Three of the main reasons behind this .

First of all the cost of the performance of Telefonica Espana, which is steadily reversing first quarter '02 negative trends, with revenues for the second quarter at close to two percent year on year, and EBITDA decreasing by just two percent with respect to the second quarter '01. Telefonica Movilas, which is keeping its very strong performance, with domestic operations posting revenues and EBITDA growing at 20 and 33 percentage rate respectively. EBITDA margins for the second quarter stood at 53 percent.

And we continued to push on cost contention, with second quarter '02 operating expenses dropping by seven percent year on year, as business lines continued to elapse to more demanding operating conditions. It is worth mentioning that Telefonica was successful in improving its second quarter '02 EBITDA margins versus first quarter level of 41 and a half percent by .5 percentage points.

Turning to slide number ten, Telefonica effectively working to offset current weakness in demand, focusing on cash flow generation for the tight control of both operating expenses and capital expenditures. As a result, both divisions have continued to focus on cost cutting and capital efficiency, compatible with revenue generation, with the group posting a five percent decline in operating expenses on an annual basis, and keeping its solid EBITDA margin unchanged at the 41 and a half percent mark.

I would like to highlight that most of the subsidiaries have shown progress on trimming the cost basis in second quarter versus the first quarter, including EBITDA margins sequentially. In terms of cap ex, total investments reached 1.8 billion euros for the first six months of the year, equivalent on an annual increase, decrease sorry, of 52 percent.

Tight control over Latin American investment programs, with the weight of group cap ex falling by 20 percentage points to 32 percent in just one year, and also the benefits from Telefonica Espana, higher efficiency, mostly in ADSL deployment are the reasons behind this cap ex reduction. And as a result group cash flow calculated as EBITDA minus cap ex exceeded four billion euros, which is a 67 percent increase over the first half '01 figures.

Turning to slide 11, year to date contribution by business lines to the revenue and EBITDA structure and growth, this presented in business line with Telefonica Movilas supporting strongly the group results. With revenues and EBITDA growth to 4.7 and 1.9 billion euros for the January to June period, cellular business is part of the main contributor to consolidated revenues and EBITDA growth, with three percentage points and five and a half percentage points respectively.

Telefonica's diversified portfolio of assets places the group in a better position to expand current sector outlook. As a result Telefonica Movilas is partly compensating 2002 Telefonica Latin America shortfall, and has increased its weight over total EBITDA by more than six percentage points to exceed the 30 percent figure in the four months. Telefonica Espana group, with revenues up 1.6 percent, and EBITDA almost stable in second quarter '02 versus first quarter '02, has helped its negative contribution to total revenues and EBITDA growth.

Telefonica Latin America hit by the devaluation of the Argentine economic crises, and the annual comparison of Latin America exchange rates for the period, saw its negative contribution to revenues and EBITDA growth increase. Telefonica Latin America contributions to growth for the period April June 2002, was minus ten percentage points in revenues, and minus 13 percentage points at the EBITDA level.

In absolute terms, Telefonica Latin America's weight in total EBITDA has decreased to 32 percent, a reduction of two percentage points in comparison with the first quarter of . Telefonica Espana remains as the major single contributor to consolidated revenues and EBITDA. On the slide 12, turning to domestic fixed line business, Telefonica Espana operations are heavily conditioned by a stringent throughout the within the Spanish telecoms market, coupled with increasing competition that we've already seen and shared with you in the first quarter of the year.

The number of re-assigned lines have over 1.6 million, being 74 and a half percent of them, which means almost 1.2 million, what we call assigned lines. As projected business, Telefonica Espana has lost five and a half percentage points of market share, showing the activity of competitors, especially cable operators. Total estimated traffic for the first half of the year has shown a slight improvement, reaching 73.6 billion minutes, with a year on year increase of 6.2 percent, compared to the 3.4 percent increase of the first quarter.

Incoming traffic has contributed to the better performance, with an additional improvement of outgoing traffic with a year over year decrease of .3 percent, whereas first quarter figure presented a one percent annual decrease. Local traffic, which accounts for almost 25 percent of total traffic had a better performance over the second quarter, improving from a minus ten percent decrease in the first quarter to a minus eight percent decrease at half year 2002.

Internet traffic has reduced its increasing trend from previous quarters, mainly due to the substitution effect of the ADSL service. International traffic continues to be affected by the rationalization of the traffic reseller business in the country. And fixed mobile and domestic long distance have improved from the previous quarter, while domestic long distance and others remain pretty much in line. in business remains within expected figures and parameters. Number of in the quarter was 153,000, exceeding total number of previous cell connections, the number of 660,000 at June 30th.

return installations have increased to 56 and a half percent, and done installation rate stands at 2,800 having to wait to comply with our 900,000 number target by year end. Telefonica Espana has roughly over 50 percent share of global marketing in Spain as of June 2002, including of cable operators. In the next we will review the Telefonica Espana groups EBITDA, making an allowances for the first half and expected performance through year end.

During the second quarter of '02, EBITDA grew 2.8 percent over the previous quarter, while in year 2001 the second quarter experienced a decrease of 5.7 percent compared to the first quarter. Improvement shown in 2002 compared to 2001 is mainly due to . But this quarter of last year showed an extraordinary good performance with EBITDA margin reaching 48 and a half percent.

The timing of the obligation resulted in a greater impact in the second quarter of last year, while status changes made during the first quarter of this year have had a neutral effect but due to the different application for a of this CMD, Telefonica had to further decrease the status due in the first quarter of 2002, having therefore a negative revenue impact.

As the year progresses in the ADSL business we shall take advantage of higher economies of the scale and improve the EBITDA performance as the number of producing lines increases. We are in line with our target to reach flat EBITDAs at the end of the year. To understand the second half of I will summarize the factors that should be , should differentiate the first half '02 versus the second half '02 performance.

During the second half '02, '01 the increase of provisions related to international long distance resurfaced. The negative contribution of ADSL, the tariff decreases in October in compliance with the price cap of CPM minus nine percent and the interconnection tariffs reductions approved in August last year, are the basic elements behind the 15 percent decrease in EBITDA compared to the first half of '01.

For the second half of this year, we expect that the stronger ADSL contribution, coupled with the benefits from additional cost cutting measures implemented in March and June will assess additional tariff reductions corresponding to adjustments in two price caps, and expected market share loss among others, to which similar EBITDA figure than in the first half '02.

If we turn to page 14 we'll start with the review of our Latin American wire land business. With respect to the operating performance Telefonica Latin Americana is reducing the base of lines growth to a three percent year over year, ending June 2002 with 21.5 million managed lines in service. Since the beginning of the year the region close to 150,000, mostly related to tighter controls to improve the quality of its client base and Telefonica Argentina's lower activity.

So we have these trends is offering, has started to offer products oriented to low income clients. That is resulting in positive in June, a trend we expect to keep in the second half of 2002. ADSL continues to be a priority for the group, ending June with more than 350,000 connections, 80 percent located in Brazil. has started to accelerate in the second quarter, driven by new marketing constraints, with an April and June figure of 66,000 new clients, roughly four times higher starting in the first quarter of this year.

Regarding financials, revenues and decreased by two 23 percent and 25 percent in Euros. Currency situation, lower resource in local currency but also except the less. And the reconciliation of the Telefonica Argentina low quo part of the quarters, generates to know two purses October to March, October to December's, March '01 are driving the first half '02 performance.

Telefonica Latin America revenues excluding , and consolidating Telefonica's Argentina's compatible quarters will have room at point seven percentage rate to an EDTA increasing by just one point four percent.

Finally, I would like to comment on pre-cash stores for the region that amounting and navigate to one being used despite current model. Total graders are posting, profit figures are showing their commitment to cost control, with addition of personal caps made in Brazil and Chile in the first half of this year and capital amortization with the less producing embankment by more than 60 percent. The less total this capital figure contract with last year, 360 million Euros, making us a bit slow for the first half.

Keeping our focus in Latin America, I will reveal now operations of our businesses in Brazil. Total revenues in from our Brazilian operations increased by two percent and one percent during the first half of 2002 in Euro on an annual basis. These results are highly affected by the real average exchange repetition of four percent in the last 12 months. Excluding this effect, Brazil would have both seen double deals showing solid on the line of operating performance. Nevertheless, Brazil's contribution to the consolidated have remained unchanged, but for the first half of one figure, generating close to 23 percent of the group's in the first half of this year. with accounts were over 90 percent of revenues, starting from Brazil.

Turning to the list, the company showed double digit growth driven landline servers and telephone cruisers granted in the last 2001. In new tonic adjustments, both eight percent on average has been approved in June, but will continue to possibly laid back second half officials. More operations continue to serve in great performance without our client base growing at 19 of the new rate and market shares are stable in this 64 percent range on average.

Finally, base operations in Brazil have reached 83 over given and present also a solid growth potential along with the government of Latin wide operations.

At slide number 16 and with respect to Argentina, our financial performance is still linked to the current economic crisis, which we think has dropped us by 16 percent in the first quarter and the continuing depreciation of the peso, which lost 63 percent of its value against the dollar in just six months. As a result, Argentina is reducing its contribution to consolidated by seven percentage points in the last four months to just a mere four percent - four percent weight.

Going to Telefonica Argentina, the six one operations, operating performance is characterized by a stable market shares and line to service marginality claim with higher weight of pre-paid currents. That's as management is focused on cost control, down 18 percent year-over-year, in best are in Texas and cap ex rationalization. margin has remained about 50 percent. Likewise, PCP, our wireless industry, is being managed to maximize cash flow. Commercial focus is on high volume customers, with contract clients accounting for 68 percent of total subscriber base, of course having count to offset total revenues improving margins steadily. And generally, securing cap ex has been reduced to little more than three million Euros.

Little exposure to Argentina including equity, goodwill, and internal debt, continues to decline, falling below the one million Euro at June, 2002 in comparison with the six billion Euros prior to the fiscal evaluation.

Turning to the normal business in the slide 17, from an operating perspective, active minus clients reached 51 and a half million at the end of June representing another increase of 19 percent, a positive figure considering depressed economy in most of the markets of operation. Telefonica in most accounts were more than 50 percent of the group's , representing more than 800,000 new clients in the first half of '02.

We will stick to financials, revenues and of any growth, excluding and additions to the consolidated accounts, reached 13 and 22 percent growth respectively. Telefonica mobile is in Spain, continues to act as a world driver with revenues and up by 20 and a half and 33 percent respectively on an annual basis.

It is also worth mentioning that the Spanish operations keep strong under a highly competitive environment, with second quarter margins at 53 percent, improving the first quarter figure by three percentage points.

First half consolidated margins stands at 41.2 percent, with costs lowering at 13 and a half percent rate, driven by additions to consolidated accounts and by the centralized purchase, purchasing 100 model.

Focusing on the Spanish business highlights, commercial success is being driven by lower return, which remain at four percent for the billion end of 2002. This figure is even lower when talking economic turn. Subscriber position costs plus subscriber patient cost over adjusted revenues was half in the first half of '02. However, the company continues to lead the market with the stable market share.

Working on minutes of usage and are showing a positive trend. Second quarter minutes of usage rise almost eight percent with respect to the previous quarter, where second quarter actually increasing by four percent versus the first quarter of this year.

Normally, by the Telefonica parent conference call, you already have heard the Telefonica mobile list conference call. I will request that you ask today's questions on the conference call tomorrow, Friday, at 1600.

On a bit of business on page 18, the performance is showing a solid contribution from our incumbent contributions in Spain and Latin America as well as improvement over international operations. We continue to see the results of our survey, our focus on efficiency and thinned management of operations.

In terms of efficiency, restructuring efforts have totaled the EBTA margins to four point eight percent, continuing first quarter 2002 trend. Three basic contributions to this efficiency, first, group economics have been in the Spanish where EBTA is growing in despite of the poor financial service of the month, while maintaining the margin of the revenues in the mid-20s. Second, 11 percentage in ETA margins enhancement in Brazil to reach nine percent level, combining sublingual driven by corporate communication services and areas of deployment, while investing in near and future growth from operations outside of our area. And third, the added contribution of international services, profiting from both top line growth at 48 percent, relating to the global corporate severance unit, and also cost cutting initiative in the wholesale division, driving most of the 25 percent growth in EBTA.

Now, I would like to hand over to to explain the financial results.

Moving to financial results, the company posted net financial results in line with first half, 2001 level, excluding the effects of Argentinian evaluation. While for this charge has decreased due to both lower net debt levels and lower interest rates, the higher level of Latin American hitching are fully offset , The Argentinian depreciation from 1.7 pesos to dollar at the quarter in 2001 financial statement to 3.8 pesos to dollar in June 2002, has added 618 million euro charge to the net financial result. Argentinian company .

Moving now to slide 22. Telefonica's net debt amounted to 25.8 billion euros as of June 2002, decreasing by 5.5 billion euros versus June 2001, and 3.2 billion euros versus December 2001. The significant drop at close of year has been driven by the operating performance, generating 2 billion euros of retained cash flow after cap ex and by the liability management leading to a 2 billion euros savings when translating into euros, the debt denominating in Latin American or in U.S. dollars for hitching purpose.

Other have in the opposite direction, increasing debt by 823 million euros. First, financial investments by 654 million euros, including stock acquisition. And second, changes in the parameter of consolidation having 209 million euros of debt. It is worth mentioning that this significant debt reduction is purely based on the generation and waste management capabilities of the company. We saw extraordinary divestitures.

The current reduction in the debt amount is maturity the real estate and the expected future of lead us to believe that Telefonica will not need to access the debt market over the next 12 months, at least. And we'll only do it in an opportunistic way.

I would like to highlight that Telefonica has continued to be active to market against currency situation. In that respect, all U.S. dollar denominated external for Latin America have continued, excluding Argentina, is currently fully hitched.

Now I would like to make some comments on the change we have made in the organization of the company. First of all, we are experiencing a new that is . I think as well as you, the growing direction between the strategy and and the fact on our basic economics in our future capital allocations. that we are incorporating in our area, as I said a very important area that until now alone . will be of acquisitions. of all the business.

It's highly respected by abilities and combines economic drivers of the sector. of the company. will lead the Telefonica to Telefonica . , a Portugese national who joined the group in January 1999, is now responsible for our fix operations in Latin America. He has managed the expansion of Brazil and will focus the operation to get the . , our Chief Financial Officer, will move to head the six operations in Latin America where he worked before as Chief Financial Officer.

It is clear that his will be a very valuable asset in managing this operation in the quarter and the other months, balancing quarterly growth in capital allocations. will be the new Chief Financial Officer, replacing . has been for the last 5 years, CEO of , and the in Spain, which, by the way, have ranked Number One in those 5 years. He is 44 years old, majored in economics and finance by the Northeastern University in Boston. He has distinctive previous experience in different financial institutions and joined Telefonica in 1996.

And now, we'll pause to answer any questions you might have.

Ladies and gentlemen, . If you have a question, please press the number 1 on your telephone keypad and (X) the hash or pound sign to cancel. Once again, that's one to ask a question, and the hash or pound sign to cancel. Please stand by while participants register their questions.

The first question comes from . Please go to your question and answer your company name.

Good afternoon, gentlemen, it's from Bank. Just a couple of questions, if I may. I just wonder if you could quickly -- I can't clarify whether the group, namely Telefonica, is likely to receive a tax credit on the write-down of the UNTS licenses. And you mentioned about capital expenditures potentially being a bit lower than your previous guidance. I was wondering if you could what you think is possibly a more realistic out-turn for the full year and, in particular, I'm interested in what your view of Telefonica de Espana cap ex should be. I think you were previously saying around sort of 18 percent of revenue is around 1.8 billion. I was just wondering whether that was still a good number or if we should expect it to come in a bit lower. Thank you.

Concerning the first part of your question, we will be applying the current tax in Germany and in Spain and, as a result, the impact on the income actually in the financial statement of Telefonica reflecting the tax applicable to these rules. Yes, and we do reflect it in the financial statement. In regard to cap ex, position is that the capital for the year will be around 5.4 and including revision, will come down to a figure close to 5 million.

And any comments on the domestic business in particular.

Well, domestic is, fixed somewhere around percent.

Down by 5 percent?

Yes.

Thank you very much.

The next question comes from Robert . Please go to your question and answer your company name.

Yes, it's Robert McCasha, City Group. I've got two questions. Can you talk us through the balance sheet impact of the write-down that you've taken, particularly how it's impacted the balance sheet in the first half of the year, if at all. I'm particularly interested in why the has come down by six and a half billion and the amount of the interest has gone up by 2.3 billion.

The second question concerns the proposal for a share buy-back. Can you just explain the exact way that works? Are you proposing to buy back an incremental 2 percent or is that just going up to 2 percent from the current 1.57 percent? And on , are there any restrictions that when and how you go through that process? Thank you.

I'll answer the question about the variables. to buy up to 2 percent of the stock to . This year, as you know, we do not propose to pay a dividend so we decided that a way of redistributing with buy-back or with helping normally. And doing through the different months, looking at where we value for Telefonica and we will continue this policy. We will get to the 2 percent. We will in the next year. This is the way we proceed. We have to review the .

I'm taking your first question concerning the impact of the write-off on the balance sheet. They are fully reflected on the June this year balance sheet, but an effect that had been recorded after the closing. All the effect is currently reflected on the provisions part of the balance sheet and will be distributed in next balance sheet. Continuing your question about minorities. Minorities have increased because the shareholder's loan of the in Germany, mainly the participation of this shareholder's loan, has been capitalized and, as a result, now have equity of the company in Germany. And the network is reflecting both the write-offs and the interest of and the other currency depreciation in the first half of this year. In Argentina, of course.

Does that mean you now own the same proportion of Group as you did before or has the ownership proportion changed?

We own exactly the same that we owned before.

Thank you.

The next question comes from . Please go to your question and answer your company name.

Hi gentlemen, this is . A couple of questions, if I may. The first one is concerning the in Latin America. We can see that is very strong and seems to be around a billion. We sold almost 50 percent of the in the past 6 months. Now, you interest on the cash into the region, so how is that bring back this cash back to Spain and, I assume, this cash-out management fees and the ready interest paid on these company loans?

The second one is on your tactics, especially your guidance 3 billion cap ex for the year-end. This would be called the second part of the year, obviously, the 1.8 billion you've done in the first part. So could you just tell which part of the business is going to have a significant increase on the cap ex going forward?

And the third one is on Argentina. On the press release, you basically mentioned that there are still risks continuing that negative equity and the amortization of the debt expressed in foreign currency. But you didn't really quantify how much it could be. So could you just give some color if there is any sort of plans to put further cash into Argentina? Thanks.

On the last one, there's no further any further Argentina, there's no need. What we've said is that the book value, including equity, in loans and goodwill of all our Argentina methods before the devaluation of the peso, was 6 billion and, on our balance sheet at the end of June this year, it's 980 million euros. That means with the on the balance sheet, on the shareholder's equity and on the income statements so far of the difference on that would . The in Latin America is very strong, OK? And we are basically using that cash flow in the useful way. But debt at the level, fact of which is debt from Telefonica and a touch debt repayment of close to 600 million euros and part of that has been paid back to Telefonica or to other external lenders in the . We continue to which, for example, in Brazil was declared 900 million that we paid in the fourth quarter and we continue to have the same plans. And, obviously, some of that cash has been as useful as the standard we do every year on management fees, notably in the case of Peru which is our biggest one.

Basically, on the cap ex figure, there are 3 effects moving down our guidance on cap ex, or on cap ex. The first one is that the currency situations are , meaning that in terms, some of the cap ex coming from Latin America are even lower. OK? The second one, big effects ,which the Chairman mentioned, is the fact that the of the UMTS operations, obviously, it's reducing within this same year an additional 200 million cap ex lower in the guidance. And the third element is that so far, you know, half of the year the cap ex execution is well below the planned cap ex and that's what it means, despite having a second half execution which should be higher than the first half execution. We will be -- we are thinking that the final cap ex items will be in the region of 5 billion, as the Chairman stated. Basically, there are some and there should be some in data, a little bit in and also a little bit in Telefonica de Espana.

Yeah, that's good. And just a quick follow-up. Right at the beginning of the call you would say that Telefonica's explored business opportunities in Mexico. Could you just clarify what you mean for that? You mean acquisitions ?

I think what I said is that when I was referring to our (MA) policy, I said that the only place where we have is money to Mexico. And that's all it is. And we operations is the only operation we have done on the merger acquisition sales and we haven't planned to do any more.

So basically you're going to...

...now and you have a chance open that basically no, not in Mexico .

Thank you.

The next question comes from . Please go to your question and answer your company name.

I would like to know what's the current situation regarding the commitments that you have with the governments or regulators in the countries where you have licenses. How is this going to be handled now? Is there any kind of potential penalties? Basically, what do you have to do now, do you need to reach an agreement with them? Could you please give us some light on these things? Thank you.

OK, again, you know you have the Telphonica conference call, which is probably the place to ask in detail these questions country by country. In general terms, they are not other currencies or penalties beyond the ones that are basically financial guarantees to pay the prices of the licenses that you start with. And the second thing, in Germany we are totally the operations, but given the needs of the license to comply and to fulfill the requirements, we will not be the license before some time to come, so obviously we will keep that possibility. But I will suggest you to ask in that because this is very heavily prepared by the Telephonica conference call for tomorrow. Okay?

Okay.

Thank you.

The next question comes from Ricardo . Please go to the question, announcing your company name.

Yeah, hi, it's Ricardo from . Actually, I've got a couple of questions on a--on the European issue. I would like to know, what do you think after these provisional doing right now? And also, you said on the press release that you're evaluating the of a UN project. Has the UN been a competitive market as Germany? I would like to know, is a way of saying that you will definitely be--Germany and all the other countries and when could we expect to see these kind of steps being taken? Finally, just on the debt and the change debt in this quarter, relative to the previous quarter. You mentioned on the press release that the reduction has to do with with the Argentinians and the devaluation and some other . But you didn't actually mention the fact of the capitalization of the loans in group to explain the change in Telephonica's debt. Is that also contributing to the debt reduction Telephonica declared in then?

In regard to the first question, as you know, we have maybe 95 percent right now. That may be overestimate, which is the virtual value for in the UN, Europe and we are not going to commit any single more to any UN operations.

Concerning the rest of your question, our debt reduction, the debt reduction posted does not include the capitalization of loans in . That was already accounted. That would have had no impact at all. The debt reduction mainly based on free capital generation and the impact of the of U.S. dollars vs. euros.

Okay, sorry, just to follow up on the European UN , so what is actually the carrying value that you have now in your account regarding these projects ?

the numbers is 5 million euros in Switzerland, 5 million euros in Autstria, and in total, the total is 375 million euros. That is Europe's--your money . That percent are for . Okay? Is okay?

The next question comes from . Please go ahead with your question, announcing your company name.

Hi, good afternoon. My question regarded the dividends, the restatement of your dividends. Could you give us maybe some indication of the amount of the dividend? And just a follow-up question regarding again the book value of the--of UN . I think I have missed something, but the book value before any write-off was almost 10 billions, Italy, so if it is right now written off by 5 billions against the remaining--this other 5 billion, I don't know if I'm missing here something. Is that correct, this calculation?

No , it's not correct, because see in this 10 billion you are including the for results, you need to account for our taking the different . As a result, our initial was much lower than the 10 billion during that--I will give you the exact number. It's in the neighborhood of 7 billion, but call up and we'll give you the correct number.

Okay.

And in regard to the dividends, I think it's two percent, the amount of two percent that we presumed in amortization is a very good indicative for what will be the dividend next year.

Thank you.

The next question comes from . Please go ahead with your question, announcing your company name.

Yes, this is indeed from . There is talk of the rate relief as far--by the in Argentina. How long do you think it will take for these constantly upping the prices, to the point where it will help you?

We have no clear timing here, okay? This is still--the initial process should have ended a month ago, and we never expected, and they are still discussing whether it's going to be a government's commission, or something with Congress, so we have right now no real time expectation of that regard. Okay, we'll continue to have a number of meetings in all forms, but clearly, there's no timing completion here, okay?

Okay.

The next question comes from Maria . Please go ahead with your question, announcing your company name.

Hi everyone, I'm from . Just two quick questions on--if you can give us figure of inter-company loans to your Brazilian subsidiaries, and regarding the Italian license, I understand it's not fully paid. So I would expect you have to still make some cash outflows to pay the license on an annual basis. If you can confirm this, it would be great. Thanks.

Maria, to the second part of your question, you are right, there is still a pending burden of approximately 600 million euros that will have been brought in the second part of this year. And considering the first part of your question, inter-company loans to Brazil from Telephonica is 692 million euros.

And that's with the fixed, I guess?

That includes also some of the call centers, but basically .

Okay, thanks .

The next question comes from Frank . Please go ahead with your question, announcing your company name.

Hello, it's , . I have a couple of following questions to the other speakers. First on the tax credit, you mentioned that you had a tax credit, for example, for the German business. I wonder how you can use this tax credit, can you transfer it to Spain? Then , didn't that rightly answer on the question how much the dividend will be? And is it right, his first question as the book value on the remaining book value, will be about 2 billion? Thanks.

Excepting for the last question, the chairman already stated that they did--residual book value of '98 is going to be in the neighborhood of 370 million euros. This is the book value, after the write off. Considering the tax shield, we will give you the indication that we will be applying both Spanish and German tax , and as a result, we'll be handling--conducting the tax shield in the best course of action in the next year. So we cannot answer you now, where we are going to be applying those taxes.

the dividend is at more or less at 2 percent--the 2 percent is in line with what would be around the dividend .

Okay, thank you.

The next question comes from . Please go ahead with your question, announcing your company name.

Thank you, , I'm from . A couple of questions on the domestic core business, if I can. Can you give us some more clarity on just where your volume market shares have gone over the last quarter or two, in the face of things, and particularly given that you expect some improvement in the second half on results? And secondly, can you talk about where you're going with discounts that you've been providing? I noticed that in the other category on TDE, we have about 100 million improvement in revenues, usually this is from--these revenues involve with discounts. I don't know if you're doing less discounting, or if there are other things going on in that line.

Very quickly, on volumes, we are experiencing a quarter improvement over the first quarter in volume growth. Basically, you know we mentioned, it was a frequent point on traffic growth, first quarter, and we to 6.2 percent increase June--year to June, basically.

That is basically local traffic, remember local traffic has--total traffic--local came down 10 percent in the first quarter, a slow down, and given that local traffic represents 25 percent--accounts for 25 percent of total traffic, that obviously it's impacting and improving the traffic then.

Internet traffic continues to slow down, decrease very clear, the migration which continues to grow the numbers, and obviously that continues to migrate the little bit of Internet. But additionally, clients have already impacting because clients less--are consuming less Internet narrow band, and therefore it's migrating less. International traffic continues to be pretty much in the same trend, of not improving, and on domestic long distance have improved from the previous quarter.

In terms of market share, we continue to be basically on the same levels. As we've mentioned that we've lost 5 ½ percentage points of , we continue to have the same expectations for year end. We continue to have 10 percent market share loss on , roughly 14 percent market share loss on what we call , domestic long distance, we beat 20 percent market share loss, and fixed we also keep roughly -- we lost 20 percent market share loss, both domestic long distance and remain pretty stable in terms of market share for the last quarters. And then the international market share loss that was quite aggressive when we took the steps to close down that on international long distance.

We sell it, and it came down from a 20 percent market share loss that we've had, now to the levels where we lost basically percent at the end of June, but that for closing international long distance share, slowed substantially, I would say between March and June, although we lost a little bit more. So basically, our market share is right on track, and we haven't experienced really this quarter any upheaval on the contrary is moving a little bit.

I don't know whether you make an additional but I don't remember ...

Just asking what's going on with discounting and why the ...

OK, on discounting, you know, we are -- our discount policies are changing and our difficulties for because every time we apply price counts, discounts -- I mean, every time we lowered because of the price cut mechanism, that doesn't mean we are applying the same sort of tariff reductions on the bundled products that we called . And as you know, we have 100,000, several hundred thousand .

So basically, that means, you know, we are cushioning on the down side and having really effective price reductions that are -- should be, also in the second half, lower than the official tariff reductions due to price cap, and that's another reason why second half should be better and should help on performance of from merging with our guidance, basically. OK?

And that continues to be the case for the second half.

Thank you.

Your next question comes from . Please go to the question announcing your company names.

Hi, this is from Goldman Sachs. I just had two questions. First, whether there was any payment that is due to because of the terminations and network sharings. And then secondly, whether this restructuring charge for assets of 287 million includes any charge for Italy.

The figure that we have is a net figure of taxes on a gross figure is in the neighborhood of 480 million euros, you will have to of that probably on the conference call of . We are not going to be disclosing the excess amount of the difference , because some of the agreements have not still closed.

We have already taken into consideration the main assets of the restructuring, the most realistic approach that we have today or what could be the cost of placing our operations in Germany.

And so 480 million is related to KPN or to total costs of restructuring?

Total.

Total costs. And -- and also I was wondering whether -- you haven't really explicitly said in the press release whether this that you are shutting down Italy or you're just continuing with your current strategy of sort of putting it into hibernation.

Well, we are closing Italy. It is the same -- the same in Italy, and the reason we're cutting our operation is nothing -- nothing . Like in Germany, but you know, and like in .

Just to clarify on restructuring costs, basically, you know, we provisioned 480 restructuring costs for closing and freezing our operations in and that is a comprehensive amount for basically several things, including, you know, layoffs, or, you know, whatever commitments we might be taking.

That is not anticipating whether we pay or not pay to KPN or to any other basically relationships and obligations, arrangements, or agreements that we might have. I will, you know, that tomorrow on that conference call. You basically can get detailed information on that, OK?

OK, thank you.

Our last question today comes from . Please go to your question, announcing your company name.

Good afternoon, . You've halted commercial activities in many areas in Europe. Can you tell me how you see, therefore, mobile developing at specifically mobile data arteries developing in your domestic markets? Do you see them going up or down, and how much of the -- or future up you see next year and the year after. Do you see percentage way taken up by data, mobile data?

OK, I guess you cannot anticipate any basically any parameter for our improvement on our mobile operations from the position of closing our operations because the of closing the operations are incorporated the very complex, long, and you know, you know, changing the business model, which taking into account not only but also market position, describe our position costs, and also to .

So, you know, there's no linkage, basically -- basically on that. We continue to see it progressing well -- progressing well in our domestic operations, in Spain for example, the percentage of over total revenues from France, which is roughly, you know, close to 15 percent already, we continue to see absolutely on track our improvement on the , but we anticipated to you at the beginning of first quarter that we'll be improving readily, you know, as the year will be progressing, and that is the case. That I mentioned before on the Mobile Group, the business is moving and on the second quarter it's been minus 7 percent in Spain compared to minus 11 percent, you know, in the first quarter -- first quarter.

So we continue to see that progressing well, and that is not really related -- to the very complex decision, our long decision of closing our European operations in the . It's a different business case, OK?

OK. Thank you.

OK. Well, on behalf of , I want to thank you all for attending our conference call on the first half, and the best. Thanks a lot.

That concludes conference call, you may now disconnect your lines.